[Federal Register Volume 62, Number 161 (Wednesday, August 20, 1997)]
[Notices]
[Pages 44296-44298]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-22057]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38928; File No. SR-CBOE-97-37]


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

August 12, 1997.
    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 August 
6, 1997, the Chicago Board Options Exchange, Inc. (``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.

I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    CBOE proposes to add two additional eligibility requirements that 
market makers must satisfy in order to participate in the Exchange's 
Retail Automatic Execution System (``RAES'') under CBOE Rule 8.16. The 
Exchange is also proposing to clarify that Rule 8.16 applies to RAES 
for all CBOE options other than options on the Standard & Poor's 100 
Stock Index (``OEX'') and options on the Standard & Poor's 500 Stock 
Index (``SPX''), which have separate RAES rules. The text of 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 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 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

1. Purpose
    The purpose of the proposed rule change is to amend CBOE Rule 8.16, 
the rule governing RAES \1\ eligibility for CBOE options (other than 
OEX and SPX), by adding two eligibility requirements which market 
makers must satisfy before they may continue to participate on RAES. In 
addition, the Exchange is making certain changes to CBOE Rule 8.16 to 
make it clear that the rule applies to RAES participation in all CBOE 
options other than options on the OEX and SPX.
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    \1\ RAES is the Exchange's automatic execution system for small 
(generally less 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 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.
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    Currently, CBOE Rule 8.16 does not contain any eligibility 
requirement for participating on RAES that is related to a market 
maker's trading activity. Paragraph (a) of Rule 8.16 merely requires a 
market maker: (i) To log onto the system using his own acronym and 
individual password; (ii) to designate that his trades be assigned to 
and clear into either his individual account or a joint account in 
which he is a participant; and (iii) to log on only in person and to 
continue on the system only so long as he is present in the trading 
crowd. The Exchange has learned, however, that a few market makers 
across the floor have relied on their participation in RAES to derive a 
large percentage of their profits and have not been inclined to take 
the risks involved with proactively fulfilling their market maker 
obligations as set forth in CBOE Rule 8.3.\2\ Participation on RAES was 
intended to be an adjunct, and not a substitute, to the normal 
operation of a traditional market making business. To the extent a 
market maker is able to derive some profits from participation on RAES 
with little risk, RAES participation can act as a disincentive to

[[Page 44297]]

these market makers to perform their obligations under Rule 8.7.\3\
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    \2\ The obligations of a market maker as set forth in CBOE Rule 
8.3 include, among others, to compete with other market makers to 
improve markets in all series of option classes where the market 
maker is present, to make markets that, absent changed 
circumstances, will be honored to a reasonable number of contracts, 
and to update quotations in response to changed market conditions.
    \3\ While the Market Performance Committee has the authority 
under rule 8.60 to take remedial action against a market maker who 
has been found to have not fulfilled his Rule 8.3 performance 
standards, it is often difficult to proceed against a particular 
market maker, as opposed to a trading crowd, where there are no 
objective criteria on which to base that market maker's performance. 
The proposed changes to the eligibility standards, on the other 
hand, will set forth objective criteria and should to a large extent 
be self-policing because a market maker who does not meet the 
objective criteria may lose their right to continue to participate 
on RAES.
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    Consequently, the Exchange has determined that there should be a 
limit on the percentage of a market maker's overall trades, both in 
terms of total transaction and contract volume, that a market maker may 
transact on RAES over a designated period of time. The Exchange 
believes that this eligibility standard will provide an incentive to 
those market makers that currently derive a large percentage of their 
activity from RAES to actively fulfill their market making obligations. 
Additionally, this proposal would ensure that those market makers that 
actively fulfill their obligations are the same ones that receive the 
benefits of RAES participation.
    The Exchange is not at this time proposing specific percentages 
which market makers will have to satisfy because it expects that the 
percentages will have to be adjusted from time to time as the Exchange 
gains experience with the effect of these requirements. Instead the 
Exchange is proposing that the Market Performance Committee be given 
the authority to set the percentages and the time period over which 
these percentages shall be determined. The Market Performance Committee 
would provide advance notice by way of a regulatory circular of the 
applicable percentages before the beginning of any time period during 
which these percentages would be calculated. The Market Performance 
Committee would also have the authority to provide exemptions to 
certain option classes and for all market maker activity in one or more 
classes of options for certain days. Finally, the Market Performance 
Committee would have the authority to apply the percentages in 
aggregate to all the options traded at a particular trading station or 
to single option classes.
    For example, the Market Performance Committee might determine that 
in order to remain eligible to participate on RAES in a particular 
class of options a market maker may not execute through RAES orders 
more than 25% of his total transactions or more than 25% of his total 
contract volume during a particular calendar quarter. Under these 
requirements, the Market Performance Committee may grant exemptions 
from these requirements in situations in which it would be more 
difficult than normal to satisfy the criteria. For example, the Market 
Performance Committee might grant exemptions from the requirements 
where: (i) The average daily volume of contracts traded in the class of 
options is less than 100 per day for the calendar quarter; or (ii) the 
aggregate number of transactions in the option class at the Exchange 
executed through RAES orders by all market makers during the calendar 
quarter is greater than 25% of the number of total transactions in the 
option class executed by all market makers in the calendar quarter; or 
(iii) the aggregate contract volume at the Exchange in the option class 
resulting from transactions executed through RAES by all market makers 
during the calendar quarter is greater than 25% of the total contract 
volume at the Exchange in the option class executed by all market 
makers in the calendar quarter. In addition, the Market Performance 
Committee might determine to exempt a particular day of trading from 
the calculations if there was an unusually large volume of RAES 
transactions during a particular day.
    In addition to being ineligible to participate on RAES, violations 
of the above requirements could subject the member to disciplinary 
action or other remedial action by the Market Performance Committee 
under paragraph (d) of Rule 8.16. Of course, as with all Exchange 
decisions involving economic aggrievement a market maker who was the 
subject of a Market Performance remedial action would have the right to 
appeal such decision under Chapter XIX of the Exchange's rules. Appeal 
rights also exist under Chapter XVII of the Exchange's rules for 
disciplinary actions taken by the Exchange. Also, despite a market 
maker's ineligibility under the provisions of CBOE Rule 8.16, the 
Exchange's Market Performance Floor Officials could require, pursuant 
to paragraph (c) of Rule 8.16, the ineligible market maker to log onto 
RAES if there is inadequate RAES participation in a particular options 
class.
2. Statutory Basis
    CBOE believes that the proposed rule change should provide an 
incentive to Exchange market makers to proactively fulfill their 
obligations under Exchange rules. As such, the Exchange believes the 
rule proposal is consistent with and furthers the objectives of Section 
6(b)(5) of the Act,\4\ in that it is designed to perfect the mechanisms 
of a free and open market and to protect investors and the public 
interest.
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    \4\ 15 U.S.C. 78f(b)(5).
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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 either solicited or received.

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

    Within 35 days of the 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 the 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 at the 
Commission's Public Reference Room. Copies of such filing will also be 
available for inspection and copying at the principal office of the 
Exchange. All submissions should refer to File No. SR-CBOE-97-37 and 
should be submitted by September 10, 1997.


[[Page 44298]]


    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.
Jonathan G. Katz,
Secretary.
[FR Doc. 97-22057 Filed 8-19-97; 8:45 am]
BILLING CODE 8010-01-M