[Federal Register Volume 62, Number 163 (Friday, August 22, 1997)]
[Notices]
[Pages 44739-44740]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-22293]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38939; File No. SR-CBOE-97-16]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Inc.; Order Approving Proposed Rule Change, and Amendment No. 1
Thereto, Relating to the Trading of FLEX Index Options
August 15, 1997.
On March 13, 1997, 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 amend its rules governing the
trading of FLEX Index options. On May 13, 1997, the CBOE submitted an
amendment to the Commission regarding the proposal.\3\ Notice of the
proposed rule change, and Amendment No. 1 thereto, appeared in the
Federal Register on May 22, 1997.\4\ No comments were received on the
proposal. This order approves the proposal, as amended.
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\1\ 15 U.S.C. 78s(b)(1) (1988 & Supp. V 1993).
\2\ 17 CFR 240.19b-4.
\3\ See letter from Timothy H. Thompson, Senior Attorney, CBOE,
to Steve Youhn, Division of Market Regulation, Commission, dated May
13, 1997 (``Amendment No. 1'').
\4\ See Securities Exchange Act Release No. 38637 (May 14,
1997), 62 FR 28084 (May 22, 1997).
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I. Description of the Proposal
The purpose of the proposed rule change is to make certain changes
to the Exchange's rules governing the trading of FLEX Index options.
Specifically, those changes involve a reduction in the percentage of a
trade to which a Submitting Member indicating an intent to cross is
entitled, and the establishment of bid-offer spreads for certain FLEX
Index trades.
Since their inception,\5\ FLEX Index options have relied on
Appointed Market-Makers (``AMMs'') to provide liquidity for FLEX
requests for quotes (``RFQs''). AMMs are required, pursuant to CBOE
Rule 24A.9(b), to enter a FLEX Quote in response to any RFQ on any FLEX
option of the class to which the AMM is appointed.
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\5\ See Securities Exchange Act Release No. 31920 (February 24,
1993), 58 FR 12280 (March 3, 1993).
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As an inducement to attract volume that would otherwise be
transacted in the over-the-counter market, the Exchange established
percentage entitlements for the Exchange member that initiates FLEX
bidding and offering by submitting a RFQ (``Submitting Member'') where
the Submitting Member has indicated an intention to cross or to act as
principal on the trade and has matched or improved the best bid or
offer (``BBO''). Generally, with some qualifications, pursuant to CBOE
Rule 24A.5, the Submitting Member in a FLEX Index option is entitled to
50% (\1/2\) of the trade in the case where the Submitting Member
matches the BBO and 66.67% (\2/3\) of the trade where the Submitting
Member improves the BBO.
To the extent Submitting Members accept their entire entitlement on
a FLEX Index option trade, half of the trade or less would remain for
the other market-makers to share. The Exchange believes, however, that
these entitlements have discouraged participation by market-makers in
the FLEX Index product. Accordingly, the Exchange has proposed to amend
its rules so that the entitlement for Submitting Members would be
reduced to the greater of 25% or a proportional share of the trade.\6\
This means, for example, that if there are four market-makers
participating on the trade in addition to the Submitting Member, then
the Submitting Member would be entitled to 25% of the trade because it
is greater than the proportional share (\1/5\) of the trade. However,
if there were two market-makers participating on a trade along with a
Submitting Member, the Submitting Member would be entitled to a
proportional share of the trade, or \1/3\. This is different from the
current entitlement for Submitting Members in Flex Equity options,
under CBOE Rule 24A.5, who are entitled only to 25% of the trade
regardless of the number of participants to the trade.\7\
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\6\ The rule currently provides that the Submitting Member is
entitled to the largest of the percentage of the trade (\1/2\ or \2/
3\), $1 million Underlying Equivalent Value, or the remaining
Underlying Equivalent Value on a closing transaction valued at less
than $1 million. These qualifications ($1 million Underlying
Equivalent Value or the remaining Underlying Equivalent Value)
remain in the proposed rule.
\7\ Because the percentage entitlements for Submitting Members
for both FLEX Equity and FLEX Index options are currently contained
in one paragraph in CBOE Rule 24A.5, the Exchange's proposal will
separate the treatment of Flex Equity and Flex Index options into
different paragraphs.
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[[Page 44740]]
The proposed rule change also amends the language of sub-paragraphs
(e)(iii) (A) and (B) of CBOE Rule 24A.5 to state that a submitting
member ``will have priority to execute'' the specified share of a trade
that is the subject of a RFQ, instead of the term ``be permitted to
execute.'' The Exchange initially adopted this rule language in
Securities Exchange Act Release No. 37337 in order to clarify that a
member may cross more than the designated share as to which he has
priority if no one else is willing to trade at the same or a better
price.\8\ The current filing inadvertently utilized the old rule
language. Amendment No. 1 to the filing clarifies that the original
rule language will remain unchanged.
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\8\ See Securities Exchange Act Release No. 37337 (June 19,
1996), 61 FR 33561 (June 27, 1996).
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The Exchange is also proposing to impose maximum bid-offer spreads
on certain FLEX Index options. Currently, under CBOE Rule 24A.9 (d),
market-makers are not required to quote a minimum bid-offer spread in
FLEX options because of the unique nature of the product in which new
series are established periodically by the submission of a RFQ. Based
on experience over the last four years, however, the Exchange has
determined that it is appropriate to establish maximum bid-offer
spreads for Index FLEX AMMs when quoting European-exercise FLEX options
overlying the S&P 100 Index (``OEX'') or the S&P 500 Index (``SPX')
with a time to expiration of more than two weeks and less than two
years.\9\ The Exchange expects that the establishment of these spreads
will increase customer confidence in the CBOE markets for these
products. The CBOE also believes that the establishment of these
maximum bid-offer spreads will ensure tight markets for the majority of
the Index FLEX RFQs submitted to the CBOE floor; the proposed spreads
would have applied to 77% of the RFQs submitted in 1996. The Exchange
also believes that if, as expected, the reduction in the entitlement of
a trade to a Submitting Member encourages more active participation by
market-makers in the quoting process, then bid-offer spreads, through
competition, should decrease in any event.
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\9\ Options with a time to expiration greater than two weeks and
less than or equal to one year shall have the following bid/ask
spreads:
Where Bid Is Maximum Bid/Ask Spread Is
Less than $5.............................. \3/4\ of $1
At least $5, but not more than $10...... $1
At least $10, but not more than $20..... $1.50
At least $20.............................. $2
Options with a time to expiration greater than one year and less than
two years shall have the following maximum bid/ask spreads:
Where Bid Is Maximum Bid/Ask Spread Is
Less than $10............................. $1.50
At least $10, but not more than $20..... $2
At least $20, but not more than $40..... $3
At least $40.............................. $4
Compare CBOE Rule 8.7 regarding maximum bid/ask spreads for non-Flex
options.
Because the proposed rules should encourage more active
participation of market-makers in the establishment of bid-ask spreads
as well as require the quoting of spreads on FLEX Index options within
a certain range, CBOE believes that the proposed rules are consistent
with and further the objectives of Section 6(b)(5) of the Act in that
they are designed to improve communications to and from the Exchange's
trading floor in a manner that promotes just and equitable principles
of trade, prevents fraudulent and manipulative acts and practices, and
maintains fair and orderly markets.
II. Findings and Conclusions
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).\10\ The Commission
finds that CBOE's proposal to reduce the Submitting Member's
entitlement rate to the greater of 25% or a proportional share of the
trade should serve to encourage more active participation by market-
makers in FLEX Index options. Specifically, because participating
market-makers will be entitled to a greater share of the FLEX trade,
they should have more incentive to make markets in FLEX Index options.
More active participation should, in turn, result in increased
liquidity for the product, which would serve to enhance the market for
FLEX Index options.\11\ Accordingly, the Commission believes that this
portion of the CBOE filing is consistent with the Act in that it should
facilitate transactions in securities consistent with investor
protection and in furtherance of the public interest.\12\
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\10\ 15 U.S.C. 78f(b)(5) (1988).
\11\ The Commission notes that the current entitlement for
Submitting Members in FLEX Equity options will remain unchanged at
25% of the trade regardless of the number of participants to the
trade.
\12\ The Commission also believes that the proposed rule change
will not result in any injury to public customers as customer orders
on parity will not receive a smaller participation than any other
crowd participant.
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The Commission also believes that CBOE's proposal to impose maximum
bid-offer spreads for Index FLEX AMMs when quoting European-style FLEX
options overlying the OEX or the SPX should serve to potentially
tighten spreads as well as to ensure that the spreads are no larger
than the predetermined range. The Commission believes that the
potential for tighter markets in FLEX OEX and SPX contracts as a result
of the adoption of maximum bid-ask spreads should serve to increase
investors' confidence that the quoted market for these options
represents fair and indicative prices. In this regard, the CBOE may
wish to adopt maximum bid-ask spreads for other FLEX options.
Accordingly, the Commission believes the Exchange's proposal to impose
maximum bid-offer spreads for certain FLEX Index options is consistent
with the Act in that it should facilitate trading in securities.
It therefore is ordered, pursuant to Section 19(b)(2) of the
Act,\13\ that the proposed rule change (SR-CBOE-97-16), as amended, is
approved.
\13\ 15 U.S.C. 78s(b)(2) (1988).
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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. 97-22293 Filed 8-21-97; 8:45 am]
BILLING CODE 8010-01-M
