[Federal Register Volume 63, Number 168 (Monday, August 31, 1998)]
[Notices]
[Pages 46258-46259]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-23313]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40358; File No. SR-CBOE-98-20]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Inc.; Order Approving Proposed Rule Change Relating to RAES Eligibility 
Requirements for OEX and DJX Options

August 24, 1998.

I. Introduction

    On May 18, 1998, 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 CBOE Rule 24.17, RAES 
Eligibility in OEX and DJX, that would allow a market maker to 
participate in the CBOE's Retail Automatic Execution System (``RAES'') 
\3\ in options on the Standard & Poor's 100 Index (``OEX'') and options 
on the Dow Jones Industrial Average (``DJX'') during the same calendar 
month by meeting the eligibility requirements for OEX alone, DJX alone, 
or eligibility requirements that consider the percentage of 
transactions and contracts a market maker transacted in OEX and DJX 
combined. On June 24, 1998, the CBOE filed Amendment No. 1 to the 
proposal.\4\ The proposed rule change and Amendment No. 1 were 
published for comment in the Federal Register on July 16, 1998.\5\ The 
Commission received no comments on the proposal. This order approves 
the proposed rule change, as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ RAES is the Exchange's automatic execution system for small 
(generally less than 10 contracts) public customer market of 
marketable limit orders. When an order is entered through RAES, the 
system automatically attaches 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 pays the offer; a sell order 
sells at the bid. An eligible market maker who is signed onto the 
system at the time an order is received will be designated to trade 
with the public customer order at the assigned price.
    \4\ See Letter from Timothy H. Thompson, Director, Regulatory 
Affairs, CBOE, to Deborah Flynn, Attorney, Division of Market 
Regulation, Commission, dated June 19, 1998 (``Amendment No. 1'').
    \5\ Securities Exchange Act Release No. 40186 (July 9, 1998), 63 
FR 38441.
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II. Description of the Proposal

    Currently, CBOE Rule 24.17(b)(v) sets forth four eligibility 
requirements that a market maker must meet before he can

[[Page 46259]]

participate in RAES in either OEX or DJX. Under one of these 
requirements, the market maker must execute at least seventy-five 
percent of his market maker contracts for the preceding calendar month 
in the option class in which the market maker is participating on RAES. 
This requirement precludes a market maker who qualifies to participate 
in RAES in either OEX or DJX from qualifying to participate in the 
other class. The Exchange believes the seventy-five percent requirement 
is so high that it serves as a disincentive for a market maker on one 
side of the common structure in which OEX or DJX are traded to move to 
the other side of the structure to trade the other option product for 
fear that the market maker will no longer qualify for RAES in his 
primary trading area. Although OEX and DJX are technically traded at 
two separate trading posts, the market makers for each product are 
separated by a movable railing within the same physical structure. 
Because the traders in OEX and DJX stand right next to each other in 
the same physical structure, the Exchange believes they are in the best 
position to provide added liquidity and capital to the product by 
moving from one side of the trading structure to the other.\6\ A market 
maker must be present in the particular trading crowd where the class 
is traded while he is participating in RAES for that class.
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    \6\ The Exchange notes that in the equity posts on the floor, a 
market maker may participate in RAES in all classes traded at that 
post.
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    The CBOE proposes to amend CBOE Rule 24.17 by adding new sub-
paragraph (b)(iv) to allow a market maker to participate in RAES in 
both OEX and DJX during the same calendar month by transacting at least 
seventy percent of his market-maker contracts for the preceding 
calendar month in: (1) OEX; (2) DJX; or (3) both OEX and DJX combined, 
and by transacting seventy-five percent of his contracts in OEX and DJX 
during the month in person. A market maker can particiapte in RAES in 
both OEX and DJX during the same calendar month as long as he meets one 
of the sets of criteria above and as long as the two products continue 
to be traded at the same physical trading location. The proposed rule 
change will make it easier for market makers to move from one trading 
pit to another to provide liquidity when market conditions warrant.
    The Exchange proposes to implement this rule change at the 
beginning of the next calendar month after the Commission approves the 
proposal. The Exchange also proposes to delete current Interpretation 
.02 to CBOE Rule 24.17 because it is no longer relevant.

III. Discussion

    The Commission finds that the proposed rule change is consistent 
with the Act \7\ and, in particular, with Section 6(b) of the Act.\8\ 
Specifically, the Commission believes that the proposal is consistent 
with the Section 6(b)(5) \9\ requirements that the rules of an exchange 
be designed to promote just and equitable principles of trade, to 
prevent fraudulent and manipulative acts, and, in general, to protect 
investors and public interest.
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    \7\ In approving this rule change, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
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    The proposed rule change to the RAES eligibility standards is 
designed to ensure that there is adequate market maker participation at 
all times in OEX and DJX, by eliminating a disincentive for market 
makers to actively participate in RAES in both OEX and DJX. The 
Commission believes that the presence of an adequate number of market 
makers contributes to the maintenance of a fair and orderly market by 
helping to ensure that there is adequate liquidity for these important 
indexes, particularly in times of market stress. The Commission also 
believes the deletion of CBOE Rule 24.17, Interpretation .02, which 
limited the applicability of the rule until December 1, 1997, is 
appropriate since the specified date, December 1, 1997, has passed.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\10\ that the proposed rule change, as amended, (SR-CBOE-98-20) is 
approved.
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    \10\ 15 U.S.C. 78s(b)(2).

    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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Jonathan G. Katz,
Secretary.
[FR Doc. 98-23313 Filed 8-28-98; 8:45 am]
BILLING CODE 8010-01-M