[Federal Register Volume 61, Number 131 (Monday, July 8, 1996)]
[Notices]
[Pages 35821-35822]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-17251]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37388; File No. SR-CBOE-96-31]
Self-Regulatory Organizations; Notice of Filing and Immediate
Effectiveness of Proposed Rule Change by the Chicago Board Options
Exchange, Incorporated Relating to Operation and Enforcement of the
Firm Quote Rule in the OEX Trading Crowd
June 28, 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 May 15,
1996, 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.
The Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The CBOE proposes to issue two regulatory circulars pertaining to
the administration and enforcement of the firm quote rule in the
trading crowd where options on the Standard and Poor's 100 Index (``OEX
options'') are traded. The text of the regulatory circulars and the
proposed rule change are 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, first, to consolidate
and clarify in a single regulatory circular (referred to as
``Regulatory Circular 96-xx'') the Exchange's policies concerning the
administration and enforcement of the firm quote rule (CBOE Rule 8.51)
in the OEX trading crowd, and, second, to set forth in a separate
regulatory circular (referred to as ``Regulatory Circular 96-yy'') the
specific fines that may be imposed under the Exchange's summary fine
procedure for violations of the requirements of the firm quote program
in the OEX crowd, as contemplated in CBOE Rule 17.50(g)(6).
Proposed Regulatory Circular 96-xx consolidates without substantial
change various requirements applicable to market makers and floor
brokers in the OEX trading crowd under CBOE Rule 8.51 (the firm quote
rule). These requirements have previously been set forth in a number of
different regulatory circulars, two of which (RG 90-09 and RG 96-25)
are currently effective. The proposed regulatory circular would take
the place of both of these circulars in order to provide in one place a
clear and comprehensive statement of how firm quote requirements apply
in the OEX crowd.
In addition to restating what is set forth in existing circulars,
the proposed circular would amend those circulars to clarify certain
aspects of the obligations of market makers and floor brokers under the
firm quote rule, and how those obligations are enforced. Specifically,
with respect to market makers, proposed Regulatory Circular 96-xx sets
forth a mechanism for the enforcement of Rule 8.51 in the OEX trading
crowd by providing that if the OEX trading crowd fails to honor a
posted quotation in accordance with the firm quote rule, two Floor
Officials may designate one or more market makers in the crowd to take
the contra side of the order that is entitled to execution. The
proposed circular makes it clear that any failure to comply with the
Floor Officials' designation is a violation of Rule 8.51, which may
subject the violator to summary fine under Rule 17.50 as well as to
formal disciplinary proceedings.\1\ The circular points out that the
fine permitted to be imposed by Floor Officials for such violations can
be as high as $5,000, which is the maximum fine authorized under the
summary fine rule. It is the Exchange's expectation that the in
terrorem effect of a substantial fine will cause market makers to
comply with Floor Officials' designations, and the fines themselves
will rarely if ever have to be imposed.
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\1\ Violations of Rule 8.51 are deemed to be violations of Rule
6.20(b) pursuant to paragraph (vii) of Interpretation and Policy .04
under Rule 6.20. Rule 6.20(b) requires that fines imposed thereunder
must be agreed upon by at least two Floor Officials.
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Proposed Regulatory Circular 96-xx also clarifies the meaning of
the due diligence obligation imposed on floor brokers under Rule
6.73(a), as that obligation applies in the OEX trading crowd in light
of the operation of the firm quote rule. The circular describes two
alternative ways in which public customer orders eligible for execution
under the firm quote rule may be represented: The floor broker may
either ask for a market and then immediately fill the order for up to
the ten contract limit entitled to execution under the firm quote rule
at the better of the posted market or the market given in response to
his request, or the floor broker may bid or offer on behalf of his
customer at a price between the posted bid and offer in an attempt to
obtain an execution at a better price than the posted market. Under the
second alternative, the floor broker must then immediately fill the
public customer order for up to ten contracts at his announced bid or
offer if the crowd is willing to trade at that price, or if not, he
must immediately fill the order at the originally posted market.
In all other respects, proposed Regulatory Circular 96-xx is
substantially the same as the existing circulars that it will replace.
Proposed Regulatory Circular 96-yy is being issued pursuant to
CBOE's summary fine rule (Rule 17.50), which authorizes the summary
imposition of fines for certain specified ``minor rule violations'' in
lieu of formal disciplinary proceedings. Paragraph (g)(6) of Rule 17.50
covers the imposition of summary
[[Page 35822]]
fines for violation of trading conduct and decorum policies established
under CBOE Rule 6.20, and states that the specific dollar amount that
may be imposed as fines thereunder will be distributed to the
membership periodically. The Exchange has previously issued Regulatory
Circular 95-37, which sets forth fines for most of the trading conduct
and decorum policies established under Rule 6.20, but does not include
fines for violation of the firm quote requirements of Rule 8.51, which
are deemed to be violations of Rule 6.20(b).\2\ Proposed Regulatory
Circular 96-yy cures this omission for violations of the firm quote
rule in the OEX crowd by setting forth the specific dollar amounts that
may be imposed as summary fines for such violations. As noted above,
the fines that may be imposed for refusal to take the other side of an
OEX trade entitled to execution under the firm quote rule when directed
to do so by Floor Officials range from $1,000 to $5,000, which places
them at the high end of the scale under Rule 17.50. This is intended to
remove any economic incentive for a market maker to refuse to obey the
directions of Floor Officials to comply with firm quote requirements.
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\2\ See supra note 1.
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The Exchange believes that by clarifying the obligations of market
makers and floor brokers in the OEX crowd under the firm quote rule and
by specifying the fines that may be imposed for failure to honor these
obligations, the proposed regulatory circulars will serve to promote
just and equitable principles of trade and to protect investors and the
public interest, in furtherance of the objectives of section 6(b)(5) of
the Act.
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 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-96-31 and should be
submitted by July 29, 1996.
For Commission, by the Division of Market Regulation, pursuant
to delegated authority.\3\
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\3\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 96-17251 Filed 7-5-96; 8:45 am]
BILLING CODE 8010-01-M