[Federal Register Volume 61, Number 214 (Monday, November 4, 1996)]
[Notices]
[Pages 56728-56729]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-28183]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37876; File No. SR-CBOE-96-15]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Inc.; Order Approving a Proposed Rule Change Relating to the Placing of 
Orders Over the Outside Telephone Lines at the Equity Trading Posts

October 28, 1996.

I. Introduction

    On March 12, 1996, the Chicago Board Options Exchange, Inc. 
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'' or ``SEC''), pursuant to Section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposal to amend its Regulatory Circular governing 
the use of member-owned or Exchange-owned telephones located at the 
equity trading post on the floor of the Exchange. The proposed rule 
change was published for comment and appeared in the Federal Register 
on April 8, 1996.\3\ No comments were received. This order approves the 
proposal.
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    \1\ 15 U.S.C. Sec. 78s(b)(1) (1988).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 37050 (March 29, 1996), 
61 FR 15542.
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II. Description of the Proposal

    CBOE Rule 6.23 \4\ currently prohibits orders of any type to be 
entered via outside telephone lines at equity option trading posts.\5\ 
The rule change would amend this prohibition by permitting market 
makers only to place orders with floor brokers over the outside 
telephone lines at equity option trading posts.\6\ The policy for use 
of the telephones at the equity posts will remain unchanged in every 
other respect. Thus, for example, customers will not be permitted to 
place orders over the telephones located at the equity posts.
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    \4\ Exchange Rule 6.23 prohibits members from establishing or 
maintaining any telephone or other wire communications between their 
offices and the Exchange floor, and it authorizes the Exchange to 
direct the discontinuance of any communication facility terminating 
on the Exchange floor.
    \5\ See Securities Exchange Act Release No. 33701 (March 2, 
1994), 59 FR 11336 (March 10, 1994) (order approving the Exchange's 
equity options telephone policy).
    \6\ Currently, the Exchange permits market makers to place 
orders with floor brokers via intra-floor lines.
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    In its filing, the Exchange stated that the purpose of the proposed 
rule change was to permit market makers to transmit their orders more 
efficiently even when they need to be off the floor to attend to 
personal or Exchange business. The Exchange stated in its filing that 
this change will be particularly useful to those members of the 
Exchange that are often requested to attend meetings on Exchange 
matters during the trading day.
    Orders of market makers placed over the outside telephone lines 
pursuant to the amended policy will be counted as off-floor orders for 
purposes of determining a market maker's compliance with the 80% 
requirement of Rule 8.7. Pursuant to Interpretation .03 of Rule 8.7, 
Obligations of Market-Makers, a market maker must execute in-person 80% 
of his total transactions to receive market maker treatment for off-
floor orders. An order that receives market maker treatment is entitled 
to certain benefits, such as favorable margin treatment under Federal 
Reserve Board Regulation T; therefore, there is an incentive for market 
makers to satisfy the 80% requirement. Also, Interpretation .03 of Rule 
8.7 states that the off-floor orders for which a market maker receives 
market maker treatment shall be effected for the purpose of hedging, 
reducing risk of, rebalancing, or liquidating open positions of the 
market maker. Finally, Interpretation .03 to Rule 8.7 also requires a 
market maker, at a minimum, to execute at least 25% of his total 
transactions in-person.
    As with the current policy governing the use of telephones at the 
equity trading posts, the Exchange intends to monitor compliance with 
these conditions by means of customary floor surveillance procedures, 
including reliance on surveillance by Floor Officials and Exchange 
employees. In addition, the Exchange will review on a weekly basis 
clearance data, as it does now, to assure that a market maker meets the 
80% in-person requirement.

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) of the Act,\7\ in that 
it is designed to promote just and equitable principles of trade, 
foster cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, prevent fraudulent and 
manipulative acts and practices, and, in general, to protect investors 
and the public interest; and is not designed to permit unfair 
discrimination between customers, issuers, brokers, or dealers.
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    \7\ 15 U.S.C. Sec. 78f(b)(5) (1988).
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    Specifically, the Commission believes that the proposed rule change 
may allow market makers more efficient access to equity option posts 
when they are off the Exchange floor temporarily which could 
potentially enhance liquidity. In this context, under CBOE Rule 8.7(a), 
any orders placed by a market maker over the outside telephone lines at 
the equity post should constitute a course of dealings reasonably 
calculated to contribute to the maintenance of a fair and orderly 
market. As noted above, the other requirements of Rule 8.7 should also 
help to ensure that access to place orders over the outside telephone 
lines

[[Page 56729]]

will not be used as a method to avoid standing in the crowd and 
fulfilling market making duties.
    The Commission notes that the policy does differentiate between 
market makers and customers in that the amended policy will continue to 
prohibit customers from placing orders with floor brokers over the 
outside telephone lines. By contrast, customers are permitted direct 
telephone access to enter orders with floor brokers in the trading 
crowds of certain CBOE index options.\8\ However, the Commission 
believes that it is not unreasonable for CBOE to prohibit customers 
from placing orders directly with floor brokers in equity options 
trading crowds. The CBOE has represented to the Commission that CBOE 
members may not wish that their customers receive direct phone access 
to equity crowds because equity options tend to be used more widely by 
retail customers: direct phone access may inhibit member firms' ability 
to discharge their customer suitability and margin obligations.\9\ 
Furthermore, member firms do not commonly station a floor-broker in 
each equity trading crowd on the floor.\10\ Floor brokers commonly are 
responsible for representing orders in multiple crowds, which means 
that customers are less likely to be able to direct orders to a 
particular floor broker in a particular crowd.\11\
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    \8\ See Letter from Mary L. Bender, Senior Vice President, CBOE, 
to Sharon Lawson, Senior Special Counsel, Division of Market 
Regulation, Commission, dated October 18, 1996 (available in 
Commission's Public Reference Room).
    \9\ Id.
    \10\ Id.
    \11\ Id.
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    Furthermore, CBOE offers automated systems that permit member firms 
to ensure that customer orders are swiftly routed to the floor of the 
exchange.\12\ Approximately 70% of customer orders are routed through 
CBOE's Order Routing System (``ORS''), which provides an electronic 
interface between the Exchange's trading systems and the member firms' 
order transmission systems.\13\ In summary, because customer orders can 
be transmitted quickly to the post through other means, direct customer 
telephone access may cause compliance problems for members firms while 
offering uncertain access to the trading crowd and because the 
Commission has not received any comments about alleged unfair 
discriminatory effects objecting to the proposed rule change, the 
Commission believes it is reasonable to conclude that the amended 
telephone policy is not presently designed to permit unfair 
discrimination.\14\
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    \12\ See id.
    \13\ See id. ORS routes customer orders that qualify for firm 
quote guarantees to the Retail Automatic Execution System 
(``RAES''), which automatically and instantaneously executes such 
orders. According to CBOE, approximately 1 out of 5 customer orders 
at the CBOE are executed through RAES. ORS routes pre-opening market 
orders and limit orders, and limit orders at least one price tick 
away from the same-side market quote to the Exchange's Electronic 
Book. Finally, ORS routes market orders not eligible for firm quote 
guarantees and limit orders ``near'' the market quote to the trading 
crowd. Such orders are delivered either to printers or to Public 
Automated Routing (``PAR'') System touch screen terminals in the 
trading pit. According to CBOE, the capabilities of the PAR 
workstation allows customer orders routed through it to ``enjoy 
turnaround time second only to RAES.''
    \14\ See Timpinaro v. SEC, 2 F.3d 453, 457 (D.C. Cir. 1993) 
(finding that the Act prohibits only unfair discrimination, not all 
discrimination).
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    The Commission expects the CBOE to maintain surveillance procedures 
that are adequate to ensure that market makers do not use the amended 
telephone policy to avoid standing in their respective crowds or to 
assume de facto an appointment in an option traded at another post. In 
addition, the Commission believes that the 80% in-person requirement 
will serve to discourage market makers from utilizing the amended 
telephone policy to avoid standing in their respective crowds or to 
assume de facto an appointment in an option traded at another post.

IV. Conclusion

    For the reasons discussed above, the Commission finds that the 
proposal is consistent with the Act, and, in particular, Section 6 of 
the Act.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\15\ that the proposed rule change (File No. SR-CBOE-96-15) is 
approved.

    \15\ 15 U.S.C. Sec. 78s(b)(2) (1988).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-28183 Filed 11-1-96; 8:45 am]
BILLING CODE 8010-01-M