[Federal Register Volume 60, Number 206 (Wednesday, October 25, 1995)]
[Notices]
[Pages 54737-54739]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-26428]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36391; File No. SR-CBOE-95-52]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Incorporated Relating to 
the Suspension of the Ten Contract Firm Quote Requirement During Fast 
Markets

October 18, 1995.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on September 5, 1995, the Chicago Board Options Exchange, Incorporated 
(``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 
Exchange. 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).
    \2\17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend CBOE Rules 8.51, 6.6 and 6.20 
Interpretation .09 to: (i) remove the pilot status of Rule 8.51; (ii) 
conform Rule 8.51 to the existing practice of permitting, but not 
requiring, Floor Officials to suspend the ten contract firm quote 
requirement of Rule 8.51(a) during a fast market; (iii) expand the 
group of persons with authority to grant suspensions, exemptions or 
exceptions to Rule 8.51 (currently only the Market Performance 
Committee) to any two Floor Officials; (iv) specify that when a fast 
market is declared any two Floor Officials have the power to suspend 
the firm quote requirement of Rule 8.51 and turn off the Retail 
Automatic Execution System (``RAES''); (v) allow the senior person then 
in charge of the Exchange's Control Room to suspend the ten contract 
firm quote requirement under certain circumstances; and (vi) amend Rule 
6.20 Interpretation .09 to clarify the instances where a member of the 
Market Performance Committee may perform the functions of a Floor 
Official. The text of the proposed rule change is available at the 
Office of the Secretary, the Exchange, and at the Commission.

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 Exchange included statements 
concerning the purpose of and basis for the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
Section (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 purposes of the proposed rules changes are: (1) to approve Rule 
8.51 on a permanent basis, removing the current pilot program 
designation, (2) to conform Rule 8.51 to the existing practice of 
permitting, but not requiring, Floor Officials to suspend the ten 
contract firm quote requirement of Rule 8.51(a) during a fast market, 
(3) to expand the group of persons with authority to grant suspensions, 
exemptions, or exceptions to the firm quote requirement from the Market 
Performance Commission members to any two Floor Officials, (4) to 
specify that when a fast market is declared pursuant to Rule 6.6, two 
Floor Officials have the power to suspend the firm quote requirement of 
Rule 8.51 and turn off RAES, (5) grant the senior person then in charge 
of the Exchange's Control Room the authority to suspend the ten 
contract firm quote requirement, if there is a system malfunction that 
affects the Exchange's ability to disseminate or update market quotes, 
and (6) to amend Rule 6.20 Interpretation .09 to clarify that the 
instances where a member of the Market Performance Committee may 
perform the functions of a Floor Official include enforcing policies 
and acting pursuant to rules related to RAES, fast markets, and the ten 
contract firm quote requirement.
    Rule 8.51(a) requires a trading crowd to sell (buy) at least ten 
contracts at the offer (bid) which is displayed when a buy (sell) 
customer order reaches the trading crowd. Initially, this rule was 
adopted as an Exchange pilot program to be monitored and enforced by 
the Exchange's Market Performance Committee.\3\ The rule has been in 
effect since 1989, and the Exchange believes it is now time to remove 
the designation as a pilot program. The Exchange believes that the rule 
has been beneficial to investors and has provided greater liquidity to 
the markets by requiring that the orders of non-broker dealer customers 
be filled for at least ten contracts at the displayed quote price.

    \3\See Securities Exchange Act Release No. 26924 (June 13, 
1989), 54 FR 26284 (June 22, 1989).
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    Rule 8.51(a)(2) currently provides that the ten contract firm quote 
requirement will be in effect unless a fast market has been declared. 
Although not presently explicit in the rules, it is current practice 
not to automatically suspend this requirement when a fast market has 
been declared. Instead, pursuant to Rule 8.51(a)(3), when a fast market 
has been declared, Market Performance Committee members determine 
whether the ten contract firm quote requirement in paragraph (a) of 
Rule 8.51 should be suspended. The proposed amendment would amend Rule 
8.51(a)(2) and add Interpretation .07 to clarify that the ten contract 
firm quote requirement in paragraph (a) of Rule 8.51 is not 
automatically suspended when a fast market is declared. Instead, 
Interpretation .07 would provide that any two Floor Officials have the 
power, but are not required, to suspend this requirement when a fast 
market has been declared.
    CBOE believes the interests of a fair and orderly market are better 
served when the rules allow Exchange officials the discretion to 
evaluate market conditions and circumstances and to exercise their 
judgment as to whether the ten contract firm quote requirement should 
be suspended in a fast market. This permits the firm quote requirement 
to remain in place for the benefit of non-broker dealer customers even 
when a fast market has been declared, except in those specific 
instances where two Floor Officials have determined that the ten 
contract firm quote requirement should be suspended.
    As set forth in Interpretation .09 to Rule 6.20, members of the 
Market Performance Committee may perform the functions of Floor 
Officials for the purpose of enforcing trading conduct policies. As 
Rule 8.51 is presently written, only the Market Performance Committee 
or Market Performance Committee members acting as Floor Officials may 
grant exemptions or make exceptions to Rule 8.51. CBOE believes 

[[Page 54738]]
Floor Officials from the Floor Officials Committee are also qualified 
to make decisions regarding exemptions and exceptions to Rule 8.51. 
CBOE sees no reason to limit this power to members of the Market 
Performance Committee. CBOE also believes that the power to suspend 
Rule 8.51 once a fast market is declared should be granted to any two 
Floor Officials, whether they are members of the Market Performance 
Committee or members of the Floor Officials Committee.
    CBOE's proposal would grant equal power to members of the Floor 
Officials Committee and members of the Market Performance Committee to 
act under Rule 8.51 regarding suspensions, exceptions or exemptions to 
the firm quote requirement. It is important for a timely decision to be 
made once a fast market has been declared or other situations have 
arisen which warrant the suspension of the firm quote requirement, or 
an exemption or exception to this requirement. CBOE believes that it 
could be detrimental to a fair and orderly market to delay action until 
a member of the Market Performance Committee could be found to make 
such a decision when members of the Floor Officials Committee might 
already be present at the trading post. To implement CBOE's intention 
that any two Floor Officials may make decisions under Rule 8.51, 
including members of the Market Performance Committee acting as Floor 
Officials and members of the Floor Officials Committee, the proposal 
would amend Rule 6.20, Interpretation .09, amend Rule 8.51(a)(3), and 
add Interpretation .06 to Rule 8.51. In addition, the proposal would 
amend Rule 8.51 to clarify that in deciding whether to grant a 
suspension, exception or exemption to the firm quote requirement, Floor 
Officials consider whether to do so would be in the interest of a fair 
and orderly market.
    Because Rule 8.51 requires that Exchange market makers honor non-
broker dealer customer orders at the displayed quote for up to ten 
contracts, it is important that the displayed market quote be accurate. 
Otherwise, market makers would be forced to trade ten contracts at an 
inaccurate or ``stale'' quote price. Therefore, if there is a system 
malfunction or other circumstance which interferes with the Exchange's 
ability to disseminate the then current and accurate quote, it is 
important for the Exchange to be able to act quickly to suspend the 
market maker's obligations under Rule 8.51 until the difficulty is 
resolved. To implement such a quick response, the proposal would 
further amend Rule 8.51 to grant to the senior person then in charge of 
the Exchange's Control Room the authority to suspend the ten contract 
firm quote requirement contained in Rule 8.51(a) if there is a system 
malfunction or other circumstance that affects the Exchange's ability 
to disseminate or update market quotes. After exercising such 
authority, the senior person would need immediately to seek approval of 
two Floor Officials, who would be empowered to confirm or overrule the 
suspension.
    It is important for the Control Room to have this power to suspend 
the firm quote requirement, since the Control Room would most likely 
learn of the system malfunction or other circumstance before Floor 
Officials or other Exchange staff. Consequently, the Control Room could 
act in a timely manner to prevent market makers from having to trade at 
``stale'' market quotes. If the Control Room does invoke its power to 
suspend the firm quote requirement, then the Control Room would 
disseminate a message notifying the public that the displayed quotes 
are not firm because of a data dissemination problem. This would inform 
non-broker dealer customers that their orders would not necessarily be 
filled at that displayed bid or offer. Once the system malfunction has 
been corrected and the market quotes have been updated, either the 
senior person then in charge of the Exchange's Control Room or two 
Floor Officials would be required to end the suspension of the firm 
quote requirement.
    As it is presently written, Rule 6.6(b) provides that the two Floor 
Officials declaring a fast market have the power to take a number of 
specified actions and more generally to take such other actions as are 
deemed necessary in the interest of maintaining a fair and orderly 
market. When a fast market has been declared, pursuant to these general 
powers, Floor Officials will often, in the interest of maintaining a 
fair and orderly market, suspend the ten contract firm quote 
requirement of Rule 8.51. This decision to suspend the firm quote 
requirement is made often during a fast market because the displayed 
quote is not current or accurate due to the influx of orders or other 
unusual circumstances. Therefore, market makers should not be forced to 
trade ten contracts at an inaccurate quote. In order to notify members 
and the public that, during a fast market, Floor Officials may suspend 
the firm quote requirement, CBOE proposes to specify in Rule 6.6(b) 
that when a fast market is declared, Floor Officials have the power to 
suspend the ten contract firm quote requirement of Rule 8.51.
    For the same reasons, after a fast market declaration, another 
action Floor Officials may take in the interest of maintaining a fair 
and orderly market is to turn off RAES. When RAES receives an order, 
the system automatically will attach to the order its execution price, 
determined by the prevailing market quote at the time of the order's 
entry into the system. A buy order will pay the prevailing market quote 
for an offer and a sell order will sell at the prevailing market quote 
for the bid. A market maker who has signed on as a participant in RAES 
will be designated as a contra-broker on the trade. Trades are assigned 
to these participating market makers on a rotating basis. Therefore, by 
agreeing to participate in RAES, a market maker is automatically 
assigned trades based on the prevailing market quote that is then being 
disseminated. Consequently, it is important for the prevailing market 
quote to be accurate, because otherwise market makers participating in 
RAES may be assigned trades at prices other than the actual prevailing 
market quote. During a fast market, often the influx of orders is 
greatly increased or other unusual circumstances exist that affect the 
accuracy of the prevailing market quote. For this reason, Floor 
Officials, acting under the general powers of Rule 6.6(b), may turn off 
RAES to prevent market makers from being assigned trades based on 
inaccurate market quotes. In order to notify members and the public 
that such action may be taken in a fast market, CBOE proposes to amend 
Rule 6.6 to specify that Floor Officials have the power to turn off 
RAES after a fast market has been declared.
    Furthermore, as Rule 6.6(b) is presently written, it could be 
interpreted that only the same two Floor Officials who declared the 
fast market have the power to take the other actions specified in Rule 
6.6(b). CBOE's practice has been that any two Floor Officials have the 
powers specified in Rule 6.6(b), not just the specific two individuals 
who declared the fast market. Therefore, CBOE proposes an amendment to 
Rule 6.6(b) to clarify that any two Floor Officials have the powers 
specified in 6.6(b).
    CBOE believes that members of the Market Performance Committee, who 
perform Floor Officials functions, as well as Floor Officials who are 
members of the Floor Officials Committee, are equally qualified to make 
decisions regarding Rule 6.6. To clarify that members of the Market 
Performance Committee may also act pursuant to Rule 6.6, the proposal 
would amend Rule 6.20 Interpretation .09 to specify 

[[Page 54739]]
that the Floor Official functions that Market Performance Committee 
members may perform include acting pursuant to rules related to fast 
markets and RAES. Again, when circumstances arise which might require 
the declaration of a fast market, it is important for timely decisions 
to be made regarding the declaration of a fast market and other related 
decisions specified in Rule 6.6. CBOE believes that it could be 
detrimental to a fair and orderly market to delay action until a Floor 
Official from the Floor Officials Committee is found to make such 
decisions when members of the Market Performance Committee might 
already be present at the trading post.
    The Exchange believes that the proposed rule changes are consistent 
with and further the objectives of Section 6(b)(5) of the Act, in that 
the rule changes are designed to perfect the mechanisms of a free and 
open market and to protect investors and the public interest by 
enabling any two Floor Officials to evaluate and consider market 
conditions and circumstances in determining whether to suspend the firm 
quote requirement of Rule 8.51 during a fast market. The proposed rule 
changes clarifying the powers of Market Performance Committee members 
and specifying the powers Floor Officials may invoke during a fast 
market are also consistent with and further the objectives of Section 
6(b)(5) of the Act, in that they too are designed to perfect the 
mechanism of a free and open market and to protect investors and the 
public interest. The proposed rule change regarding the authority of 
the Control Room to suspend the firm quote requirement when there has 
been a system malfunction affecting the dissemination or updating of 
quotes is also consistent with and furthers the objectives of Section 
6(b)(5) of the Act, in that the change is designed to perfect the 
mechanism of a free and open market.
    The Exchange also believes that the proposed rule changes, 
collectively, are consistent with Section 6(b) of the Act in general 
and furthers the objectives of Section 6(b)(5) in particular in that 
they are designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of change, to 
foster cooperation and coordination with persons engaged in 
facilitating transactions in securities, and to remove impediments to 
and perfect the mechanism of a free and open market and a national 
market system.

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

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition.

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

    No written comments were solicited or received with respect to the 
proposed rule change.

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 at 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 SR-CBOE-95-52 and should be submitted by 
November 15, 1995.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\4\

    \4\17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-26428 Filed 10-24-95; 8:45 am]
BILLING CODE 8010-01-M