[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