[Federal Register Volume 63, Number 125 (Tuesday, June 30, 1998)]
[Notices]
[Pages 35629-35631]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-17294]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40111); File No. SR-CBOE-97-41]
Self-Regulatory Organizations; Order Approving Proposed Rule
Change and Notice of Filing and Order Granting Accelerated Approval of
Amendment No. 1 to the Proposed Rule Change by the Chicago Board
Options Exchange, Inc., Relating to the Definition of Stop Orders
June 23, 1998.
I. Introduction
On August 25, 1997, the Chicago Board Options Exchange, Inc.
(``CBOE or Exchange''), filed with the Securities and Exchange
Commission (``SEC or ``Commission''), pursuant to Section 19(b)(1) of
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to amend its Rule 6.53
(``Rule''), governing the definition of option stop orders, to clarify
that option stop orders on the CBOE are triggered when the option
contract reaches a specified price ``on the CBOE floor.'' The proposed
rule change was published for comment in Securities Exchange Act
Release No. 39100 (September 19, 1997), 62 FR 50644 (September 26,
1997). No comments were received on the proposal.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See letter from Stephanie C. Mullins, Attorney, CBOE, to
Mike Walinskas, Deputy Associate Director, Division of Market
Regulation (``Division''), Commission, dated May 26, 1998
(``Amendment No. 1''). In Amendment No. 1, the CBOE amends the
filing by clarifying that: (1) an option stop order is triggered by
a trade, as well as by a bid or offer; (2) while the options markets
do have access to information from other exchanges, they do not have
an electronic linkage that provides for the transmission of orders
similar to the Intermakert Trading System; and (3) while the CBOE
does not explicitly prohibit trade-throughs, Rule 6.73(a) requires a
floor broker ``to use due diligence to execute the order at the best
price or prices available to him in accordance with the rules.'' and
in some circumstances, a floor broker may determine that he should
try to execute his order on another market.
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On May 26, 1998, the Exchange submitted Amendment No. 1 to the
proposed rule change.\3\ This order approves the proposal and approves
[[Page 35630]]
Amendment No. 1 on an accelerated basis.
II. Description of the Proposal
The CBOE proposes to amend its Rule 6.53 (``Rule'') governing the
definition of stop orders to clarify that an option stop order on the
CBOE is triggered when the option contract reaches a specified price
``on the CBOE floor.''
Currently, paragraph (c)(iii) of Exchange Rule 6.53 defines a stop
order as a contingency order to buy or sell when the market for a
particular option contract reaches a specified price. The Rule does not
specify, but has always been interpreted by the CBOE to mean, that the
contingency to buy or sell is satisfied when the option contract trades
or is bid at or above the stop price (in the case of a buy order) or
trades or is offered at or below the stop price (in the case of a sell
order) ``on the floor of the CBOE.'' \4\ The proposed amendment will
make it clear, therefore, that a stop order is not activated when the
bid or offer (as appropriate) reaches the stop limit on another options
exchange or when an options transaction occurs at the stop limit on
another options exchange. The CBOE believes that the proposed rule
change will clarify the required treatment of option stop orders under
the CBOE's rules.
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\4\ See Amendment No. 1, supra note 3.
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III. Discussion
After careful review of the Exchange's proposal, and for the
reasons discussed below, the Commission believes that the proposed rule
change is consistent with the requirements of the Act and the rules and
regulations thereunder applicable to national securities exchanges,
and, in particular, with the requirements of Section 6(b) of the
Act.\5\ Specifically, the Commission believes the proposal is
consistent with the Section 6(b)(5) requirements that the rules of an
exchange be designed to promote just and equitable principles of trade,
to remove impediments to and perfect the mechanism of a free and open
market and a national market system, to prevent fraudulent and
manipulative acts, and, in general, to protect investors and the public
interest.\6\
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\5\ 15 U.S.C. 78f(b).
\6\ In approving this rule, the Commission has considered the
proposed rule's impact on efficiency, competition, and capital
formation. 15 U.S.C. 78c(f).
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The Commission believes that the proposal is reasonable in that it
will not adversely affect the depth and liquidity necessary to maintain
fair and orderly markets because the proposal represents a codification
of the existing practice of the CBOE requiring that stop orders left
with CBOE members must be effected and executed based on transactions
or quotes that occur only on the floor of the CBOE.\7\ It also serves
to clarify the responsibility of CBOE members regarding the handling of
stop orders by removing a potential ambiguity contained in the existing
Rule.
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\7\ The Commission notes that the American Stock Exchange
(``Amex'') and the Pacific Exchange, Inc. (``PCX''), interpret their
rules to mean that a stop order left with a member will be executed
based on transactions or quotes that occur only on the floor of
their own exchange. Telephone conversation between Stuart Diamond,
Director of Rulings, Amex, and Chester A. McPherson, Staff Attorney,
Division, Commission, February 3, 1998; telephone conversation
between Michael D. Pierson, Senior Attorney, Regulatory Policy, PCX,
and James T. McHale, Special Counsel, Division, Commission, on June
18, 1998.
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The Commission notes that the CBOE has retracted a statement made
in its original filing that claimed CBOE options traders have no way of
knowing whether a contract has reached a specified ``stop'' in another
options market place.\8\ CBOE now states that it recognizes that
options markets do have access to trade and quote information occurring
on other options exchanges; however, CBOE maintains that the absence of
an electronic linkage providing for the transmission of orders to other
options exchanges in order to access current quotes makes it
impracticable for CBOE members to rely on such data.
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\8\ The Commission notes that various available proprietary
systems provide quotes and transactions reports on a real time
basis.
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The Commission disagrees that the existence of an electronic order
routing linkage between options markets should be a requirement to
``triggering'' option stop orders based on quotes or transactions
occurring in another options market. In determining the proper
triggering event(s) that apply to option stop orders, the most
important factor to consider is whether the triggering quotes or trades
are bona fide and available on a timely and reliable basis. However, it
is not necessary to have an electronic order routing linkage, such as
the Intermarket Trading System (``ITS''), to ensure that quotes and
trades occurring on other options exchanges meet this test.
Notwithstanding its disagreement with CBOE over the relevance of
the existence of an intermarket electronic order routing system to the
present proposal, the Commission believes there are valid reasons for
approving the CBOE's proposal at this time. The rule proposal codifies
an interpretation of CBOE Rule 6.53 that has been observed by market
participants for many years. Indeed, this interpretation is consistent
with the practices of the Annex and PCX.\9\ Ideally, the extension of
national market system principles to the options exchanges would
include the existence of electronic linkages ensuring the availability
to all market participants of real-time quote and trade information and
the ability of exchange markets to access each other's markets at the
touch of a button. Another reason to approve the present filing is that
while real-time quote and trade information originating from other
options markets is currently available to all market participants,
including CBOE floor members, this information is not always reliable.
For instance, during the last several years, the dissemination of
options trade information has been subject, during certain peak market
volatility events, to ``queuing,'' whereby quote and trade data become
bottlenecked and cannot be delivered on a real-time basis. Until
options quote and trade information becomes more reliable, it is
reasonable for the options exchanges to limit instances where members
must automatically trigger and execute customer orders based on quote
and trade information emanating from the other options exchanges.
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\9\ See supra note 7.
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Given that CBOE's policy regarding options stop orders ignores
quotes and transactions occurring on other options markets, it is
important to emphasizes that broker-dealers representing customer
options orders, including CBOE floor brokers, must continue to fulfill
their best execution obligations, this includes monitoring the prices
available on all exchanges that trade the particular option and may
require the broker-dealer to attempt execution on the exchange with the
best available price. Moreover, the CBOE, along with the other
exchanges, should continue to efforts to increase the reliability of
the dissemination of timely quote and trade information. At some point
in future, when such reliability increases, it may be appropriate to
activate stop orders or other contingency orders based on bids, offers,
or executions occurring on other options markets.
The Commission finds good cause for approving Amendment No. 1 prior
to the thirtieth day after the date of publication of notice of filing
thereof in the Federal Register. The Amendment clarifies the
description of the proposed rule change and explains several statements
in the filing. For these reasons, the Commission finds good cause for
approving Amendment No. 1 on an accelerated basis.
[[Page 35631]]
IV. Solicitation of Comments
Interested person are invited to submit written data, views and
arguments concerning Amendment No. 1, including whether it is
consistent with the Act. Persons making written submissions should file
six copies thereof with the Secretary, Securities and Exchange
Commission, 450 Fifth Street, N.W., Washington, DC 20549. Copies of the
submissions, 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 the 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, 450 Fifth Street, N.W., Washington, DC 20549.
Copies of such filing will also be available for inspection and copying
at the principal office of the CBOE. All submissions should refer to
File No. SR-CBOE-97-41, and should be submitted by July 21, 1998.
V. Conclusion
It is Therefore Ordered, pursuant to Section 19(b)(2) of the
Act,\10\ that the proposed rule change (SR-CBOE-97-41) is approved.
\10\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\11\
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\11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-17294 Filed 6-29-98; 8:45 am]
BILLING CODE 8010-01-M