[Federal Register Volume 61, Number 123 (Tuesday, June 25, 1996)]
[Notices]
[Pages 32868-32870]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-16067]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37316; File No. SR-CBOE-96-10]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change by the Chicago Board Options Exchange, Inc., Relating to 
Multiple Representation

June 17, 1996.

I. Introduction

    On March 6, 1996, the Chicago Board Options Exchange, Inc. 
(``CBOE'' or ``Exchange'') submitted to the Securities and Exchange 
Commission (``SEC'' or ``Commission'') a proposed rule change to amend 
CBOE Rule 6.55, ``Multiple Orders Prohibited,'' to provide that, except 
in accordance with procedures established by the appropriate Floor 
Procedure Committee, or with such Floor Procedure Committee's 
permission in individual cases, no market maker shall enter or be 
present in a trading crowd while a floor broker present in the trading 
crowd is holding an order on behalf of the market maker's individual 
account or an order initiated by the market maker for an account in 
which the market maker has an interest.
    Notice of the proposal was published for comment and appeared in 
the Federal Register on March 28, 1996.\1\ No comments were received on 
the proposed rule change.
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    \1\ See Securities Exchange Act Release No. 36996 (March 20, 
1996), 61 FR 13907.
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II. Description of the Proposal

    Currently, CBOE Rule 6.55 provides that no CBOE member, for any 
account in which he has an interest or on behalf of a customer, shall 
maintain with more than one broker orders for the purchase or sale of 
the same option contract or other security, or the same combination of 
option contracts or other securities, with the knowledge that such 
orders are for the account of the same principal. According to the 
Exchange, the purpose of CBOE Rule 6.55 is to prevent a person from 
being disproportionately represented in a trading crowd.
    In furtherance of this purpose, the Exchange also has had a long-
standing policy of prohibiting market makers from entering or being 
present in a trading crowd while a floor broker present in the trading 
crowd is holding an order on behalf of the market maker's individual 
account or an order initiated by the market maker for an account in 
which the market maker has an interest, except in accordance with 
procedures established by the appropriate Floor Procedure Committee or 
with such Floor Procedure Committee's permission in individual 
cases.\2\ This policy prevents a market maker from avoiding CBOE Rule 
6.55 by placing an order with a floor broker for a particular option 
contract or other security and also representing himself or herself in 
the trading crowd for such option contract or other security. The 
purpose of the proposal is to specifically delineate this policy in the 
Exchange's rules by including it in a new paragraph (b) to CBOE Rule 
6.55.
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    \2\ Exceptions to this policy which have been approved by a 
Floor Procedure Committee are contained in Exchange Regulatory 
Circular RG95-64, which concerns the trading activities of joint 
account participants in the Standard & Poor's (``S&P'') 100 
(``OEX'') and S&P 500 (``SPX'') index option classes. See also 
Securities Exchange Act Release No. 36977 (March 15, 1996) (order 
approving File No. SR-CBOE-95-65) (approving regulatory circular 
which provides that a joint account trading in equity options may be 
represented simultaneously in a trading crowd by participants 
trading in person) (``Joint Account Circular'').
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    In addition, the CBOE proposes to add Interpretation and Policy .01 
to CBOE Rule 6.55 to specify three alternative procedures that govern 
how a market maker may permissibly enter a trading crowd in which a 
floor broker is present who holds an order on behalf of the market 
maker's individual account or an order initiated by the market maker 
for an account in which the market maker has an interest.
    Under the first alternative, the market maker must make the floor 
broker aware of the market maker's intention to enter the trading crowd 
and the floor broker

[[Page 32869]]

must time-stamp the order ticket for the market maker order and write 
the notation ``Cancel'' or ``CXL'' next to the time stamp. If the 
market maker wishes to re-enter the order via the floor broker upon the 
market maker's exit from the trading crowd, the floor broker must at 
that time again time stamp the order ticket and write the notation 
``Reentry'' or ``RNTRY'' next to such subsequent time stamp.
    Under the second alternative, the market maker must cancel the 
market maker order by giving the floor broker a written cancellation of 
the order which is time-stamped by the market maker immediately prior 
to its transmission to the floor broker. If the market maker wishes to 
re-enter the order upon his exit from the trading crowd, a new order 
ticket must be used by the representing floor broker.
    Under the third alternative, the market maker must cancel the 
market maker order by taking the order ticket for the order back from 
the floor broker, provided that the market maker allows the floor 
broker to retain a copy of the order ticket (which the floor broker 
must time-stamp at the time of cancellation and retain for the floor 
broker's records). If the market maker wishes to re-enter the order 
upon his exit form the trading crowd, a new order ticket must be used.
    The CBOE states that the proposed amendment to CBOE Rule 6.55 also 
codifies past practice by providing that the appropriate Floor 
Procedure Committee may adopt other procedures which, if followed, 
would permit a market maker to be exempt from the requirements of 
paragraph (b) of CBOE Rule 6.55, or may grant permission for a market 
maker to enter a trading crowd in a particular instance notwithstanding 
the requirements of that paragraph.\3\ Proposed Interpretation and 
Policy .02 advises members to consult CBOE regulatory circulars 
concerning joint accounts in connection with procedures governing the 
simultaneous presence in a trading crowd of participants in and orders 
for the same joint account.
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    \3\ The CBOE has represented that this provision is intended to 
provide the Exchange with the flexibility to address special 
situations that may arise infrequently. One such situation would 
exist where there is exceptionally high activity in a small trading 
crowd. In this case, the CBOE may grant permission to market makers 
to enter the trading crowd for a limited time. Telephone 
conversation between Mike Meyer, Schiff Hardin & Waite, and Yvonne 
Fraticelli, Attorney, Office of Market Supervision, Division of 
Market Regulation, Commission, on May 13, 1996.
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    Finally, the proposal changes the title of CBOE Rule 6.55 from 
``Multiple Orders Prohibited'' to ``Multiple Representation 
Prohibited'' in order to more accurately reflect the scope of the 
amended rule.

III. Discussion

    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) \4\ in that it is 
designed to remove impediments to and perfect the mechanism of a free 
and open securities market and to facilitate transactions in 
securities, while protecting investors and the public interest.
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    \4\ 15 U.S.C. 78f(b)(5) (1988 & Supp. V 1993).
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    Currently, CBOE Rule 6.55 prohibits members from placing identical 
orders for the account of the same principal with several floor 
brokers. According to the Exchange, CBOE Rule 6.55 is designed to 
prevent a person from being represented disproportionately in a trading 
crowd. An account using multiple orders would be represented 
disproportionately because, when an execution is divided among 
competing brokers, an account using multiple orders would receive a 
larger share of the execution that an account using a single order.\5\
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    \5\ See File No. SR-CBOE-80-11 (proposal to adopt CBOE Rule 
6.55).
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    The proposal, which codifies an existing CBOE policy, is designed 
to prevent a market maker from avoiding CBOE Rule 6.55 by placing an 
order with a floor broker for a particular option contract or other 
security and also representing himself or herself in the trading crowd 
for that option contract or security. By prohibiting a market maker 
from entering or being present in a trading crowd while a floor broker 
in the trading crowd holds an order on behalf of the market maker's 
individual account or an order initiated by the market maker for an 
account in which the market maker has an interest, the proposal 
furthers the objectives of CBOE Rule 6.55 and prevents a person from 
being represented disproportionately in a trading crowd.\6\
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    \6\ In addition, the proposal is consistent with the provisions 
of the Joint Account Circular, which was approved recently by the 
Commission. See note 2, supra. Specifically, the Joint Account 
Circular notes, among other things, that members may not enter 
orders in a particular crowd with floor brokers for their individual 
or joint account whenever they are trading in person in that crowd.
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    The Commission believes that it is appropriate for the CBOE to 
adopt Interpretation and Policy .01, which includes procedures that 
will allow a market maker to cancel his order with a floor broker and 
enter a trading crowd in which a floor broker is present who was 
holding an order on behalf of the market maker's individual account or 
an order initiated by the market maker for an account in which the 
market maker has an interest.\7\ The Commission believes that the 
procedures proposed in Interpretation and Policy .01 are consistent 
with the purpose of CBOE Rule 6.55 in that they allow a market maker to 
enter the trading crowd after cancelling his order with the floor 
broker, thereby ensuring that the market maker is not represented 
disproportionately in the trading crowd. In addition, Interpretation 
and Policy .01 should help the CBOE to maintain a fair and orderly 
market by clearly specifying procedures that will allow market maker to 
enter a trading crowd in which a floor broker holds an order on behalf 
of the market maker, and providing procedures that will allow the 
market maker to re-enter the order with the floor broker upon the 
market maker's exit from the trading crowd.
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    \7\ The procedures provided in Interpretation and Policy .01 for 
cancelling an order are as follows: (1) The market maker makes the 
floor broker aware of the market maker's intention to enter the 
trading crowd and the floor broker time stamps the order ticket for 
the order and writes the notation ``Cancel'' or ``CXL'' next to the 
time stamp; (2) the market maker cancels his order by giving the 
floor broker a written cancellation of the order which is time-
stamped by the market maker immediately prior to its transmission to 
the floor broker; or (3) the market maker cancels his order by 
taking the order ticket for the order back from the floor broker, 
provided that the market maker allows the floor broker to retain a 
copy of the order ticket (which the floor broker must time-stamp at 
the time of cancellation and retain for the floor broker's records). 
Interpretation and Policy .01 also provides procedures that allow 
the market maker to re-enter the order with the floor broker upon 
the market maker's exit from the trading crowd.
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    The Commission notes that CBOE Rule 6.55(b) allows the appropriate 
Floor Procedure Committee to create exceptions to CBOE Rule 6.55(b) by 
establishing procedures or granting permission to a market maker in 
individual cases. The Commission believes that this provision is 
appropriate and consistent with the Act because it will add flexibility 
to CBOE Rule 6.55(b) by allowing the CBOE to create an exception to the 
rule under extraordinary circumstances \8\ or to develop special 
trading procedures, such as those established in RG95-64.\9\
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    \8\ The Commission expects that the CBOE will grant such 
exceptions only in limited and truly extraordinary circumstances. 
See note 3, supra.
    \9\ See note 2, supra. The Commission notes that the 
establishment of such procedures would require a rule filing with 
the Commission pursuant to Section 19(b)(2) under the Act.
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    Finally, the Commission believes that it is reasonable for the CBOE 
to amend the title of CBOE Rule 6.55 to clarify the scope of the rule, 
and to adopt Interpretation and Policy .02, which

[[Page 32870]]

advises members to consult Exchange regulatory circulars for procedures 
governing the simultaneous presence in a trading crowd of participants 
in and orders for the same joint account.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\10\ that the proposed rule change (SR-CBOE-96-10) is approved.
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    \10\ 15 U.S.C. 78s(b)(2) (1988).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12) (1995).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-16067 Filed 6-24-96; 8:45 am]
BILLING CODE 8010-01-M