[Federal Register Volume 63, Number 50 (Monday, March 16, 1998)]
[Notices]
[Pages 12851-12852]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-6661]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39736; File No. SR-CBOE-97-49]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Inc.; Order Granting Approval to Proposed Rule Change Relating to 
Trading Differentials for Option Contracts

March 9, 1998.
    On October 21, 1997, the Chicago Board Options Exchange, Inc. 
(``CBOE'' or ``Exchange'') submitted to the Securities and Exchange 
Commission (``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Exchange Act'' or ``Act'') \1\ and 
Rule 19b-4 thereunder,\2\ a proposed rule change to allow the Exchange 
to establish, upon the filing of a rule change proposal pursuant to 
Section 19(b)(3)(A) of the Exchange Act, the trading differentials for 
option contracts traded on the Exchange.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    The proposed rule change was published for comment in the Federal 
Register on December 1, 1997.\3\ No comments were received on the 
proposal. This order approves the proposal, as amended.
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    \3\ See Exchange Act Release No. 39348 (November 21, 1997), 62 
FR 63577 (December 1, 1997). The Exchange submitted on amendment to 
the proposed rule change on November 17, 1997. See Letter from 
Timothy H. Thompson, CBOE, to Christine Richardson, Division of 
Market Regulation, Commission (Nov. 14, 1997). The amendment was 
published for comment along with the originally submitted filing. By 
adding the term ``appropriate'' before the term ``Floor Procedure 
Committee'' in the text of proposed Rule 6.42, the amendment 
clarifies that the decision to change the increments with respect to 
a particular class of options will be made by whichever Floor 
Procedure Committee has jurisdiction over trading in that option 
class. The amendment also replaced Exhibit 1 to the submitted filing 
with a revised Exhibit 1.
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    The Exchange is proposing to amend Exchange Rule 6.42 to give the 
Board of Directors the authority to establish the minimum trading 
increments for option contracts. Currently, Rule 6.42 that bids and 
offers shall be express in eighths of $1 unless a different increment 
is approved by the Floor Procedure Committee for an option contract of 
a particular series. An interpretation to the Rule states that bids and 
offers for all option series trading below $3 shall be expressed in 
sixteenths of a dollar. Until such time as the Board determines to make 
a change, the current standards will apply.
    The proposed change would allow the Exchange to change the trading 
increments on an expedited basis and thus, allow the Exchange to 
respond appropriately to changes in the minimum trading increment in 
the markets for the securities underlying CBOE options or to changes in 
the minimum trading increments for one of the other options exchanges. 
When the Board of Directors determines to change the trading 
increments, the Exchange will designate such change as a stated policy, 
practice, or interpretation with respect to the administration of Rule 
6.42 within the meaning of subparagraph (3)(A) of subsection 19(b) of 
the Exchange Act and will file a rule change for immediate 
effectiveness upon filing with the Commission.
    The Exchange notes that there has been a movement within the 
industry to reduce the minimum trading and quotation increments imposed 
by the various SROs.\4\ As derivative securities, the prices of options 
are determined in reference to the prices of the underlying securities. 
Consequently, the Exchange believes that where practicable, the 
Exchange should have minimum increments comparable to those applicable 
to the securities underlying CBOE options.
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    \4\ See Exchange Act Release No. 38571 (May 5, 1997), 62 FR 
25682 (May 9, 1997) (Commission order approving a change in the 
minimum increment to \1/16\th for equity securities listed in the 
American Stock Exchange); Exchange Act Release No. 38678 (May 27, 
1997), 62 FR 30363 (June 3, 1997) (Commission order approving a 
change in the minimum increment to \1/16\th for Nasdaq-listed equity 
securities); and Exchange Act Release No. 38897 (Aug. 1, 1997), 62 
FR 42847 (Aug. 8, 1997) (Commission order approving a change in the 
minimum increment to \1/16\th for NYSE=listed equity securities).
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    The Exchange also believes that the proposed rule change would give 
the Exchange the flexibility to follow the suit of the principal 
exchanges for the underlying securities without having to update its 
rules continually but at the same time would give the Exchange the 
flexibility it needs to deviate from the minimum increments established 
by the principal markets for the underlying securities in the event 
that the CBOE's systems were not immediately able to handle such 
increments. The Exchange, therefore, believes the quality of the market 
for CBOE options will be

[[Page 12852]]

enhanced by allowing for more accurate pricing of CBOE options.
    The Commission finds that the proposed rule change is consistent 
with the requirement of the Act and the rules and regulations 
thereunder applicable to a national securities exchange, and, in 
particular, with the requirements of Sections 6 and 11A of the Act.\5\ 
Specifically, the Commission believes that permitting the Exchange to 
establish trading differentials for option contracts upon the filing of 
a proposal under Section 19(b)(3)(A) of the Act will help to facilitate 
securities transactions, to remove impediments to and perfect the 
mechanism of a free and open market, to foster competition and 
coordination with persons engaged in regulating securities, and to 
promote just and equitable principles of trade.
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    \5\ See 15 U.S.C. 78f(b) and 78k-1. In approving this rule 
change, the Commission notes that it has considered the proposal's 
impact on efficiency, competition, and capital formation, consistent 
with Section 3 of the Act. Id. at 78c(f).
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    As noted above, the Commission previously has approved a rule 
proposal that allows the Exchange to establish trading increments for 
equity securities. The Commission believes that permitting the Exchange 
to establish trading differentials for option contracts upon the filing 
of a proposal under Section 19(b)(3)(A) of the Act will provide greater 
flexibility to the Exchange and thereby enhance the quality of the 
market for affected CBOE-listed options. Allowing the CBOE to quote in 
finer increments will facilitate quote competition. This should help 
produce more accurate pricing of options and should result in tighter 
quotations. Furthermore, if the quoted markets are improved by reducing 
the minimum increment, the change could result in added benefits to the 
markets such as reduced transaction costs.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\6\ that the proposed rule change (SR-CBOE-97-49) is approved.

    \6\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-6661 Filed 3-13-98; 8:45 am]
BILLING CODE 8010-01-M