[Federal Register Volume 59, Number 18 (Thursday, January 27, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-1677]


[[Page Unknown]]

[Federal Register: January 27, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33494; File No. SR-CBOE-93-41]

 

Self-Regulatory Organizations; Filing and Order Granting 
Accelerated Approval of Proposed Rule Change by the Chicago Board 
Options Exchange, Inc., Relating to Opening Transactions in Exchange-
Traded Options and Duties of Designated Primary Market Makers

January 19, 1994.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on 
September 24, 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 and II below, which Items have been prepared by the self-
regulatory organization. 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

    Currently, Interpretation and Policy .01 to CBOE Rule 6.2, 
``Trading Rotations,'' provides that the opening transaction in each 
class of options traded on the Exchange shall be held promptly 
following the opening transaction in the underlying security on the 
principal exchange where the security is traded. The rules of the other 
options exchanges allow opening rotations to commence following the 
opening of the underlying security.\1\ In order to conform its rules to 
the rules of the other options exchanges, the CBOE proposes to amend 
Interpretation and Policy .01(a) to state that the opening rotation in 
each class of options shall be held promptly following the opening of 
the underlying security on the principal market where the security is 
traded. Under proposed paragraph (d) to Commentary .01, an underlying 
security shall be deemed to have opened on the principal market where 
it is traded if the market has (i) reported a transaction in the 
underlying security or (ii) disseminated opening quotations for the 
underlying security and not given an indication of a delayed opening, 
whichever first occurs. In addition, the CBOE proposes to amend 
Interpretation and Policy .01 to provide that any member appointed as a 
Designated Primary Market-Maker (``DPM'') shall participate in opening 
rotations to the same extent as an Order Book Official (``OBO'').
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    \1\See American Stock Exchange (``Amex'') Rule 918(a)(1); New 
York Stock Exchange (``NYSE'') Rule 717(a); Pacific Stock Exchange 
(``PSE'') Rule 6.64, Commentary .01; and Philadelphia Stock Exchange 
(``PHLX'') Rule 1047, Commentary .01.
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    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 CBOE proposes to amend Exchange Rule 6.2, Interpretation and 
Policy .01 to allow opening rotations in Exchange-listed options to 
commence upon the earlier of the following events: (i) the report of an 
opening transaction in the underlying security on the primary market, 
or (ii) the dissemination of opening quotations by such market. In 
addition, the CBOE proposes to amend Interpretation and Policy .01 to 
provide specifically that a DPM shall participate in opening rotations 
to the same extent as an OBO.
    Currently, CBOE Rule 6.62, Interpretation and Policy .01 provides 
that the opening rotation in each class of option contracts traded on 
the CBOE will commence promptly following the opening transaction in 
the underlying security. The rules of the other options exchanges 
provide that opening rotations will commence following the opening of 
the underlying security.\2\ The CBOE states that the other options 
exchanges interpret their rules to permit the commencement of opening 
rotations upon the earlier of either a reported transaction in the 
underlying security or a reported market quote for the security, 
provided that the primary market has not given any indication of a 
delayed opening. The CBOE's proposal is designed to conform the 
commencement of opening rotations at the CBOE to that of the other 
options exchanges, thereby alleviating the risk of inter-market pricing 
disparities.
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    \2\See note 1, supra.
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    In addition, the proposal modifies Interpretation and Policy .01 to 
provide specifically that any member appointed as a DPM shall 
participate in opening rotations to the same extent as an OBO. The CBOE 
believes that this amendment states expressly what is implied by 
paragraph (c) of CBOE Rule 8.80, ``Modified Trading System,'' which 
provides, in part, that when acting as an OBO in appointed options 
classes, the DPM shall fulfill all obligations associated with the 
OBO's functions.
    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 clarify the 
meaning of existing CBOE rules and to conform the CBOE's rules to the 
rules of the other options exchanges, thereby contributing to a fair 
and orderly market.

(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 CBOE has requested that the proposed rule change be given 
accelerated effectiveness pursuant to Section 19(b)(2) of the Act. The 
CBOE states that the proposal is intended to minimize the risk of 
pricing disparities at the opening of trading on the Exchange. With the 
expansion of multiple trading of options as provided in Rule 19c-5 of 
the Act, the CBOE believes it is imperative that the CBOE conform the 
commencement of its opening rotations to the procedures of the other 
options exchanges. In addition, the CBOE states that its proposal 
raises no new regulatory concerns because the Exchange is adopting 
procedures that have been adopted previously by the other options 
exchanges.
    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) thereunder\3\ in that 
the proposal is designed to remove impediments to and perfect the 
mechanism of a free and open market by conforming the CBOE's opening 
procedures to those of the other options exchanges. Specifically, the 
CBOE's proposal will allow the Exchange to commence opening rotations 
upon the earlier of either a reported transaction in the underlying 
security or a reported market quote for the security (provided that the 
primary market has not indicated a delayed opening), rather than 
waiting for an opening transaction in the underlying security, as 
required currently under CBOE Rule 6.2, Interpretation and Policy 
.01.\4\
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    \3\15 U.S.C. 78f(b)(5) (1982).
    \4\The CBOE states that only quotations disseminated at the 
opening on a trading day will be deemed to have opened the market in 
an underlying security. Stale quotations disseminated on a prior 
trading day will not be deemed to have opened the market in an 
underlying security. See Letter from Michael L. Meyer, Schiff Hardin 
& Waite, to Richard Zack, Branch Chief, Options Branch, Division of 
Market Regulation, Commission, dated January 14, 1994.
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    The Commission believes that the proposed rule change should help 
to alleviate the risk of pricing disparities among the options 
exchanges and should allow the CBOE to compete effectively with the 
other options exchanges for order flow.
    In addition, by allowing the CBOE to commence opening rotations 
after the opening of the underlying security on the primary market 
where it is traded, the Commission believes that the proposal should 
decrease the time required to obtain opening market quotations and 
should allow free trading to commence as quickly as possible after the 
opening. As the Commission has noted in the past, expedited free 
trading will allow market makers to engage in hedging strategies as 
soon as possible after the opening and will result in the prompt 
execution of customer orders.\5\
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    \5\See Securities Exchange Act Release No. 29652 (September 4, 
1991), 56 FR 46454 (order approving File No. SR-CBOE-91-29).
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    The Commission also believes that the proposal clarifies 
Interpretation and Policy .01 and CBOE Rule 8.80(c) by providing 
specifically that a DPM shall participate in opening rotations to the 
same extent as an OBO, thereby eliminating potential confusion 
concerning the obligations of a DPM during opening rotations.
    The Commission finds good cause for approving the proposed rule 
change prior to the thirtieth day after the date of publication of 
notice thereof in the Federal Register because the proposal amends the 
CBOE's rules to conform the CBOE's opening rotations to the procedures 
used on the other options exchanges. The Commission does not believe 
that the CBOE's proposal raise new regulatory issues. In addition, the 
Commission finds good cause for approving the CBOE's amendment 
regarding the obligations of DPMs under CBOE Rule 6.2, Interpretation 
and Policy .01 because the amendment clarifies the existing obligations 
of DPMs under CBOE Rule 8.80.

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 February 17, 
1994.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\6\ that the proposed rule change (File No. SR-CBOE-93-41), is 
approved.

    \6\15 U.S.C. 78s(b)(2) (1982).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\7\
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    \7\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-1677 Filed 1-26-94; 8:45 am]
BILLING CODE 8010-01-M