[Federal Register Volume 60, Number 237 (Monday, December 11, 1995)]
[Notices]
[Pages 63552-63554]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-30073]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36546; File No. SR-CBOE-95-49]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Inc.; Order Approving a Proposed Rule Change Relating to Telephone on
the Floor of the Exchange
December 1, 1995.
I. Introduction
On August 25, 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 regarding the adoption of 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. The proposed rule change was
published for comment and appeared in the Federal Register on October
13, 1995.\3\ No comments were received regarding the proposal.\4\ This
order approves the proposal.
\1\ 15 U.S.C. 78s(b)(1) (1988).
\2\ 17 CFR 240.19b-4 (1994).
\3\ See Securities Exchange Act Release No. 36331 (October 3,
1995), 60 FR 53440.
\4\ The Exchange previously filed a proposal concerning its OEX
trading post telephone policy that became effective upon filing
pursuant to Section 19(b)(3)(A) of the Act. Securities Exchange Act
Release No. 35725 (May 17, 1995), 60 FR 27575. The Commission
received one comment letter objecting to the prohibition on the use
of telephones at the OEX post to receive orders. Letter from David
C. Bohan, Jenner & Block, to Jonathan G. Katz, Secretary,
Commission, dated June 14, 1995. The Commission published the CBOE's
current proposal for a full 21 day comment period, and has received
no comments.
---------------------------------------------------------------------------
II. Description of the Proposal
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 Regulatory 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 the Commission previously approved governing the use of
telephones at the equity option trading posts on the floor of CBOE.\5\
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.\6\
\5\ See Securities Exchange Act Release No. 33701 (March 2,
1994), 59 FR 11336.
\6\ The telephone policy also allows members to use the floor
telephones to provide 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.
---------------------------------------------------------------------------
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 Exchange approval, and it
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 proposed rule change also imposes user fees on members who are
approved to use Exchange-installed telephones located at the OEX
trading post. The Exchange is adopting these fees pursuant to Exchange
Rule 2.22, which permits the Exchange to impose fees on members for the
rule 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 CPC'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.
The Exchange's proposal is limited to outgoing calls only. The
Exchange has stated that telephones at the OEX trading post should not
be used to receive customer order until it has given further
consideration 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,
[[Page 63553]]
and how to surveil order-taking activity conducted over floor
telephones.\7\
\7\ The Exchange states that it 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.
---------------------------------------------------------------------------
III. Discussion
The Committee 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),\8\ in that it is
designed to promote just and equitable principles of trade, prevent
fraudulent and manipulative acts and practices, and maintain fair and
orderly markets. Specifically, the Commission believes the proposed
rule change should help to promote improved relationships between the
OEX trading crowds and the member firms and facilitate efficient access
to underlying markets. Providing procedures whereby members in the OEX
options crowd can readily communicate with the off-floor offices of
member firms as well as other locations off of the Exchange's trading
floor, will allow them to obtain and transmit information more
efficiently which may result in benefits to investors by improving
execution of orders.
\8\ 15 U.S.C. 78f(b)(5) (1988).
---------------------------------------------------------------------------
Further, incorporating the procedures contained in the Regulatory
Circular into the Rules of the Exchange will enable the Exchange to
monitor better the use of the floor telephones and to discipline
members for violations of those rules. As noted above, because the
proposed telephone policy does not restrict where a member may call,
the telephones may be used to place orders in underlying stocks and in
futures markets.\9\
\9\ The proposed rule change also allows members to use the
floor telephones for the purpose of providing quotations that have
been publicly disseminated pursuant to CBOE Rule 6.43.
---------------------------------------------------------------------------
With respect to equity-related transactions, while the telephones
may give options market makers more immediate access to the market in
the underlying securities, the Commission believes that the CBOE's
surveillance systems currently in place are adequate to detect and
deter any such attempts at manipulation including frontrunning. It also
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.
With respect to futures-related transactions, the Commission
believes that the Exchange will be able to conduct adequately
surveillance for improper activities as a result of the transaction
information provided to the Exchange by the Chicago Mercantile Exchange
(``CME'') pursuant to the Exchange's surveillance sharing agreement
with the CME. Although the surveillance information obtained by the
Exchange would not indicate that the floor telephones were used to
enter into a potentially improper futures transactions, the Exchange's
ability to conduct surveillance for potential manipulation will not be
hindered because of the existence of floor telephones at the OEX
options posts on the floor of the Exchange. Additionally, the
Commission also notes that surveillance information is shared through
the Intermarket Surveillance Group (``ISG'') \10\ which the CME and the
Chicago Board of Trade joined as affiliate members in 1990.
\10\ ISG 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.
---------------------------------------------------------------------------
The Commission believes that the Exchange's prohibition on the use
of telephones to receive incoming calls is justified by legitimate
regulatory concerns. Specifically, issues such as the possible misuse
of non-public information, the need to ensure compliance with rules
designed to assure the qualifications of members who accept orders
directly from public customers, and how to provide adequate
surveillance over this activity need to be addressed.
The Exchange's proposal also prohibits the use of portable,
cellular, and headset telephones on the OEX options trading floor.
Prohibiting the use of portable telephones aids in ensuring that market
makers will be physically present at the OEX options trading posts
where the options classes to which they have been appointed are traded.
It is not unreasonable for the CBOE to take measures to ensure the
physical presence of market makers at the OEX trading post in order to
promote the maintenance of fair and orderly markets. The Exchange
believes that the prohibition should enable it to monitor and control
telephone usage at the trading post, and minimize disruption of trading
at the post. In addition, the Exchange notes that 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. As a result, the
Commission believes that this restriction is within the discretion of
the Exchange and does not raise regulatory concerns.\11\
\11\ This does not imply that the Exchange is prohibited from
allowing portable telephones on its floor, subject to appropriate
safeguards. Rather, that it is not inconsistent with the Act for the
CBOE to prohibit them for the reasons discussed above.
---------------------------------------------------------------------------
The Exchange has represented that since the Regulatory Circular was
issued and telephones at the OEX options trading post have been
installed, the Exchange has not received any complaints concerning
their use, nor detected any violations of the procedures set forth in
the Regulatory Circular.\12\
\12\ Telephone Conversation between Timothy Thompson, Senior
Attorney, CBOE, and Francois Mazur, Attorney, Office of Market
Supervision, Division of Market Regulation, Commission, on November
21, 1995.
---------------------------------------------------------------------------
Finally, the Commission believes that the CBOE's proposed fees for
the use of the telephones are consistent with the requirement under
Section 6(b)(4) of the Act that the rules of an exchange provide for
the equitable allocation of reasonable dues, fees, and other charges
among its members. CBOE Rule 2.22 allows the Exchange to impose fees on
members relating to the use of Exchange facilities or for any services
or privileges granted by the Exchange. The Exchange has stated that the
proposed fees generally will be the same as those charged for the use
of telephones at the equity trading posts.\13\
\13\ 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.
---------------------------------------------------------------------------
In summary, because the Commission believes that installing
telephones at the OEX options post on the floor of the Exchange may
result in benefits to investors by allowing market makers to hedge
their options positions more efficiently through improved immediate
access to underlying markets while not impairing or diminishing the
ability of the Exchange to conduct surveillance for improper equity-
related or futures-related trading activity, the Commission finds that
the proposed rule change is
[[Page 63554]]
consistent with the requirements of the Act.
IV. Conclusion
For the reasons discussed above, the Commission finds that the
proposal 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-95-49) 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).
---------------------------------------------------------------------------
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-30073 Filed 12-8-95; 8:45 am]
BILLING CODE 8010-01-M