[Federal Register Volume 59, Number 146 (Monday, August 1, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-18578]


[[Page Unknown]]

[Federal Register: August 1, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34432; File No. SR-CBOE-93-17]

 

Self-Regulatory Organizations; Order Approving Proposed Rule 
Change by the Chicago Board Options Exchange, Inc., Relating to 
Requirements That Market Makers Fill Incoming Orders or Update Existing 
Markets

July 22, 1994.
    The Chicago Board Options Exchange, Inc., (``CBOE'' or 
``Exchange''), filed with the Securities and Exchange Commission 
(``Commission''), on March 30, 1993, pursuant to Section 19(b) of the 
Securities Exchange Act of 1934 (``Act'')\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to require members of the CBOE 
trading crowd to respond to orders at the currently displayed bid or 
offer, either by satisfying the orders at the displayed price or by 
updating the existing market in the subject series.
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    \1\15 U.S.C. 78s(b) (1988).
    \2\17 CFR 240.19b-4 (1993).
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    The proposed rule change was published for comment in Securities 
Exchange Act Release No. 32406 (June 3, 1993), 58 FR 32404 (June 9, 
1993). No comments were received on the proposed rule change.
    The proposal amends CBOE Rule 8.51 to require members of the CBOE 
trading crowd to execute an order, at the currently displayed quote, in 
its entirety or change the displayed quote to reflect that the 
previously displayed quote is no longer available.\3\ The proposal also 
adds Interpretation and Policy .04 to CBOE Rule 8.51, which prohibits 
the trading crowd from immediately re-displaying the previously 
disseminated market quote, unless warranted by a change in market 
conditions.
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    \3\The Commission understands this provision to allow an 
exchange, upon receipt of a market or marketable limit order, to 
execute less than the total number of contracts contained in the 
order, but the exchange then becomes obligated to update its 
quotation if it is not willing to transact with any more of the 
order at the same price. For example, if as a result of displaying a 
more competitive offer, an exchange is sent an order to buy 50 
contracts that was originally received by another exchange, it may 
buy fewer than 50 contracts at its quoted price, but must then 
revise its quotation to reflect that the price is no longer 
available.
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    Further, the proposal amends Interpretations and Policies .01 
through .03 to Rule 8.51 to extend certain obligations, regarding 
disseminated firm quotes, that are currently only imposed on Floor 
Brokers and Order Book Officials to Designated Primary Market-Makers 
(``DPM's''). Specifically, the obligation imposed on the trading crowd 
under Interpretation .01 to make a disseminated quote good for ten 
contracts, will also be triggered if the disseminated quotation is on 
behalf of an order represented by a DPM. In addition, Interpretation 
.02 will now obligate a DPM to remove, after a fill or cancellation, a 
quotation that he has caused to be disseminated or otherwise be 
responsible for satisfying the firm quote requirement with respect to 
the next order.
    Finally, the proposal amends Interpretation and Policy .03 to Rule 
8.51 to require that all market maker orders and other broker-dealer 
proprietary orders, that in each case are for less than ten contracts 
and are represented by a Floor Broker or a Designated Primary Market-
Maker, not be reflected in the displayed market quote. This requirement 
currently only applies to CBOE market markers.\4\
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    \4\See Letter from Michael L. Mayer, Schiff, Hardin & Waite, 
attorneys for CBOE, to Scott C. Kursman, attorney, National Market 
System Branch, Division of Market Regulation, Commission 
(nonsubstantive amendment clarifying Interpretation and Policy .03 
under Rule 8.51).
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    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).\5\ Specifically, the 
Commission finds that requiring members of the CBOE trading crowd to 
execute orders or update their markets facilities transactions in 
securities, protects investors and the public interest, and promotes 
fair competition among options markets by reducing the likelihood that 
an outdated quote from one options market will hinder the execution of 
an order on another options market by making such execution appear to 
be at an inferior price (i.e., a ``trade-through'').
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    \5\15 U.S.C. 78f(b)(5) (1988).
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    Currently, in light of the expansion in the multiple trading of 
options, the options exchanges have either implemented or are working 
to implement systems upgrades which will prevent orders that are 
identified as potential trade-throughs from being automatically 
executed and will re-route these orders to the appropriate market maker 
or specialist at each exchange for non-automated execution. Further, to 
attract order flow, many market makers and specialists from the 
different options exchanges have represented to their customers that 
they will execute the orders they receive at the best price available 
at any of the five options exchanges. The current proposal, therefore, 
will, consistent with Section 6(b)(5) of the Act, facilitate options 
transactions by encouraging members of the CBOE trading crowd to keep 
their markets up-to-date. This, in turn, should reduce the likelihood 
that outdated quotes will cause orders on other exchanges, that could 
be automatically executed, to be re-routed for non-automated handling. 
It also should reduce the likelihood that outdated quotes will cause 
orders executed on other exchanges at current market prices to appear 
to be executed at inferior prices. The Commission further notes that, 
concurrently with approval of this proposal, it is approving similar 
proposals by the American Stock Exchange (``AMEX''), New York Stock 
Exchange (``NYSE''), Pacific Stock Exchange (``PSE'') and the 
Philadelphia Stock Exchange (``PHLX'').\6\
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    \6\See Securities Exchange Act Release No. 34431, 34433, 34435, 
and 34434, (July 22, 1994), respectively.
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    The commission also finds that extending obligations regarding the 
dissemination of firm quotes, which are already applicable to Floor 
Brokers, to Designated Primary Market-Makers, facilitates transactions 
in securities, protects investors and the public interest, and promotes 
fair competition among options markets by helping to ensure the 
accuracy of CBOE options quotations.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act\7\, that the proposed rule change (SR-CBOE-93-17) requiring that 
members of a CBOE trading crowd execute a trade at the disseminated 
quote or update their market and extending to Designated Primary 
Market-Makers certain obligations related to firm quote disseminations 
is approved.
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    \7\15 U.S.C. 78s(b) (1988).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-18578 Filed 7-29-94; 8:45 am]
BILLING CODE 8010-01-M