[Federal Register Volume 64, Number 161 (Friday, August 20, 1999)]
[Notices]
[Pages 45578-45579]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-21656]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41742; File No. SR-CBOE-99-35]


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

August 13, 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 June 29, 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 its rule governing the crossing of index 
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 is set forth below. 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) \3\ No change.
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    \3\ Paragraph (d) of Rule 6.74 was proposed to be added in SR-
CBOE-99-10, which is currently pending before the Commission. See 
Securities Exchange Act Release No. 41609 (July 8, 1999), 64 FR 
38494 (July 16, 1999).
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    (e)(i) Notwithstanding the provisions of paragraphs (a) and (b) of 
this Rule, when a Floor Broker holds an index option order for 500 or 
more contracts (``original order''), the Floor Broker is entitled to 
cross 20% of the order with a facilitation order of the originating 
firm (as defined in paragraph (d)) after requesting bids and offers for 
such option series, if the order is traded between the best bid and 
offer given by the crowd in response to the broker's initial request 
for a market.
    (ii) 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.
    (iii) 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.
    (iv) The appropriate Floor Procedure Committee may exempt a 
particular option class from the application of this paragraph.
* * * 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 (e) to CBOE Rule 6.74, 
``Crossing'' Orders, to give a firm that is holding an index option 
order for a public customer the right to participate on the order 
through a facilitation order in certain circumstances.\4\ To take 
advantage of the new provision, the particular index 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.
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    \4\ The Exchange has proposed to add a paragraph (d) to Rule 
6.74, to provide for a participation right for crossing equity 
option orders, in SR-CBOE-99-10. That filing is pending before the 
Commission. See Securities Exchange Act Release No. 41609 (July 8, 
1999), 64 FR 38494 (July 16, 1999). See also Securities Exchange Act 
Release No. 41610 (July 8, 1999), 64 FR 38495 (July 16, 1999) (SR-
CBOR-99-07) (a proposed rule change to permit ``cross-only'' 
contingency orders).
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    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) of CBOE Rule 6.74 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 
that 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 willing to take the entire order the floor 
broker will not be able to cross or facilitate any part of the order.
    Generally, new paragraph (e) will provide that, in those 
circumstances where a floor broker has an index option order for a 
public customer for 500 contracts or more that he is holding to execute 
(``original order''), that floor broker will have priority to cross 20% 
of that original order against a firm proprietary order of the 
originating firm (i.e., faciliation order), if the cross is done at a 
price between the best bid and offer quoted by 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. This is 
comparable to the 25% participation right given under certain 
circumstances to a firm bringing a FLEX option order to the floor 
pursuant to CBOE Rule 24A.5(e)(iii).
    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 proposed 
new paragraph (e) of CBOE Rule 6.74, then the DPM shall not also be 
entitled to the guaranteed participation rate provided by paragraph 
(c)(7) of CBOE Rule 8.80 for that particular trade.
    The Rule will also provide that the appropriate Floor Procedure 
Committee may exempt a particular option class from the application of 
this paragraph. 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, and, at the same time, it will encourage member 
firms to bring their

[[Page 45579]]

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 CBOE 
expects that 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) \5\ of the Act in 
that it is designed to remove impediments to a free and open market and 
protects investors and the public interest.
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    \5\ 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. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 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-99-35 and should 
be submitted by September 10, 1999.

    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. 99-21656 Filed 8-19-99; 8:45 am]
BILLING CODE 8010-01-M