[Federal Register Volume 59, Number 133 (Wednesday, July 13, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-16951]
[[Page Unknown]]
[Federal Register: July 13, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34323; File No. SR-CBOE-94-15]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Chicago Board Options Exchange, Inc. Relating to
Solicited Transactions
July 6, 1994.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on May 3, 1994, the Chicago
Board Options Exchange, Inc. (``CBOE'' or ``Exchange'') filed with the
Securities and Exchange Commission (``Commission'') the proposed rule
change as described in Items I, II, and III below, which Items have
been prepared by the self-regulatory organization. The Commission is
publishing this notice to solicit comments on the proposed rule change
from interested persons.
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\1\15 U.S.C. 78s(b)(1).
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The Exchange proposes to adopt a new Rule 6.9 that would regulate
the execution of ``solicited orders,'' as that term is defined in the
rule; would set forth specific priority principles applicable to such
orders; and would restrict trading by members and associated persons
possessing knowledge of imminent undisclosed solicited transactions.
The text of the proposal is available at the Office of the
Secretary, CBOE and at the Commission.
II. Self-Regulatory Organization's Statement of the Purpose Of, and
Statutory Basis For, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of and basis for the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of these statements may be examined at
the places specified in Item IV below. The self-regulatory organization
has prepared summaries, set forth in sections (A), (B) and (C) below,
of the most significant aspects of such statements.
(A) Self-Regulatory Organization's Statement of the Purpose Of, and
Statutory Basis For, the Proposed Rule Change
The purpose of the proposed rule change is to regulate the
execution of ``solicited'' transactions in options, i.e., options
transactions having terms that are pre-negotiated prior to the time the
orders comprising the transaction are exposed to the trading crowd on
the CBOE floor. The proposed rule change also restricts trading in any
class of an option, as well as trading in the underlying security or
any ``related instrument,'' by CBOE members and their associated
persons who have knowledge of an imminent solicited transaction in
options of that class. This prohibition applies until all terms are
disclosed to the trading crowd or until execution of the solicited
transaction cannot reasonably be considered imminent given the passage
of time since the transaction was agreed upon.
The Exchange believes that it is appropriate to permit solicitation
between potential buyers and potential sellers of options in advance of
the time they send actual orders to the trading crowd on the Exchange.
The Exchange states that complex options orders, such as spreads,
straddles and combination orders, as well as stock-option orders, often
require the ``advance shopping'' that is characteristic of a solicited
transaction. The Exchange believes that such interactions between
buyers and sellers and the resulting solicited transactions can enhance
liquidity and depth at the CBOE by bringing orders to the floor that
might otherwise be difficult to effect.
Nevertheless, if the orders that comprise a solicited transaction
are not suitably exposed to the order interaction process on the CBOE
floor, the execution of such orders would not be consistent with CBOE
rules designed to promote order interaction in an open-outcry auction.
For example, Rule 6.43 requires bids and offers to be made at the post
by public outcry, and Rule 6.74 imposes specific order exposure
requirements on floor brokers seeking to cross buy orders with sell
orders. Solicited transactions by definition entail negotiation, and if
the orders that comprise a solicited transaction are not adequately
exposed to the floor auction, the crowd cannot have sufficient time to
digest and react to those orders' terms. The pre-negotiation inherent
in the solicitation process thus can enable the parties to a solicited
transaction to preempt the crowd to an execution at the pre-negotiated
price.
Proposed Rule 6.9 is intended to preserve the right to solicit
orders in advance of submitting a proposed trade to the crowd, while at
the same time assuring that original orders that are the subject of a
solicitation are exposed to the auction market in a meaningful way. For
instance, the proposed rule change would require a member representing
an original order that is the subject of a solicitation to disclose the
terms of the original order to the crowd before the original order can
be executed. CBOE believes that such disclosure would eliminate the
unfairness that can be associated with pre-negotiated transactions and
would subject the order that is the subject of the solicitation to full
auction interaction with other orders in the crowd.
To promote disclosure at the inception of a solicitation period,
rather than later, and to encourage solicited persons to bid or offer
at prices that improve the current market, CBOE's rule change would
establish a series of priority principles for solicited transactions.
Priority would be accorded depending on whether the original order is
disclosed throughout the solicitation period; whether the solicited
order improves the best bid or offer in the crowd; and whether the
solicited order matches the original order's limit. Thus, when the
original order is disclosed in advance of the solicitation and the
solicited order both matches the disclosed original order's limit and
improves the market, the solicited order will have priority over other
orders in the crowd and may trade with the original order at the
improved bid or offered price, subject to the customer limit order book
priorities set forth in Rule 6.45. When a solicited order does not
match the original order's limit and does not improve the market,
however, it will not have priority over other bids and offers
represented in the crowd even if the original order was disclosed to
the crowd for the full solicitation period. A responsive solicited
order will not have priority to trade with the original order even if
the solicited order improves the market; instead, in that instance,
others in the crowd may trade ahead of the solicited person at the
improved price.
In addition to requiring disclosure of original orders and
clarifying the priority principles applicable to solicited
transactions, proposed Rule 6.9(e) would make it prohibited conduct,
inconsistent with just and equitable principles of trade, for any
member or associated person who has knowledge of all the material terms
of an original order and a solicited order that matches the original
order's price, to enter an order to buy or sell an option of the same
class as any option that is the subject of the solicitation prior to
the time the original order's terms are disclosed to the crowd or the
execution of the solicited transaction can no longer reasonably be
considered imminent. This prohibition would extend to orders to buy or
sell the underlying security or any ``related instrument,'' as that
term is defined in the Rule. The CBOE believes that these prophylactic
requirements are necessary to prevent members and associated persons
from using undisclosed information about imminent solicited option
transactions to trade the relevant option or any closely-related
instrument in advance of persons represented in the relevant options
crowd.
The CBOE believes that proposed Rule 6.9 will improve the CBOE
auction by clarifying the requirements applicable to solicited
transactions and by enabling the Exchange to initiate enforcement
proceedings in appropriate cases under specific rules. The Exchange
believes that the proposed rule change is consistent with section 6(b)
of the Act in general and section 6(b)(5) in particular in that it is
designed to promote just and equitable principles of trades and to
protect investors and the public interest.
(B) Self-Regulatory Organization's Statement on Burden on Competition
CBOE does not believe that the proposed rule change will impose any
burden on competition.
(C) Self-Regulatory Organization's Statement on Comments on the
Proposed Rule Change Received From Members, Participants, or Others
Written comments on the proposed rule change were neither solicited
nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing
for Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period: (i) As the Commission
may designate up to 90 days of such date if it finds such longer period
to be appropriate and publishes its reasons for so finding or (ii) as
to which the self-regulatory organization consents, the Commission
will:
(a) By order approve such proposed rule change, or
(b) Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. 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, NW., Washington, DC 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 in the
Commission's Public Reference Section, 450 Fifth Street, NW.,
Washington, DC. Copies of such filing will also be available for
inspection and copying at the principal office of the above-mentioned
self-regulatory organization. All submissions should refer to File No.
SR-CBOE-94-15 and should be submitted by August 3, 1994.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\2\
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\2\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-16951 Filed 7-12-94; 8:45 am]
BILLING CODE 8010-01-M
