[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