[Federal Register Volume 64, Number 45 (Tuesday, March 9, 1999)]
[Notices]
[Pages 11523-11527]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-5719]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41121; File No. SR-CBOE-98-35]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Inc.; Order Approving Proposed Rule Change and Notice of Filing and 
Order Granting Accelerated Approval of Amendment No. 1 to Proposed Rule 
Change Relating to Order Book Rates and Floor Brokerage Subsidies

February 26, 1999.

I. Introduction

    On July 27, 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 \2\ 
thereunder, a proposal to allow CBOE market-makers in a trading crowd 
to subsidize the limit order book rate and the activity of stationary 
floor brokers who represent orders in that crowd. The proposed rule 
change was published for comment in the Federal Register on September 
16, 1998.\3\ The Commission received one comment letter on the 
proposal.\4\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 40419 (September 9, 
1998), 63 FR 49619.
    \4\ Comment Letter, from the United States Department of 
Justice, dated October 21, 1998 (``DOJ Letter''). CBOE submitted a 
letter responding to the DOJ Letter. See letter from William 
Brodsky, Chairman, CBOE, to Richard Lindsey, Director, Division of 
Market Regulation (``Division''), SEC, dated December 17, 1998 
(``CBOE Response Letter'').
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    On February 26, 1999, CBOE filed Amendment No. 1 to the proposed 
rule change.\5\ This notice and order approves the proposed rule 
change, as amended, and seeks comments from interested persons on 
Amendment No. 1 to the proposal.
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    \5\ See letter from Timothy Thompson, Director--Regulatory 
Affairs, to Michael Walinskas, Deputy Associate Director, Division, 
SEC, dated February 26, 1999 (``Amendment No. 1''). Among other 
things, in Amendment No. 1 CBOE proposes to cap the Market-Maker 
Surcharge at $0.25 per contract, to grant the authority to impose 
the Surcharge to the appropriate Floor Procedure Committee rather 
than to the Resident Market-Makers as was originally-proposed, and 
to operate the proposal as a pilot program through March 31, 2000.
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II. Description of the Proposal

A. Background

    Many options traded on CBOE are traded in crowds where the quotes 
are established by competing market-makers.\6\ In CBOE's competing 
market-maker crowds, the agency function is performed by OBOs, who are 
CBOE employees, and floor brokers, including stationary floor brokers 
(``SFBs'') who remain at stations where the option classes are traded. 
An OBO maintains the limit order book in each options class, and 
generally only limit orders away from the current market price may be 
placed with an OBO. Orders in which any CBOE member or another broker-
dealer has an interest may not be placed with an OBO. Orders that 
cannot be placed with an OBO can be routed through CBOE's order routing 
system to the floor terminal of an SFB. Other exchanges, such as the 
American Stock Exchange, have a specialist system that is akin to 
CBOE's DPM system. Unlike CBOE's market-maker crowds, DPMs and 
specialists can serve both the agency and principal functions.
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    \6\ Other options on CBOE are traded in a Designated Primary 
Market-Maker (``DPM'') system. The DPM functions in approved classes 
of options as a market-maker, floor broker, and in the place of the 
Order Book Official (``OBO''). See CBOE Rules Chapter VIII, Section 
C: Modified Trading System. This proposal does not apply to DPM 
option classes. See Amendment No. 1, supra note 5.
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    As a result of the differences between competing market-maker 
crowds and specialist systems, the OBO's rates at CBOE compete with 
rates charged by specialists with respect to orders that can be placed 
with an OBO, and the SFB's rates at CBOE compete with the rates of 
specialists with respect to most other agency orders. CBOE contends 
that specialists can reduce their brokerage rates to attract order flow 
and can offset such reductions through revenue they earn from the 
principal part of their business. Because CBOE's market-makers (which 
cannot represent agency orders) and SFBs (which do not have a 
proprietary business) lack the flexibility over pricing enjoyed by 
specialists, CBOE developed the current proposal to allow CBOE and its 
member firms to better compete with other exchanges in floor brokerage 
and order book rates.

B. General Description of the Proposal

    The Exchange is proposing a new Rule 2.40 that would allow the 
Exchange to impose a fee on market-makers (``Surcharge'') for contracts 
traded by market-makers in a particular option class. This fee, not to 
exceed $0.25 per contract,\7\ will be collected by

[[Page 11524]]

the Exchange and will be used for two purposes. First, it will be used 
to reimburse the Exchange to the extent the OBO brokerage rate is 
reduced if such reduction is based upon a recommendation of the 
Resident Market-Makers.\8\ Any remaining amount of the Surcharge 
collected will then be paid to SFBs \9\ to induce them to reduce the 
brokerage rates they charge their customers, which are primarily other 
broker-dealers representing customer orders as agent.\10\ Therefore, 
the proposed Surcharge would allow CBOE to compete with other exchanges 
in two respects: (1) based on the respective fee each exchange charges 
a firm to place an order on the limit order book, and (2) by 
anticipated reductions in fees SFBs charge their customers to place 
orders with them.
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    \7\ See Amendment No. 1, supra note 5. Bids and offers in 
options series trading below $3 are expressed in sixteenths of a 
dollar, i.e. $0.0625. Because standard options contracts have a 
multiplier of 100 (i.e., they represent interest in 100 shares of 
the underlying security), the value of the minimum spread between 
any option contract listed on the Exchange would be $6.25 ($0.0625 
times 100). Options priced over $3 have a minimum spread of one 
eighth of a dollar ($12.50 value for the minimum spread). Thus, the 
25-cent cap on the Surcharge will ensure that it remains far below 
the minimum quote increment for options traded on CBOE.
    \8\ The proposal defines a ``Resident Market-Maker'' as someone 
who transacted at least 80% of his market-maker contracts in option 
classes traded in the trading crowd in the prior calendar month. If 
the Exchange decides on its own initiative to reduce the OBO rate 
for a particular option class, then the Surcharge would not be used 
to reimburse the Exchange.
    \9\ An SFB is defined in the proposal as a floor broker (A) who 
has established a business in the trading crowd for that options 
class of accepting and executing orders for members of registered 
broker-dealers, and (B) who transacted at least 80% of his orders 
for the previous month in the trading crowd at which that option 
class is traded. According to the Exchange, the definition is 
designed to ensure that those floor brokers who have made a 
commitment to the particular option class and who are willing to 
accept orders from a wide variety of market participants are the 
ones who will benefit from the subsidy.
    \10\ Generally, there is only one SFB in a trading crowd. Where 
there is more than one SFB in a trading crowd, the amount of the 
Surcharge remaining after the Exchange has been reimbursed will be 
paid to the SFBs on a pro rata basis based on the number of the 
Exchange's order routing system (``ORS'') orders executed by each 
floor broker. For purposes of proposed Rule 2.40, an ORS Order is an 
order that is sent over ORS and given an ORS identification number, 
and that is not an order of the firm for whom the SFB acts as a 
nominee or for whom the SFB has registered his membership. Non-ORS 
orders--such as spreads, large telephone orders, and complex or 
contingent orders--are excluded from the proposal because they 
require a higher level of service and thus are not as price 
sensitive as ORS orders. In addition, the Exchange determined not to 
allow ORS orders executed by an SFB on behalf of the firm for whom 
the SFB is a nominee or for whom he has registered his membership 
because these orders will be executed by the SFB by virtue of the 
relationship rather than the brokerage rate charged.
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C. How the Surcharge Will be Determined

    Under proposed Rule 2.40, the Appropriate Floor Procedure Committee 
(``Committee''),\11\ under authority delegated to it by CBOE's Board of 
Directors, will determine the option classes for which the Surcharge 
would be assessed as well as what that Surcharge, if any, will be.\12\ 
Any Resident Market-Maker can recommend a Surcharge amount. All 
Resident Market-Makers then vote on the recommended amounts of the 
Surcharge, with each person having an equal vote.\13\ Any amount that 
receives a majority of the votes is the Surcharge amount that is 
recommended to the Committee, which then decides the actual Surcharge. 
In reaching its decision, the Committee must consider the vote of the 
Resident Market-Makers and the views of any market-maker in favor of or 
opposed to the recommended Surcharge.\14\ The Committee is not bound, 
however, to follow the Resident Market Makers' recommendation. The 
Committee is free to impose a different Surcharge than the one 
recommended or to impose no Surcharge at all.\15\ Any market-maker may 
appeal the decision of the Committee to the Exchange's Appeals 
Committee pursuant to Chapter XIX of CBOE's Rules. The Surcharge will 
remain in effect until the appeal has been decided.
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    \11\ CBOE has three Floor Procedure Committees, although only 
one, the Equity Floor Procedure Committee (``EFPC''), governs equity 
options that are multiply traded (i.e., those to which the proposal 
applies). Generally, the EFPC consists of 15 to 25 members who trade 
on the floor. The Chairman of the EFPC is almost always a member of 
CBOE's Board of Directors. EFPC members that would be impacted by 
the Surcharge would be required to recuse themselves from that vote. 
See Amendment No. 1, supra note 5.
    \12\ The proposal is limited, however, to options classes in 
competing market-maker crowds that are multiply traded, and does not 
include DPM options classes. See Amendment No. 1, supra note 5. As 
of February 1, 1999, there were 1375 options classes traded on CBOE. 
Two hundred and seventy of these were multiply traded at market 
maker stations.
    \13\ See Amendment No. 1, supra note 5. Under the original 
proposal, the vote was to be weighted in accordance with each 
Resident Market-Maker's percentage of the contracts traded in the 
relevant options class during the six calendar months prior to the 
month in which the vote is taken.
    \14\ The Committee must give notice of its meeting schedule for 
the consideration of the Surcharge and the deadline for the 
submission of other materials for its consideration.
    \15\ The Committee may delegate responsibility for reviewing 
submitted materials and to review other positions to a Sub-
Committee. The full Committee, however, makes the final decision 
regarding whether the fee should be imposed and the amount, if any, 
of the Surcharge or any changes in the Surcharge.
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    Once the Committee determines to implement a Surcharge and change 
the OBO fee, it will file a rule proposal with the SEC pursuant to 
Section 19(b)(3)(A) under the Act.\16\ After determining to impose or 
amend a Surcharge, the Committee will notify CBOE's Board at the 
meeting following the determination.\17\ Any Surcharge to be paid by 
the market-makers would be in effect for at least one month to avoid 
disrupting normal Exchange billing and accounting procedures.
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    \16\ See Amendment No. 1, supra note 5.
    \17\ Id.
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D. Disclosure Requirements

    Proposed Rule 2.40(h) requires that SFBs disclose to their 
customers any Surcharge they receive. This disclosure will be akin to 
that required under Exchange Act Rule 10b-10 regarding payment for 
order flow.\18\
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    \18\ Id.
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III. Summary of Comment and CBOE Response

A. DOJ Comment

    As discussed, the Commission received one comment on the proposal, 
from the Department of Justice (``DOJ'').\19\ DOJ urged that the 
proposed rule not be approved until the Exchange has adequately 
explained why the proposal will not adversely affect competition and 
until the Exchange has provided a fuller explanation of how the 
proposal will promote competition between it and other exchanges. 
Specifically, DOJ objected to allowing market-makers to agree on 
matters that could affect the public pays.\20\ DOJ was also concerned 
about the possibility that the Surcharge may increase pressure on 
market-makers to increase their spreads to finance the Surcharge, thus 
increasing consumer costs. DOJ contended that the risk of an adverse 
effect could be greatest for small retail market orders that are 
executed automatically without intervention by the OBO or a floor 
broker because these customers may not receive any benefit from lower 
floor broker commissions.
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    \19\ See DOJ Letter, supra note 4.
    \20\ DOJ was also concerned about the fact that Resident Market-
Maker's vote was to be weighted by market share, thus creating an 
opportunity for market-makers with substantial order flow to set the 
Surcharge that competing market-makers must also pay. The Commission 
notes that under the proposal as amended each Resident Market-Maker 
would have an equal vote in determining whether to impose a 
Surcharge and the amount of the Surcharge. See Amendment No. 1, 
supra note 5.
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    DOJ also noted that there was no guarantee that the proposal will 
reduce consumer commission costs because SFBs are under no obligation 
to reduce their commission rates under the proposed rule change. 
Moreover, DOJ argues that even if SFB's commission rates were reduced 
to off-floor brokers, off-floor brokers may not reduce charges to their 
public customers. DOJ also noted that off-floor brokers would have an 
incentive to route orders to CBOE

[[Page 11525]]

because of reduced commissions, thus creating a form of ``payment for 
order flow'' and harming customers because the customers could receive 
a better execution if orders are routed elsewhere.

B. CBOE's Response

    In its Response Letter, CBOE first explained in greater detail its 
market-maker system, how it differs from the specialist systems 
employed at other options exchanges, and the reasons for the 
proposal.\21\ CBOE argued generally that the proposal would enable the 
Exchange and its members to compete better with other options exchanges 
without creating an adverse competitive effect.
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    \21\ See CBOE Response Letter, supra note 4.
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1. Widening of Spreads
    COBE argued that the widening of spreads as a result of pressure on 
market-makers to finance the Surcharge is extremely unlikely for a 
number of reasons. First, since the purpose of the proposal is to 
attract order flow by providing brokerage rates competitive with other 
exchanges, it would be contrary to each market-maker's own economic 
interest to widen its spreads and thereby risk losing order flow. 
Second, CBOE argued that the Surcharge amount, expected to be $0.10 per 
contract or less, was not great enough to force market-makers to widen 
their spreads.\22\ Third, CBOE noted that there is no evidence to 
suggest that spreads have widened when specialists at other exchanges 
lower their brokerage feeds.
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    \22\ The Commission notes that in Amendment No. 1, CBOE capped 
the Surcharge at $.25 per contract.
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2. Effect on Retail Orders
    CBOE argued that retail orders would not be adversely affected by 
the proposal. According to the Exchange, these orders are automatically 
executed by its Retail Automatic Execution System (``RAES'') at the 
best bid or offer (``BBO'') then existing on CBOE. However, if that bid 
of offer is inferior to the current quote on another exchange, RAES 
automatically executes the order at the better quote on the other 
exchange if it is one tick better than CBOE's BBO. If the other 
market's quote is more than one tick better, the order will not be 
automatically executed by RAES. Instead, it will be ``kicked out'' of 
RAES and the market-maker will attempt to obtain the superior price 
quoted in the other market for that order. According to CBOE, under 
normal trading conditions ``kicked out'' orders are almost always 
filled at a price no worse than the CBOE bid/offer that was available 
at the time the order was kicked out, even if the CBOE market moves 
against the price in the interim.\23\ According to CBOE, in most 
instances, the trading crowd will fill the order at a price equal to or 
better than the better bid or offer displayed in the other market. How 
this will be accomplished varies from crowd to crowd. Some crowds may 
attempt to ascertain whether the other quote is in fact available and 
will fill the order at the better price if it is available. Other 
trading crowds may fill the order at the better price and attempt to 
trade against the other market after doing so.
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    \23\ See Amendment No. 1, supra note 5.
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3. No Benefit to Public Customers
    CBOE acknowledged that customers may not benefit even if the SFBs 
reduced their rates because they may decide to keep the savings for 
themselves. The Exchange noted, however, that, although the proposal 
would not require SFBs to pass savings on to customers, customers would 
be in a better position to negotiate for lower commissions if their 
firm's costs were reduced.
4. Payment for Order Flow
    In response to DOJ's argument that the proposal could be considered 
a payment for order flow, CBOE contended that orders would not be sent 
to it when better executions are available elsewhere because of the 
best execution obligations of brokers and market-makers. In addition, 
CBOE suggested that RAES and other similar systems are designed to 
ensure that orders are sent to the market that can provide best 
execution.\24\ In any event, CBOE argues that payment for order flow is 
not improper as long as there is adequate disclosure.\25\
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    \24\ For example, as discussed above, RAES will automatically 
execute at the other market's quote if it is one tick better than 
CBOE's best bid or offer. If the other market's quote is more than 
one tick better, then the order will be handled manually. The 
Commission notes that currently no options exchange system 
(including CBOE's RAES) re-routes orders to another market showing 
the best bid or offer.
    \25\ In Amendment No. 1, CBOE added a requirement that SFBs' 
customers be informed when they receive a Surcharge from CBOE 
market-makers.
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IV. Discussion

    The Commission finds that the proposed rule change, as amended, is 
consistent with the requirements of the Act and the rules and 
regulations under the Act that apply to a national securities exchange, 
and, in particular, with the requirements of Section 6(b)(5).\26\ That 
section provides that the rules of a national securities exchange must 
be designed, among other things, to facilitate transactions in 
securities and to remove impediments to and perfect the mechanism of a 
free and open market and a national market system and in general to 
protect investors and the public interest. It also provides that the 
rules of an exchange not be designed to permit unfair discrimination 
between customers, issuers, brokers or dealers. Moreover, the 
Commission believes that the proposal, as amended, is consistent with 
Section 3(f) under the Act.\27\ That provision states that: ``Whenever 
pursuant to [the Act] the Commission is engaged in . . . the review of 
a rule of a self-regulatory organization, and is required to consider 
or determine whether an action is necessary or appropriate in the 
public interest, the Commission shall also consider, in addition to the 
protection of investors, whether the action will promote efficiency, 
competition, and capital formation.''
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    \26\ 15 U.S.C. 78f(b)(5).
    \27\ 15 U.S.C. 78c(f).
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A. Competitive Issues

    The Commission believes that the proposed rule change, as amended, 
is a reasonable effort by CBOE to better enable its competitive market-
maker crowds to compete for multiply listed options with other 
exchanges that employ a specialist system. While transaction charges 
are not the only means of competition among exchanges, they are an 
important area for distinguishing between the mix of prices and 
services offered by the competing options markets. As a result, the 
Commission believes that by potentially lowering the execution costs on 
CBOE, the proposal should help to promote interexchange competition. 
Although there is no guarantee that public customers will ultimately 
benefit from the reduction in brokerage rates as a result of the 
Surcharge, the Commission believes that CBOE intends for the proposal 
to have that effect. This is not to say that the proposal could not 
have unintended collateral effects.
    One potential adverse collateral effect could be that CBOE market-
makers that favored the Surcharge could use the fee as a competitive 
weapon to drive smaller market-makers out of a particular trading 
crowd. The Commission believes that the proposal has been amended in a 
way that should significantly reduce the likelihood that the proposal 
will have such an unintended effect. In this regard, the

[[Page 11526]]

Commission notes that the amendments made by CBOE, such as imposing a 
ceiling on the Surcharge of $0.25 per contract, establishing equal 
weighting of Resident Market-Maker votes, and resting the ultimate 
authority of whether to impose a Surcharge and the amount in the 
Committee rather than with the Resident Market-Makers, all serve to 
reduce the potential for anti-competitive effects of the proposal.\28\
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    \28\ See Amendment No. 1, supra note 5.
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    Another possible collateral effect of the proposal would be that 
CBOE market-makers might widen spreads to make up for the costs of 
providing floor brokers with the Surcharge First, the Commission notes 
generally that options market-makers are required to establish quote 
ranges that promote fair and orderly markets. Artificially wide quote 
spreads are inconsistent with that requirement.\29\ In addition, 
competition for order flow among competing market-makers as well as 
between those firms and specialists on other markets serves to narrow 
quote spreads. The Commission does not believe that there is anything 
particularly unique in the current proposal that would make it more 
likely that a market-maker would widen spreads. The same potential 
concern is present under existing specialist systems. Theoretically, 
options specialists could, without regulatory approval, eliminate their 
transaction and limit order book fees, or pay for order flow, and 
subsidize such activities by widening their quote spreads. Under CBOE's 
proposal, on the other hand, the Exchange (under SEC oversight) is 
accountable for the Surcharge.
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    \29\ See, e.g., CBOE Rule 8.7(a), which states ``[t]ransactions 
of a Market-Maker should constitute a course of dealing reasonably 
calculated to contribute to the maintenance of a fair and orderly 
market, and no Market-Maker should enter into transactions or make 
bids or offers that are inconsistent with such a course of 
dealings.'' Moreover, collusive activity by market-makers to keep 
spreads artificially wide would, of course, violate the federal 
securities laws.
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    Additionally, the best execution obligations of the upstairs order 
routing firms should reduce the likelihood that spreads will be widened 
by requiring that those firms direct order flow to the markets that are 
disseminating superior quotes. The duty of best execution requires a 
broker-dealer to seek the most favorable terms reasonably available 
under the circumstances for a customer's transaction. A broker-dealer 
routing orders for automated execution would need to assess 
periodically the quality of competing markets to assure that aggregated 
order flow was directed to markets providing the most advantageous 
terms for its customers' orders.\30\ Thus, any broker-dealer who sends 
order flow to CBOE to benefit itself from reduced brokerage commissions 
generally would be in violation of its duty of best execution if the 
orders it represents received worse executions on CBOE than available 
at other exchanges. Additionally, it generally would be inconsistent 
with a broker's best execution obligations if a broker-dealer were 
automatically to route orders to the exchange with the lowest 
brokerage/book rates when better options prices are available on 
another exchange. Consistent with best execution responsibilities, a 
broker-dealer generally should only consider routing orders to one 
exchange over another based on reduced brokerage/book rates under two 
circumstances: (1) where competing exchanges offer identical prices; or 
(2) where the reduced brokerage/book rates will be passed on to the 
broker-dealer's customers to an extent that compensates for otherwise 
inferior execution. The Commission anticipates that CBOE will continue 
vigilantly to enforce the applicable best execution duties of its 
member firms generally and with respect to this proposal.
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    \30\See Exchange Act Release No. 36310 (September 29, 1995), 60 
FR 57292 (October 10, 1995).
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    Although, for the reasons discussed above, the Commission believes 
it is unlikely that the proposal would have the unintended result of 
widening spreads on CBOE, in an abundance of caution, the Commission is 
asking CBOE to gather and analyze data to permit comparisons of spreads 
on CBOE before and after a Surcharge is implemented. Should these 
comparisons suggest that the proposal is having such an unintended 
consequence, the Commission would weigh that as a factor in determining 
whether the proposal should be approved permanently.

B. Payment for Order Flow Issues

    The Commission acknowledges that the Surcharge, which is intended 
to attract order flow to CBOE, could be considered a form of ``payment 
for order flow.'' The practice of paying for order flow has generated 
much debate and controversy in the past.\31\ The Commission ultimately 
decided not to ban the practice, but instead required broker-dealers to 
inform customers in writing about their policies regarding the receipt 
of payment for order flow, including whether payment for order flow is 
received and a detailed description of the nature of the 
compensation.\32\ The Exchange has amended the proposal to include a 
requirement that SFBs disclose to their customers the payment in a 
manner satisfactory to the Exchange and consistent with the broker-
dealer's obligations under the federal securities laws.\33\ The 
Commission believes that requiring SFBs to provide notice to their 
customers (most of which are broker-dealers) that they have received a 
payment to attract their orders to CBOE will provide those customers 
necessary information with regard to the Surcharge arrangement. In 
turn, those customers may use the information to negotiate better 
commissions from the SFB or to take other appropriate action.
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    \31\ See Exchange Act Release No. 33026 (October 6, 1993), 58 FR 
36262 (October 13, 1993) (discussing the practice and the history of 
the debate).
    \32\ See Exchange Act Release No. 34902 (October 27, 1994), 59 
FR 55006 (November 2, 1994) (adopting amendments to Exchange Act 
Rules 10b-10 and 11Ac1-3). At the same time, the Commission proposed 
for comment whether these disclosure requirements should apply to 
the options market. See Exchange Act Release No. 34903 (October 27, 
1994), 59 FR 55014 (November 2, 1994). The Commission has yet to 
adopt such requirements.
    \33\ See Amendment No. 1, supra note 5.
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C. Exchange and Continued Commission Oversight

    Under the proposal, as amended, the Appropriate Procedure 
Committee, pursuant to authority delegated to it by the Exchange, 
rather than the market-maker crowd,\34\ would determine whether to 
impose the Surcharge and, if so, its amount.\35\ Although under the 
proposal the Committee must consider the result of the vote of the 
Resident Market-Makers in reaching its decision, it must also consider 
the views of any market-maker opposing the Surcharge or favoring a 
different amount.\36\ Thus, under the revised proposal, the Resident 
Market-Makers play only an advisory role, while the Committee has the 
final decision-making authority.\37\ Although, under the proposal, the 
Exchange would narrowly delegate authority to the

[[Page 11527]]

Committee to impose a Surcharge, the Committee will notify the Board of 
any such action at the Board meeting following the Committee's decision 
to impose a Surcharge.\38\ this notification will ensure that the 
Exchange is made aware of the Committee's action and give the Exchange 
an opportunity to eliminate or change the fee if it decides to do so. 
All Surcharges would of course need to be filed with the Commission.
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    \34\ CBOE has also amended the vote weighting provision so that 
each Resident Market-Maker vote is now weighted equally. See 
Amendment No. 1, supra note 5.
    \35\ After the Surcharge and OBO rates are determined or any 
changes are made to them, the Committee through authority delegated 
by the Board will submit a rule filing to the Commission pursuant to 
Section 19(b)(3)(A) of the Act before the fee is implemented. See 
Amendment No. 1, supra note 5.
    \36\ Any market-maker may appeal the Committee's decision to the 
Exchange's Appeals Committee pursuant to Chapter XIX of CBOE Rules.
    \37\ Although the Board would delegate its authority to impose a 
Surcharge to the Committee, the Board itself could at any time 
impose such a fee, subject, of course to CBOE's responsibilities 
under the Act, on its own accord or at the suggestion of the 
Resident Market-Makers.
    \38\ See Amendment No. 1, supra note 5.
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    The Commission believes that these safeguards should help to ensure 
that any Surcharge is imposed fairly and in a manner designed to 
promote interexchange competition. Ultimately, such enhanced 
competition should benefit the markets and investors.

D. Accelerated Approval of Amendment No. 1

    The Commission finds good cause to approve Amendment No. 1 to the 
proposed rule change prior to the thirtieth day after the date of 
publication of notice of filing thereof in the Federal Register. In 
Amendment No. 1, CBOE changed the proposal in significant ways to 
respond to the concerns raised by DOJ and Commission staff. 
Specifically, Amendment No. 1, among other things, proposed to cap the 
Market-Maker Surcharge at $0.25 per contract, to grant the authority to 
impose the Surcharge to the Committee rather than to the Resident 
Market-Makers, and to operate the proposal as a pilot program. Because 
the amendment responds to the Commission's concerns and those of DOJ, 
the Commission believes that it is consistent with Sections 6(b)(5) and 
19(b)(2) of the Act to approve Amendment No. 1 to the proposal on an 
accelerated basis.

V. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 1 to the rule proposal, including 
whether the amendment 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, 
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. 552, will be available for inspection and 
copying at the Commission's Public Reference Room. Copies of such 
filing also will be available for inspection and copying at the 
principal office of the Exchange. All submissions should refer to File 
No. SR-CBOE-98-35 and should be submitted by March 24, 1999.

VI. Conclusion

    I is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\39\ that the proposed rule change (SR-CBOE-98-35) as amended is 
approved through March 31, 2000.

    \39\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\40\
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    \40\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-5719 Filed 3-8-99; 8:45 am]
BILLING CODE 8010-01-M