[Federal Register Volume 59, Number 141 (Monday, July 25, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-17594]


[[Page Unknown]]

[Federal Register: July 25, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34397; File No. SR-CBOE-93-54]

 

Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 to Proposed Rule Change by the Chicago Board 
Options Exchange, Inc., Relating to Pricing Increments and Priority 
Principles on Combined Trades

July 18, 1994.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'')\1\ and Rule 19b-4 thereunder\2\ notice is hereby given that 
on November 17, 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, II, and III below, which Items have been prepared 
by the self-regulatory organization. On July 14, 1994, the CBOE 
submitted Amendment No. 1 (``Amendment No. 1'') to the proposed rule 
change.\3\ 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) (1982).
    \2\17 CFR 240.19b-4 (1993).
    \3\See Letter from Barbara J. Casey, Vice President, Department 
of Market Regulation, CBOE, to Michael Walinskas, Derivative 
Products Regulation, SEC, dated July 13, 1994.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The CBOE proposes to amend Rule 6.42 and 6.45 and Interpretations 
and Policies to Rule 6.42 concerning pricing and priorities on spread, 
straddle, and combination orders. 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 CBO states that the purpose of the proposed rule change is 
twofold: first, to revise the minimum increments permissible for bids 
and offers on spread, straddle, and combination orders and, second, to 
prescribe the priority principles to apply to such orders when priced 
net at a multiple of one sixteenth of a dollar. The CBOE believes that 
these changes will facilitate the orderly execution of spread, 
straddle, and combination orders.
    The first change, to Rule 6.42, clarifies the language of the rule 
and adds a new Interpretation and Policy .02. This new Interpretation 
reflects the determination of the CBOE's Floor Procedure Committee that 
quotes for spreads, straddles, and combination orders (``combined 
trades'') may be expressed in any fractional or decimal price, which 
will makes it easier for members to price combined trades in relation 
to the current market. The second change, to paragraph (d) of Rule 
6.45, adjusts the priority principles applicable to combined trades. As 
revised, a CBOE member holding an order on a combined trade that is 
priced net at a multiple of \1/16\ (i.e., \1/4\, \3/8\, \7/16\, \1/2\, 
etc.) has priority over bids and offers in the trading crowd if all 
legs of the combined trade would trade at a price that is at least 
equivalent to quotes in the crowd. Furthermore, the order will also 
take priority over bids and offers in the customer limit order book if, 
in addition to all legs of the combination at least matching quotes in 
the crowd, at least one leg of the combination trades at a price that 
is better than the corresponding bid or offer in the book. Bids or 
offers that are part of a combined trade and that are not priced at a 
net multiple of \1/16\, while permissible, will not be entitled to 
priority under the exception contained in paragraph (d) to Rule 6.45.
    Also under the proposed rule change, special priority principles 
will apply to stock-option combination orders that are priced net at a 
multiple of \1/16\. Under this change, a stock-option order, as defined 
in CBOE Rule 1.1(ii)(a), that consists of an order to buy or sell a 
given number of shares of an underlying stock and an opposite side of 
the market order to buy or sell an option covering the same number of 
shares will be considered to be a combined trade for purposes of 
priority over bids and offers in the crowd, but not over bids and 
offers in the book. A stock-option order, as defined in CBOE Rule 
1.1(ii)(b), that consists of an order to buy or sell an underlying 
stock with the purchase and sale of an equal number of puts and calls, 
each having the same exercise price, expiration date and covering the 
same number of shares of the underlying stock, each being on the 
opposite side of the market from the order to buy or sell stock, and 
covering in the aggregate twice the number of shares represented by the 
stock order, will be considered to be a combined trade and will have 
priority over orders in the crowd and in the book.
    As an illustration, assume that Option A is quoted at 5 bid, 5\1/8\ 
asked, and option B is quoted at 6 bid, 6\1/8\ asked, and assume that 
all four quotes are represented in the book. In that instance, a spread 
involving the purchase (or sale) of option A and the sale (or purchase) 
of option B may trade at a net credit or debit of 1 (e.g., a net credit 
of 1 if option A is bought at 5 and option B sold at 6, or a net debit 
of 1 if option A is sold at 5\1/8\ and option B is bought at 6\1/8\. In 
this example, because the net price is a multiple of \1/16\ and the 
execution of the spread involves taking the same side of the market as 
the book on only one side of the spread, the spread would receive 
priority even though it ``touches'' quotes in the book on both sides. 
(That is, in the spread consisting of the purchase of option A at 5 and 
the sale of option B at 6, only the purchase of option A occurs at the 
same price and on the same side of the market as the book, which is bid 
at 5; the sale of option B at 6 is on the opposite side of the market 
in the book, which is bid at 6.) In the same example, it would not be 
permissible under Rule 6.45(d) to trade the spread at a net debit of 
\7/8\ by selling the first option at 5\1/8\ and buying the second at 6, 
because this trade would be executed at the same price and on the same 
side of the market as the book on both sides of the spread.
    To qualify for priority treatment, combined orders must meet the 
existing requirements of Rule 6.45(d), i.e., one member must represent 
all legs of the combined trade, each leg must cover the same number of 
options, and the trade must be executed against one other member. In 
those circumstances, the CBOE believes, it is fair to give combined 
trades priority when priced net at a multiple of \1/16\. Additionally, 
the CBOE represents that it has the systems capacity to disseminate 
transactions in decimals and also has a prefix field which will be used 
to identify, among other things, trades effected as part of a spread. 
Any transaction effected at non-standard prices would be disseminated 
in decimals and identified as being part of a spread by entering an 
``S'' in the prefix field.\4\
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    \4\See Amendment No. 1.
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    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 promote just 
and equitable principles of trade and to protect investors and the 
public interest.

(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

    Within 35 days after the 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 reason 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 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 August 15, 1994.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\5\
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    \5\17 CFR 200.30-(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-17594 Filed 7-22-94; 8:45 am]
BILLING CODE 8010-01-M