[Federal Register Volume 59, Number 108 (Tuesday, June 7, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-13733]
[[Page Unknown]]
[Federal Register: June 7, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34138; File No. SR-CBOE-93-44]
Self-Regulatory Organizations; Order Approving Proposed Rule
Change by the Chicago Board Options Exchange, Inc., Relating To
Issuance of Regulatory Circular Relating to Floor Brokerage Practices
June 1, 1994.
On October 20, 1993, the Chicago Board Options Exchange, Inc.
(``CBOE'' or ``Exchange'') submitted to the Securities and Exchange
Commission (``SEC'' or ``Commission''), pursuant to Section 19(b) of
the Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4
thereunder,\2\ a proposal to issue to its membership a Regulatory
Circular (``1993 Circular'') relating to certain floor brokerage
practices.
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\1\15 U.S.C. 78s(b)(1) (1982).
\2\17 CFR 240.19b-4 (1993).
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The proposed rule change was published for comment in Securities
Exchange Act Release No. 33155 (November 4, 1993), 58 FR 59763. No
comments were received on the proposed rule change.
The CBOE states that the 1993 Circular is designed to assist floor
brokers in understanding their responsibilities under the CBOE's Rules,
the Act, and the Commission's regulations. On June 19, 1986, the CBOE
issued a Regulatory Circular (``1986 Circular'') which describes, among
other things, the steps that should be taken when a floor broker
proposes to ``leg in'' a multi-part order or to cross customer orders
pursuant to CBOE Rule 6.74, ```Crossing' Orders.'' In addition, the
1986 Circular sets forth procedures to be followed when there has been
a ``print-through''\3\ on a limit order or an order is not otherwise
executed due to a floor broker's error.
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\3\A ``print through'' occurs when a trade is effected in the
crowd at a price that is better than the price at which a customer
order should have been represented by a floor broker in the trading
crowd. The 1993 Circular states that if a broker discovers a print-
through during trading hours and a better price is available at the
time, the customer order should be filled at the better price. If
the better price is no longer available, then the floor broker is
responsible at the original limit price and may either execute the
order at the available market and give the customer a ``different
check'' or fill the order out of his error account, provided it does
not reduce or liquidate a position in the error account. If the
print-through is discovered outside trading hours and the customer
requires a fill as of that trade date, the floor broker may fill the
customer's order at the limit price from his error account. If the
print-through occurs on the opening, the customer is generally
entitled to the number of contracts which print through at the
opening price. If a better price than the opening price is available
when the error is discovered, the customer order should be filled at
the better price.
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The 1993 Circular restates and expands upon the subjects discussed
in the 1986 Circular. For example, the 1993 Circular provides a more
detailed discussion of recordkeeping requirements, restates the
procedures applicable to a print-through on a limit order, and makes
clear that, except as otherwise specified, a floor broker is not
permitted to fill the customer order from his error account if doing so
would reduce or liquidate a position in the broker's error account.
Similarly, the 1986 Circular explains that the CBOE's Rules do not
prohibit the ``legging'' of multi-part orders as long as the executing
floor broker remains in compliance with the CBOE's rules concerning the
use of due diligence in the execution of customer orders and the
separation of market maker and floor broker functions. The 1993
Circular expands upon the treatment of this subject by setting forth
specific procedures that are to be followed when a floor broker
discovers that he is unable to complete the execution of a multi-part
order.\4\
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\4\Specifically, the 1993 Circular states that if a floor broker
determines that he is unable to complete an order he has legged he
must either: (1) Offer the executed leg to the customer; (2)
liquidate the leg in open outcry and then offer the trade,
regardless of whether it is a profit or loss, to the customer; or
(3) execute the remaining leg(s) of the order at the available
market in open outcry and give the customer a difference check. In
addition, the 1993 Circular notes that a floor broker may not
provide an execution on the unexecuted portion of the order from his
error account; by doing so he is acting as a market maker.
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The 1993 Circular also provides guidance to floor brokers with
respect to subjects that were not covered in the 1986 Circular. These
subjects include the priority of customer orders in a floor broker's
``deck,'' the ``stopping'' of customer orders, and trading in
securities underlying options traded by a floor broker. Specifically,
with regard to a floor broker's ``deck,'' the 1993 Circular states that
under Exchange Rule 6.73, a floor broker's agency business takes
priority over trades for his error account and that a floor broker must
determine the priority of agency orders entered simultaneously with
him. The 1993 Circular also states that a floor broker must use due
diligence to execute those orders at the best available price or
prices. With regard to the ``stopping'' of customer orders, the 1993
Circular states that it is improper for a floor broker to ``stop'' or
guarantee an execution to a customer order he is holding from his error
account or deck because by doing so he is acting as a market maker and
is in violation of CBOE Rule 8.8. The 1993 Circular notes that it is
not a violation of CBOE Rule 8.8 for a floor broker to cross a public
customer order with a facilitation order in accordance with the
provisions of CBOE Rule 6.74(b), ```Crossing' Orders.''
Finally, with regard to the trading of underlying securities, the
1993 Circular states that the CBOE's rules do not prohibit a floor
broker from entering into transactions on other exchanges for his
personal account in financial instruments underlying or related to the
classes at the station where he acts as a floor broker. Because trading
in the underlying financial instrument could be perceived as a conflict
of interest, the Equity and Index Floor Procedure Committees strongly
advise against it. The 1993 Circular states that it would be a
violation of the CBOE's rules for a floor broker to enter into
transactions in an underlying or related financial instrument based on
information concerning a customer option order which he holds.
The CBOE states that the 1993 Circular is designed to provide
guidance to floor brokers regarding the Exchange's interpretation of
applicable CBOE Rules, the Act, and Commission regulations. The CBOE
states that the 1993 Circular is not intended to be a comprehensive
discussion of the named subjects, but is designed to supplement
existing Exchange rules and Interpretations and Policies relating
thereto for the purpose of providing CBOE members with authoritative
guidance regarding the Exchange's interpretation of its rules, the Act,
and Commission regulations in certain specific contexts.
The CBOE believes that the proposed 1993 Circular is consistent
with Section 6(b) of the Act, in general, and furthers the objectives
of Section 6(b)(5) of the Act, in particular, in that it will provide
guidance to CBOE members regarding the obligations of floor brokers
under CBOE rules, the Act, and Commission regulations, and is thereby
designed to prevent fraudulent and manipulative acts and practices and
to promote just and equitable principles of trade.
The Commission finds that the proposed 1993 Circular is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to a national securities exchange, and, in
particular, the requirements of Section 6(b)(5) in that the 1993
Circular is designed to promote just and equitable principles of trade
and to protect investors and the public interest.\5\ Specifically, the
Commission believes that the 1993 Circular should help to provide floor
brokers with a clear explanation of certain of their obligations under
the Act, the Commission's regulations, and the CBOE's rules, thereby
helping to ensure the maintenance of fair and orderly markets. The
Commission believes that the 1993 Circular should facilitate the
execution of customer orders at the best available prices by providing
guidance with regard to print-throughs and orders executed erroneously,
and by stating that floor brokers representing customer orders have a
fiduciary obligation to their clients to execute their orders on the
CBOE floor at the best available prices. The 1993 Circular also notes
that a floor broker's due diligence in handling an order includes the
floor broker's insuring that all market or marketable limit orders are
constantly represented in the crowd either by himself or by another
floor broker for as long as the order is active.
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\5\15 U.S.C. 78f(b)(5) (1984).
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In addition, the Commission believes that the 1993 Circular should
help to ensure the integrity and fairness of the CBOE's markets by
advising members of restrictions on floor brokers' activities.
Specifically, the 1993 Circular notes that the CBOE's rules prohibit a
member from trading as a market maker with respect to option contracts
traded at a particular station on the same day that the member is
acting as a floor broker at that station. The 1993 Circular also
contains provisions designed to ensure that floor brokers do not engage
in abusive or illegal trading. In this regard, the 1993 Circular makes
clear that it is a violation of the CBOE's rules for a floor broker to
enter into transactions in an underlying or related financial
instrument based on information concerning a customer option order
which he holds.\6\
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\6\Such transactions would also be inconsistent with the Act.
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Finally, the Commission believes that it is beneficial for the CBOE
to codify in a circular existing Exchange policies and procedures
regarding floor broker activity. The Commission believes that the 1993
Circular will make it easier for floor brokers to understand and have
access to relevant policies and procedures with respect to their
obligations as floor brokers.
It is therefore ordered, pursuant to Section 19(b)(2) of the Act\7\
that the proposed rule change (SR-CBOE-93-44) is approved.
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\7\15 U.S.C. 78s(b)(2) (1982).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\8\
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\8\17 CFR 200.30-3(a)(12) (1993).
[FR Doc. 94-13733 Filed 6-6-94; 8:45 am]
BILLING CODE 8010-01-M
