[Federal Register Volume 60, Number 109 (Wednesday, June 7, 1995)]
[Notices]
[Pages 30125-30127]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-13899]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35785; File No. SR-CBOE-94-54]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Inc.; Order Approving Proposed Rule Change and Notice of Filing and
Order Granting Accelerated Approval of Amendment No. 1 to the Proposal
Relating to Firm Quote Responsibilities
May 31, 1995.
On January 4, 1995, 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 proposed rule change to expand the applicability of
CBOE Rule 8.51, its firm quote rule, to certain two-part equity option
orders in an attempt to allow public customers to execute defined risk
strategies, such as spreads and straddles, at the disseminated market
quotes.
\1\15 U.S.C. Sec. 78s(b)(1) (1988 & Supp. V 1993).
\2\17 CFR 240.19b-4 (1994).
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Notice of the proposed rule change was published for comment and
appeared in the Federal Register on February 14, 1995.\3\ No comments
were received on the proposal. On May 24, 1995, the CBOE submitted
Amendment No. 1 to the filing (``Amendment No. 1'') in order to clarify
certain non-substantive matters.\4\ This order approves the proposal,
as amended.
\3\See Securities Exchange Act Release No. 35345, 60 FR 8433.
\4\See Letter from Michael L. Meyer, Schiff Hardin & Waite, to
Michael A. Walinskas, Chief, Options Branch, SEC, dated May 24,
1995. Specifically, Amendment No. 1 proposes to add Interpretation
and Policy .06 to CBOE Rule 8.51. [[Page 30126]]
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I. Description of the Proposal
The purpose of the proposed rule change is to expand the
applicability of CBOE Rule 8.51, its firm quote (``firm quote'') or
ten-up (``ten-up'') rule, to include two-part equity option orders in
which the component series are on opposite sides of the market and in a
one-to-one ratio. The CBOE believes this change will enhance the
ability of public customers to execute defined risk strategies, such as
spreads and straddles, at the disseminated market quotes.\5\
\5\In its filing, the CBOE included a draft regulatory circular
to be issued to members describing the change in policy applicable
to the ten-up guarantee under CBOE Rule 8.51.
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CBOE Rule 8.51 places the responsibility on the trading crowd to
ensure that non-broker-dealer customer orders are sold or bought, up to
ten contracts, at the quoted offer or bid, respectively. This ``firm
quote'' or ``ten-up'' requirement is meant to provide confidence that
the displayed quotes may be relied upon by the investing public and to
ensure that public customer orders will be executed at those quotes, or
better.
From its inception the ten-up rule was intended to apply to, and
has been interpreted to apply only to, single part orders, i.e., either
a buy order or a sell order for a particular option series. The
Exchange has determined, however, that public customers would be served
better if the interpretation were expanded to include a requirement to
provide a ten-up market in two-part equity option orders in which the
components of the order are on opposite sides of the market and in a
one-to-one ratio to each other. The expansion in the interpretation of
this rule would make it possible for public customers to execute both
sides of a defined risk strategy, for up to ten contracts on each side,
such as a spread or a straddle, at the disseminated prices. The
exchange believes the rule change should help it compete more
effectively for public customer order flow and trading activity.
The Exchange does not believe this rule change would be burdensome
to market-makers because, under the current interpretation, the market-
makers would be required to satisfy the ten-up requirement as to each
leg of a spread or straddle if each was placed as a separate order.
This rule change would merely ensure that these two components may be
done at the same time, as one order, and at the same prevailing market
quotes. The Exchange believes, however, that it is inappropriate, under
any circumstance, to extend the firm-quote treatment to multipart
orders with all parts on the same side of the market as this would
effectively impose the burden on options market-makers of making
markets in the underlying security. For example, a position in a long
call and a short put is economically equivalent to being long the
underlying stock; and thus, requiring a trading crowd to provide firm
quote treatment to an order for this position would essentially be
requiring the option market-makers to act as market-makers in the
underlying security.\6\
\6\Under existing Rule 8.51, the firm quote size minimum will
continue to not apply whenever a ``fast market'' is declared under
Rule 6.6, and may be suspended for any class or series on a case by
case basis as determined by the Market Performance Committee.
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II. Discussion
The Commission finds that the proposed rule change 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).\7\ In particular, the
Commission believes the proposal is consistent with the Section 6(b)(5)
requirement that the rules of an exchange be designed to promote just
and equitable principles of trade and not to permit unfair
discrimination between customers, issuers, brokers, and dealers.
\7\15 U.S.C. 78f(b)(5) (1982).
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The Commission believes that the CBOE's proposal to modify its
current ten-up rule should expand the benefits to public customers
associated with ten-up markets. In general, the ten-up rule results in
faster executions of public customer orders and improves the quality of
the Exchanges' options markets and market maker performance.
Specifically, the proposal will extend the ten-up rule to each leg of
certain two-part equity options. Accordingly, small public customers
will be assured order execution for both parts of the order at the same
time and at the best bid or offer to a minimum depth of ten contracts.
Accordingly, the proposal should result in better executions for these
types of non-broker dealer customer orders.
The Commission also believes the proposal will provide greater
depth to the option markets without imposing any undue burdens upon
market makers. Because market makers are already required to satisfy
the ten-up requirement as to each leg of two part equity option orders
as if each was placed as a separate order, the Commission does not
believe the proposal will impose any additional unnecessary burdens or
capital risks upon market makers.
The Commission also notes that the proposal will only apply to two-
part equity option orders in which the components are on opposite sides
of the market and in a one-to-one ratio. The Commission believes these
conditions are reasonable measures that should help ensure that the
proposal will not allow the simultaneous execution of certain types of
orders that otherwise might effectively raise the firm quote
requirements above the current ten contracts limit, which could create
disparate firm quote treatment for ``one'' versus ``two'' part orders.
The Commission finds good cause for approving Amendment No. 1 to
the proposed rule change prior to the thirtieth day after the date of
publication of notice of filing thereof in the Federal Register.
Amendment No. 1 adopts Interpretation and Policy .06 to Rule 8.51,
which reflects in summary form the policy described in the Regulatory
Circular. Because the Regulatory Circular was included as part of the
filing, the substance and policy of which were discussed in the notice,
the Commission does not believe that Amendment No. 1 raises any new or
substantive issues. Therefore, the Commission believes it is consistent
with Sections 6(b)(5) and 19(b)(2) of the Act to approve Amendment No.
1 to the proposal on an accelerated basis.
III. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for inspection and copying at the
Commission's Public Reference Section, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Copies of such filing will also be available
for inspection and copying at the principal office of the Amex. All
submissions should refer to File No. SR-CBOE-94- [[Page 30127]] 54 and
should be submitted by June 28, 1995.
It Therefore Is Ordered, pursuant to Section 19(b)(2) of the
Act,\8\ that the proposed rule change (SR-CBOE-94-54) is approved, as
amended.
\8\15 U.S.C. Sec. 78s(b)(2) (1988)
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\9\
\9\17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-13899 Filed 6-6-95; 8:45 am]
BILLING CODE 8010-01-M
