[Federal Register Volume 64, Number 235 (Wednesday, December 8, 1999)]
[Notices]
[Pages 68706-68707]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-31779]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42190; File No. SR-CBOE-99-32]


Self-Regulatory Organizations; Order Approving a Proposed Rule 
Change by the Chicago Board Options Exchange, Inc. to Change the 
Participation Entitlement of Designated Primary Market-Makers

December 1, 1999.

I. Introduction

    On June 23, 1999, the Chicago Board Options Exchange, Inc. 
(``CBOE'' or ``Exchange'') submitted to the Securities and Exchange 
Commission (``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act''),\1\ Rule 19b-4 
thereunder,\2\ a proposed rule change to modify the participation 
entitlement of designated primary market-makers (``DPMs''). The 
proposed rule change was published in the Federal Register on September 
30, 1999.\3\ The Commission did not receive any comments on the 
proposed rule change. This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 140.19b-4.
    \3\ Securities Exchange Act Release No. 41904 (September 22, 
1999), 64 FR 52813.
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II. Description of the Proposed Rule Change

    A DPM's right to participate as a principal in a transaction is 
generally governed by the principles of time and price priority as set 
forth in CBOE Rule 6.45. Under this rule, if a DPM is first to respond 
with the best bid (offer) to a member who is not acting on behalf of 
the DPM and who has requested a market, the DPM is entitled to 100 
percent participation in any resulting transaction. In addition, CBOE 
Rule 8.80(c)(7)(ii) grants each DPM a right to participate ``pro-
rata,'' with market-makers present in the trading crowd. This pro-rata 
right applies to any transaction in a security allocated to the DPM if 
the DPM's previously established bid (offer) was equal to the highest 
bid (lowest offer) in the trading crowd, even is the DPM's bid (offer) 
is not entitled to priority under CBOE Rule 6.45.\4\
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    \4\ The right of a DPM to participate pro-rata, however, does 
not include trades executed on the Exchange's Retail Automatic 
Exchange System (``RAES'').
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    The Exchange has not previously defined the term ``Pro-rata.'' The 
Modified Trading System Appointments Committee (``MTS'' 
Committee''),\5\ however, has interpreted a participation entitlement 
in transactions that occur in a DPM's allocated security (when the 
DPM's previously established principal bid (offer) was equal to the 
highest bid (lowest offer) in the trading crowd) to be as follows: an 
initial 40 percent participation right; a 30 percent participation 
right for securities with an average daily volume during the previous 
calendar quarter of at least 2,501 contracts; and no guaranteed 
participation right when the average daily volume in a security during 
the previous calendar quarter exceeded 5,000 contracts. In addition, 
the MTS Committee established a 40 percent participation level for all 
multiply-traded securities.
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    \5\ The MTS Committee is responsible for appointing DPMs and 
overseeing the Exchange's DPM program.
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    The Exchange now proposes to change the participation level. The 
Exchange proposes to fix the DPM participation right at 30 percent for 
transactions in all DPM allocated securities that occur at the DPM's 
previously established principal bid or offer. The 30 percent 
participation right would apply equally to all allocated securities 
regardless of their contract volume or whether they are multiply-
traded.
    The proposal to set the DPM participation right at 30 percent for 
all DPM allocated securities does not, however, affect the MTS 
Committee's authority to establish a lower participation right for new 
DPM appointments or as a remedial action against a DPM that has failed 
to perform satisfactorily.

III. Discussion

    After careful review, the Commission finds the proposed rule change 
is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities exchange.\6\ 
In particular, the Commission finds that the proposal is consistent 
with Section 6(b)(5) \7\ because it is designed to remove impediments 
to and perfect the mechanism of a free and open market.
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    \6\ In approving this proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
    \7\ 15 U.S.C. 78f(b)(5).
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    The proposed rule change amends the Exchange's established policy 
relating to the level of DPM participation in transactions occurring at 
the DPM's previously established bid (offer) for securities allocated 
to the DPM. Now, instead of staggering the amount of DPM participation 
based on either the

[[Page 68707]]

security's average daily volume or its status as multiply-traded, the 
participation amount will be a simple fixed percentage. Each DPM will 
be entitled to the same participation amount regardless of the 
security's volume or status.
    The Commission agrees with the Exchange's assertion that the 
proposal should foster a more equitable result than under the current 
staggered approach. Now, all DPMs will be entitled to the same amount 
of participation regardless of the security. Moreover, the fixed 
percentage should be easier to apply than the current formula. 
Therefore, the proposal should improve the operation of the DPM 
program.
    The Commission notes that the DPM participation right was 
established as an incentive to spark interest in the DPM program and to 
entice DPMs to remain in the program. This purpose is still valid today 
as the DPM program expands floor-wide. DPMs assume additional 
affirmative obligations, which are not required of other members. These 
additional obligations include, among other things, the obligation to 
be present at the trading post throughout the business day, the 
obligation to participate at all times in automated execution and order 
handling systems such as RAES, and the obligation to act as an order 
book official and maintain the public order book. These additional 
obligations are required of all DPMs regardless of the volume or 
multiply-traded status of the DPM's allocated security and, thus, the 
Exchange's proposal to establish a flat participation entitlement 
appears reasonable and fair.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\8\ that the proposed rule change (SR-CBOE-99-32) is approved.

    \8\ 15 U.S.C. 78s(b)(2).
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    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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Jonathan G. Katz,
Secretary.
[FR Doc. 99-31779 Filed 12-7-99; 8:45 am]
BILLING CODE 8010-01-M