[Federal Register Volume 65, Number 61 (Wednesday, March 29, 2000)]
[Notices]
[Pages 16676-16677]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-7687]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42558; File No. SR-CBOE-99-21]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Inc.; Order Approving Proposed Rule Change and Notice of Filing and 
Order Granting Accelerated Approval of Amendment Nos. 1 and 2 Relating 
to the Exchange's Firm Quote Rule

March 22, 2000.

I. Introduction

    On May 27, 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\ and Rule 19b-4 
thereunder,\2\ a proposed rule change relating to the exchange's Firm 
Quote Rule. The proposed rule change was published for comment in the 
Federal Register on July 6, 1999.\3\ No comments were received on the 
proposal. On September 23, 1999, CBOE submitted Amendment No. 1 to the 
proposed rule change.\4\ On January 11, 2000, CBOE submitted Amendment 
No. 2.\5\ In this

[[Page 16677]]

notice and order, the Commission is seeking comment from interested 
persons on Amendment Nos. 1 and 2 and is approving the proposed rule 
change and is approving Amendment Nos. 1 and 2 on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 41558 (June 24, 1999), 
64 FR 36414.
    \4\ See Letter to Heather Traeger, Attorney, Division of Market 
Regulation, SEC, from Timothy Thompson, Director--Regulatory 
Affairs, CBOE, dated September 22, 1999 (``Amendment No. 1''). In 
Amendment No. 1, CBOE proposes to eliminate the discretion of the 
appropriate Floor Procedure Committee to determine whether or not to 
apply the firm quote requirement to firm or broker-dealer orders by 
establishing that: (1) the extension of the firm quote requirement 
will apply to all equity and narrow-based index options and (2) only 
non-broker-dealer customer orders are entitled to firm quote 
treatment in all other products. The amendment also clarifies the 
proposed rule's requirement that the trading crowd change its quotes 
if members of the crowd are unwilling to trade at the displayed 
quote with an order that is not entitled to firm quote treatment.
    \5\ See Letter to Heather Traeger, Attorney, Division of Market 
Regulation, SEC, from Timothy Thompson, Director--Regulatory 
Affairs, CBOE, dated January 5, 2000 (``Amendment No. 2''). In 
Amendment No. 2, CBOE proposes to delete that portion of the 
proposed rule change that would have extended firm quote treatment 
to broker-dealer and firm orders.
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II. Description of the Proposal

    The proposal would amend CBOE Rule 8.51 to specify to what extent 
multiple orders entered by the same beneficial owner and represented at 
a trading station at approximately the same time will be entitled to 
firm quote protection. Specifically, the proposal would amend CBOE Rule 
8.51 to deny firm quote protection to those orders or portions of 
orders for the same class of options (whether for the same or different 
series) that are entered by the same beneficial owner and are 
represented at the trading station at approximately the same time and 
cumulatively exceed the firm quote requirement for that particular 
class of options.\6\ Under the proposed new paragraph (a)(3) of CBOE 
Rule 8.51, only the first of these three orders would be entitled to 
firm quote protection. The crowd would be required to trade the other 
two ten lot orders at the displayed market or to change the market 
pursuant to the terms of the ``trade or fade'' policy set forth in 
paragraph (b) of the Rule.\7\
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    \6\ For example, assume the firm quote requirement in option ABC 
is ten contracts and that a broker-dealer simultaneously sends 
orders to a floor broker in a crowd to buy ten at-the-money call 
options in each of three different series for that class ABC. The 
floor broker will likely represent each of these three orders one 
after another.
    \7\ Under the ``trade or fade'' policy, CBOE trading crowds and 
specialists or crowds on other exchanges have the option to trade a 
broker-dealer order at the displayed quote or to change the 
displayed bid (offer) to reflect that the previously displayed bid 
(offer) is no longer available. CBOE Rule 8.51(b).
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    The Exchange also proposes to amend paragraph (b) of CBOE Rule 8.51 
and Interpretation .06 to make them consistent with the change in the 
categories of orders proposed to be subject to the firm quote 
guarantee.

III. 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 \8\ 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.\9\
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    \8\ 15 U.S.C. 78f(b)(5).
    \9\ In approving this rule, the Commission has considered the 
proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
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    The Commission believes that providing for limits on the extension 
of the firm quote protection in cases where multiple orders for the 
same class of options are submitted at approximately the same time will 
prevent market makers from being subjected to undue risk arising from 
an inability to refresh their quotes in a timely manner. The proposal 
should also prevent orders from being broken up by series solely to 
qualify for firm quote protection. This, in turn, should ensure that 
all customer orders are treated consistently with respect to firm quote 
protection.
    The Commission finds good cause for approving proposed Amendment 
Nos. 1 and 2 prior to the 30th day after the date of publication of 
notice of filing in the Federal Register. Amendment No. 1 made several 
changes to the portion of the proposed rule change that would have 
extended firm quote treatment to broker-dealer and firm orders. 
Amendment No. 2 then deleted that same portion of the proposed rule 
change, leaving only sections of the proposal which were published in 
the Federal Register for notice and comment. The Commission did not 
receive any comments on the proposed rule change. Accordingly, the 
Commission finds good cause pursuant to Section 6(b)(5) of the Act for 
accelerating approval of Amendment Nos. 1 and 2.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment Nos. 1 and 2, including whether the 
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 20549-0609. 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 also be available for inspection and copying at the 
principal office of the Exchange. All submissions should refer to File 
No. SR-CBOE-99-21 and should be submitted by April 19, 2000.

V. Conclusion

    It Is Therefore Ordered, pursuant to Section 19(b)(2) of the 
Act,\10\ that the proposed rule change (SR-CBOE-99-21), as amended, is 
approved.
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    \10\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-7687 Filed 3-28-00; 8:45 am]
BILLING CODE 8010-01-M