[Federal Register Volume 60, Number 80 (Wednesday, April 26, 1995)]
[Notices]
[Pages 20542-20544]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-10222]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35629; File No. SR-CBOE-94-44]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Inc.; Order Approving and Notice of Filing and Order Granting 
Accelerated Approval of Amendments to a Proposed Rule Change Relating 
to Market Maker Appointments

April 19, 1995.

I. Introduction

    On November 14, 1994, the Chicago Board Options Exchange, Inc. 
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'' or ``SEC''), pursuant to Section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act'')\1\ and Rule 19b-4 
thereunder,\2\ a proposal to amend CBOE Rule 8.3(c) concerning the 
number of trading stations at which a single market maker's appointed 
classes of options are traded. The proposed rule change was published 
for comment and appeared in the Federal Register on January 12, 
1995.\3\ on February 21, 1995, the CBOE filed Amendment No. 1 to its 
proposal,\4\ on February 24, 1995, the CBOE filed Amendment No. 2 to 
its proposal,\5\ and on April 11, 1995, the CBOE filed Amendment No. 3 
to its [[Page 20543]] proposal.\6\ No comments were received regarding 
the proposal. This order approves the proposal, as amended.

    \1\15 U.S.C. 78s(b)(1) (1988).
    \2\17 CFR 240.19b-4 (1994).
    \3\See Securities Exchange Act Release No. 35192 (January 4, 
1995), 60 FR 3012.
    \4\In Amendment No. 1, the CBOE provides information comparing 
its method of assigning classes of options to that of the American 
Stock Exchange (``Amex''), describes the effect of increasing the 
number of trading stations to which a market maker's appointment may 
relate from five to ten, provides further rationale for this 
increase; and states that future changes respecting the number of 
applicable trading stations would be made pursuant to a filing under 
Section 19(b)(3)(A) under the Act, 15 U.S.C. 78s(b)(3)(A) (1988). 
See letter from Michael L. Meyer, Schiff, Hardin & Waite, to 
Francois Mazur, Attorney, Division of Market Regulation 
(``Division''), Commission, dated February 17, 1995. The reference 
in Amendment No. 1 regarding the means by which future changes will 
be effected is superseded by Amendment Nos. 2 and 3, infra notes 5 
and 6, respectively.
    \5\Amendment No. 2 states that the CBOE will discuss with 
Commission staff the appropriate manner in which to file future 
changes in the maximum number of designated trading stations prior 
to making any such filing with the Commission. See letter from Mary 
L. Bender, Senior Vice President, Division of Regulatory Services, 
CBOE to Francois Mazur, Attorney, Division, Commission, dated 
February 23, 1995.
    \6\Amendment No. 3 amends the original proposed changes to Rule 
8.3(c) by removing reference to the Market Performance Committee 
(``MPC'') designating the maximum number of trading stations, and by 
removing Proposed Interpretation and Policy .02 which stated that 
the MPC had designated such maximum number to be ten. Proposed Rule 
8.3(c) now replaces five with ten as the maximum number of trading 
stations at which a market maker may hold an appointment. Amendment 
No. 3 also discusses the alternative means by which future proposed 
changes to Rule 8.3(c) may be filed, and states that the MPC, when 
assigning station appointments to market makers, considers, among 
other matters, the physical location of stations to be assigned to a 
market maker. See letter from Mary L. Bender, Senior Vice President, 
Division of Regulatory Services, CBOE, to Michael Walinskas, Branch 
Chief, Division, Commission, dated April 10, 1995.
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II. Description of the Proposal

    The CBOE proposes to increase from five trading stations to ten the 
maximum number of trading stations at which a market maker's appointed 
classes of options may be traded pursuant to CBOE Rule 8.3(c).\7\ In 
addition, the MPC maintains its authority to provide exemptions to the 
trading station limitation. The CBOE's proposal also will have the 
effect of allowing market makers to rely on the market maker exemption 
to the NASD's short sale rule for hedging a greater number of options 
classes, provided that the requirements of the exemption are met.\8\

    \7\See Amendment No. 3, supra note 6.
    \8\The NASD short sale rule prohibits broker-dealers from 
effecting short sales for themselves or their customers at or below 
the ``bid'' when the current ``inside'' or best price is below the 
previous inside bid. See NASD Rules of Fair Practice, Art. III, 
section 48. The CBOE's market maker exemption to the short sale rule 
allows options market makers to hedge options positions in their 
appointed classes of options by buying or selling (including selling 
short) shares of underlying stocks or underlying component stocks 
contained in stock indexes. Such an ``exempt hedge transaction'' is 
defined by the Exchange as a short sale effected to hedge, and which 
in fact serves to hedge, an existing offsetting options position or 
an offsetting options position that was created in one or more 
transactions contemporaneous with the short sale. See CBOE Rule 
15.10.
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III. Discussion

    The Commission finds the proposed rule change consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to a national securities exchange. Specifically, the 
proposed rule change is consistent with the requirements of Section 
6(b)(5) of the Act because the proposal is designed to remove 
impediments to and perfect the mechanism of a free and open market, and 
protect investors and the public interest.
    The Commission believes that increasing the number of trading 
stations which may be included in a market maker's appointment from 
five stations to ten stations is a reasonable measure designed by the 
Exchange to help ensure adequate market maker participation in each 
class of options traded on the Exchange. The Exchange has stated that 
the effect of increasing the trading station maximum will be to 
increase the maximum number of options classes in which a market maker 
may hold an appointment. Accordingly, out of a total of 644 classes of 
options at the CBOE, the change can result in increases from 137 to 241 
in appointed classes, representing an increase from 21% to 37% of the 
total number of classes traded on the Exchange.\9\

    \9\See Amendment No. 1, supra note 4. In comparison, the CBOE 
notes that a registered options trader on the Amex may be assigned 
to 300 classes of options or more representing 70% of the 430 
classes of options traded on the Amex. Id.
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    The Commission believes that the CBOE's proposal will benefit the 
market and investors by increasing the potential number of options 
classes to which the obligations of a market maker will apply.\10\ 
Although the Commission recognizes that the proposal can result in 
increasing a market maker's appointed classes by over 100 classes, we 
believe adequate market making capabilities and obligations will 
continue to exist in such classes. In this regard, the Commission 
expects CBOE to assess whether market makers have adequate capital to 
fulfill their continual market making obligations under CBOE Rule 8.7 
in all their appointed classes. Further, the in-person and general 
trading requirements applicable to market makers under CBOE Rule 8.7, 
Interpretation and Policy .03\11\ should continue to ensure that market 
making is adequate in all appointed classes.\12\ Finally, in light of 
the growth of the number of options traded on the Exchange in recent 
years, the increase from 21% to 37% of the classes traded on the CBOE 
is reasonable.\13\

    \10\For example, CBOE Rule 8.7 requires generally that a market 
maker's transactions constitute a course of dealing reasonably 
calculated to contribute to the maintenance of a fair and orderly 
market. Specific requirements include a market maker's continuous 
obligation to deal for his or her own account when there is a lack 
of price continuity; or when there is a disparity between supply and 
demand for a particular option contract, or between options 
contracts of the same class. In fulfilling these requirements, 
market maker must, among other things, compete with other market 
makers to improve markets, make markets, and update market 
quotations in response to changed market conditions.
    The Commission notes that increasing the number of trading 
stations at which a market maker may hold an appointment does not in 
any way lessen a market maker's obligation to make a market. The 
CBOE has stated that the MPC, when assigning station appointments to 
market makers, considers, among other matters, the physical location 
of the stations to be assigned to a market maker. See amendment No. 
3, supra note 6.
    \11\CBOE Rule 8.7, Interpretation .03 generally requires that at 
least 25% of a market maker's transactions be executed in person, 
and not through the use of orders. Moreover, at least 75% of a 
market maker's total contract volume must be in option classes to 
which the market maker has been appointed.
    \12\The Commission notes that any further increases may warrant 
the development of additional standards to ensure adequate market 
making performance.
    \13\The CBOE has indicated in its proposal that, in the future, 
it will consult with Commission staff in order to determine the 
appropriate rule filing method for proposing any further increases 
to the maximum trading stations at which a market maker may hold an 
appointment. The alternatives would include: (1) filing a proposal 
pursuant to Section 19(b)(2) of the Act, which requires that the 
Commission publish notice of the proposal and provide an opportunity 
for public comment; or (2) filing a proposal pursuant to Section 
19(b)(3)(A) of the Act, including either a filing that would be 
effective immediately upon filing, or operative 30 days after the 
filing date, if filed as a non-controversial rule proposal. See 
Amendment Nos. 2 and 3, supra notes 5 and 6, respectively.
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    The Commission finds good cause for approving Amendment No. 1, as 
modified by, and together with, Amendment Nos. 2 and 3, prior to the 
thirtieth day after the date of publication of notice of filing thereof 
in the Federal Register. Amendment No. 1 provides additional 
information regarding the number of options classes affected by the 
Exchange's proposal, as well as general information regarding the 
structure of its trading floor. Amendment No. 2 modifies Amendment No. 
1 by stating that the CBOE will consult with Commission staff regarding 
the manner in which to file any future changes to the maximum number of 
trading stations at which market makers may hold appointments. 
Amendment No. 3 effects changes to Proposed Rule 8.3(c), but does not 
change the effect of the Exchange's proposal.
    The Commission believes that these changes do not affect the 
substance of the Exchange's proposal because they merely serve to 
provide additional data regarding the proposal, describe guidelines for 
seeking Commission approval of future changes by the MPC in trading 
station appointments, and fashion minor textual changes to the proposed 
language of Rule 8.3(c). Accordingly, the Commission believes the 
Amendments raise no new or unique regulatory issues. Therefore, the 
Commission believes it is consistent with Sections 6(b)(5) and 19(b)(2) 
of the Act\14\ to approve Amendment Nos. 1, 2, and 3 to the proposal on 
an accelerated basis.

    \14\15 U.S.C. 78f(b)(5) and 78s(b)(2) (1988). [[Page 20544]] 
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendments Nos. 1, 2, and 3. Persons making 
written submissions should file six copies thereof with the Secretary, 
Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, 
D.C. 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, 
N.W., Washington, D.C. 20549. 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-94-44 and should 
be submitted by May 17, 1995.

V. Conclusion

    For the reasons discussed above, the Commission finds that the 
proposal is consistent with the Act, and, in particular, Section 6 of 
the Act.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\15\ that the proposed rule change (File No. SR-CBOE-94-44), as 
amended, is approved.

    \15\15 U.S.C. 78s(b)(2) (1988).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\

    \16\17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-10222 Filed 4-25-95; 8:45 am]
BILLING CODE 8010-01-M