[Federal Register Volume 64, Number 154 (Wednesday, August 11, 1999)]
[Notices]
[Pages 43793-43795]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-20631]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-41702; File No. SR-CBOE-98-53]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Inc.; Order Approving Proposed Rule Change and Notice of Filing and
Order Granting Accelerated Approval to Amendments No. 1 and 2 to the
Proposed Rule Change To Amend the Firm Quote Requirement
August 4, 1999.
On December 15, 1998, the Chicago Board Options Exchange, Inc.
(``CBOE'' or ``Exchange'') submitted to the
[[Page 43794]]
Securities and Exchange Commission (``Commission''), pursuant to
section 19(b)(1) of the Securities Exchange Act of 1934 (``Act''),\1\ a
proposed rule change to amend the Exchange's firm quote requirement.
The proposed rule change was published for comment in the Federal
Register on January 28, 1999.\2\ The CBOE submitted Amendments No. 1
\3\ and 2 \4\ to the proposed rule change on April 15, 1999, and July
28, 1999, respectively. The Commission received no comments on the
proposal. This order approves the approval, as amended.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ See Exchange Act Release No. 40957 (Jan. 20, 1998), 64 FR
4485.
\3\ See Letter from Stephanie C. Mullins, Attorney, CBOE, to
Richard Strasser, Assistant Director, Division of Market Regulation
(``Division''), Commission, dated April 13, 1999 (``Amendment No.
1''). Amendment No. 1 explains why the Exchange believes the
proposed rule change will not have anti-competitive effects on small
market-makers.
\4\ See Letter from Stephanie C. Mullins, Attorney, CBOE, to
Richard Strasser, Assistant Director, Division, Commission, dated
July 27, 1999 (``Amendment No. 2''). Amendment No. 2 sets forth the
circumstances under which Floor Officials may grant an exemption to
or suspend the firm quote requirement. These include the declaration
of a fast market, a system malfunction, an influx or orders, or
other unusual circumstances that cause displayed quotations to be
inaccurate or not current. Amendment No. 2 also makes certain
technical changes to the proposed rule change.
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I. Description of the Proposal
The Exchange proposes to amend CBOE Rule 8.51(a)(2), CBOE's firm
quote provision, to require that trading crowds be firm for a number of
contracts on less than the RAES contract limit applicable to that class
of options.\5\ CBOE also proposes to make conforming changes to
Interpretation and Policies .01 and .06. The proposal would permit the
appropriate Floor Procedure Committee (``FPC'') to establish the firm
quote requirement for each particular class of options traded on RAES
provided that the requirement is no less than the RAES contract limit
and no more than 50 contracts. For classes or series that are not
traded on RAES, the appropriate FPC may establish a firm quote
requirement between 10 and 50 contracts.\6\
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\5\ The appropriate Floor Procedure Committee determines the
size of orders eligible for entry into RAES. The maximum RAES order
size is generally 20 contracts. All classes of securities traded on
the Exchange, except Long Term Equity Anticipation Securities
(``LEAPS''), are traded on RAES. The firm quote requirement will not
apply to orders received from other exchanges or broker/dealers.
Phone call between Stephanie C. Mullins, Attorney, CBOE, and Sonia
Patton, Attorney, Division, Commission, on June 7, 1999.
\6\ The new form quote requirement will remain in effect for
that options class indefinitely or until the FPC changes it. The FPC
meets once every two weeks. The discretion given to the FPC by the
proposed rule change to establish a different firm quote requirement
between the RAES contract limit and 50 contracts for a particular
class of options is intended to enable the FPC to respond to general
trading trends in a given options class. Phone call between Timothy
Thompson, Director, Regulatory Affairs, Legal Department, CBOE,
Sonia Patton, Attorney, Division, Commission and Constance Kiggins,
Special Counsel, Division, Commission, on January 6, 1999.
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The firm quote requirement will apply at all times,\7\ except
during an opening or closing trading rotation. Unless there is a
contrary ruling by two Floor Officials, the requirement obligates a
trading crowd to sell (buy) the established number of contracts at the
offer (bid) which is displayed when a buy (sell) customer order reaches
the trading station where the particular option class is located for
trading. Currently, paragraph (a)(2) of Rule 8.51 requires trading
crowds to buy (sell) at least ten (10) contracts under these
circumstances.
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\7\ Under Exchange Rule 8.51(a)(3), however, any two Floor
Officials may suspend the firm quote requirement for a class or a
series within a class, if it is in the interest of a fair and
orderly market.
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Because RAES is essentially a form of electronic firm quote, the
Exchange believes that in most cases, the firm quote requirement should
be no less than the RAES contract limit for a particular options class.
In fact, in deciding to raise the firm quote requirement, the Exchange
noted that the appropriate FPC responsible for setting the contract
limit for RAES in particular option classes recently increased the RAES
maximum contract size, such that in most cases the RAES contract limit
is now higher than the firm quote requirement.\8\ Exchange Rule 8.51
will continue to provide that the appropriate Market Performance
Committee may determine the classes and series that will be subject to
the requirements of the Rule.
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\8\ See Regulatory Circulars RG98-102, RG98-117, RG 98-119.
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The CBOE also is amending Interpretation and Policy .06 to Rule
8.51 to clarity that the firm quote requirements for spreads and
straddles applies only in equity options.\9\ The CBOE notes that policy
was clearly stated in File No. SR-CBOE-94-54 and in the Commission's
order approving that filing.\10\ However, the rule language itself does
not reflect this limitation. Thus, the CBOE is making this change to
clarify in the rule text what was originally intended by that rule
filing.
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\9\ The term ``spreads and straddles'' refers to two-part equity
option orders in which the component series are on opposite sided of
the market and in a one-to-one-ratio.
\10\ Securities Exchange Act Release No. 35785 (May 31, 1995),
60 FR 30125 (June 7, 1995).
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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. In particular,
the Commission finds that the proposed rule change meets the
requirements of section 6(b)(5) of the Act \11\ which states that,
among other things, the rules of an exchange must be designed to
facilitate securities transactions and to remove impediments to and
perfect the mechanism of a free and open market. The Commission
believes that the proposal should provide greater depth to the option
market and benefit public customers by ensuring that they receive fills
of their orders for a greater number of contracts. Moreover, the
Commission believes that allowing the FPC to set the firm quote
requirement on a class by basis within a given range (i.e., no less
than the RAES limit and no more than 50 contracts) will give the
Exchange the flexibility to respond to competitive pressures from other
markets for multiply listed options while not imposing an undue burden
on firms that trade those option classes.
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\11\ 15 U.S.C. 78f(b)(5). In approving this rule change, the
Commission has considered the proposal's impact on efficiency,
competition, and capital formation, consistent with Section 3 of the
Act. 15 U.S.C. 78c(f).
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Moreover, as CBOE notes, Rule 8.51 is unclear in its application to
spreads and straddles, although the Commission order approving the
proposal clearly indicates that the provision only applies to equity
options as opposed to index and equity options. As a result, the
Commission believes it is appropriate to clarify that the firm quote
requirement for spreads and straddles applies only to equity options.
Pursuant to section 19(b)(2) of the Act,\12\ the Commission finds
good cause to approve Amendments No. 1 and 2 to the proposed rule
change prior to the 30th day after the date of publication of notice of
filing thereof in the Federal Register because the Amendments do not
present any new regulatory issues.
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\12\ 15 U.S.C. 78s(b)(2).
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III. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning Amendments No. 1 and 2, including whether those
amendments are consistent with the Act. Persons making written
submissions should file six copies thereof with the Secretary,
Securities and Exchange Commission, 450 Fifth Street, NW, Washington,
DC 20549-
[[Page 43795]]
0609. 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 Room, in Washington, DC. Copies of such
filing will also be available for inspection and copying at the
principal office of the CBOE. All submissions should refer to File No.
SR-CBOE-98-53 and should be submitted by September 1, 1999.
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\13\ that the proposed rule change (SR-CBOE-98-53), as amended, is
approved.
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\13\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\14\
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\14\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-20631 Filed 8-10-99; 8:45 am]
BILLING CODE 8010-01-M
