[Federal Register Volume 59, Number 133 (Wednesday, July 13, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-16951]


[[Page Unknown]]

[Federal Register: July 13, 1994]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-34323; File No. SR-CBOE-94-15]

 

Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Inc. Relating to 
Solicited Transactions

July 6, 1994.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on May 3, 1994, 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, II, and III 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.
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    \1\15 U.S.C. 78s(b)(1).
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange proposes to adopt a new Rule 6.9 that would regulate 
the execution of ``solicited orders,'' as that term is defined in the 
rule; would set forth specific priority principles applicable to such 
orders; and would restrict trading by members and associated persons 
possessing knowledge of imminent undisclosed solicited transactions.
    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 purpose of the proposed rule change is to regulate the 
execution of ``solicited'' transactions in options, i.e., options 
transactions having terms that are pre-negotiated prior to the time the 
orders comprising the transaction are exposed to the trading crowd on 
the CBOE floor. The proposed rule change also restricts trading in any 
class of an option, as well as trading in the underlying security or 
any ``related instrument,'' by CBOE members and their associated 
persons who have knowledge of an imminent solicited transaction in 
options of that class. This prohibition applies until all terms are 
disclosed to the trading crowd or until execution of the solicited 
transaction cannot reasonably be considered imminent given the passage 
of time since the transaction was agreed upon.
    The Exchange believes that it is appropriate to permit solicitation 
between potential buyers and potential sellers of options in advance of 
the time they send actual orders to the trading crowd on the Exchange. 
The Exchange states that complex options orders, such as spreads, 
straddles and combination orders, as well as stock-option orders, often 
require the ``advance shopping'' that is characteristic of a solicited 
transaction. The Exchange believes that such interactions between 
buyers and sellers and the resulting solicited transactions can enhance 
liquidity and depth at the CBOE by bringing orders to the floor that 
might otherwise be difficult to effect.
    Nevertheless, if the orders that comprise a solicited transaction 
are not suitably exposed to the order interaction process on the CBOE 
floor, the execution of such orders would not be consistent with CBOE 
rules designed to promote order interaction in an open-outcry auction. 
For example, Rule 6.43 requires bids and offers to be made at the post 
by public outcry, and Rule 6.74 imposes specific order exposure 
requirements on floor brokers seeking to cross buy orders with sell 
orders. Solicited transactions by definition entail negotiation, and if 
the orders that comprise a solicited transaction are not adequately 
exposed to the floor auction, the crowd cannot have sufficient time to 
digest and react to those orders' terms. The pre-negotiation inherent 
in the solicitation process thus can enable the parties to a solicited 
transaction to preempt the crowd to an execution at the pre-negotiated 
price.
    Proposed Rule 6.9 is intended to preserve the right to solicit 
orders in advance of submitting a proposed trade to the crowd, while at 
the same time assuring that original orders that are the subject of a 
solicitation are exposed to the auction market in a meaningful way. For 
instance, the proposed rule change would require a member representing 
an original order that is the subject of a solicitation to disclose the 
terms of the original order to the crowd before the original order can 
be executed. CBOE believes that such disclosure would eliminate the 
unfairness that can be associated with pre-negotiated transactions and 
would subject the order that is the subject of the solicitation to full 
auction interaction with other orders in the crowd.
    To promote disclosure at the inception of a solicitation period, 
rather than later, and to encourage solicited persons to bid or offer 
at prices that improve the current market, CBOE's rule change would 
establish a series of priority principles for solicited transactions. 
Priority would be accorded depending on whether the original order is 
disclosed throughout the solicitation period; whether the solicited 
order improves the best bid or offer in the crowd; and whether the 
solicited order matches the original order's limit. Thus, when the 
original order is disclosed in advance of the solicitation and the 
solicited order both matches the disclosed original order's limit and 
improves the market, the solicited order will have priority over other 
orders in the crowd and may trade with the original order at the 
improved bid or offered price, subject to the customer limit order book 
priorities set forth in Rule 6.45. When a solicited order does not 
match the original order's limit and does not improve the market, 
however, it will not have priority over other bids and offers 
represented in the crowd even if the original order was disclosed to 
the crowd for the full solicitation period. A responsive solicited 
order will not have priority to trade with the original order even if 
the solicited order improves the market; instead, in that instance, 
others in the crowd may trade ahead of the solicited person at the 
improved price.
    In addition to requiring disclosure of original orders and 
clarifying the priority principles applicable to solicited 
transactions, proposed Rule 6.9(e) would make it prohibited conduct, 
inconsistent with just and equitable principles of trade, for any 
member or associated person who has knowledge of all the material terms 
of an original order and a solicited order that matches the original 
order's price, to enter an order to buy or sell an option of the same 
class as any option that is the subject of the solicitation prior to 
the time the original order's terms are disclosed to the crowd or the 
execution of the solicited transaction can no longer reasonably be 
considered imminent. This prohibition would extend to orders to buy or 
sell the underlying security or any ``related instrument,'' as that 
term is defined in the Rule. The CBOE believes that these prophylactic 
requirements are necessary to prevent members and associated persons 
from using undisclosed information about imminent solicited option 
transactions to trade the relevant option or any closely-related 
instrument in advance of persons represented in the relevant options 
crowd.
    The CBOE believes that proposed Rule 6.9 will improve the CBOE 
auction by clarifying the requirements applicable to solicited 
transactions and by enabling the Exchange to initiate enforcement 
proceedings in appropriate cases under specific rules. The Exchange 
believes that the proposed rule change is consistent with section 6(b) 
of the Act in general and section 6(b)(5) in particular in that it is 
designed to promote just and equitable principles of trades and to 
protect investors and the public interest.

(B) Self-Regulatory Organization's Statement on Burden on Competition

    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

    Written comments on the proposed rule change were neither solicited 
nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period: (i) As the Commission 
may designate up to 90 days of such date if it finds such longer period 
to be appropriate and publishes its reasons for so finding or (ii) as 
to which the self-regulatory organization consents, the Commission 
will:
    (a) By order approve such proposed rule change, or
    (b) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

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 above-mentioned 
self-regulatory organization. All submissions should refer to File No. 
SR-CBOE-94-15 and should be submitted by August 3, 1994.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\2\
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    \2\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-16951 Filed 7-12-94; 8:45 am]
BILLING CODE 8010-01-M