[Federal Register Volume 64, Number 136 (Friday, July 16, 1999)]
[Notices]
[Pages 38495-38497]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-18169]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41610; File No. SR-CBOE-99-07]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Inc. Relating to ``Cross-
Only'' 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 February 17, 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 proposes to amend Exchange Rules 6.43, 6.53, and 6.74 to 
permit a broker to represent a ``cross-only'' contingency. The text of 
the

[[Page 38496]]

proposed rule change follows. Additions are italicized and deletions 
are bracketed.
* * * * *

Chicago Board Options Exchange, Incorporated Rules

* * * * *

Chapter VI--Doing Business on the Exchange Floor

* * * * *

Manner of Bidding and Offering

Rule  6.43.

    Bids and offers to be effective must be made at the post by public 
outcry, except that bids and offers made by the Board Broker or Order 
Book Official shall be effective if displayed in a visible manner in 
accordance with Rule 7.7. All bids and offers shall be general ones and 
shall not be specified for acceptance by particular members.

 . . .  Interpretations and Policies:

    .01  Notwithstanding the provision in the above Rule that all bids 
and offers must be general ones, a broker may represent orders with a 
cross-only contingency as defined in Rule 6.53.
* * * * *

Certain Types of Orders Defined

Rule  6.53.

    (a) to (b) Unchanged.
    (c) Contingency Order. A contingency order is a limit or market 
order to buy or sell that is contingent upon a condition being 
satisfied while the order is at the post.
    (i) to (iv) Unchanged.
    (v)  Cross-Only Orders. A cross-only order is a contingency order 
which is to be executed in whole or in part in equity options only, the 
amount determined by the member organization placing the order, in a 
cross transaction with an order for another customer or the member 
organization itself. If the trading crowd does not allow the cross to 
take place, the member organization placing the orders may withdraw the 
order from consideration by the crowd.
    (d) to (m) Unchanged.
* * * * *

``Crossing'' Orders

Rule  6.74

    (a) A floor Broker who holds orders to buy and sell the same option 
series may cross such orders, provided that he or she proceeds in the 
following manner:
    (i) In accordance with [his responsibilities for] due diligence 
responsibilities, a Floor Broker shall request bids and offers for such 
option series and make all persons in the trading crowd, including the 
Board Broker or Order Book Official, aware of his or her request.
    (ii) After providing an opportunity for such bids and offers to be 
made, [he] the broker must
    (A) Bid above the highest bid in the market and give a 
corresponding offer at the same price or at prices differing by the 
minimum fraction or
    (B) Offer below the lowest offer in the market and give a 
corresponding bid at the same price or at prices differing by the 
minimum fraction.
    (iii) If such higher bid or lower offer is not taken, the broker 
[he] may cross the order at such higher bid or lower offer by 
announcing by public outcry that he is crossing and giving the quantity 
and price.
    (b) A Floor Broker who holds an order for a public customer of a 
member organization and a facilitation order may cross such orders 
provided that he proceeds in the following manner.
    (i) The member organization must disclose on its order ticket for 
the public customer order which is subject to facilitation, all of the 
terms of such order, including any contingency involving, and all 
related transactions in, either options or underlying or related 
securities.
    (ii) In accordance with [his responsibilities for] due diligence 
responsibilities, the Floor Broker shall disclose all securities which 
are components of the public customer order which is subject to 
facilitation and then shall request bids and offers for the execution 
of all components of the order.
    (iii) After providing an opportunity for such bids and offers to be 
made, the Floor Broker must, on behalf of the public customer whose 
order is subject to facilitation, either bid above the highest bid in 
the market of offer below the lowest offer in the market, identify the 
order as being subject to facilitation, and disclose all terms and 
conditions of such order. After all other market participants are given 
an opportunity to accept the bid or offer made on behalf of the public 
customer whose order is subject to facilitation, the Floor Broker may 
cross all or any remaining part of such order and the facilitation 
order at such customer's bid or offer by announcing in public outcry 
that he is crossing and by stating the quantity and price(s). Once such 
bid or offer has been made, the public customer order which is subject 
to facilitation has precedence over any other bid or offer in the crowd 
to trade immediately with the facilitation order.
    (c) A Floor Broker who holds cross-only orders as defined in 
6.53(c)(v) may cross the orders by proceeding in the following manner. 
Prior to representing the orders to the trading crowd, the broker must 
make the crowd aware of the total amount of contracts the broker wishes 
to cross, that the orders are to be executed on a cross-only basis, and 
the price that he wishes to cross the orders. The price must be at or 
within the bid or offer.
* * * * *

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 amend certain Exchange Rules to permit a 
member to enter and a Floor Broker to represent orders with a cross-
only contingency. The purpose of the proposed rule change is to allow a 
Floor Broker is disclose to the trading crowd, prior to execution, that 
the broker wishes to cross two orders for a certain amount of 
contracts, at a certain price within or at the quoted bid or offer. If 
the crowd does not permit the broker to do this, then the cross-only 
contingency provides that the member placing the orders may withdraw 
the orders, as if they never existed in the trading crowd. The two 
orders the broker holds to cross under this contingency may be two 
customer orders or between a customer and the firm itself. There are no 
restrictions on who the customer may be, e.g., a customer feasibly 
could be a market-marker, broker-dealer, or a public customer. The 
cross would be done at or between the bid and offer, which benefits the 
customer.
    The Exchange believes that by allowing for the cross-only 
contingency, the Exchange will help to develop public customer business 
and will expedite crosses yielding a similar result to what occurs on 
the floor currently, although currently it is done

[[Page 38497]]

by a much more circuitous route. With the current competition in the 
marketplace, the Exchange believes that by providing the cross-only 
contingency more firms will want to bring business to the CBOE, since 
the firm will have the ability to take the order elsewhere if the crowd 
does not allow the cross.
    Although Exchange Rules currently allow a similar result as the 
cross-only contingency, it is much more cumbersome. The proposed rule 
changes provide that the broker may make the crowd aware in advance of 
the amount of contracts the broker wishes to cross; the price at which 
the cross would take place, at or between the quoted prices; and if the 
crowd bars the cross from taking place, the member may withdraw the 
orders. As the Rules stand currently, a broker does not disclose in 
advance that he is holding two orders to cross; the broker must bid 
above the highest bid or offer below the lowest offer in the open 
market; if the bid or offer is not taken by the crowd, then the broker 
may cross at the higher bid or lower offer. Thus, the difference in 
result between the proposed Rule and the current Rule is not 
substantial; however it is a much quicker result since the broker will 
know immediately whether the trading crowd will allow the cross to take 
place, and the member placing the order may withdraw the order if the 
cross is not allowed by the crowd.
    The Exchange believes that this rule change is for the benefit of 
the public customer and expedites Exchange processes.
2. Statutory Basis
    By permitting a broker to represent a cross-only contingency, the 
proposed rule change is consistent with Section 6(b) of the Act in 
general and further the objectives of Section 6(b)(5) \3\ in particular 
in that it is designed to promote just and equitable principles of 
trade, enhance competition 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.\4\ Also, commenters are requested to provide 
their views on this rule revision in light of the proposed rule change 
contained in SR-CBOE-99-10, relating to participation rights for firms 
crossing orders.\5\ Persons making written submissions should file six 
copies thereof with the Secretary, Securities and Exchange Commission, 
450 Fifth Street, NW, Washington, D.C. 20549-0609. 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 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-99-07 and should be 
submitted by August 6, 1999.

    \4\ The Exchange submitted a letter responding to several 
questions posed by the staff about the application of the proposed 
rule change. See Letter from Stephanie C. Mullins, Attorney, CBOE, 
to Nancy Sanow, Assistant Director, Division of Market Regulation, 
dated May 27, 1999.
    \5\ Securities Exchange Act Release No. 41609 (July 8, 1999).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\6\
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    \6\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-18169 Filed 7-15-99; 8:45 am]
BILLING CODE 8010-01-M