[Federal Register Volume 60, Number 170 (Friday, September 1, 1995)]
[Notices]
[Pages 45753-45754]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-21702]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36159; File No. SR-CBOE-95-07]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Inc.; Order Approving and Notice of Filing and Order Granting
Accelerated Approval of Amendment to a Proposed Rule Change Relating to
Solicited Transactions
August 25, 1995.
I. Introduction
On February 14, 1995, 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 modify Paragraph (e) of CBOE Rule 6.9
concerning solicited transactions. The proposal would eliminate the
requirement that the terms of a matching order be disclosed to the
trading crowd before a member or associated person would be permitted
to trade based on knowledge of an imminent, undisclosed solicited
transaction. The proposed rule change was published for comment and
appeared in the Federal Register on March 28, 1995.\3\ No comments were
received regarding the original proposal. On June 22, 1995, the CBOE
filed Amendment No. 1 to its proposal.\4\ 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. 35519 (March 21,
1995), 60 FR 15948.
\4\ Amendment No. 1 effects two changes to the Exchange's
proposal. First, Paragraph (e) of Rule 6.9 is revised to state
explicitly that any change in the terms and conditions of the
original order, as it is entered on the trading floor and of which
the member has knowledge where there is a matching solicited order,
must also be disclosed to the trading crowd before that member or
that person associated with a member could permissibly trade an
option of the same class as any option that is the subject of the
original order, a security underlying such class, or a related
instrument. Second, the Exchange proposes adding a new
Interpretation .06 to Rule 6.9 stating that disclosing the terms and
conditions of the original order any changes to the original order
pursuant to Paragraph (e) for Rule 6.9 does not provide a safe
harbor from possible front-running prohibitions. Front-running is
considered to be a violation of CBOE Rule 4.1. See letter from
Timothy Thompson, CBOE, to Michael Walinskas, Branch Chief, Division
of Market Regulation, Commission, dated June 22, 1995 (``Amendment
No. 1'').
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II. Description of the Proposal
On November 9, 1994, the Commission approved a CBOE proposal to
adopt a new Rule 6.9 that regulates the execution of solicited orders,
and sets forth specific priority principles applicable to such orders.
In addition, Rule 6.9(e) restricts trading by members and associated
persons of members possessing knowledge of imminent undisclosed
solicited transactions.\5\
\5\ See Securities Exchange Act Release No. 34959 (November 9,
1994), 59 FR 59446.
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Pargaraph (e) of CBOE Rule 6.9 generally restricts the ability of a
member, or an associated person, who has indicated in response to a
solicitation an intention to place a responsive order, and anyone aware
of that intention, to trade options of the same class as any option
that is the subject of the original order, or securities underlying
such options, or any related instruments. If either of two conditions
is met, however, the restriction does not apply. The first condition is
that all the terms of both the original order and the matching order be
disclosed to the trading crowd.\6\
\6\ The second condition is that the solicited order can no
longer reasonably be considered imminent in view of the passage of
time since the solicitation.
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The Exchange now proposes to amend paragraph (e) to eliminate the
requirement contained in the first condition that the terms of the
solicited matching order be disclosed to the trading crowd. Thus, when
there has been advance solicitation of the other side of an original
order, a member (or associated person) with knowledge of the original
order and a matching responsive order is not permitted to trade options
of the same class as any option that is the subject of the original
order, the securities underlying such options, and any related
instruments, until the terms of the original order, and any changes in
the terms and conditions of the original order of which the member or
associated person has knowledge,\7\ are disclosed to the trading crowd;
once those terms are disclosed, however, the member or person
associated with the member may trade even if the terms of the matching
order are not disclosed. The Exchange has stated that this modification
would place solicited parties on an equal footing with Exchange members
who have knowledge of the terms of the original order only, and would
conform the trading restriction in paragraph (e) to the various
priority provisions of Rule 6.9, and Interpretation .02 thereunder,
which generally require disclosure only of the terms of an original
order, not the terms of a matching solicited order.
\7\ See Amendment No. 1, supra note 4.
Finally, the Exchange has proposed adding Interpretation .06 to
Rule 6.9. Interpretation .06 states that disclosing all the terms of
the original order and any changes in the terms and conditions of the
original order to the crowd prior to effecting a trade does not provide
a safe harbor from possible violations of front-running prohibitions,
and that front-running is considered to be a violation of Exchange Rule
4.1, Just and Equitable Principles of Trade.\8\
\8\ Id.
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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
[[Page 45754]]
mechanism of a free and open market, and protect investors and the
public interest. The Commission believes that the CBOE's proposal is
appropriate to achieve Rule 6.9's primary purpose of facilitating and
regulating solicited transactions without imposing undue restrictions
on trading, particularly anticipatory hedge transactions. Under the
present rule, once a solicited party has indicated, in response to a
solicitation, an intention to place a matching responsive order, such a
solicited party may not trade based on knowledge of the impending
solicited transaction, even though the original order has been fully
disclosed to the crowd, until the solicited order is also disclosed.
The Commission notes that paragraph (e) does not restrict trading
by other CBOE members who know the terms of a disclosed original order
but who, if solicited, have not indicated an intention to trade at the
original order's limit and who are otherwise unaware of any specific
matching solicited order. Indeed, such parties may trade under the
current rule even though they have good reason to believe that an
execution of the original order is imminent based on market
circumstances.
The Commission believes that once the terms and conditions of an
original order, as well as any changes to the terms and conditions of
the original order of which the member or associated person has
knowledge,\9\ are fully disclosed to the trading crowd, those in the
crowd have essentially the same market information as do solicited
persons. Moreover, any solicited person who has privately indicated an
intention to place a responsive order, and anyone aware of that
intention, necessarily remains subject to the risks of the market and
the auction process when entering a responsive order or effecting
anticipatory trades.
\9\ Id. If the changes to the original order were not disclosed
to the trading crowd, then the trading crowd would still be at a
disadvantage to the solicited person who did have knowledge of the
changes to the terms of the original order. The solicited person
with knowledge of the changes to the original order then would have
the opportunity to benefit from this knowledge that the trading
crowd did not have. Thus, under the CBOE's proposal, all trading
based on that knowledge is prohibited until the information is
disclosed to the trading crowd. Id.
The Commission further believes that the narrower disclosure
requirement before granting relief from the trading restrictions
described above will provide the trading crowd with a fair and full
opportunity to make informed trading decisions without subjecting
solicited parties and the solicitation process to overly burdensome
restrictions. Nevertheless, the Commission notes that this narrower
disclosure requirement does not relieve market participants of the
general CBOE requirement that their acts and practices be consistent
with just and equitable principles of trade.\10\ Thus, disclosing the
terms and conditions of the original order, and any changes in the
terms and conditions of the original order, to the crowd prior to
effecting a trade does not provide a safe harbor from possible
violations of front-running prohibitions. The Commission understands
that the Exchange will issue a regulatory circular to its members
describing the revisions to its solicitations rule.
\10\ See CBOE Rule 4.1.
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Finally, the Commission notes that the Exchange's proposal relates
only to the provision in the solicitations rule that restricts trading
based on knowledge of an imminent undisclosed transaction. Thus, the
Exchange's proposal does not affect the priority rules governing
solicited transactions.\11\
\11\ For example, under the priority rules, when an original
order is disclosed in advance of a solicitation, and the matching
order both matches the disclosed original order's limit and improves
the market, the matching order has priority over other orders in the
crowd (subject to customer limit order book priorities set forth in
Rule 6.45). See CBOE Rule 6.9(b). Similarly, when a matching order
does not match the original order's limit and does not improve the
market, it does 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. See CBOE Rule 6.9(c).
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The Commission finds good cause for approving Amendment No. 1 prior
to the thirtieth day after the date of publication of notice of filing
thereof in the Federal Register. Amendment No. 1 revises Paragraph (e)
of Rule 6.9 by making it clear that any change in the terms and
conditions of the original order must be disclosed to the crowd before
a member or associated person with knowledge of such terms and
conditions can enter into related transactions. Amendment No. 1 also
adds Interpretation .06 to Rule 6.9 to make clear that Paragraph (e) of
Rule 6.9 does not provide a safe harbor from possible violations of
front-running prohibitions.\12\
\12\ See Amendment No. 1, supra note 4.
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The Commission believes that these changes serve to strengthen and
clarify the Exchange's proposals. Specifically, the revision to Rule
6.9, Paragraph (e) addresses the concern that if changes to the
original order have not been disclosed to the trading crowd, then the
trading crowd would be at a disadvantage relative to the solicited
party who has knowledge of the changes to the terms of the original
order. New Interpretation .06 clarifies that CBOE Rule 4.1 continues to
be applicable to Rule 6.9, notwithstanding the provisions of Paragraph
(e) of Rule 6.9. Accordingly, the Commission believes that Amendment
No. 1 raises 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 \13\ to approve Amendment No. 1 to the proposal on an
accelerated basis.
\13\15 U.S.C. 78f(b)(5) and 78s(b)(2) (1988).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning Amendment No. 1. 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. Sec. 552, will be available for inspection and
copying in the Commission's Public Reference Section, 450 Fifth Street,
NW., Washington, DC 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-95-07 and should be
submitted by September 22, 1995.
V. Conclusion
For the reasons discussed above, the Commission finds that the
proposal, as amended, 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,\14\ that the proposed rule change (File No. SR-CBOE-95-07), as
amended, is approved.
\14\ 15 U.S.C. 78s(b)(2) (1988).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\15\
\15\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-21702 Filed 8-31-95; 8:45 am]
BILLING CODE 8010-01-M