[Federal Register Volume 64, Number 159 (Wednesday, August 18, 1999)]
[Notices]
[Pages 44981-44982]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-21444]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-41732; File No. SR-CBOE-99-30]
August 11, 1999.
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Chicago Board Options Exchange, Inc. Relating to
Elimination of the Prohibition Against Market-Maker Surcharges on
Single-List Issues
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 June 23, 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 CBOE. 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 CBOE Rule 2.40, Market-Maker Surcharge
for Brokerage, to eliminate the restriction against a surcharge from
being assessed on trades in classes not traded on another options
exchange. 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 CBOE included statements
concerning the purpose of a and statutory 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 recently received approval from the Commission to
assess a surchange on market-makers trading in multiply-listed classes
pursuant to new CBOE Rule 2.40.\3\ The Exchange believes CBOE Rule 2.40
will enable the Exchange to compete for order flow more effectively
against other options exchanges.
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\3\ Securities Exchange Act Release No. 41121 (February 26,
1999), 64 FR 1123 (March 9, 1999).
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In this present filing, the Exchange proposes to eliminate a
restriction in paragraph (e) of CBOE Rule 2.40 which prohibits a
surcharge from being assessed on trades in classes not traded on
another options exchange. When the Commission approved Exchange Rule
2.40 recently, the Commission stated that it 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.'' \4\ While the Exchange agrees that the proposed rule provides
the Exchange with the tools to compete more effectively in attracting
order flow in multiple list issues, the Exchange believes CBOE Rule
2.40 would be more effective and useful if the restriction against
imposing a surcharge on single-list issues was eliminated.
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\4\ Id., 64 FR at 11525.
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The Exchange believes CBOE Rule 2.40 would be more effective by
eliminating this restriction,\5\ because specialists on other
exchanges, who may trade both single-list and multiple-list issues,
have greater flexibility than CBOE market-makers currently having using
CBOE Rule 2.40 to adjust their transaction fees. Specifically, these
specialists are able to seek to attract customer loyalty and a larger
portion of their order flow in the multiple-listed issues by reducing
fees and charges not just for those multiple-listed classes, but also
for the single-list classes. Consequently, the Exchange will find it
more and more difficult to compete for order flow in multiple-listed
issues--even with Exchange Rule 2.40 in place--as long as specialists
are able to entice firms to send order flow to them by more broadly
reducing their fees, to include their single-list issues. The
elimination of the single-list prohibition will allow the Exchange to
provide the surcharge to floor brokers (thereby inducing a reduction in
their brokerage rates on customer orders) and/or to reduce the book
brokerage rate in single-list issues which will expand the benefit of
this program and the potential benefit to customers.
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\5\ The Exchange added the prohibition against imposing the
surcharge on single list issues at the suggestion of Commission
staff.
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In requesting the Exchange to revise its original proposal to limit
the surcharge to multiple-listed issues only, the Exchange is aware
that the commission believed that competition among exchanges in the
multiple-listed classes would obviate the risk that the spreads in
these classes would not be widened to compensate for the cost of
market-makers of any surcharges. As the need for the proposed rule
change makes clear, that same rationale extends to single-list classes,
since the overall competition for order flow encompasses all issues,
whether single- or multiple-list. Moreover, the Exchange believes that
current safeguards in CBOE Rule 2.40 will protect against a widening of
the spreads on the single-list issues which become subject to a
surcharge. Specifically, the cap on the surcharge amount of $0.25/
contract should help to ensure that spreads are not widened in the
single-list issues.\6\ Of course, the Exchange is also obligated to
analyze data comparing spreads before and after the imposition of the
surcharge so any
[[Page 44982]]
possible ill effects of the elimination of the prohibition will be
readily noted. Finally, the Exchange believes the elimination of this
prohibition against imposing the surcharge on single-list issues would
be fair. Specialists on the other exchanges today are able to change
their fees on their single-list issues without having to study or
justify any possible effect this action may have on the spreads in
those issues. The Exchange wants to provide its marketmakers with the
same ability to apply the surcharge to single-list issues.\7\
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\6\ As the Exchange noted in Amendment No. 1 to SR-CBOE-98-35
(dated February 26, 1999), the minimum bid-ask spread for the option
class is $6.25 (one sixteenth of a dollar ($0.0625) times a
multiplier of 100 since one option contract represents 100 shares of
stock) although the actual spread for many options in wider. (Given
that the spread is usually at $6.25 or greater, the Exchange
believes it is unlikely that spreads would be adjusted to account
for a surcharge of $0.25 or less.
\7\ Under CBOE Rules 2.40 the appropriate Floor Procedure
Committing actually imposes the surcharge on a class of options but
the market-makers in the training crowd may recommend a surcharge
amount.
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2. Statutory Basis
The CBOE believes that the proposed rule change is in furtherance
of Section 6(b)(5) the Act \8\ 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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\8\ 15 U.S.C. 78f(b)(5).
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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 that is not necessary or appropriate
in furtherance of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments on the proposed rule change were neither solicited
nor received.
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 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
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 be
available for inspection and copying at the principal office of the
Exchange. All submissions should refer to File No. SR-CBOE-99-30 and
should be submitted by September 8, 1999.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\9\
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\9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-21444 Filed 8-17-99; 8:45 am]
BILLING CODE 8010-01-M