[Federal Register Volume 63, Number 56 (Tuesday, March 24, 1998)]
[Notices]
[Pages 14151-14152]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-7515]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39763; File No. SR-CBOE-98-04]


Self-Regulatory Organizations; Proposed Rule Change by the 
Chicago Board Options Exchange, Incorporated Clarifying the Application 
of Exchange Rules 8.7 and 8.51 to the Activities of Market-Makers on 
the CBOE

March 16, 1998.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on February 6, 1998, the 
Chicago Board Options Exchange, Incorporated (``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 CBOE. The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Change

    CBOE proposes to amend certain of its rules pertaining to the 
obligations of market-makers. 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, 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 to clarify the 
application of Exchange Rules 8.7 and 8.51 to the activities of market-
makers on CBOE by amending or adopting interpretations and policies 
under those Rules. Rule 8.7 requires, among other things, that market-
makers on CBOE ``compete with other Market-Makers to improve markets in 
all series of options classes at the station where a Market-Maker is 
present.'' Rule 8.51 imposes firm quotation obligations on trading 
crowds. Ordinarily, in meeting these obligations, each market-maker 
makes his or her own independent decision concerning what market to 
quote at any given time, and does not attempt to discuss or agree with 
other market-makers concerning what the market ought to be. However, 
there are circumstances where, in order to make fair and orderly 
markets that are competitive with other markets and responsive to the 
legitimate needs of investors, some coordination among market-makers is 
necessary. These circumstances arise (1) in connection with the 
establishment of parameters used by the automated quotation updating 
system (which is generally the Exchange's Auto Quote system) to 
automatically generate options quotations in response to changes in the 
market for the underlying security or index; (2) in responding to 
requests for markets in size, such that the coordinated efforts of more 
than one market-maker are called for in order to be able to fill any 
resulting order to buy or sell options; and (3) whenever a trading 
crowd, in order to be competitive with other markets, determines 
collectively to honor its disseminated quotations in a size greater 
than the six (ordinarily 10 contracts) called for under the Exchange's 
firm quotation rule (Rule 8.51). As described below, the purpose of 
this filing is to describe the nature and extent of coordination among 
market-makers that is permitted under each of these circumstances.
Auto Quote Formulas
    Automated quotation updating systems, which are relied upon by all 
trading crowds to provide immediately updated quotations in options 
series traded by the crowd, utilize option valuation formulas in order 
to generate options quotations based on changes in any one of a number 
of variables. Among other things, these formulas require assumed 
volatility factors to be established for each underlying interest. The 
quotations that are generated and displayed by these systems translate 
into obligations of the trading crowd to buy or sell options at the 
quoted prices. For this reason, all members of the trading crowd 
participate in the decisions concerning the components of the automated 
quotation updating system formula applicable to each class of options 
traded by the crowd. Proposed Interpretation and Policy 8.8.07 reflects 
this by providing expressly that the formula used in each

[[Page 14152]]

trading crowd to generate automatically updated market quotations shall 
be as agreed upon by the trading crowd. This is made subject to the 
exception that in those trading crowds where a Designated Primary 
Market-Maker (``DPM'') has been appointed, the DPM has the primary 
responsibility for determining the variables of the formula used to 
generate automatically updated market quotations. The DPM is required 
to disclose the components used in that formula to any member of the 
trading crowd immediately upon request, provided that the MTS Committee 
will have the discretion to exempt DPMs using proprietary automated 
quotation updating systems from having to disclose proprietary 
information concerning the formulas used by those systems.
Joint Responses to Requests for Markets
    When a request for a market to buy or sell a large number of 
options is submitted to a trading crowd, it is usually the case that 
the customer on whose behalf the request is made wants to know promptly 
at what single price all of the options represented by the request can 
be bought or sold. A unitary specialist at another competing market is 
better equipped to provide this kind of response. In order to compete 
effectively, the collective members of a market maker trading crowd 
must also provide a response to this kind of request. Interpretation 
and Policy 8.7.09 expressly permits the collective response to a group 
of members.
A Crowd's Agreeing to Honor its Market at a Greater Than Required Size
    CBOE's firm quote rule (Rule 8.51) generally obligates each trading 
crowd to honor disseminated quotations for ten contracts. In some 
cases, especially for classes of options traded in more than one 
market, trading crowds on CBOE may be required by competitive and other 
business considerations to honor disseminated quotations for more than 
the required ten contracts. CBOE believes this necessarily requires 
agreement among the market-makers in the trading crowd before it can be 
announced. Interpretation and Policy 8.51.09 expressly contemplates 
such an agreement among the members of a trading crowd.
    By enhancing the ability of CBOE to make competitive, fair and 
orderly markets in options, the proposed rule change is consistent 
with, and in furtherance of, the objectives of Section 
11A(a)(1)(C)(ii)\2\ of the Act to assure fair competition among 
markets, and the objectives of Section 6(b)(5)\3\ of the Act to perfect 
the mechanism of a free and open market and a national market system 
and to protect investors and the public interest.
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    \2\ 15 U.S.C. 78k-1(a)(1)(C)(ii).
    \3\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    CBOE does not believe that the proposed rule change will 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 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

    Within 35 days of the date of publciation 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 such 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, including whether the proposed rule 
change is consistent with the Act. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 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 Room. Copies of such timing will also be 
available for inspection and copying at the principal office of CBOE. 
All submissions should refer to the File No. SR-CBOE-98-04 and should 
be submitted by April 14, 1998.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\4\
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    \4\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-7515 Filed 3-23-98; 8:45 am]
BILLING CODE 8010-01-M