[Federal Register Volume 60, Number 232 (Monday, December 4, 1995)]
[Notices]
[Pages 62114-62115]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-29382]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36516; File No. SR-CBOE-95-16]
Self-Regulatory Organizations; Order Approving a Proposed Rule
Change by the Chicago Board Options Exchange, Inc., Relating to Multi-
Market Orders
November 27, 1995.
I. Introduction
On June 1, 1995, the Chicago Board Options Exchange, Incorporated
(``CBOE'' or ``Exchange'') filed a proposed rule change with the
Securities and Exchange Commission (``SEC'' or ``Commission''),
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'')\1\ and Rule 19b-4 thereunder,\2\ to amend CBOE Rule 6.48 to
specify certain duties of CBOE members in effecting an options
transaction on the CBOE that is part of a stock-option or stock-option
combination order. The Exchange filed Amendment No. 1 to the propsoal
on June 22, 1995.\3\
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ In Amendment No. 1, the Exchange proposes to amend
subparagraph (b)(ii) of CBOE Rule 6.48 to clarify that the existence
of market conditions that prevent the execution of the non-option
leg(s) at the agreed upon price(s) would be the only basis for any
one party to a trade representing the options leg of a multi-market
order to cancel such trade. See Letter from Michael Meyer, Attorney,
Schiff Hardin & Waite, to John Ayanian, Attorney, Office of Market
Supervision, Division of Market Regulation, Commission, dated June
22, 1995 (``Amendment No. 1'').
The types of ``market conditions'' arising in a no-CBOE market
that would be sufficient under proposed Rule 6.48(b)(ii) to justify
cancellation of the CBOE leg(s) of a multi-market order, include,
but are not limited to, a sudden change in the price of the
underlying Securities prior to execution of the stock trade, and a
trading halt or systems failure that precludes immediate execution
of the stock trade at the agreed upon price. See Letter from Dan
Schneider, Attorney, Schiff Hardin & Waite, to John Ayanian,
Attorney, OMS, Market Regulation, Commission, dated June 30, 1995
(``June 30 Letter'').
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Notice of the proposal, as amended, was published for comment and
appeared in the Federal Register on August 16, 1995.\4\ No comment
letters were received on the proposed rule change. This order approves
the Exchange's proposal, as amended.
\4\ See Securities Exchange Act Release No. 36082 (August 10,
1995), 60 FR 42636.
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II. Description of the Proposal
The purpose of this proposal is to set forth in existing CBOE Rule
6.48 the duties of CBOE members executing an options order that is a
component of a ``package'' stock-option order, as defined by CBOE Rule
1.1(ii)(a) (``stock-option order'') or stock-option combination order,
as defined by CBOE Rule 1.1(ii)(b) (``stock-option combination
order''),\5\ the execution of which involves transactions in CBOE's
options market and in another market (a ``multi-market'' order), and to
specify the sole basis on which an options trade that is a component of
a multi-market order may be cancelled by the members that are parties
thereto. The proposed rule change would also make it inconsistent with
just and equitable principles of trade, and consequently a violation of
Exchange Rule 4.1, for a member to fail to fulfill the new
requirements.
\5\ A stock-option order is an order to buy or sell a stated
number of units of an underlying or a related security coupled with
either (a) the purchase or sale of option contract(s) of the same
series on the opposition side of the market representing the same
number of units of the underlying or related security or (b) the
purchase and sale of an equal number of put and call option and
numbers of units of the underlying or related Securities, on the
opposite aside of the market representing in the aggregate twice the
number of units of the underlying related security. See CBOE Rule
1.1.(ii).
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CBOE Rule 6.48 currently provides that bids or offers made and
accepted in accordance with Exchange rules constitute binding
contracts, but that Rule does not address the execution and
cancellation of complex multi-market orders. Because such orders have
become more prevalent at the CBOE as trading strategies have become
more intricate, and because such orders involve concurrent executions
at the CBOE and in markets other than the CBOE, the Exchange proposes
to adopt new paragraph (b) to Rule 6.48. The Exchange believes that
this amendment should establish well-defined conditions and
requirements in its Rules that members must observe in executing and
cancelling such transactions.
Proposed CBOE Rule 6.48(b) would apply to stock-option and stock-
option combination orders, other than orders respecting index
options,\6\ and would impose two requirements on CBOE members who are
parties to such multi-market orders. First, a member
[[Page 62115]]
announcing such an order to a trading crowd must disclose all legs of
the order and must identify the specific markets and prices at which
the non-option leg(s) are to be filled. Second, concurrent with the
execution of the option leg of any multi-market order, the initiating
member and each member that is a counterparty to the trade must take
steps immediately to execute the non-option leg(s) in the identified
market(s).\7\ Because both of these requirements are essential to fair
and efficient order execution, proposed new paragraph (c) of Rule 6.48
would provide that any failure to observe either requirement will
constitute a violation of CBOE's Rule 4.1, which prohibits conduct
inconsistent with just and equitable principles of trade. The Exchange
believes that these new provisions will clarify members' expectations
about the execution of multi-market orders covered by the proposed rule
and will promote prompt execution of each non-option component of such
orders.
\6\ The CBOE believes that paragraph (iii) of proposed Rule
6.48(b) makes it clear that the proposed rule change will not apply
to bids or offers included in combination orders that entail the
purchase or sale of index options.
\7\ The CBOE represents that it expects the order for the non-
option leg(s) of the multi-market order will be enacted concurrently
with the execution of the option leg of the order. Additionally, the
CBOE represents that it will advise members of this expectation in a
Regulatory Circular. See Letter from Barbara J. Casey, Vice
President, Department of Market Regulation, CBOE, to John Ayanian,
Attorney, OMS, Market Regulation, Commission, dated November 7, 1995
(``November 7 Letter'').
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In addition to establishing requirements incident to execution, the
proposed rule change sets forth one exclusive basis on which members
may cancel an executed options transaction that is part of a multi-
market order. Proposed Rule 6.48(b)(ii) indicates that any member that
is a party to an options transaction that is part of a multi-market
order may have the options transaction cancelled only in the event that
market conditions in any of the identified non-CBOE markets prevent the
execution of one or more of the non-option legs of the order. The
Exchange believes that cancellation under this exclusive circumstance
is fair and appropriate.
The Exchange believes that the proposed rule change is consistent
with Section 6(b) of the Act in general and furthers the objectives of
Section 6(b)(5) in particular in that it is 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.
III. Commission Finding and Conclusions
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) of the Act.\8\
Specifically, the Commission finds that the Exchange's proposal to
specify certain duties of CBOE members in effecting an options
transaction on the CBOE that is part of a stock-option or stock-option
combination order strikes a reasonable balance between the Commission's
mandate under Section 6(b)(5) to remove impediments to and perfect the
mechanism of a free and open market and a national market system, while
protecting investors and the public interest.
\8\ 15 U.S.C. 78f(b)(5).
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The Commission believes that it is appropriate for the Exchange to
clarify the conditions and requirements that CBOE members must observe
when executing and cancelling multi-market orders. The Commission
understands that complex multi-market orders have become more
prevalent, and believes that the proposed rule change addresses the
special considerations that apply when executing and cancelling such
transactions. The Commission believes that it is reasonable to require
a member announcing a multi-market order to a trading crowd to disclose
all legs of the order and identify the specific markets and prices at
which the non-option leg(s) are to be filled.
Moreover, the Commission believes that it is reasonable to require
the parties to the transaction to take steps immediately to transmit
the non-option leg(s) to the identified markets for execution. The
Commission understands that if a party to the transaction does not take
steps immediately to execute the non-option leg(s) of a multi-market
order, that party is subject to CBOE Rule 4.1, which prohibits conduct
inconsistent with just an equitable principles of trade. Accordingly,
the Commission believes that by clarifying the duties and obligations
regarding the execution of multi-market orders, this proposal will help
to ensure that the non-option leg(s) of a multi-market order are sent
immediately to the identified markets for execution.\9\
\9\ See November 7 Letter, supra note 7.
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The Commission also believes that members executing multi-market
orders should only be allowed to cancel the option leg(s) of the stock-
option transaction under limited circumstances. The Exchange proposes
that a trade may be cancelled at the request of any member that is a
party to that trade only if market conditions in any non-Exchange
market prevent the execution of the non-option leg(s) at the price(s)
agreed upon.\10\ The types of ``market conditions'' arising in a non-
CBOE market that would be sufficient under proposed Rule 6.48(b)(ii) to
justify cancellation of the CBOE leg(s) of a multi-market order,
include a sudden change in the price of the underlying securities prior
to execution of the stock trade, and a trading halt or systems failure
that precludes immediate execution of the stock trade at the agreed
upon price.\11\
\10\ See CBOE Rule 6.48(b)(ii). See also Amendment No. 1, supra
note 3.
\11\ See June 30 Letter, supra note 3.
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The Commission also notes that the priority principles regarding
stock-option, and stock-option combination orders, apply to
transactions covered by this proposed rule change.\12\ In light of the
priorities afforded to such transactions, the Commission believes that
the option leg(s) of a multi-market order should be allowed to be
cancelled only under the limited circumstances described above. The
Commission believes that the Exchange's proposed rule change
appropriately addresses this concern.
\12\ Under CBOE Rule 6.45, stock-option orders, as defined in
CBOE Rule 1.1(ii)(a), may attain priority over the trading crowd
(but never over the limit order book) when the option leg trades at
a price that is at least equivalent to quotes in the crowd.
Additionally, stock-option combinations will take priority over
orders in the crowd when all legs of the combination trade at a
price that is at least equivalent to quotes in the crowd. Stock-
option combinations will also attain priority over the limit order
book, when one leg of the transaction trades at a price that is
better than the corresponding bid or offer in the book and the
remaining legs of the transaction trades at a price that is at least
equivalent to the established bids or offers in the crowd or book.
See Securities Exchange Act Release No. 34764 (September 30, 1994),
59 FR 51223 (October 7, 1994).
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\13\ that the proposed rule change (File No. SR-CBOE-95-16), as
amended, is approved.
\13\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
prusuant to delegated authority.\14\
\14\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-29382 Filed 12-1-95; 8:45 am]
BILLING CODE 8010-01-M