[Federal Register Volume 61, Number 34 (Tuesday, February 20, 1996)]
[Notices]
[Pages 6400-6402]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-3633]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36830; File No. SR-CBOE-95-33]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change and Notice of Filing and Order Granting Accelerated Approval of 
Amendment No. 1 to the Proposed Rule Change by the Chicago Board 
Options Exchange, Inc., Relating to an Amendment to the Exchange's 
Crossing Rule

February 12, 1996.
    On July 12, 1995, the Chicago Board Options Exchange, Inc. 
(``CBOE'' or ``Exchange'') filed 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\ a proposed rule change to amend CBOE Rule 6.74, `` 
`Crossing' Orders,'' by adding Interpretation and Policy .05, which 
will allow a floor broker who has been continuously representing a 
limit order to buy or sell equity option contracts in a trading crowd 
at a limit price which is equal to the highest bid or lowest offer 
(``resting order''), and who subsequently receives a market or 
marketable limit order to sell or buy the same option series, to cross 
the resting order with the subsequent market or marketable limit order 
without regard to the provision of CBOE Rule 6.74(a)(iii) that permits 
a cross only if the higher bid or lower offer is not taken. The 
proposal is designed to permit a floor broker representing a resting 
order and a subsequent market or marketable limit order to cross the 
number of contracts of those orders to the same extent as if the 
resting order and the subsequent market or marketable limit orders were 
represented by different floor brokers.

    \1\ 15 U.S.C. 78s(b)(1) (1988).
    \2\ 17 CFR 240.19b-4 (1995).
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    Notice of the proposed rule change appeared in the Federal Register 
on October 13, 1995.\3\ On January 31, 1996, the CBOE amended its 
proposal.\4\ No comments were received on the proposed rule change.

    \3\ See Securities Exchange Act Release no. 36343 (October 5, 
1995), 60 FR 53444.
    \4\ The CBOE amended its proposal to clarify that, under the 
proposal, a floor broker may cross a resting order with a subsequent 
market or marketable limit order without regard to the provision of 
CBOE Rule 6.74(a)(iii) which permits a cross only if a floor 
broker's higher bid or lower offer is not taken. However, a floor 
broker must comply with the order exposure and price improvement 
provisions of CBOE Rule 6.74 before being eligible for the proposed 
exception. In addition, after invoking the exception, the floor 
broker remains subject to the requirement under CBOE Rule 
6.74(a)(iii) that the floor broker announce by open outcry that he 
is crossing and give the quantity and price at which the cross took 
place. See Letter from Barbara J. Casey, Vice President, Market 
Regulation, CBOE, to Ivette Lopez, Assistant Director, Division of 
Market Regulation, Commission, dated January 30, 1996 (``Amendment 
No. 1''). Amendment No. 1 also provides examples of the operation of 
the crossing rule and of the effect of the proposed amendment on the 
crossing rule, as well as explanations of the terms ``continuously 
represent'' and ``compete equally.'' Specifically, Amendment No. 1 
states that it is implicit in the term ``continuously represents'' 
that after announcing the order in open outcry, the floor broker 
must give the trading crowd a reasonable amount of time to respond 
to the announcement before the floor broker can claim the proposed 
exception to the crossing rule. The term ``compete equally'' is used 
to limit the extent to which a floor broker is permitted to cross a 
resting order and a market or marketable limit order. Specifically, 
the proposal will give a floor broker representing a resting order 
and a subsequent market or marketable limit order the ability to 
compete equally with the trading crowd, but only to the extent that 
such orders would be executed if they were represented by two 
different floor brokers.
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    Currently, CBOE Rule 6.74(a) imposes specific order exposure and 
price improvement requirements on floor brokers seeking to cross buy 
orders with sell orders. Specifically, CBOE Rule 6.74(a) requires a 
floor broker seeking to cross orders to buy and sell the same option 
series to (i) request bids and offers for such option series and make 
all persons in the trading crowd, including the Board Broker or Order 
Book Official, aware of his request; and 

[[Page 6401]]
(ii) after providing an opportunity for such bids and offers to be 
made, he must (A) bid above the highest bid in the market and give a 
corresponding offer at the same price or at prices differing by the 
minimum fraction or (B) offer below the lowest offer in the market and 
give a corresponding bid at the same price or at prices differing by 
the minimum fraction. If the higher bid or lower offer is not taken, 
CBOE Rule 6.74(a)(iii) allows the floor broker to cross the orders at 
the higher bid or lower offer by announcing by public outcry that he is 
crossing and giving the quantity and price.
    According to the CBOE, the provision of CBOE Rule 6.74(a)(iii) that 
allows a cross only if the higher bid or lower offer is not taken 
prevents a resting order from competing equally with other pre-existing 
bids (offers) and allows the trading crowd to trade ahead of the new 
market or marketable limit order to buy or sell. Thus, the CBOE notes 
that the resting order and the subsequent market or marketable limit 
order may be in a less competitive position because the orders were 
represented by a single floor broker rather than by separate floor 
brokers.
    For example,\5\ if a floor broker has been continuously 
representing \6\ a limit order to purchase 20 option contracts at a 
limit price of $10 where the market is 10-10\1/4\, and the floor broker 
subsequently receives a market order to sell 20 option contracts of the 
same series, CBOE Rule 6.74(a) requires a floor broker who wishes to 
cross the orders to offer at $10 (i.e., less than the lowest offer of 
10\1/4\) and corresponding bid at $10.\7\ The floor broker may cross 
the two orders only if the trading crowd does not take the floor 
broker's bid or offer. However, according to the CBOE, it is likely 
that the trading crowd will take the floor broker's offer of $10 
because the trading crowd was bidding at $10. Accordingly, the resting 
order will not be filled, even though it may have been previously 
represented in the crowd for at least as long as the successful bids of 
other crowd members. Thus, under existing CBOE Rule 6.74(a), a resting 
limit order held by a floor broker who subsequently receives a market 
order is unable to compete for the market order with other limit orders 
at the same price held by other crowd members.

    \5\ See Amendment No. 1, supra note 4.
    \6\ In the context of the proposal, ``continuously 
representing'' means that after announcing an order in open outcry, 
the floor broker must give the trading crowd a reasonable amount of 
time to respond to his announcement before he may claim the proposed 
exception to CBOE Rule 6.74(a)(iii). See Amendment No. 1, supra note 
4.
    \7\ Because the limit price to purchase is $10, the floor broker 
cannot bid above the highest bid in the market and thus is precluded 
from crossing at 10\1/8\ pursuant to CBOE Rule 6.74(a)(ii)(A).
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    Proposed Interpretation and Policy .05 is designed to allow a floor 
broker representing a resting order and a subsequent market or 
marketable limit order to compete equally with other bids and offers in 
the trading crowd by allowing the floor broker to cross the orders to 
the same extent as if the resting order and the subsequent market or 
marketable limit order were represented by different floor brokers.\8\ 
Thus, in the example described above, if the trading crowd includes 
four market makers each bidding at $10 who wish to take the entire 
offer, proposed Interpretation and Policy .05 would allow the floor 
broker to claim the proposed exception to CBOE Rule 6.74(a)(iii) and 
participate equally in the 20-contract offer by crossing four contracts 
of the resting order with four contracts of the sell order at $10, the 
then existing bid price in the market. The remaining 16 contracts of 
the market order would be sold to the trading crowd.\9\

    \8\ The proposal uses the term ``compete equally'' to limit the 
extent to which a floor broker is permitted to cross a resting order 
and a market or marketable limit order. Currently, the CBOE's 
crossing rule allows a floor broker to cross a resting order and a 
subsequent order only if the trading crowd does not take the floor 
broker's bid or offer. However, if the trading crowd decides to take 
the market order, the resting order will not be able to participate 
in the transaction with the market or marketable limit order; 
alternatively, the trading crowd may take the resting order and 
trade ahead of the subsequent market or marketable limit order. 
According to the CBOE, proposed Interpretation and Policy .05 will 
remove the floor broker's competitive disadvantage and allow the 
floor broker representing a resting order and a subsequent market or 
marketable limit order to compete with the trading crowd to the 
extent that such orders would be executed if they were represented 
by two different floor brokers. See Amendment No. 1, supra note 4.
    \9\ See Amendment No. 1, supra note 4.
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    Likewise, if the market makers wish to offer at $10 and take the 
entire resting limit order, the floor broker may claim the proposed 
exception and compete equally with other offers in the trading crowd by 
crossing four contracts of the subsequent market order to sell at $10 
with four contracts of the resting limit order.\10\

    \10\ Id.
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    Proposed Interpretation and Policy .05 provides an exemption solely 
from the provision of CBOE Rule 6.74(a)(iii) that permits a cross only 
if the higher bid or lower offer is not taken. The floor broker must 
comply with the order exposure and price improvement provisions of CBOE 
Rule 6.74(a) (i) and (ii) before being eligible for the proposed 
exception. After invoking the exception, the floor broker remains 
subject to the requirement in CBOE Rule 6.74(a)(iii) that the floor 
broker announce by open outcry that he is crossing and give the 
quantity and price at which the cross took place.\11\ In addition, the 
Exchange's rules pertaining to solicited orders, facilitation crosses, 
and the priority provisions of CBOE Rule 6.45, ``Priority of Bids and 
Offers,'' will continue to apply.

    \11\ Id.
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    The Exchange believes that proposed Interpretation and Policy .05 
will reduce the possible detrimental effect on the execution of a 
resting order and subsequent market or marketable limit orders that 
occurs solely because the orders are represented by the same floor 
broker. The CBOE states that proposed Interpretation and Policy .05 
will permit the orders represented by a single floor broker to compete 
equally with other bids and offers in the trading crowd by allowing the 
floor broker to cross those number of contracts of the resting order 
with subsequent market or marketable limit orders to the same extent as 
if the resting order and subsequent market or marketable limit orders 
were represented by different floor brokers.
    The CBOE 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 provides an exemption from 
provisions that currently disadvantage resting limit orders and 
subsequent market or marketable limit orders held by the same floor 
broker, and does this in a manner that promotes just and equitable 
principles of trade, fosters cooperation among persons engaged in 
facilitating securities transactions, removes impediments to and 
perfects the mechanism of a free and open market and protects investors 
and the public interest.
    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) \12\ in that it is 
designed to promote just and equitable principles of trade and to 
protect investors and the public interest. The Commission believes that 
proposed Interpretation and Policy .05 provides a limited and narrowly 
tailored exception to the provision of CBOE Rule 6.74(a)(iii) that 
permits a cross only if the trading crowd does not take the floor 
broker's higher bid or lower offer. By 

[[Page 6402]]
creating a limited exception to CBOE Rule 6.74(a)(iii), proposed 
Interpretation and Policy .05 will permit orders represented by a 
single floor broker to participate equally with other bids and offers 
in the trading crowd by allowing the floor broker to cross those number 
of contracts of the resting order with the subsequent market or 
marketable limit order to the same extent as if those orders were 
represented by different floor brokers, thereby eliminating a 
competitive disadvantage that may arise currently under CBOE Rule 
6.74(a).

    \12\ 15 U.S.C. 78f(b)(5) (1988 & Supp. V 1993).
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    CBOE Rule 6.74(a)(ii) requires a floor broker seeking to cross 
orders to (A) bid above the highest bid in the market and give a 
corresponding offer at the same price or at prices differing by the 
minimum fraction or (B) offer below the lowest offer in the market and 
give a corresponding bid at the same price or at prices differing by 
the minimum fraction. CBOE Rule 6.74(a)(iii) allows the floor broker to 
cross the orders if the trading crowd does not take the higher bid or 
lower offer. However, the CBOE states that it is likely that the 
trading crowd will take the floor broker's bid or offer, thereby 
leaving either the resting order or the subsequent market or marketable 
limit order unfilled. By creating an exception to the provision of CBOE 
Rule 6.74(a)(iii) that permits a cross only if the floor broker's 
higher bid or lower offer is not taken, proposed Interpretation and 
Policy .05 will allow a resting order and a subsequent market or 
marketable limit order represented by a single floor broker to 
participate equally with other bids and offers at the same price to the 
same extent as if those orders were represented by different floor 
brokers.\13\

    \13\ The CBOE believes that the exception provided by proposed 
Interpretation and Policy .05 will be claimed infrequently, both 
because the proposed exception applies only in very limited 
circumstances, and because even in the limited applicable 
circumstances most trading crowds do not use the crossing rule to 
prevent a resting order from competing equally with other bids or 
offers in the market or to trade ahead of market or marketable limit 
orders. The CBOE expects that the proposed exception will be claimed 
by floor brokers in equity option crowds that preclude floor brokers 
from crossing orders or in equity trading crowds that have only one 
full time floor broker and where the volume in the option series to 
be crossed is limited. See Amendment No. 1, supra note 4.
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    Thus, as noted above, proposed Interpretation and Policy .05 will 
allow a floor broker representing a resting limit order to buy at $10 
in a 10-10\1/4\ market to compete equally with four market makers in 
the trading crowd who are also bidding at $10 for a market order to 
sell 20 contracts, so that the floor broker will be able to cross four 
contracts of his resting order with four contracts of the market order. 
The market makers will take the remaining 16 contracts of the market 
order. In contrast, under the CBOE's current rule, the market makers 
could take the entire offer to sell 20 contracts at $10, leaving the 
resting limit order unfilled even though the resting order also bid $10 
(an amount equal to the highest bid in the market) and had been 
represented in the crowd for as long as the bids of the market 
makers.\14\

    \14\ Alternatively, if the market makers wish to sell at $10 and 
take the entire resting limit order, proposed Interpretation and 
Policy .05 will allow the floor broker to compete equally with the 
market makers' offers and cross four contracts of the resting order 
with four contracts of subsequent market order. The market makers 
will take the remaining contracts in the resting order.
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    Accordingly, the Commission believes that the proposal is a 
reasonable effort to modify CBOE Rule 6.74(a)(iii) to ensure that 
certain equity option orders are not disadvantaged solely because they 
are represented by a single floor broker. At the same time, the 
proposal maintains the safeguards provided in CBOE Rule 6.74(a) by 
requiring floor brokers to comply with the order exposure and price 
improvement provisions of CBOE Rule 6.74(a) (i) and (ii) before being 
eligible for the proposed exception to CBOE Rule 6.74(a)(iii). In 
addition, proposed Interpretation and Policy .05 applies to a floor 
broker who has been ``continuously representing'' a resting order.\15\ 
The Commission believes that the requirements of CBOE Rule 6.74(a) (i) 
and (ii), together with the requirement that a floor broker 
continuously represent a resting order before claiming the proposed 
exception to CBOE Rule 6.74(a)(iii), will help to ensure that orders 
represented by a floor broker who claims the proposed exception will 
have an opportunity to interact with orders in the trading crowd.

    \15\ See note 6, supra.
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    The Commission notes that after invoking the exception, the floor 
broker remains subject to the requirement in CBOE Rule 6.74(a)(iii) 
that the floor broker announce by open outcry that he is crossing and 
give the quantity and price at which the cross took place. Finally, the 
due diligence and other provisions of CBOE Rule 6.74 continue to apply, 
as well as the CBOE rules pertaining to solicited orders, facilitation 
crosses, and the priority provisions of CBOE Rule 6.45.
    The Commission finds good cause for approving Amendment No. 1 prior 
to the thirtieth day after the date of publication of notice of filing 
thereof in the Federal Register. Amendment No. 1 strengthens and 
clarifies the CBOE's proposal by indicating that a floor broker must 
comply with the order exposure and price improvement provisions of CBOE 
Rule 6.74(a)(i) and (ii) and, after invoking the exception, must 
announce by open outcry that he is crossing and give the quantity and 
price at which the cross took place. In addition, Amendment No. 1 
further clarifies the proposal by defining the terms ``continuously 
representing'' and ``compete equally'' as they are used in the 
proposal. Accordingly, the Commission believes it is consistent with 
Sections 6(b)(5) and 19(b)(2) of the Act to approve Amendment No. 1 to 
the proposal on an accelerated basis.

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, N.W., Washington, D.C. 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, D.C. Copies of such filing will also be available for 
inspection and copying at the principal office of the above-mentioned 
self-regulatory organization. All submissions should refer to the file 
number in the caption above and should be submitted by March 12, 1996.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\16\ that the rule change (File No. SR-CBOE-95-33), as amended, is 
approved.

    \16\ 15 U.S.C. 78s(b)(2) (1982).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\

    \17\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-3633 Filed 2-16-96; 8:45 am]
BILLING CODE 8010-01-M