[Federal Register Volume 61, Number 41 (Thursday, February 29, 1996)]
[Notices]
[Pages 7838-7840]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-4577]



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[[Page 7839]]


SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36880; File No. SR-CBOE-95-70]


Self-Regulatory Organizations, Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change and Amendment Nos. 1 and 2 
Thereto by the Chicago Board Options Exchange, Incorporated Relating to 
Procedures for the Enforcement of Rule 8.51 and Rule 6.43 in the OEX 
Trading Crowd

February 23, 1996.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on December 
11, 1995, the Chicago Board Options Exchange, Incorporated (``CBOE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by the CBOE. 
On January 5, 1996, the CBOE filed Amendment No. 1 to its proposal.\1\ 
The Exchange filed Amendment No. 2 to the proposal on February 16, 
1996.\2\ The Commission is publishing this notice to solicit comments 
on the proposed rule change from interested persons.

    \1\ In Amendment No. 1, the CBOE proposes a fine schedule for 
violations of the policies set forth in the regulatory circular 
discussed herein. See Letter from Timothy Thompson, Senior Attorney, 
CBOE, to James T. McHale, Attorney, Office of Market Supervision 
(``OMS''), Division of Market Regulation (``Division''), Commission, 
dated January 3, 1996 (``Amendment No. 1'').
    \2\ In Amendment No. 2, the CBOE clarifies that pursuant to 
Interpretation .03 to Rule 8.51, public customer orders for less 
than ten contracts that are represented by a floor broker, unless 
immediately executed, would have to be displayed. See Letter from 
Michael L. Meyer, Esq., Schiff, Hardin & Waite, to James T. McHale, 
Attorney, OMS, Division, Commission, dated February 16, 1996 
(``Amendment No. 2'').
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The CBOE proposes to set forth in a new regulatory circular its 
policy regarding the manner of bidding and offering for size in the OEX 
trading crowd pursuant to Rule 6.43 (``Manner of Bidding and 
Offering''). In addition, the Exchange is setting forth its policy 
regarding the procedures for enforcement in the OEX crowd of firm 
quotes pursuant to Exchange Rule 8.51 (``Trading Crowd Firm 
Disseminated Market Quotes''). Finally, the circular will notify the 
membership that they may be fined, or otherwise disciplined, for 
violations of the policies pursuant to authority under Rule 6.20 
(``Admission to and Conduct on the Trading Floor''). The text of the 
regulatory circular and the proposed rule change is available at the 
Office of the Secretary, CBOE 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 CBOE included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The CBOE has prepared summaries, set forth in sections 
(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 purpose of the proposed rule change is to set forth in a 
regulatory circular the Exchange's policy and interpretation with 
respect to the manner of bidding and offering for size in the OEX crowd 
pursuant to Rule 6.43, and regarding the administration and enforcement 
in the OEX trading crowd of firm quotes pursuant to Rules 8.51 and 
6.20.
    Rule 6.43 specifies that bids and offers by market-makers and floor 
brokers, to be effective, must be made at the post by public outcry. 
Rule 6.43 is silent regarding whether the bid or offer should specify 
the number of contracts for which the market-maker or floor broker is 
bidding or offering. The Exchange believes that it is appropriate and 
contributes to the operation of a fair and orderly market if a size is 
specified along with the bid and offer. It has become crowd convention 
at the OEX post among the market-makers to make bids and offers for 
twenty contracts unless a different size is specified. Failure to bid 
or offer for less than twenty contracts without specifying the size 
would be punishable by a fine, or other disciplinary action, pursuant 
to Rule 6.20 as described below.
    Rule 8.51 requires the trading crowd collectively to be responsible 
for filling non-broker dealer customer orders, in series as determined 
by the Exchange's Market Performance Committee, at the displayed bid or 
offer for up to ten contracts. In OEX, the firm quote rule has been 
applied to all series. The rule provides that, with respect to the 
execution of non-broker dealer customer orders, at all times other than 
during rotation, the trading crowd is required to sell (buy) at least 
ten (10) contracts at the offer (bid) which is displayed when a buy 
(sell) order reaches the trading station where the particular option 
class is trading.
    However, Rule 8.51 does not address specifically who in the trading 
crowd must fill the customer order or how this rule will be enforced 
against the members of the trading crowd. The Exchange has decided that 
one method to ensure compliance with Rule 8.51 at the OEX post is to 
make it clear that members are obligated to remove obsolete quotes. 
Thus, in order to ensure the operation of a fair and orderly market, 
the regulatory circular requires a member to remove a bid or offer that 
is no longer effective. Failure to do so will require that member to 
satisfy the firm disseminated quote commitment. Alternatively, a Floor 
Official may fine the offender,\3\ or take other disciplinary action.

    \3\ See infra, note 5.
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    The regulatory circular also specifies that a member should not 
cause a bid or offer for OEX options for less than ten contracts to be 
displayed. However, pursuant to Interpretation .03 to Rule 8.51, public 
customer orders for less than ten contracts that are represented by a 
floor broker, unless immediately executed, would have to be 
displayed.\4\ If a market-maker were to cause a quote for just one or 
two contracts to be displayed, the other market-makers in the crowd 
would then be forced to honor this individual's quote for up to ten 
contracts even if every other market-maker in the crowd were bidding 
and offering a much different market. These quotes for sizes of less 
than ten contracts tend to be disruptive to the operation of the OEX 
crowd and interfere with the fair and orderly conduct of business in 
the crowd.

    \4\ See Amendment No. 2, supra note 2.
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    To enforce the above policies of Rule 6.43 and Rule 8.51, the 
Exchange is relying upon its authority to fine, or otherwise 
discipline, members pursuant to Rule 6.20.\5\ Paragraph (b) of Rule 
6.20 gives Floor Officials authority to fine members and persons 
associated with members for conduct (i) inconsistent with the 
maintenance of a fair and orderly market; (ii) apt to impair public 
confidence in the operations of the Exchange; (iii) inconsistent with 
the ordinary and efficient conduct of business; or (iv) detrimental to 
the safety or welfare of any other person. Interpretation .04 to Rule 
6.20 makes it clear that violations of Rules 6.43 and 

[[Page 7840]]
8.51 are activities that may violate the provisions of Rule 6.20(b).\6\ 
Trading Floor Liaison staff will assist the OEX Floor Procedure 
Committee members in identifying offenders of this policy. Members of 
the Floor Procedure Committee \7\ or other Floor Officials will issue 
the fines.\8\ Members could also be charged with other appropriate 
rules violations and would be subject to further disciplinary action 
from the Exchange's Business Conduct Committee.

    \5\ For each violation of the policies set forth in the 
regulatory circular, in each calendar quarter, the Exchange will 
fine members or associated persons $100 for the first violation, 
$200 for the second violation, and $300 for the third and subsequent 
violations. See Amendment No. 1, supra note 1.
    \6\ In addition to fines, members who violate the policies set 
forth in the regulatory circular are potentially subject to other 
forms of discipline. First, pursuant to Interpretation .05 to Rule 
6.20, two floor officials may nullify a transaction or adjust its 
terms if they determine the transaction to have been in violation of 
Rule 8.51. Second, depending upon the egregiousness of the conduct 
and the disciplinary history of the individual(s) involved, the 
Exchange could bring a formal disciplinary action under Chapter 17 
of the Exchange's rules. Finally, as with any conduct that concerns 
an individual's performance standards as a member of a trading 
crowd, the Market Performance Committee, pursuant to Rules 8.3(a) 
and 8.60, may take remedial action including suspending or 
terminating a market-maker's appointment in a class of options. See 
Letter from Timothy Thompson, Senior Attorney, CBOE to James T. 
McHale, Attorney, Office of Market Supervision, Division of Market 
Regulation, Commission, dated December 21, 1995.
    \7\ Interpretation .08 to Rule 6.20 permits members of the OEX 
Floor Procedure Committee, as one of the two successor committees of 
the Index Floor Procedure Committee, to perform the functions of a 
Floor Official in the OEX trading crowd.
    \8\ Members would be entitled to appeal the fine under Chapter 
XIX of the Exchange's rules.
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    CBOE believes that its procedures for enforcement of Rule 8.51 and 
Rule 6.43 in the OEX trading crowd, as contained in a published 
regulatory circular, are consistent with Section 6 of the Act, in 
general, and further the objectives of Section 6(b)(5) of the Act in 
particular, in that they are designed to perfect the mechanisms of a 
free and open market and to protect investors and the public interest 
by holding market-makers responsible for honoring the displayed quote 
and for ensuring that accurate markets are displayed to the public.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any inappropriate 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

    Because the foregoing rule change constitutes a stated policy with 
respect to the meaning, administration, or enforcement of an existing 
rule, it has become effective pursuant to Section 19(b)(3)(A) of the 
act and Rule 19b-4 thereunder. At any time within 60 days of the filing 
of the proposed rule change, the Commission may summarily abrogate such 
rule change if it appears to the Commission that such action is 
necessary or appropriate in the public interest, for the protection of 
investors, or otherwise in furtherance of the purposes of the Act.

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, 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 in the 
Commission's Public Reference Section, 450 Fifth Street, N.W., 
Washington, D.C. 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 the File No. SR-CBOE-95-70 and should be 
submitted by March 21, 1996.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\

    \9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-4577 Filed 2-28-96; 8:45 am]
BILLING CODE 8010-01-M