[Federal Register Volume 64, Number 128 (Tuesday, July 6, 1999)]
[Notices]
[Pages 36414-36415]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-16949]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41558; File No. SR-CBOE-99-21]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Inc. Relating to Changes 
to the Firm Quote Rule

June 24, 1999.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on May 27, 1999, the Chicago Board Options Exchange, Inc. (``CBOE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I, II and III below, which Items have been prepared by the 
Exchange. The Commission is publishing this notice to solicit comments 
on the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    CBOE proposes to amend Rule 8.51, Trading Crowd Firm Disseminated 
Market Quotes, to expand the categories of orders entitled to firm 
quote treatment and to specify to what extent multiple orders entered 
by the same beneficial owner at the same time will be entitled to firm 
quote treatment. 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, the Exchange 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 Exchange 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

1. Purpose
    The Exchange proposes to amend Rule 8.51 to expand the categories 
of orders entitled to firm quote protection and to specify to what 
extent multiple orders entered by the same beneficial owner and 
represented at a trading station at approximately the same time will be 
entitled to firm quote protection.
    Currently, Rule 8.51(a) states that ``non-broker-dealer customer'' 
orders up to the specified size (currently 10 contracts) are entitled 
to be executed at the offer (bid) which is displayed when a buy (sell) 
customer reaches the trading station where the particular option class 
is located for trading.\3\ The Exchange is proposing to expand the 
category of orders entitled to this protection such that, with one 
exception, all orders would be entitled to the firm quote treatment 
under Rule 8.51(a). The firm quote requirement would not apply to 
orders of individuals who trade in the account of a market-maker or 
specialist on the Exchange or on another exchange, which account is 
exempt from the provisions of Regulation T of the Board of Governors of 
the Federal Reserve System pursuant to Section 7(c)(2) of the Act.\4\ 
This exception would exclude not only market-maker accounts but also 
customer accounts of market-makers or specialists. In other words, the 
proposal would apply to orders of broker-dealers (other than those 
acting as market-makers) regardless of whether they are agency or 
proprietary orders. The appropriate Floor Procedure Committee would 
have the authority to determine not to extend firm quote treatment to 
broker-dealer orders in a particular class of options under its 
jurisdiction.
---------------------------------------------------------------------------

    \3\But see Securities Exchange Act Release No. 40957 (January 
20, 1999), 64 FR 4485 (January 28, 1999) (File No. SR-CBOE-98-53, 
proposing to raise the number of contracts guaranteed under the firm 
quote rule to the RAES contract limit).
    \4\ Section 7(c)(2) of the Act specifies those categories of 
persons that are exempt from the requirements of Regulation T with 
respect to the arrangement, extension or maintenance of credit to 
finance securities transactions. Among those persons exempted are 
members of national securities exchanges or registered broker-
dealers who arrange or maintain credit to finance their activities 
as market makers.
---------------------------------------------------------------------------

    In proposing this change, the Exchange believes that extending the 
firm quote treatment to broker-dealer orders will provide an incentive 
to broker-dealers to send their orders to the Exchange because they 
will be assured that their order will be executed at the

[[Page 36415]]

displayed bid or offer, as appropriate. Currently, CBOE trading crowds 
and specialists or crowds on other exchanges have the option to trade a 
broker-dealer order at the displayed quote or to change the displayed 
bid (offer) to reflect that the previously displayed bid (offer) is no 
longer available. This ``trade or fade'' policy is codified in 
paragraph (b) of Rule 8.51.
    The Exchange is also proposing to amend Rule 8.51 to deny the firm 
quote protection to those orders or portions of orders for the same 
class of options (whether for the same or different series) that are 
entered by the same beneficial owner and that are represented at the 
trading station at approximately the same time and that cumulatively 
exceed the firm quote requirement for that particular class of options. 
For example, assume the firm quote requirement in option ABC is ten 
contracts and that a broker-dealer simultaneously sends orders to the 
floor broker in a crowd to by ten at-the-money call options in each of 
three different series for that class ABC. The floor broker will likely 
represent each of these three orders one after another. Under the 
proposed new paragraph (a)(3) of Rule 8.51, only the first of these 
three orders would be entitled to firm quote protection. The crowd 
would be required to trade the other two ten lot orders at the 
displayed market or to change that market pursuant to the terms of the 
``trade or fade'' policy set forth in paragraph (b) of the Rule.
    The Exchange believes that customers or broker-dealers can attempt 
to circumvent the limits of the firm quote protection by submitting 
orders at the same time that are in many respects economically very 
similar. If the market-makers in a crowd were required to fill each of 
these orders at the displayed quotes without the possibility of 
refreshing those quotes they would essentially be responsible for 
honoring the displayed quotes in the crowd at a level beyond the 
intended protection and would be subjected to undue risk. The potential 
risk will be even greater than it is today with the expansion in the 
category of orders that will be entitled to firm quote protection. In 
addition, the potential risk will be increased if the firm quote limit 
were to be raised. The Exchange recently submitted a filing with the 
Commission proposing to expand the allowable firm quote limit up to 50 
contracts. The Exchange believes that providing for limits on the 
extension of the firm quote protection in cases where multiple orders 
for the same class of options are submitted at approximately the same 
time is the best way to ensure the viability of the expansion of the 
firm quote protection that the Exchange has proposed in both this 
filing (with respect to an expansion in the category of orders entitled 
to the firm quote guarantee) and in SR-CBOE-98-53 (with respect to an 
expansion in the allowable firm quote contract limit).
    The Exchange also proposes to amend paragraph (b) of Rule 8.51 and 
Interpretation .06 to make them consistent with the change in the 
categories of orders now subject to the firm quote guarantee.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with and furthers the objectives of Section 6(b)(5) of the Act \5\ in 
that it is designed to remove impediments to a free and open market and 
protecting investors and the public interest.
---------------------------------------------------------------------------

    \5\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange 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 publication 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 the 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 20549-0609. 
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 will also be 
available for inspection and copying at the principal office of the 
Exchange. All submissions should refer to File No. SR-CBOE-99-21 and 
should be submitted by July 27, 1999.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\6\
---------------------------------------------------------------------------

    \6\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-16949 Filed 7-2-99; 8:45 am]
BILLING CODE 8010-01-M