[Federal Register Volume 64, Number 154 (Wednesday, August 11, 1999)]
[Notices]
[Pages 43793-43795]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-20631]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41702; File No. SR-CBOE-98-53]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Inc.; Order Approving Proposed Rule Change and Notice of Filing and 
Order Granting Accelerated Approval to Amendments No. 1 and 2 to the 
Proposed Rule Change To Amend the Firm Quote Requirement

August 4, 1999.
    On December 15, 1998, the Chicago Board Options Exchange, Inc. 
(``CBOE'' or ``Exchange'') submitted to the

[[Page 43794]]

Securities and Exchange Commission (``Commission''), pursuant to 
section 19(b)(1) of the Securities Exchange Act of 1934 (``Act''),\1\ a 
proposed rule change to amend the Exchange's firm quote requirement. 
The proposed rule change was published for comment in the Federal 
Register on January 28, 1999.\2\ The CBOE submitted Amendments No. 1 
\3\ and 2 \4\ to the proposed rule change on April 15, 1999, and July 
28, 1999, respectively. The Commission received no comments on the 
proposal. This order approves the approval, as amended.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ See Exchange Act Release No. 40957 (Jan. 20, 1998), 64 FR 
4485.
    \3\ See Letter from Stephanie C. Mullins, Attorney, CBOE, to 
Richard Strasser, Assistant Director, Division of Market Regulation 
(``Division''), Commission, dated April 13, 1999 (``Amendment No. 
1''). Amendment No. 1 explains why the Exchange believes the 
proposed rule change will not have anti-competitive effects on small 
market-makers.
    \4\ See Letter from Stephanie C. Mullins, Attorney, CBOE, to 
Richard Strasser, Assistant Director, Division, Commission, dated 
July 27, 1999 (``Amendment No. 2''). Amendment No. 2 sets forth the 
circumstances under which Floor Officials may grant an exemption to 
or suspend the firm quote requirement. These include the declaration 
of a fast market, a system malfunction, an influx or orders, or 
other unusual circumstances that cause displayed quotations to be 
inaccurate or not current. Amendment No. 2 also makes certain 
technical changes to the proposed rule change.
---------------------------------------------------------------------------

I. Description of the Proposal

    The Exchange proposes to amend CBOE Rule 8.51(a)(2), CBOE's firm 
quote provision, to require that trading crowds be firm for a number of 
contracts on less than the RAES contract limit applicable to that class 
of options.\5\ CBOE also proposes to make conforming changes to 
Interpretation and Policies .01 and .06. The proposal would permit the 
appropriate Floor Procedure Committee (``FPC'') to establish the firm 
quote requirement for each particular class of options traded on RAES 
provided that the requirement is no less than the RAES contract limit 
and no more than 50 contracts. For classes or series that are not 
traded on RAES, the appropriate FPC may establish a firm quote 
requirement between 10 and 50 contracts.\6\
---------------------------------------------------------------------------

    \5\ The appropriate Floor Procedure Committee determines the 
size of orders eligible for entry into RAES. The maximum RAES order 
size is generally 20 contracts. All classes of securities traded on 
the Exchange, except Long Term Equity Anticipation Securities 
(``LEAPS''), are traded on RAES. The firm quote requirement will not 
apply to orders received from other exchanges or broker/dealers. 
Phone call between Stephanie C. Mullins, Attorney, CBOE, and Sonia 
Patton, Attorney, Division, Commission, on June 7, 1999.
    \6\ The new form quote requirement will remain in effect for 
that options class indefinitely or until the FPC changes it. The FPC 
meets once every two weeks. The discretion given to the FPC by the 
proposed rule change to establish a different firm quote requirement 
between the RAES contract limit and 50 contracts for a particular 
class of options is intended to enable the FPC to respond to general 
trading trends in a given options class. Phone call between Timothy 
Thompson, Director, Regulatory Affairs, Legal Department, CBOE, 
Sonia Patton, Attorney, Division, Commission and Constance Kiggins, 
Special Counsel, Division, Commission, on January 6, 1999.
---------------------------------------------------------------------------

    The firm quote requirement will apply at all times,\7\ except 
during an opening or closing trading rotation. Unless there is a 
contrary ruling by two Floor Officials, the requirement obligates a 
trading crowd to sell (buy) the established number of contracts at the 
offer (bid) which is displayed when a buy (sell) customer order reaches 
the trading station where the particular option class is located for 
trading. Currently, paragraph (a)(2) of Rule 8.51 requires trading 
crowds to buy (sell) at least ten (10) contracts under these 
circumstances.
---------------------------------------------------------------------------

    \7\ Under Exchange Rule 8.51(a)(3), however, any two Floor 
Officials may suspend the firm quote requirement for a class or a 
series within a class, if it is in the interest of a fair and 
orderly market.
---------------------------------------------------------------------------

    Because RAES is essentially a form of electronic firm quote, the 
Exchange believes that in most cases, the firm quote requirement should 
be no less than the RAES contract limit for a particular options class. 
In fact, in deciding to raise the firm quote requirement, the Exchange 
noted that the appropriate FPC responsible for setting the contract 
limit for RAES in particular option classes recently increased the RAES 
maximum contract size, such that in most cases the RAES contract limit 
is now higher than the firm quote requirement.\8\ Exchange Rule 8.51 
will continue to provide that the appropriate Market Performance 
Committee may determine the classes and series that will be subject to 
the requirements of the Rule.
---------------------------------------------------------------------------

    \8\ See Regulatory Circulars RG98-102, RG98-117, RG 98-119.
---------------------------------------------------------------------------

    The CBOE also is amending Interpretation and Policy .06 to Rule 
8.51 to clarity that the firm quote requirements for spreads and 
straddles applies only in equity options.\9\ The CBOE notes that policy 
was clearly stated in File No. SR-CBOE-94-54 and in the Commission's 
order approving that filing.\10\ However, the rule language itself does 
not reflect this limitation. Thus, the CBOE is making this change to 
clarify in the rule text what was originally intended by that rule 
filing.
---------------------------------------------------------------------------

    \9\ The term ``spreads and straddles'' refers to two-part equity 
option orders in which the component series are on opposite sided of 
the market and in a one-to-one-ratio.
    \10\ Securities Exchange Act Release No. 35785 (May 31, 1995), 
60 FR 30125 (June 7, 1995).
---------------------------------------------------------------------------

II. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange. In particular, 
the Commission finds that the proposed rule change meets the 
requirements of section 6(b)(5) of the Act \11\ which states that, 
among other things, the rules of an exchange must be designed to 
facilitate securities transactions and to remove impediments to and 
perfect the mechanism of a free and open market. The Commission 
believes that the proposal should provide greater depth to the option 
market and benefit public customers by ensuring that they receive fills 
of their orders for a greater number of contracts. Moreover, the 
Commission believes that allowing the FPC to set the firm quote 
requirement on a class by basis within a given range (i.e., no less 
than the RAES limit and no more than 50 contracts) will give the 
Exchange the flexibility to respond to competitive pressures from other 
markets for multiply listed options while not imposing an undue burden 
on firms that trade those option classes.
---------------------------------------------------------------------------

    \11\ 15 U.S.C. 78f(b)(5). In approving this rule change, the 
Commission has considered the proposal's impact on efficiency, 
competition, and capital formation, consistent with Section 3 of the 
Act. 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    Moreover, as CBOE notes, Rule 8.51 is unclear in its application to 
spreads and straddles, although the Commission order approving the 
proposal clearly indicates that the provision only applies to equity 
options as opposed to index and equity options. As a result, the 
Commission believes it is appropriate to clarify that the firm quote 
requirement for spreads and straddles applies only to equity options.
    Pursuant to section 19(b)(2) of the Act,\12\ the Commission finds 
good cause to approve Amendments No. 1 and 2 to the proposed rule 
change prior to the 30th day after the date of publication of notice of 
filing thereof in the Federal Register because the Amendments do not 
present any new regulatory issues.
---------------------------------------------------------------------------

    \12\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

III. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning Amendments No. 1 and 2, including whether those 
amendments are 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-

[[Page 43795]]

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, in Washington, DC. Copies of such 
filing will also be available for inspection and copying at the 
principal office of the CBOE. All submissions should refer to File No. 
SR-CBOE-98-53 and should be submitted by September 1, 1999.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\13\ that the proposed rule change (SR-CBOE-98-53), as amended, is 
approved.
---------------------------------------------------------------------------

    \13\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
---------------------------------------------------------------------------

    \14\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-20631 Filed 8-10-99; 8:45 am]
BILLING CODE 8010-01-M