[Federal Register Volume 59, Number 141 (Monday, July 25, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-17594]
[[Page Unknown]]
[Federal Register: July 25, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34397; File No. SR-CBOE-93-54]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change and Amendment No. 1 to Proposed Rule Change by the Chicago Board
Options Exchange, Inc., Relating to Pricing Increments and Priority
Principles on Combined Trades
July 18, 1994.
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 November 17, 1993, the Chicago Board Options Exchange, Inc.
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange
Commission (``SEC'' or ``Commission'') the proposed rule change as
described in Items I, II, and III below, which Items have been prepared
by the self-regulatory organization. On July 14, 1994, the CBOE
submitted Amendment No. 1 (``Amendment No. 1'') to the proposed rule
change.\3\ 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) (1982).
\2\17 CFR 240.19b-4 (1993).
\3\See Letter from Barbara J. Casey, Vice President, Department
of Market Regulation, CBOE, to Michael Walinskas, Derivative
Products Regulation, SEC, dated July 13, 1994.
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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 Rule 6.42 and 6.45 and Interpretations
and Policies to Rule 6.42 concerning pricing and priorities on spread,
straddle, and combination orders. 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 CBO states that the purpose of the proposed rule change is
twofold: first, to revise the minimum increments permissible for bids
and offers on spread, straddle, and combination orders and, second, to
prescribe the priority principles to apply to such orders when priced
net at a multiple of one sixteenth of a dollar. The CBOE believes that
these changes will facilitate the orderly execution of spread,
straddle, and combination orders.
The first change, to Rule 6.42, clarifies the language of the rule
and adds a new Interpretation and Policy .02. This new Interpretation
reflects the determination of the CBOE's Floor Procedure Committee that
quotes for spreads, straddles, and combination orders (``combined
trades'') may be expressed in any fractional or decimal price, which
will makes it easier for members to price combined trades in relation
to the current market. The second change, to paragraph (d) of Rule
6.45, adjusts the priority principles applicable to combined trades. As
revised, a CBOE member holding an order on a combined trade that is
priced net at a multiple of \1/16\ (i.e., \1/4\, \3/8\, \7/16\, \1/2\,
etc.) has priority over bids and offers in the trading crowd if all
legs of the combined trade would trade at a price that is at least
equivalent to quotes in the crowd. Furthermore, the order will also
take priority over bids and offers in the customer limit order book if,
in addition to all legs of the combination at least matching quotes in
the crowd, at least one leg of the combination trades at a price that
is better than the corresponding bid or offer in the book. Bids or
offers that are part of a combined trade and that are not priced at a
net multiple of \1/16\, while permissible, will not be entitled to
priority under the exception contained in paragraph (d) to Rule 6.45.
Also under the proposed rule change, special priority principles
will apply to stock-option combination orders that are priced net at a
multiple of \1/16\. Under this change, a stock-option order, as defined
in CBOE Rule 1.1(ii)(a), that consists of an order to buy or sell a
given number of shares of an underlying stock and an opposite side of
the market order to buy or sell an option covering the same number of
shares will be considered to be a combined trade for purposes of
priority over bids and offers in the crowd, but not over bids and
offers in the book. A stock-option order, as defined in CBOE Rule
1.1(ii)(b), that consists of an order to buy or sell an underlying
stock with the purchase and sale of an equal number of puts and calls,
each having the same exercise price, expiration date and covering the
same number of shares of the underlying stock, each being on the
opposite side of the market from the order to buy or sell stock, and
covering in the aggregate twice the number of shares represented by the
stock order, will be considered to be a combined trade and will have
priority over orders in the crowd and in the book.
As an illustration, assume that Option A is quoted at 5 bid, 5\1/8\
asked, and option B is quoted at 6 bid, 6\1/8\ asked, and assume that
all four quotes are represented in the book. In that instance, a spread
involving the purchase (or sale) of option A and the sale (or purchase)
of option B may trade at a net credit or debit of 1 (e.g., a net credit
of 1 if option A is bought at 5 and option B sold at 6, or a net debit
of 1 if option A is sold at 5\1/8\ and option B is bought at 6\1/8\. In
this example, because the net price is a multiple of \1/16\ and the
execution of the spread involves taking the same side of the market as
the book on only one side of the spread, the spread would receive
priority even though it ``touches'' quotes in the book on both sides.
(That is, in the spread consisting of the purchase of option A at 5 and
the sale of option B at 6, only the purchase of option A occurs at the
same price and on the same side of the market as the book, which is bid
at 5; the sale of option B at 6 is on the opposite side of the market
in the book, which is bid at 6.) In the same example, it would not be
permissible under Rule 6.45(d) to trade the spread at a net debit of
\7/8\ by selling the first option at 5\1/8\ and buying the second at 6,
because this trade would be executed at the same price and on the same
side of the market as the book on both sides of the spread.
To qualify for priority treatment, combined orders must meet the
existing requirements of Rule 6.45(d), i.e., one member must represent
all legs of the combined trade, each leg must cover the same number of
options, and the trade must be executed against one other member. In
those circumstances, the CBOE believes, it is fair to give combined
trades priority when priced net at a multiple of \1/16\. Additionally,
the CBOE represents that it has the systems capacity to disseminate
transactions in decimals and also has a prefix field which will be used
to identify, among other things, trades effected as part of a spread.
Any transaction effected at non-standard prices would be disseminated
in decimals and identified as being part of a spread by entering an
``S'' in the prefix field.\4\
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\4\See Amendment No. 1.
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The CBOE believes that the proposed rule change is consistent with
Section 6(b) of the Act, in general, and furthers the objectives of
Section 6(b)(5), in particular, in that it is designed to promote just
and equitable principles of trade and to protect investors and the
public interest.
(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 after the 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 reason 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 at 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 the file
number in the caption above and should be submitted by August 15, 1994.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\5\
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\5\17 CFR 200.30-(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-17594 Filed 7-22-94; 8:45 am]
BILLING CODE 8010-01-M
