[Federal Register Volume 64, Number 136 (Friday, July 16, 1999)]
[Notices]
[Pages 38494-38495]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-18168]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41609; File No. SR-CBOE-99-10]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Inc. Relating to 
Participation Rights for Firms Crossing Orders

July 8, 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 March 18, 1999, the Chicago Board Options Exchange, Inc. (``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 Exchange. 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).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The CBOE hereby proposes to amend its rule governing the crossing 
of equity option orders of 500 contracts or more by brokers, to give 
the firm from which an order originates a participation right in trades 
that are proposed to be crossed in certain circumstances. The text of 
the proposed rule change follows. Additions are italicized.
* * * * *

Chicago Board Options Exchange, Inc. Rules

* * * * *

Chapter VI--Doing Business on the Exchange Floor

Section D: Floor Brokers

* * * * *

``Crossing'' Orders

RULE 6.74.

    (a)-(c) No change.
    (d) Notwithstanding the provisions of paragraphs (a) and (b) of 
this Rule, when a Floor Broker holds an equity option order of 500 
or more contracts (``original order''), the Floor Broker is entitled 
to cross a certain percentage of the order with other customer 
orders from the same firm from which the original order originated 
(``originating firm'') that he is holding or with a facilitation 
order of the originating firm after requesting bids and offers for 
such option series. The percentage of the order which a Floor Broker 
is entitled to cross is determined as follows:
    (i) 20% of the order if the order is traded at the best bid or 
offer given by the crowd in response to the broker's initial request 
for a market; or
    (ii) 40% of the order if the order is traded between the best 
bid or offer given by the crows in response to the broker's initial 
request for a market.
    In determining whether an order satisfies the 500 contract 
requirement, any multi-part or spread order must contain one leg 
alone which is for 500 contracts or more. If the originating firm is 
also the Designated Primary Market-Maker (``DPM'') for the 
particular class of options to which the order relates, then the DPM 
is not entitled to the DPM guaranteed participation rate.

. . . Interpretations and Policies:

    No change.
* * * * *

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 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 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 CBOE proposes to add a new paragraph (d) to CBOE Rule 6.74, 
``Crossing'' Orders, to give a firm that is holding either (i) customer 
equity option orders to buy and sell the same series, or (ii) a 
customer equity option order and a facilitation order, certain rights 
to cross the orders or to facilitate the customer order in certain 
circumstances. To take advantage of the new provision, a particular 
equity option order must be for 500 or more contracts. For a multi-part 
or spread order, at least one leg of the order alone must be for 500 
contracts or more.
    Paragraph (a) of CBOE Rule 6.74 sets forth the procedures to be 
followed currently by a floor broker to cross customer orders. 
Paragraph (b) sets forth the procedures to be followed by a floor 
broker to facilitate a customer order. In both cases, market-makers in 
the trading crowd currently are given the opportunity to accept a floor 
broker's better bid or offer for orders which he intends to cross or 
facilitate before the floor broker can cross or facilitate the orders 
himself. Under current rules, therefore, if the market-makers are

[[Page 38495]]

willing to take the entire order, the floor broker will not be able to 
cross of facilitate any part of the order.
    Generally, new paragraph (d) will provide that, in those 
circumstances where a floor broker has an equity option order for 500 
contracts or more that he is holding to execute (``original order''), 
that floor broker will have priority to cross a certain percentage of 
the original order against other customer orders from the same firm 
from which the original order originated (``originating firm'') that he 
is holding to execute or against a firm proprietary order of the 
originating firm (i.e., facilitation order).
    The percentage to which the floor broker is entitled to execute 
depends upon a comparison between the original market quoted by the 
crowd in response to a request from the broker and the price at which 
the orders are traded. If the orders are traded at the best bid or 
offer provided by the market-makers in the trading crowd in response to 
the broker's initial request for a market, then the floor broker is 
entitled to cross 20% of the order. If the orders are traded at a price 
between the best bid and offer provided by the market-makers in the 
crowd (i.e., at a price that improves the market provided by the 
market-makers) in response to the broker's initial request for a 
market, then the floor broker is entitled to cross 40% of the order.
    There is precedent in the Exchange's rules for providing a 
participation right to the firm that has brought the order to the 
floor. Paragraph (e)(iii) of CBOE Rule 24A.5, FLEX Trading Procedures 
and Principles, provides for the Submitting Member of a FLEX trade (as 
defined in CBOE Rule 24A.1) to 25% of a trade in certain circumstances.
    In the event that the originating firm is also the Designated 
Primary Market-Maker (``DPM'') for that option class and the floor 
broker takes advantage of the participation right provided by this new 
paragraph (d) of CBOE Rule 6.74, then the DPM also shall not be 
entitled to the guaranteed participation rate provided by paragraph 
(c)(7) of CBOE Rule 8.80 for that particular trade.
    The Exchange believes that the effect of this liberalization of its 
crossing rule will be to provide market-makers with an additional 
incentive to quote tighter markets in response to a request for quotes 
at the same time it will encourage member firms to bring their order 
flow to the CBOE. The Rule will also provide floor brokers with an 
incentive to trade at a price between the quoted bid and ask. The 
benefits of the tighter markets will inure to the customers. In 
addition, by establishing a minimum participation right, the Rule will 
provide firms with the ability to participate on these trades in a more 
efficient manner than is available today.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with and furthers the objectives of Section 6(b)(5) \3\ of the Act, in 
that it is designed to remove impediments to a free and open market and 
to protect investors and the public interest.
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    \3\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The 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 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 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. In particular, the Commission seeks 
comment on whether the proposed rule change will result in fair 
executions for the various orders and parties represented in the 
crossing transaction. Also, commenters are requested to provide their 
views on this rule revision in light of the proposed rule change 
contained in SR-CBOE-99-07, relating to ``cross-only contingency'' 
orders.\4\ 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 in the Commission's Public 
Reference Room. Copies of the filing will also be available for 
inspection and copying at the principal offices of the CBOE. All 
submissions should refer to File No. SR-CBOE-99-10 and should be 
submitted by August 6, 1999.
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    \4\ Securities Exchange Act Release No. 41610 (July 8, 1999).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\5\
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    \5\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-18168 Filed 7-15-99; 8:45 am]
BILLING CODE 8010-01-M