[Federal Register Volume 60, Number 109 (Wednesday, June 7, 1995)]
[Notices]
[Pages 30125-30127]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-13899]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35785; File No. SR-CBOE-94-54]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Inc.; Order Approving Proposed Rule Change and Notice of Filing and 
Order Granting Accelerated Approval of Amendment No. 1 to the Proposal 
Relating to Firm Quote Responsibilities

May 31, 1995.
    On January 4, 1995, the Chicago Board Options Exchange, Inc. 
(``CBOE'' or ``Exchange'') submitted to the Securities and Exchange 
Commission (``SEC'' or ``Commission''), 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 expand the applicability of 
CBOE Rule 8.51, its firm quote rule, to certain two-part equity option 
orders in an attempt to allow public customers to execute defined risk 
strategies, such as spreads and straddles, at the disseminated market 
quotes.

    \1\15 U.S.C. Sec. 78s(b)(1) (1988 & Supp. V 1993).
    \2\17 CFR 240.19b-4 (1994).
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    Notice of the proposed rule change was published for comment and 
appeared in the Federal Register on February 14, 1995.\3\ No comments 
were received on the proposal. On May 24, 1995, the CBOE submitted 
Amendment No. 1 to the filing (``Amendment No. 1'') in order to clarify 
certain non-substantive matters.\4\ This order approves the proposal, 
as amended.

    \3\See Securities Exchange Act Release No. 35345, 60 FR 8433.
    \4\See Letter from Michael L. Meyer, Schiff Hardin & Waite, to 
Michael A. Walinskas, Chief, Options Branch, SEC, dated May 24, 
1995. Specifically, Amendment No. 1 proposes to add Interpretation 
and Policy .06 to CBOE Rule 8.51. [[Page 30126]] 
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I. Description of the Proposal

    The purpose of the proposed rule change is to expand the 
applicability of CBOE Rule 8.51, its firm quote (``firm quote'') or 
ten-up (``ten-up'') rule, to include two-part equity option orders in 
which the component series are on opposite sides of the market and in a 
one-to-one ratio. The CBOE believes this change will enhance the 
ability of public customers to execute defined risk strategies, such as 
spreads and straddles, at the disseminated market quotes.\5\

    \5\In its filing, the CBOE included a draft regulatory circular 
to be issued to members describing the change in policy applicable 
to the ten-up guarantee under CBOE Rule 8.51.
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    CBOE Rule 8.51 places the responsibility on the trading crowd to 
ensure that non-broker-dealer customer orders are sold or bought, up to 
ten contracts, at the quoted offer or bid, respectively. This ``firm 
quote'' or ``ten-up'' requirement is meant to provide confidence that 
the displayed quotes may be relied upon by the investing public and to 
ensure that public customer orders will be executed at those quotes, or 
better.
    From its inception the ten-up rule was intended to apply to, and 
has been interpreted to apply only to, single part orders, i.e., either 
a buy order or a sell order for a particular option series. The 
Exchange has determined, however, that public customers would be served 
better if the interpretation were expanded to include a requirement to 
provide a ten-up market in two-part equity option orders in which the 
components of the order are on opposite sides of the market and in a 
one-to-one ratio to each other. The expansion in the interpretation of 
this rule would make it possible for public customers to execute both 
sides of a defined risk strategy, for up to ten contracts on each side, 
such as a spread or a straddle, at the disseminated prices. The 
exchange believes the rule change should help it compete more 
effectively for public customer order flow and trading activity.
    The Exchange does not believe this rule change would be burdensome 
to market-makers because, under the current interpretation, the market-
makers would be required to satisfy the ten-up requirement as to each 
leg of a spread or straddle if each was placed as a separate order. 
This rule change would merely ensure that these two components may be 
done at the same time, as one order, and at the same prevailing market 
quotes. The Exchange believes, however, that it is inappropriate, under 
any circumstance, to extend the firm-quote treatment to multipart 
orders with all parts on the same side of the market as this would 
effectively impose the burden on options market-makers of making 
markets in the underlying security. For example, a position in a long 
call and a short put is economically equivalent to being long the 
underlying stock; and thus, requiring a trading crowd to provide firm 
quote treatment to an order for this position would essentially be 
requiring the option market-makers to act as market-makers in the 
underlying security.\6\

    \6\Under existing Rule 8.51, the firm quote size minimum will 
continue to not apply whenever a ``fast market'' is declared under 
Rule 6.6, and may be suspended for any class or series on a case by 
case basis as determined by the Market Performance Committee.
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II. Discussion

    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).\7\ In particular, the 
Commission believes the proposal is consistent with the Section 6(b)(5) 
requirement that the rules of an exchange be designed to promote just 
and equitable principles of trade and not to permit unfair 
discrimination between customers, issuers, brokers, and dealers.

    \7\15 U.S.C. 78f(b)(5) (1982).
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    The Commission believes that the CBOE's proposal to modify its 
current ten-up rule should expand the benefits to public customers 
associated with ten-up markets. In general, the ten-up rule results in 
faster executions of public customer orders and improves the quality of 
the Exchanges' options markets and market maker performance. 
Specifically, the proposal will extend the ten-up rule to each leg of 
certain two-part equity options. Accordingly, small public customers 
will be assured order execution for both parts of the order at the same 
time and at the best bid or offer to a minimum depth of ten contracts. 
Accordingly, the proposal should result in better executions for these 
types of non-broker dealer customer orders.
    The Commission also believes the proposal will provide greater 
depth to the option markets without imposing any undue burdens upon 
market makers. Because market makers are already required to satisfy 
the ten-up requirement as to each leg of two part equity option orders 
as if each was placed as a separate order, the Commission does not 
believe the proposal will impose any additional unnecessary burdens or 
capital risks upon market makers.
    The Commission also notes that the proposal will only apply to two-
part equity option orders in which the components are on opposite sides 
of the market and in a one-to-one ratio. The Commission believes these 
conditions are reasonable measures that should help ensure that the 
proposal will not allow the simultaneous execution of certain types of 
orders that otherwise might effectively raise the firm quote 
requirements above the current ten contracts limit, which could create 
disparate firm quote treatment for ``one'' versus ``two'' part orders.
    The Commission finds good cause for approving Amendment No. 1 to 
the proposed rule change prior to the thirtieth day after the date of 
publication of notice of filing thereof in the Federal Register. 
Amendment No. 1 adopts Interpretation and Policy .06 to Rule 8.51, 
which reflects in summary form the policy described in the Regulatory 
Circular. Because the Regulatory Circular was included as part of the 
filing, the substance and policy of which were discussed in the notice, 
the Commission does not believe that Amendment No. 1 raises any new or 
substantive issues. Therefore, the Commission believes it is consistent 
with Sections 6(b)(5) and 19(b)(2) of the Act to approve Amendment No. 
1 to the proposal on an accelerated basis.

III. 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, 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 at 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 Amex. All 
submissions should refer to File No. SR-CBOE-94- [[Page 30127]] 54 and 
should be submitted by June 28, 1995.
    It Therefore Is Ordered, pursuant to Section 19(b)(2) of the 
Act,\8\ that the proposed rule change (SR-CBOE-94-54) is approved, as 
amended.

    \8\15 U.S.C. Sec. 78s(b)(2) (1988)
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\

    \9\17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-13899 Filed 6-6-95; 8:45 am]
BILLING CODE 8010-01-M