[Federal Register Volume 62, Number 194 (Tuesday, October 7, 1997)]
[Notices]
[Pages 52365-52367]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-26523]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39159; File No. SR-CBOE-97-46]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by the Chicago 
Board Options Exchange, Incorporated Relating to Fractional Changes to 
Bids and Offers in Stocks

September 30, 1997.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on September 11, 1997, the Chicago Board Options Exchange, Incorporated 
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``SEC'' or ``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 from interested persons and to grant 
accelerated approval to the proposed rule change.
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    \1\ 15 U.S.C. Sec. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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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 CBOE Rule 30.33, which governs the 
permissible fractional variation for bids or offers in stocks. 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 III 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 Exchange proposes to amend its rules to expand the number of 
CBOE securities traded in sixteenths, i.e., \1/16\ of $1.00, to include 
all securities trading above $.25 per share.\3\ Exchange Rule 30.33, 
Fractional Changes for Bids and Offers, currently requires bids and 
offers in stocks (and other instruments that may be traded on the 
Exchange and to which Chapter 30 of the CBOE rules applies) \4\ with a 
price of $10.00 or less to be made at a variation of at least \1/16\ of 
$1.00.\5\
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    \3\ Bids and offers in stocks with prices of less than $.25 per 
share may be varied by as little as 1/32 of $1.00 per share.
    \4\ The Commission notes that the CBOE does not currently trade 
stocks. However, the Commission notes that the CBOE does trade 
equity derivative products that will be affected by the rule change; 
those products include equity (and equity index) linked notes and 
index warrants.
    \5\ In 1995, the Commission approved an expansion of sixteenths 
trading to permit all CBOE securities selling under $10.00 to trade 
in sixteenths. (Securities selling under $.25 could be traded in 
variations of \1/32\ of $1.00.) See Securities Exchange Act Release 
No. 35538 (Mar. 27, 1995), 60 FR 16895 (April 3, 1995) (order 
approving SR-CBOE-95-18). Prior to the approval of that filing, 
sixteenths trading was permitted for securities selling under $5.00 
and above $.25.
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    The change will, therefore, affect the bidding and offering in 
covered securities selling over $10.00 per share.
    The Exchange believes that by increasing the number of stocks and 
other instruments eligible to be traded in sixteenths, the Exchange 
will be better able to compete for listings in instruments, such as 
warrants. In fact, the Exchange's proposal is identical to a proposal 
of the American Stock

[[Page 52366]]

Exchange (``Amex'') and similar to a proposal of the Nasdaq Stock 
Market (``Nasdaq'') and the New York Stock Exchange (``NYSE'') which 
were recently approved by the Commission.\6\ The Exchange believes that 
trading in sixteenths will improve the market for covered securities 
trading above $10 by promoting greater liquidity and providing for 
superior executions of retail and professional orders. Also, the 
proposal is responsive to the recommendations of the Division of Market 
Regulation in its Market 2000 study that the exchanges and Nasdaq 
convert to a minimum variation of one-sixteenth as soon as possible.\7\
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    \6\ Securities Exchange Act Release No. 38571 (May 5, 1997), 62 
FR 25682 (May 9, 1997) (approving an Amex proposal to reduce the 
minimum trading increment to \1/16\ for certain Amex-listed equity 
securities); Securities Exchange Act Release No. 38678 (May 27, 
1997), 62 FR 30363 (June 6, 1997) (approving a Nasdaq rule change to 
reduce the minimum quotation increment to \1/16\ for certain Nasdaq-
listed securities) and Securities Exchange Act Release No. 38897 
(Aug. 1, 1997), 62 FR 42847 (Aug. 8, 1997) (approving a NYSE rule 
change to reduce the minimum quotation increment to \1/16\ for 
certain NYSE-listed securities).
    \7\ Division of Market Regulation, SEC, Market 2000: An 
Examination of Current Equity Market Developments at 18 (Jan. 1994) 
(``Market 2000 Study'').
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    On March 18, 1997, a representative of the CBOE discussed the 
proposed expansion of trading in sixteenths with the Intermarket 
Trading System (``ITS'') participants and with the Securities Industry 
Automation Corporation (``SIACS''). The ITS Operating Committee voted 
unanimously to instruct SIAC to make necessary enhancements to the ITS 
host system to accommodate the proposed expanded sixteenths trading. 
SIAC also agreed to coordinate with the ITS participants regarding any 
required testing and changes to the participants' internal systems.
2. Statutory Basis
    The basis under the Act for the proposed rule change is the 
requirement under Section 6(b)(5) \8\ that an exchange have rules that 
are designed to promote just and equitable principles of trade, to 
foster cooperation with persons engaged in facilitation and clearing 
transactions in securities, and to protect investors and the public 
interest.
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    \8\ 15 U.S.C. Sec. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange represents that the proposed rule change will not 
impose any burden on competition.

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

    No written comment were solicited or received with respect to the 
proposed rule change.

III. 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. Sec. 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-97-46 and 
should be submitted by October 28, 1997 21 days from date of 
publication.

IV. Commission's Findings and Order Granting Accelerated Approval 
of Proposed Rule Change

    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 \9\ and the rules and 
regulations thereunder. Specifically, the Commission finds that the 
proposed rule change is consistent with the Section 6(b)(5) \10\ 
requirements that the rules of an exchange be designed to promote just 
and equitable principles of trade, to foster cooperation with persons 
engaged in facilitation and clearing transactions in securities and to 
protect investors and the public interest.\11\
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    \9\ 15 U.S.C. 78f.
    \10\ 15 U.S.C. 78f(b)(5).
    \11\ In approving this rule, the Commission has considered the 
proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. Sec. 78c(f).
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    Recently, there has been a movement within the industry to reduce 
the minimum trading and quotation increments imposed by the various 
self-regulatory organizations (``SROs''). The Amex Nasdaq and NYSE have 
recently reduced their minimum increments.\12\ In addition, several 
third market makers have begun quoting securities in increments smaller 
than the primary markets. The proposed rule change will allow the CBOE 
the flexibility it needs to address this development and remain 
competitive with these markets. Nevertheless, the Commission notes that 
any further change in the minimum increments constitutes (1) a change 
in a stated policy, practice, or interpretation with respect to the 
meaning, administration, or enforcement of an existing rule of the 
CBOE, or (2) a change in an existing order-entry of trading system of 
an SRO, or (3) both.
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    \12\ See supra note 5.
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    Therefore, the Exchange is still obligated to file such proposed 
changes with the Commission.\13\
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    \13\ These changes, however, may become effective upon filing if 
they meet certain statutory requirements. See 15 U.S.C. 
78s(b)(3)(A)(i) and 17 CFR 240.19b-4(e).
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    The Commission also believes the proposed rule change will likely 
enhance the quality of the market for the affected CBOE-listed 
activities. Allowing the CBOE to quote affected securities in finer 
increments will facilitate quote competition.\14\ This should help 
produce more accurate pricing of such securities and can result in 
tighter quotations.\15\ In addition, if the quoted markets are improved 
by reducing the minimum increment, the change could result in added 
benefits to the market such as reduced transaction costs.
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    \14\ The rule change is consistent with the recommendation of 
the Division of Market Regulation (``Division'') in its Market 2000 
Study, in which the Division noted that the \1/8\ minimum variation 
can cause artificially wide spreads and hinder quote competition by 
preventing offers to buy or sell at prices inside the prevailing 
quote. See SEC, Division of Market Regulation, Market 2000: An 
Examination of Current Equity Market Developments 18-19 (Jan. 1994).
    \15\ A study that analyzed the reduction in the minimum tick 
size from \1/8\ to \1/16\ for securities listed on the Amex priced 
between $1.00 and $5.00 found that, in general, the spreads for 
those securities decreased significantly while trading activity and 
market depth were relatively unaffected. See Hee-Joon Ahn, Charles 
Q. Chao, and Hyuk Choe, Tick Size, Spread, and Volume, 5 J. Fin 
Intermediation 2 (1996).
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    The Commission finds good cause for approving the proposed rule 
change prior to the thirtieth day after the date of publication of 
notice thereof in the Federal Register.\16\ The proposal

[[Page 52367]]

provides the CBOE with the ability to quickly modify its trading 
increment to meet changing market conditions. This will enable the CBOE 
to quote competitively with other markets. Waiting the full statutory 
review period for the proposed rule change could place the CBOE at a 
significant competitive disadvantage to other markets. Therefore, the 
Commission believes it is consistent with Section 6(b)(5) and Section 
19(b)(2) of the Act to grant accelerated approval to the proposed rule 
change.\17\
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    \16\ A prior proposal by another exchange to reduce its minimum 
fractional change was published for the full statutory comment 
period without any comments being received by the Commission. 
Securities Exchange Act Release No. 38571 (May 5, 1997) (approving a 
proposed rule change by the Amex to reduce the minimum trading 
differential from \1/8\ to \1/16\ for equity securities priced at or 
above $10.00).
    \17\ 15 U.S.C. Secs. 78f(b)(5) and 78s(b)(2).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\18\ that the proposed rule change (SR-CBOE-97-46) is approved.
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    \18\ 15 U.S.C. Sec. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-26523 Filed 10-6-97; 8:45 am]
BILLING CODE 8010-01-M