[Federal Register Volume 59, Number 9 (Thursday, January 13, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-819]


[[Page Unknown]]

[Federal Register: January 13, 1994]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33430; File No. SR-CBOE-93-51]

 

Self-Regulatory Organizations; Filing and Order Granting 
Accelerated Approval of Proposed Rule Change by the Chicago Board 
Options Exchange, Inc., Relating to an Extension of the Modified 
Trading System Pilot Program

January 5, 1994.
    Pursuant to section 19(b)(1) of the Securities and Exchange Act of 
1934 (``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on 
November 24, 1993, 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 and 
II below, which Items have been prepared by the CBOE. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The CBOE proposes to extend its Modified Trading System pilot 
program until November 30, 1994. The text of the proposed rule change 
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 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 CBOE 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 the 
Statutory Basis for, the Proposed Rule Change

    The purpose of the proposed rule change is to extend the operation 
of the Exchange's Modified Trading System pilot program (``MTS Pilot 
Program'' or Pilot Program').\1\ Under Exchange Rule 8.80(a), the MTS 
Pilot has been authorized by the Commission to operate through 
September 22, 1993.\2\ The proposed rule change would revise Exchange 
Rule 8.80(a) to extend the MTS Pilot Program until November 30, 1994.
---------------------------------------------------------------------------

    \1\The MTS was originally approved by the Commission in 1987 as 
a two-year pilot program. See Securities Exchange Act Release No. 
24934 (September 22, 1987), 52 FR 36122 (September 29, 1987).
    \2\See Securities Exchange Act Release Nos. 27167 (August 22, 
1989), 54 FR 35960 (August 30, 1989) (extending MTS Pilot Program 
until September 22, 1991); and 29935 (November 13, 1991), 56 FR 
58595 (November 20, 1991) (extending MTS Pilot Program until 
September 22, 1993) (``Exchange Act Release No. 29935'').
---------------------------------------------------------------------------

    The Exchange's MTS Pilot Program permits the CBOE to assign a 
Designated Primary Market Maker (``DPM'') for options classes. Under 
the Pilot Program, members appointed as DPMs assume responsibilities 
and acquire rights in their appointed options classed beyond the 
obligations and rights of other market makers that trade in the same 
options class. Specifically, in addition to the normal obligations of a 
market maker, the DPM assumes additional obligations designed to 
strengthen the market making in the designated options class, such as 
(1) assuring that disseminated market quotations are accurate; (2) 
being present at the training post throughout every business day; (3) 
resolving trading disputes, subject to Floor Official review; and (4) 
participating at all times in any automated execution system which may 
be open in appointed options classes.\3\
---------------------------------------------------------------------------

    \3\See Exchange Rule 8.80(c)
---------------------------------------------------------------------------

    When the Commission last extended the MTS Pilot Program in 1991, 
the Commission stated that prior to granting permanent approval or a 
further extension of the Pilot Program, the Exchange would have to 
submit a report discussing various aspects of the Pilot Program.\4\ As 
a result, in connection with this filing, the CBOE has filed such a 
report with the Commission (``MTS Report'').\5\ The central findings 
stated by the Exchange in the MTS Report are that: (1) No complaints 
have been lodged with the Exchange concerning the operation of the 
Pilot Program; (2) no disciplinary or performance action has been taken 
against any Exchange member due to the operation of the Pilot Program; 
(3) since its inception, use of the Pilot Program by members has 
consistently increased in terms of the number of DPMs, the number of 
options classes assigned to DPMs, and the aggregate average daily 
trading volume associated with options classes assigned to DPMs; and 
(4) objective and subjective surveys of members conducted by the 
Exchange's research department have consistently shown that options 
classes assigned to DPMs are characteristized by narrower bid/ask 
spreads than other options classes listed on the Exchange.\6\
---------------------------------------------------------------------------

    \4\Specifically, the Exchange was to submit a report addressing: 
(1) whether there have been any complaints regarding the operation 
of the Pilot Program; (2) whether the CBOE has taken any 
disciplinary or performance action against any member due to the 
operation of the Pilot Program; (3) the number of DPM's involved in 
the Pilot Program; (4) the extent to which the Pilot Program has 
been used on the CBOE; (5) whether the CBOE terminated or replaced a 
DPM and the reasons therefore; (6) the impact of the Pilot Program 
on the bid/ask spreads, depth and continuity in the CBOE options 
markets; and (7) whether the CBOE has taken any action or there have 
been any complaints against DPMs or associated broker-dealers 
relating to the improper activity as a result of DPM affiliations 
with upstairs firms. See Exchange Act Release No. 29935, supra note 
2.
    \5\See Letter from Daniel Hustad, Director, Market Procedures 
and Planning Department, CBOE, to Richard Zack, Branch Chief, Office 
of Derivatives Regulation, Division of Market Regulation, 
Commission, dated January 5, 1994.
    \6\Id.
---------------------------------------------------------------------------

    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) of the Act in particular in that it is designed to 
promote just and equitable principles of trade, and perfect the 
mechanism of a free and open market. Specifically, the Exchange 
believes that the proposed rule change will continue the operation of a 
trading system that, in accordance with Section 11A(a)(1)(C)(i) of the 
Act,\7\ assures the economic and efficient execution of securities 
transactions.
---------------------------------------------------------------------------

    \7\15 U.S.C. Sec. 78k-1(a)(1)(C)(i) (1990).
---------------------------------------------------------------------------

(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

    The Exchange has requested that the proposed rule change be given 
accelerated effectiveness pursuant to Section 19(b)(2) of the Act.
    The Commission finds that the proposed rule change to extend the 
MTS Pilot Program until November 30, 1994 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) thereunder.\8\ Specifically, based on 
the representations made by the Exchange in the MTS Report, the 
Commission concludes that the Pilot Program has contributed to the 
protection of investors and to the Exchange's ability to provide fair 
and orderly markets in new options products. Additionally, the growth 
in the use of the MTS Pilot Program as represented by the CBOE, 
combined with the Exchange's findings that options classes assigned to 
DPMs are consistently characterized as having narrowing bid/ask spreads 
than other options classes, leads the Commission to conclude that the 
Pilot Program is beneficial in achieving fair and orderly markets for 
options classes. Accordingly, for the reasons stated herein and for the 
reasons originally articulated in the Commission's order first 
approving the MTS Pilot Program,\9\ the Commission concludes that 
extending the Pilot Program will further contribute to the protection 
of investors and to the Exchange's ability to provide fair and orderly 
markets in new options products.\10\
---------------------------------------------------------------------------

    \8\15 U.S.C. 78f(b)(5) (1982).
    \9\See Exchange Act Release No. 24934, supra note 1.
    \10\The Commission notes, however, that before the pilot program 
can be approved on a permanent basis or further extended, the CBOE 
must provide the Commission with a detailed report on the operation 
of the MTS pilot program incorporating the MTS Report and 
supplementing it with any new developments arising during this 
extension of the pilot program.
---------------------------------------------------------------------------

    The Commission finds good cause for approving the proposed rule 
change prior to the thirtieth day after the date of publication of 
notice of filing thereof in the Federal Register in order to permit the 
uninterrupted continuation of the MTS Pilot Program. As set forth in 
the MTS Report, the CBOE has represented that no adverse comments have 
been received and no problems have arisen in connection with the 
operation of the MTS Pilot Program since its inception. Furthermore, 
the Commission has not received any comments opposing the Pilot Program 
or otherwise indicating that the Pilot Program is operating other than 
as originally intended. Accordingly, the Commission believes good cause 
exists for approving the extension of the Pilot Program until November 
30, 1994, on an accelerated basis.

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 in 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 CBOE. All 
submissions should refer to File No. SR-CBOE-93-51 and should be 
submitted by February 3, 1994.
    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\11\ that the proposed rule change (SR-CBOE-93-51) is approved, 
and, accordingly, the MTS Pilot Program is extended until November 30, 
1994.
---------------------------------------------------------------------------

    \11\15 U.S.C. 78s(b)(2) (1982).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
---------------------------------------------------------------------------

    \12\17 CFR 200.30-3(a)(12) (1993).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-819 Filed 1-12-94; 8:45 am]
BILLING CODE 8010-01-M