[Federal Register Volume 60, Number 198 (Friday, October 13, 1995)]
[Notices]
[Pages 53440-53442]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-25368]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-36331; File No. SR-CBOE-95-49]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Inc., Relating to 
Telephones on the Floor of the Exchange

October 3, 1995.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on August 25, 1995, the 
Chicago Board Options Exchange, Inc. (``CBOE'' or ``Exchange'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II, and III below, which 
Items have been prepared by the self-regulatory organization. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.

    \1\ 15 U.S.C. 78s(b)(1) (1988).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The CBOE has adopted a Regulatory Circular governing the use of 
member-owned or Exchange-owned telephones located at the trading post 
where options on the Standard & Poor's 100 Stock Index (``OEX 
Options'') are traded, and has determined to file this Circular as a 
proposed rule change pursuant to Section 19(b)(2) of the Act.

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 purpose of the Regulatory Circular is to permit telephones 
located at the OEX trading post on the floor of the Exchange to provide 
members and clerks with access to outside lines for outgoing calls, 
subject to the conditions set forth in the Circular. With the exception 
of the prohibition on the use of telephones at the OEX trading post to 
receive incoming calls, these conditions are the same as those 
previously approved by the Commission governing the use of telephones 
at the equity option trading posts on the floor of the CBOE.\2\

    \2\ See Securities Exchange Act Release No. 33701 (March 2, 
1994), 59 FR 11336.
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    Exchange Rule 6.23 prohibits members from establishing or 
maintaining any telephone or other wire communications between their 
offices and the Exchange floor without prior approval by the Exchange, 
and it 

[[Page 53441]]
authorizes the Exchange to direct the discontinuance of any 
communication facility terminating on the Exchange floor. Pursuant to 
this rule, the Exchange adopted the Regulatory Circular to permit the 
installation of outside telephone lines at the OEX trading post, and to 
adopt conditions governing their use. The Exchange believes that the 
installation of outside telephone lines at the OEX trading post, 
subject to the conditions set forth in the Regulatory Circular, will 
allow members in the OEX trading crowd to communicate more effectively 
and efficiently with persons located off the floor, which in turn will 
improve the efficiency of the OEX market and provide better execution 
of options orders to the benefit of investors.
    The proposed rule change also imposes user fees on members who are 
approved to use Exchange-installed telephones located at the OEX 
trading post. These fees are adopted pursuant to Exchange Rule 2.22, 
which permits the Exchange to impose fees on members for the use of 
Exchange facilities or for any services or privileges granted by the 
Exchange.
    The conditions imposed by the Regulatory Circular on the use of 
telephones at the OEX trading post are as follows:
    1. The telephones may not be used to receive orders, but may be 
used to provide quotes that have been publicly disseminated pursuant to 
Rule 6.43.
    2. Members may give their clerks their PIN access code. Although 
both members and clerks may use the telephones, members will have 
priority. Each member will be responsible for all calls made using that 
member's PIN access code.
    3. Headsets will not be permitted on the telephones in the post 
pit. Portable or cellular phones also will not be permitted.
    4. Clerks will not be permitted to establish a base of operation 
utilizing telephones at the OEX post.
    5. Members and their clerks using the telephones are required to 
consent to recording of conversations on telephones at the OEX post.
    6. The telephones are to be used for voice service only. Data 
services (PC's, fax, etc.) will remain subject to Exchange consent 
under a separate program.
    7. Only outgoing calls may be made on the telephones; incoming 
calls are not permitted.
    The Exchange intends to enforce these conditions as rules of the 
Exchange, and has advised members that violations may lead to formal 
disciplinary proceedings.
    By restricting floor telephones at the OEX post to hardwired 
devices only and not allowing cellular, portable, or headset 
telephones, the Exchange believes it will better be able to monitor and 
control telephone usage at the trading post, and minimize disruption of 
trading at the post. In addition, currently available technology would 
not permit a large number of portable or cellular telephones to be used 
in the environment of the trading floor without significant 
deterioration or interruption of service.
    The Exchange has determined that telephones at the OEX trading post 
should be limited to outgoing calls only and should not be used to 
receive customer orders until further consideration can be given to 
relevant regulatory issues, including how to provide customers with 
access to the trading floor on a fair and non-discriminatory basis, how 
to assure that persons on the floor are qualified to receive orders 
directly from customers, and how to surveil order-taking activity 
conducted over floor telephones. The Exchange intends to consider these 
issues in the near future, and depending on its conclusions, the 
Exchange may determine to revise or eliminate these conditions pursuant 
to a subsequent rule filing under Section 19(b) of the Act.
    As with the use of telephones at the equity trading posts, the 
Exchange intends to police compliance with the conditions applicable to 
the use of telephones at the OEX post by means of customary floor 
surveillance procedures, including reliance on surveillance procedures, 
including reliance on surveillance by Floor Officials and Exchange 
employees.
    Because there are no restrictions on where a member may place an 
outgoing call, telephones at the OEX trading post may be used to place 
orders in equity or futures markets.\3\ To the extent that this might 
raise concerns over the possibility of misuse of non-public information 
available at the OEX trading post, it should be noted that the S&P 100 
Index, on which OEX options are based, is a capitalization-weighted 
index of 100 different blue chip stocks. The fact that the value of OEX 
options is derived from the value of these stocks, combined with the 
large number of stocks included in the index, suggests that the type of 
information that may be available at the OEX trading post is not likely 
to be significant in predicting future changes in the index. In any 
event, the Exchange believes that the surveillance procedures it has in 
place will detect and deter any attempts at misuse of non-public 
information related to OEX options. The Exchange shares surveillance 
information through the Intermarket Surveillance Group (``ISG'') with 
other stock and options markets, and also has in place a surveillance 
sharing agreement with the Chicago Mercantile Exchange, which provides 
a market in futures on the S&P 500 Index.\4\

    \3\ The telephone policy also allows members to use the floor 
telephones for the purpose of providing quotations on OEX options. 
In using the telephones for this purpose, members may only provide 
quotations that have been publicly disseminated pursuant to CBOE 
Rule 6.43.
    \4\ SG was formed on July 14, 1983 to, among other things, 
coordinate more effectively surveillance and investigate information 
sharing arrangements in the stock and options market. Because of 
potential opportunities for trading abuses involving stock index 
futures, stock options, and the underlying stocks and the need for 
greater sharing of surveillance information for these potential 
intermarket trading abuses, the Chicago Mercantile Exchange and the 
Chicago Board of Trade joined the ISG as affiliate members in 1990. 
See Intermarket Surveillance Group Agreement, July 14, 1983.
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    The proposed fees for the use of the telephones will generally be 
the same as those charged for the use of telephones at the equity 
trading posts. Specifically, local calls over Exchange telephones will 
be charged at 10 cents per minute. Long distance calls over Exchange 
telephones will be charged at a rate 25% greater than the Exchange's 
direct costs. In addition, the Exchange will charge a $5 monthly fee 
for the use of the phones.
    The Exchange believes that its proposal is consistent with and 
furthers the objectives of Section 6(b)(5) of the Act in that it is 
designed to improve communications between the Exchange's trading floor 
and off-floor locations in a manner that promotes just and equitable 
principles of trade, prevents fraudulent and manipulative acts and 
practices, fosters cooperation and coordination with persons engaging 
in facilitating transactions in securities, and removes impediments to 
and perfects the mechanism of a free and open market and national 
market system.
    In addition, the Exchange believes that the proposed rule change 
with respect to the fees is consistent with Section 6(b)(4) of the Act 
in that it is designed to provide for the equitable allocation of 
reasonable dues, fees, and charges among CBOE members.

(B) Self-Regulatory Organization's Statement on Burden on Competition

    CBOE believes that the Regulatory Circular's prohibition on the use 
of headsets and portable and cellular telephones and its prohibition on 
the 

[[Page 53442]]
use of telephones to receive incoming calls or to receive orders do not 
have any anti-competitive effects that are not justified by legitimate 
regulatory concerns. All members at the OEX trading post will have the 
same access to telephone communications. This is likely to minimize 
existing differences among floor members in terms of their ability to 
communicate with off-floor locations. While some persons off the floor 
might be competitively advantaged if they were able to place calls 
directly to the OEX trading post and to place orders directly with 
members at the post, since most investors would not be able to do this 
even if it were permitted, there could be questions of unfair 
competition in the absence of the restrictions that are embodied in the 
Regulatory Circular. Further, before off-floor customers are permitted 
to place orders directly with floor members, the Exchange must give 
further consideration to regulatory concerns, including the possible 
misuse of non-public information, the need to assure compliance with 
rules designed to assure the qualifications of members who accept 
orders directly from public customers, and how to provide audit-trail 
surveillance over this activity. Until these concerns have been 
addressed, the Exchange believes that it is justified in limiting the 
use of telephones at the OEX post as provided in the Regulatory 
Circular.

(C) Self-Regulatory Organization's Statement on Comments on the 
Proposed Rule Change Received from Members, Participants, or Others

    Written comments on the proposed rule change were neither solicited 
nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of 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 reasons 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 in 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. All submissions should refer to File No. SR-CBOE-95-49 
and should be submitted by November 3, 1995.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\5\

    \5\ 17 CFR 200.30-3(a)(12) (1994).
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Jonathan G. Katz,
Secretary.
[FR Doc. 95-25368 Filed 10-12-95; 8:45 am]
BILLING CODE 8010-01-M