[Federal Register Volume 61, Number 73 (Monday, April 15, 1996)]
[Notices]
[Pages 16514-16515]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-9229]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-37078; File No. SR-CBOE-96-19]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Inc. Relating to 
Eligibility Requirements for Participation on the RAES System in SPX 
Options

April 5, 1996.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on March 18, 1996, the 
Chicago Board Options Exchange, Incorporated (``CBOE'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II, and III below, which 
Items have been prepared by the self-regulatory organization. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. Sec. 78s(b)(1) (1988).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend one of the four Rule 24.16 
requirements market makers in Standard & Poor's 500 Stock Index 
(``SPX'') options must meet to qualify for participation in the Retail 
Automatic Execution System (``RAES''). Pursuant to the change, SPX 
market makers who execute at least 50%, instead of 75% (as CBOE Rule 
24.16 currently states), of their market maker contracts for the 
preceding month in SPX options may participate on RAES.

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 self-regulatory organization 
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 self-regulatory organization 
has prepared summaries, set forth in Section (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 amend one of the four 
Rule 24.16 requirements SPX market makers must meet to qualify for 
participation in RAES. RAES is the Exchange's automatic execution 
system for small (generally fewer than 10 contracts) public customer 
market or marketable limit orders. When RAES receives an order, the 
system automatically will attach to the order its execution price, 
determined by the prevailing market quote at the time of the order's 
entry into the system. A buy order will pay the offer; a sell order 
will sell at the bid. An eligible SPX market maker who is signed onto 
the system at the time the order is received will be designated to 
trade with the public customer order at the assigned price.
    Rule 24.16(a)(iv), RAES Eligibility in SPX, states that for a 
market maker to qualify to participate in SPX RAES that market maker 
must: (A) be approved under Exchange rules as a market maker with a 
letter of guarantee, (B) maintain his principal business on the CBOE as 
a market maker, (C) execute at least seventy-five percent of his market 
maker contracts for the preceding month in SPX options (``75% SPX 
requirement''), and (D) execute at least seventy-five percent of his 
market maker trades for the preceding month in SPX options in person. 
These requirements generally ensure that those market makers who are 
satisfying the public customer orders at the prevailing bid or offer 
are the same market makers who have made a commitment to make markets 
on a regular basis at the SPX post.
    The Exchange has learned, however, that a number of market makers 
who regularly make markets in SPX fail to execute seventy-five percent 
of their market marker contracts for the preceding month in SPX 
options. In many cases, these market makers fail to meet the 75% SPX 
qualification because they execute a large percentage of contracts in 
S&P 100 (``OEX'') options on the floor of the Exchange in order to 
hedge their SPX positions. Because SPX and OEX options are legitimate 
hedge vehicles for each other, the Exchange does not believe a market 
maker who makes markets regularly in SPX options, but who employs these 
hedge strategies, should be prevented from contributing to the 
Exchange's efforts to execute small public customer RAES orders. 
Consequently, the Exchange proposes that the 75% SPX requirement be 
reduced to a 50% requirement.
    The proposed change will increase the number of market makers 
available to execute the public customer RAES orders, at the same time 
ensuring that the orders are filled by market makers who are best 
equipped to handle these orders. In fact, the 50% requirement would 
ensure that a market maker who was assigned a RAES trade had transacted 
at least as many market maker contracts in SPX options as that market 
maker had transacted in all other products on the CBOE floor combined. 
The Exchange's proposed change to increase participation on SPX RAES 
should work in conjunction with existing Rule 24.16(b) to ensure broad 
participation. Paragraph (b) of the Rule states that any market maker 
who has logged onto RAES at any time during an expiration month must 
continue to do so each time he is present in the trading crowd until 
the next expiration. Therefore, the proposed rule change will ensure 
that a larger number of market makers generally will be available to 
participate on RAES and paragraph (b) should ensure that those market 
makers will be available on any particular day.
    CBOE believes that the proposed rule change will increase the 
number of market makers available to execute public customer RAES 
orders in SPX. Hence, the Exchange believes the rule proposal is 
consistent with and furthers the objectives of Section 6(b)(5) of the 
Act, in that it is designed to perfect the mechanisms of a free and 
open market and to protect investors and the public interest.

(B) Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed change will impose 
any burden on competition.

(C) Self-Regulatory Organization's Statement on Comments on the 
Proposed Rule Change Received From Members, Participants, or Others

    Written comments on the proposed rule change were neither solicited 
nor received.

[[Page 16515]]

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (a) By order approve such proposed rule change, or
    (b) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

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. 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 File No. 
SR-CBOE-96-19 and should be submitted by May 6, 1996.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\2\
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    \2\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-9229 Filed 4-12-96; 8:45 am]
BILLING CODE 8010-01-M