[Federal Register Volume 64, Number 136 (Friday, July 16, 1999)]
[Notices]
[Pages 38495-38497]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-18169]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-41610; File No. SR-CBOE-99-07]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Chicago Board Options Exchange, Inc. Relating to ``Cross-
Only'' Orders
July 8, 1999.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and rule 19b-4 thereunder,\2\ notice is hereby given that
on February 17, 1999, 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
Exchange. 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).
\2\ 17 CFR 240.19b-4
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The CBOE proposes to amend Exchange Rules 6.43, 6.53, and 6.74 to
permit a broker to represent a ``cross-only'' contingency. The text of
the
[[Page 38496]]
proposed rule change follows. Additions are italicized and deletions
are bracketed.
* * * * *
Chicago Board Options Exchange, Incorporated Rules
* * * * *
Chapter VI--Doing Business on the Exchange Floor
* * * * *
Manner of Bidding and Offering
Rule 6.43.
Bids and offers to be effective must be made at the post by public
outcry, except that bids and offers made by the Board Broker or Order
Book Official shall be effective if displayed in a visible manner in
accordance with Rule 7.7. All bids and offers shall be general ones and
shall not be specified for acceptance by particular members.
. . . Interpretations and Policies:
.01 Notwithstanding the provision in the above Rule that all bids
and offers must be general ones, a broker may represent orders with a
cross-only contingency as defined in Rule 6.53.
* * * * *
Certain Types of Orders Defined
Rule 6.53.
(a) to (b) Unchanged.
(c) Contingency Order. A contingency order is a limit or market
order to buy or sell that is contingent upon a condition being
satisfied while the order is at the post.
(i) to (iv) Unchanged.
(v) Cross-Only Orders. A cross-only order is a contingency order
which is to be executed in whole or in part in equity options only, the
amount determined by the member organization placing the order, in a
cross transaction with an order for another customer or the member
organization itself. If the trading crowd does not allow the cross to
take place, the member organization placing the orders may withdraw the
order from consideration by the crowd.
(d) to (m) Unchanged.
* * * * *
``Crossing'' Orders
Rule 6.74
(a) A floor Broker who holds orders to buy and sell the same option
series may cross such orders, provided that he or she proceeds in the
following manner:
(i) In accordance with [his responsibilities for] due diligence
responsibilities, a Floor Broker shall request bids and offers for such
option series and make all persons in the trading crowd, including the
Board Broker or Order Book Official, aware of his or her request.
(ii) After providing an opportunity for such bids and offers to be
made, [he] the broker must
(A) Bid above the highest bid in the market and give a
corresponding offer at the same price or at prices differing by the
minimum fraction or
(B) Offer below the lowest offer in the market and give a
corresponding bid at the same price or at prices differing by the
minimum fraction.
(iii) If such higher bid or lower offer is not taken, the broker
[he] may cross the order at such higher bid or lower offer by
announcing by public outcry that he is crossing and giving the quantity
and price.
(b) A Floor Broker who holds an order for a public customer of a
member organization and a facilitation order may cross such orders
provided that he proceeds in the following manner.
(i) The member organization must disclose on its order ticket for
the public customer order which is subject to facilitation, all of the
terms of such order, including any contingency involving, and all
related transactions in, either options or underlying or related
securities.
(ii) In accordance with [his responsibilities for] due diligence
responsibilities, the Floor Broker shall disclose all securities which
are components of the public customer order which is subject to
facilitation and then shall request bids and offers for the execution
of all components of the order.
(iii) After providing an opportunity for such bids and offers to be
made, the Floor Broker must, on behalf of the public customer whose
order is subject to facilitation, either bid above the highest bid in
the market of offer below the lowest offer in the market, identify the
order as being subject to facilitation, and disclose all terms and
conditions of such order. After all other market participants are given
an opportunity to accept the bid or offer made on behalf of the public
customer whose order is subject to facilitation, the Floor Broker may
cross all or any remaining part of such order and the facilitation
order at such customer's bid or offer by announcing in public outcry
that he is crossing and by stating the quantity and price(s). Once such
bid or offer has been made, the public customer order which is subject
to facilitation has precedence over any other bid or offer in the crowd
to trade immediately with the facilitation order.
(c) A Floor Broker who holds cross-only orders as defined in
6.53(c)(v) may cross the orders by proceeding in the following manner.
Prior to representing the orders to the trading crowd, the broker must
make the crowd aware of the total amount of contracts the broker wishes
to cross, that the orders are to be executed on a cross-only basis, and
the price that he wishes to cross the orders. The price must be at or
within the bid or offer.
* * * * *
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 CBOE 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 Exchange 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
1. Purpose
The CBOE proposes to amend certain Exchange Rules to permit a
member to enter and a Floor Broker to represent orders with a cross-
only contingency. The purpose of the proposed rule change is to allow a
Floor Broker is disclose to the trading crowd, prior to execution, that
the broker wishes to cross two orders for a certain amount of
contracts, at a certain price within or at the quoted bid or offer. If
the crowd does not permit the broker to do this, then the cross-only
contingency provides that the member placing the orders may withdraw
the orders, as if they never existed in the trading crowd. The two
orders the broker holds to cross under this contingency may be two
customer orders or between a customer and the firm itself. There are no
restrictions on who the customer may be, e.g., a customer feasibly
could be a market-marker, broker-dealer, or a public customer. The
cross would be done at or between the bid and offer, which benefits the
customer.
The Exchange believes that by allowing for the cross-only
contingency, the Exchange will help to develop public customer business
and will expedite crosses yielding a similar result to what occurs on
the floor currently, although currently it is done
[[Page 38497]]
by a much more circuitous route. With the current competition in the
marketplace, the Exchange believes that by providing the cross-only
contingency more firms will want to bring business to the CBOE, since
the firm will have the ability to take the order elsewhere if the crowd
does not allow the cross.
Although Exchange Rules currently allow a similar result as the
cross-only contingency, it is much more cumbersome. The proposed rule
changes provide that the broker may make the crowd aware in advance of
the amount of contracts the broker wishes to cross; the price at which
the cross would take place, at or between the quoted prices; and if the
crowd bars the cross from taking place, the member may withdraw the
orders. As the Rules stand currently, a broker does not disclose in
advance that he is holding two orders to cross; the broker must bid
above the highest bid or offer below the lowest offer in the open
market; if the bid or offer is not taken by the crowd, then the broker
may cross at the higher bid or lower offer. Thus, the difference in
result between the proposed Rule and the current Rule is not
substantial; however it is a much quicker result since the broker will
know immediately whether the trading crowd will allow the cross to take
place, and the member placing the order may withdraw the order if the
cross is not allowed by the crowd.
The Exchange believes that this rule change is for the benefit of
the public customer and expedites Exchange processes.
2. Statutory Basis
By permitting a broker to represent a cross-only contingency, the
proposed rule change is consistent with Section 6(b) of the Act in
general and further the objectives of Section 6(b)(5) \3\ in particular
in that it is designed to promote just and equitable principles of
trade, enhance competition and to protect investors and the public
interest.
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\3\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The 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
No written comments were solicited or received with respect to the
proposed rule change.
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, including whether the proposed rule
change is consistent with the Act. In particular, the Commission seeks
comment on whether the proposed rule change will result in fair
executions for the various orders and parties represented in the
crossing transaction.\4\ Also, commenters are requested to provide
their views on this rule revision in light of the proposed rule change
contained in SR-CBOE-99-10, relating to participation rights for firms
crossing orders.\5\ Persons making written submissions should file six
copies thereof with the Secretary, Securities and Exchange Commission,
450 Fifth Street, NW, Washington, D.C. 20549-0609. Copies of the
submissions, 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 Room. Copies of the filing will also be available for
inspection and copying at the principal offices of the CBOE. All
submissions should refer to File No. SR-CBOE-99-07 and should be
submitted by August 6, 1999.
\4\ The Exchange submitted a letter responding to several
questions posed by the staff about the application of the proposed
rule change. See Letter from Stephanie C. Mullins, Attorney, CBOE,
to Nancy Sanow, Assistant Director, Division of Market Regulation,
dated May 27, 1999.
\5\ Securities Exchange Act Release No. 41609 (July 8, 1999).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\6\
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\6\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-18169 Filed 7-15-99; 8:45 am]
BILLING CODE 8010-01-M
