[Federal Register Volume 63, Number 168 (Monday, August 31, 1998)]
[Notices]
[Pages 46258-46259]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-23313]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40358; File No. SR-CBOE-98-20]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Inc.; Order Approving Proposed Rule Change Relating to RAES Eligibility
Requirements for OEX and DJX Options
August 24, 1998.
I. Introduction
On May 18, 1998, the Chicago Board Options Exchange, Inc. (``CBOE''
or ``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to amend CBOE Rule 24.17, RAES
Eligibility in OEX and DJX, that would allow a market maker to
participate in the CBOE's Retail Automatic Execution System (``RAES'')
\3\ in options on the Standard & Poor's 100 Index (``OEX'') and options
on the Dow Jones Industrial Average (``DJX'') during the same calendar
month by meeting the eligibility requirements for OEX alone, DJX alone,
or eligibility requirements that consider the percentage of
transactions and contracts a market maker transacted in OEX and DJX
combined. On June 24, 1998, the CBOE filed Amendment No. 1 to the
proposal.\4\ The proposed rule change and Amendment No. 1 were
published for comment in the Federal Register on July 16, 1998.\5\ The
Commission received no comments on the proposal. This order approves
the proposed rule change, as amended.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ RAES is the Exchange's automatic execution system for small
(generally less than 10 contracts) public customer market of
marketable limit orders. When an order is entered through RAES, the
system automatically attaches to the order its execution price,
determined by the prevailing market quote at the time of the order's
entry into the system. A buy order pays the offer; a sell order
sells at the bid. An eligible market maker who is signed onto the
system at the time an order is received will be designated to trade
with the public customer order at the assigned price.
\4\ See Letter from Timothy H. Thompson, Director, Regulatory
Affairs, CBOE, to Deborah Flynn, Attorney, Division of Market
Regulation, Commission, dated June 19, 1998 (``Amendment No. 1'').
\5\ Securities Exchange Act Release No. 40186 (July 9, 1998), 63
FR 38441.
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II. Description of the Proposal
Currently, CBOE Rule 24.17(b)(v) sets forth four eligibility
requirements that a market maker must meet before he can
[[Page 46259]]
participate in RAES in either OEX or DJX. Under one of these
requirements, the market maker must execute at least seventy-five
percent of his market maker contracts for the preceding calendar month
in the option class in which the market maker is participating on RAES.
This requirement precludes a market maker who qualifies to participate
in RAES in either OEX or DJX from qualifying to participate in the
other class. The Exchange believes the seventy-five percent requirement
is so high that it serves as a disincentive for a market maker on one
side of the common structure in which OEX or DJX are traded to move to
the other side of the structure to trade the other option product for
fear that the market maker will no longer qualify for RAES in his
primary trading area. Although OEX and DJX are technically traded at
two separate trading posts, the market makers for each product are
separated by a movable railing within the same physical structure.
Because the traders in OEX and DJX stand right next to each other in
the same physical structure, the Exchange believes they are in the best
position to provide added liquidity and capital to the product by
moving from one side of the trading structure to the other.\6\ A market
maker must be present in the particular trading crowd where the class
is traded while he is participating in RAES for that class.
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\6\ The Exchange notes that in the equity posts on the floor, a
market maker may participate in RAES in all classes traded at that
post.
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The CBOE proposes to amend CBOE Rule 24.17 by adding new sub-
paragraph (b)(iv) to allow a market maker to participate in RAES in
both OEX and DJX during the same calendar month by transacting at least
seventy percent of his market-maker contracts for the preceding
calendar month in: (1) OEX; (2) DJX; or (3) both OEX and DJX combined,
and by transacting seventy-five percent of his contracts in OEX and DJX
during the month in person. A market maker can particiapte in RAES in
both OEX and DJX during the same calendar month as long as he meets one
of the sets of criteria above and as long as the two products continue
to be traded at the same physical trading location. The proposed rule
change will make it easier for market makers to move from one trading
pit to another to provide liquidity when market conditions warrant.
The Exchange proposes to implement this rule change at the
beginning of the next calendar month after the Commission approves the
proposal. The Exchange also proposes to delete current Interpretation
.02 to CBOE Rule 24.17 because it is no longer relevant.
III. Discussion
The Commission finds that the proposed rule change is consistent
with the Act \7\ and, in particular, with Section 6(b) of the Act.\8\
Specifically, the Commission believes that the proposal is consistent
with the Section 6(b)(5) \9\ requirements that the rules of an exchange
be designed to promote just and equitable principles of trade, to
prevent fraudulent and manipulative acts, and, in general, to protect
investors and public interest.
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\7\ In approving this rule change, the Commission has considered
the proposed rule's impact on efficiency, competition, and capital
formation. 15 U.S.C. 78c(f).
\8\ 15 U.S.C. 78f(b).
\9\ 15 U.S.C. 78f(b)(5).
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The proposed rule change to the RAES eligibility standards is
designed to ensure that there is adequate market maker participation at
all times in OEX and DJX, by eliminating a disincentive for market
makers to actively participate in RAES in both OEX and DJX. The
Commission believes that the presence of an adequate number of market
makers contributes to the maintenance of a fair and orderly market by
helping to ensure that there is adequate liquidity for these important
indexes, particularly in times of market stress. The Commission also
believes the deletion of CBOE Rule 24.17, Interpretation .02, which
limited the applicability of the rule until December 1, 1997, is
appropriate since the specified date, December 1, 1997, has passed.
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\10\ that the proposed rule change, as amended, (SR-CBOE-98-20) is
approved.
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\10\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\11\
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\11\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 98-23313 Filed 8-28-98; 8:45 am]
BILLING CODE 8010-01-M
