[Federal Register Volume 65, Number 175 (Friday, September 8, 2000)]
[Notices]
[Pages 54582-54585]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-23075]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43238; File No. SR-CBOE-00-07]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change and Amendment Nos. 1 and 2 by the 
Chicago Board Options Exchange, Incorporated To Facilitate the 
Conversion to Pricing in Decimals

August 31, 2000.
    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 March 6, 2000, the Chicago Board Options Exchange, Incorporated 
(``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 Exchange filed amendments to the proposed rule change on August 7, 
2000 and August 16, 2000, respectively.\3\ The Commission is publishing 
this notice to solicit comments on the proposed rule change, as 
amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Letter dated August 7, 2000, from Angelo Evangelou, 
Attorney, Legal Division, CBOE, to Alton Harvey, Office Head, 
Division of Market Regulation (``Division''), Commission 
(``Amendment No. 1''). Amendment No. 1 converts the filing to a non-
controversial filing under Section 19(b)(3)(A) of the Act and Rule 
19b-4(f)(6) thereunder and requests the Commission to waive the 5 
day pre-filing notice requirement and the 30-day operative period. 
Amendment No. 1 also updates the background material set forth in 
Item II.A of this notice and makes certain changes to the proposed 
rule text. Amendment No. 1 replaces and supersedes the original 
filing in its entirety. See also Letter dated August 15, 2000, from 
Angelo Evangelou, Attorney, Legal Division, CBOE, to Alton Harvey, 
Office Head, Division, Commission (``Amendment No. 2''). Amendment 
No. 2 amends CBOE Rule 30.72 to conform the rule to a recent 
proposed amendment to the Intermarket Trading System Plan (``ITS 
Plan'') relating to decimal pricing.
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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 rules to conform to the securities 
industry's Decimals Implementation Plan submitted to the Commission on 
July 24, 2000, and to facilitate the conversion to pricing in decimals. 
The text of the proposed rule change is available at the Commission and 
the CBOE.

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 CBOE 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
    Background. On January 28, 2000, the Commission issued an order 
directing the national securities exchanges and the National 
Association of Securities Dealers, Inc. (``Participants''), pursuant to 
Section 11A(a)(3)(B) of the Act,\4\ to jointly submit a decimalization 
implementation plan.\5\ That order prescribed a timetable for the 
Participants to begin pricing some equity securities, and options on 
those equity securities, in decimals by July 3, 2000, and all equities 
and options in decimals by January 3, 2001. However, on March 6, 2000, 
the National Association of Securities Dealers, Inc. announced that the 
Nasdaq Stock Market, Inc. (``Nasdaq'') would not have sufficient 
capacity to meet the target dates for implementation. Subsequently, on 
April 13, 2000, the Commission issued an order staying the original 
deadlines for decimalization.\6\
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    \4\ 15 U.S.C. 78k-1(a)(3)(B).
    \5\ See Securities Exchange Act Release No. 42360 (Jan. 28, 
2000), 65 FR 5003 (Feb. 2, 2000).
    \6\ See Securities Exchange Act Release No. 42685 (April 13, 
2000), 65 FR 21046 (April 19, 2000).
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    On June 8, 2000, the Commission issued another order (``Order'') 
\7\ requiring the Participants to act jointly in planning, discussing, 
developing, and submitting to the Commission a plan that will begin 
phasing in the implementation of decimal pricing in equity securities 
and options on or before September 5, 2000 (``Plan''). The Commission 
directed the Participants to submit the Plan to the Commission by July 
24, 2000 and further directed each Participant to file the rule changes 
necessary to implement the phase-in plan.
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    \7\ See Securities Exchange Act Release No. 42914 (June 8, 
2000), 65 FR 38010 (June 19, 2000).
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    As part of the Order, the Commission requires the full 
implementation of decimal pricing in all exchange-traded and Nasdaq 
equity securities and options to be completed no later than April 9, 
2001, and that the Participants submit within two months after full 
implementation (individually or jointly) a study to the Commission 
regarding the impact of decimal pricing on systems capacity, liquidity, 
and trading behavior, including an analysis of whether there should be 
a uniform minimum increment for a security. Further, within thirty days 
after submitting the study, and absent Commission action, the 
Participants individually must submit proposed rule

[[Page 54583]]

changes to establish their individual choice of minimum increments by 
which equities or options are quoted on their respective markets. The 
Order will be effective until the Commission has acted on those 
proposed rule changes filed by the individual Participants establishing 
the minimum increments or until otherwise ordered by the Commission.
    The Plan, which was submitted on July 24, 2000, recommends a 
phased-in implementation for the conversion to decimal pricing that 
reduces the risk to the investing public, issuers, Participants, 
utilities, and member firms. This implementation period will begin on 
August 28, 2000 and will end with full implementation of decimal 
pricing for all equities and options on or before April 9, 2001. The 
Plan also requires a Minimum Price Variation (``MPV'') to be applied 
through the last day that the Plan is in effect. The Plan's MPV 
schedule for quoting is as follows: for equity issues--$.01 MPV; for 
option issues quoted under $3 a contract--$.05 MPV; and, for option 
issues quoted at $3 a contract and greater--$.10 MPV. A penny-pilot for 
options may be established during the implementation period pursuant to 
the Plan.\7\ The Plan will remain in effect until the Commission 
approves rules for each Participant that designate the minimum 
increment by which equities and options are quoted, or until any other 
date identified by the Commission.
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    \7\ The Plan contemplates that the options exchanges may wish to 
consider a pilot program for one-cent minimum price variations for 
quoting in a limited number of options (``Penny Pilot'') at some 
point in the implementation process. The Commission expects that, 
before implementing a Penny Pilot, the options exchanges will 
carefully coordinate on such issues as the selection and number of 
options to be included in the pilot to ensure the continued orderly 
operation of the markets and clearing organizations. In particular, 
the Commission expects that the options exchanges will consult with 
the Commission regarding the impact on market-wide capacity. Before 
implementing a Penny Pilot, each options exchange should also submit 
appropriate rule filings to the Commission under Section 19(b) of 
the Exchange Act.
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    The Plan further provides that decimal pricing be implemented 
pursuant to several phases. The initial phase, to begin on Monday, 
August 28, 2000, provides that a minimum of 10 to 15 exchange-listed 
equity issues, and options on those equities, will quote in decimals 
(per the recommended quote MPV scheduled noted above) and that the 
Participants, with the cooperation of other market participants, will 
evaluate the industry's transition to decimals. Subsequently, on 
September 25, 2000, approximately 50 to 100 exchange-listed equity 
issues, and options on those equities, will begin quoting in decimals 
provided the initial phase of the transition was successful. The 
Participants will continually evaluate the transition to decimal 
pricing and its impacts on the industry, especially as they relate to 
capacity, liquidity and trading patterns.
    The next phase will commence after October 2000. If the 
Participants determine, after consultation with certain market 
participants and the Commission, that the Participants are technically 
prepared for full decimals implementation and that such implementation 
would not cause adverse impacts to the investing public, the 
Participants may elect to fully convert all exchange-listed issues and/
or all option issues (both exchange-listed and Nasdaq-listed) to 
decimal quoting (per the recommended quote MPV schedule noted above). 
The Participants may also elect to implement a penny pilot in selected 
option issues during this phase pursuant to the Plan. The Plan provides 
that any decision to fully convert exchange-listed issues and/or all 
options or to implement a penny pilot on options must be made during 
the period between November 2000 and April 2001, and a notice would be 
widely disseminated by the Participants and the Securities Industry 
Association to the industry and the investing public at least 30 
calendar days before such implementation.
    The Plan further requires an initial phase of limited Nasdaq equity 
issues, and options on those issues if not already quoting in decimals, 
to begin quoting in decimals on or before March 12, 2001. Lastly, the 
Plan provides that if, after consultation with the interested market 
participants and the Commission, the Participants believe that the 
Participants and certain other market participants are technically 
prepared for full implementation and that it would not cause adverse 
impacts to the investing public, the Participants would recommend that 
full implementation of decimal quoting for equities and options begin 
on or before April 9, 2001 and continue through the last day that the 
Plan is in effect. The Participants, with the cooperation of an 
industry evaluation team, would evaluate the industry's transition to 
full decimal pricing in all issues and joint and/or independent studies 
would also evaluate the impact of decimal pricing.
    Proposed Changes. The purpose of the proposed rule change filing is 
to comply with the Order and facilitate the industry's conversion to 
decimal pricing. The proposed rule change is designed to allow for the 
implementation of the Plan and thereby facilitate the eventual 
conversion to decimal pricing by (1) eliminating virtually all 
references to fractions throughout the CBOE's option and stock rules; 
(2) allowing for certain option classes to begin quoting in decimals in 
accordance with the Plan; and (3) permitting certain option classes to 
continue to be quoted in fractions during the phase-in period, if 
necessary.
    A large number of the references to fractions in the Exchange's 
rules are used in the context of examples to illustrate the application 
of various Exchange rules. In such cases, the Exchange has replaced the 
fractions with their decimal equivalents. In other instances, 
references are made to fractions to describe minimum tick increments 
(e.g. CBOE Rule 6.74(a)(ii)(A)). In those cases, the terms ``fraction'' 
or ``fractional'' are replaced with language that would allow for 
pricing in decimals or fractions.
    Fractions are also used in the CBOE rules to describe bid/offer 
parameters. For example, Rule 8.7. (Obligations of Market Makers) 
requires CBOE market makers to provide markets with bid/ask 
differentials no greater than certain fractional increments based on 
the bid price (e.g. when the bid is at least $2 but no more than $5, 
the spread can be no greater than \1/2\ of $1). Again, in these 
instances the Exchange is proposing to convert the fractions to their 
decimal equivalents. However, in instances where the decimal equivalent 
of a fraction equals a number that extends more than two places to the 
right of the decimal point (e.g. \3/8\=.375), the Exchange has rounded 
the decimal equivalent to a number that is only two places to the right 
of the decimal point (e.g. \3/8\ is rounded to .40) in a manner that 
would also allow for pricing in $.01, $.05 or $.10 minimum increments, 
as applicable in accordance with the Plan. This was done to ensure that 
the Exchange could fully comply with the requirements of the Plan and 
to reduce any potential system burdens.
    The Exchange believes that the proposed rule change would allow for 
quoting in decimals or fractions until decimal pricing is completely 
implemented. To that end, there are certain rules where references to 
fractions will remain unchanged, at least until the completion of 
decimal pricing implementation. For example, CBOE Rule 24.8 (Meaning of 
Premium Bids and Offers) provides that with respect to index options, 
bids and offers shall be expressed in terms of ``dollars and fractions 
or dollars and decimals per unit of the index.'' To the extent that 
some or all CBOE index options may

[[Page 54584]]

continue to be priced in fractions beyond September 2000, the reference 
to bids and offers being expressed in terms of dollars and fractions 
will remain in place.
    The Exchange is also proposing to amend CBOE Rule 6.42 (Minimum 
Increments for Bids and Offers). Currently, this rule provides that, 
among other things, bids and offers for all option series trading at or 
above $3 be expressed in eighths of $1, and that bids and offers for 
all option series trading below $3 be expressed in sixteenths of $1, 
unless a different increment is approved by the appropriate Floor 
Procedure Committee for an option contract of a particular series. 
Furthermore, Interpretation and Policy .03 states that the Exchange may 
determine that bids or offers in all series of options on the Dow Jones 
Industrial Average shall be expressed in sixteenths of $1.
    The CBOE proposes to amend Rule 6.42 to explicitly state and give 
effect to the minimum price increments mandated by the Plan. Thus, to 
the extent an option class is pricing in decimals, the MPVs would be as 
follows: for options quoting under $3 a contract, the MPV would be 
$.05; and for options quoting under $3 a contract, the MPV would be 
$.05; and for options quoted at $3 a contract or greater, the MPV would 
be $.10. Proposed Interpretation and Policy .04 under Rule 6.42 
provides that the Exchange would price options in decimals or fractions 
in accordance with the Plan until the Plan is no longer effective. 
Further, the Exchange would not exercise its ability to institute 
smaller increments than those stated in proposed Rule 6.42 (either via 
the Board of Directors or the appropriate Floor Procedure Committee for 
a particular options contract) throughout the duration of the Plan 
unless prescribed by the Plan.\8\
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    \8\ Rule 6.42 currently grants the Exchange's Board of Directors 
authority to establish minimum price increments for options traded 
on the Exchange.
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    Lastly, the Exchange proposes to amend its rules governing trading 
in stocks, warrants and other instruments that may be traded on the 
Exchange and to which Chapter 30 of the CBOE rules applies to eliminate 
references to fractions. As part of these proposed changes, and in 
accordance with the Plan, the Exchange would require bids/offers in 
stocks and other non-option securities governed by CBOE Chapter 30 to 
have a $0.01 MPV. As with options, the Exchange would not exercise its 
ability to institute smaller increments than what is stated in proposed 
Rule 30.33 (via the Board of Directors) throughout the duration of the 
Plan unless prescribed by the Plan.\9\ Also, the proposed rule changes 
provides that the minimum increment for Index Portfolio Receipts 
(``IPRs'') and Index Portfolio Shares (``IPSs'') will be $.01. 
Moreover, the Exchange is proposing to amend Rule 30.72 (Pre-Opening 
Application Rule) to conform the rule to recent proposed changes to the 
ITS Plan relating to decimal pricing. \10\
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    \9\ The Plan provides for MPVs for equities and options of no 
less than one cent. The Order requires the Participants to submit 
joint or individual studies two months after Full Implementation (as 
defined in the Plan) regarding the impact of decimal pricing on 
systems capacity, liquidity, and trading behavior, including an 
analysis of whether there should be a uniform minimum quoting 
increment. If a Participant wishes to move to quoting in an 
increment of less than one cent, the Participant should include in 
its study a full analysis of the potential impact of such trading on 
the Participant's market and the markets as a whole. Within thirty 
days after submitting the study, and absent Commission action, the 
Participants individually must submit for notice, comment, and 
Commission action, proposed rule changes under Section 19(b) of the 
Exchange Act to establish their individual choice of minimum 
increments by which equities or options are quoted on their 
respective markets.
    \10\ See Amendment No. 2, supra n.3.
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with section 6(b) of the Act,\11\ in general, and furthers the 
objectives of Section 6(b)(5) \12\ in particular, in that it would 
remove impediments to and perfect the mechanism of a free and open 
market in a manner consistent with the protection of investors and the 
public interest.
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    \11\ 15 U.S.C. 78f(b).
    \12\ 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 not necessary or appropriate in furtherance 
of the purposes of the Act.

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

    Because the foregoing proposed rule does not: (i) Significantly 
affect the protection of investors or the public interest; (ii) impose 
any significant burden on competition; and (iii) become operative for 
30 days from the date on which it was filed, or such shorter time as 
the Commission may designate,\13\ it has become effective pursuant to 
Section 19(b)(3)(A) of the Act \14\ and Rule 19b-4(f)(6) \15\ 
thereunder. At any time within 60 days of the filing of the proposed 
rule change, the commission may summarily abrogate such rule change if 
it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.
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    \13\ The Exchange requested the Commission to waive the 5 day 
pre-filing notice requirement and the 30-day operative period. See 
Amendment No. 1, supra n. 3.
    \14\ 15 U.S.C. 78s(b)(3)(A).
    \15\ 17 CFR 240.19-4(f)(6).
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    The CBOE has requested that the Commission accelerate the operative 
date. The Commission believes that it is consistent with the protection 
of investors and the public interest and therefore finds good cause to 
designate the proposal to become immediately operative upon filing. 
Acceleration of the operative date will ensure that the CBOE is able to 
operate in accordance with the terms and conditions of the Plan. For 
these reasons, the Commission finds good cause to designate that the 
proposal become operative immediately upon filing.\16\
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    \16\ For purposes only of accelerating the operative date of 
this proposal, 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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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 in the 
Commission's Public Reference Room. Copies of such filing will also be 
available for inspection and copying at the principal office of CBOE. 
All submissions should refer to the File No. SR-CBOE-00-07 and should 
be submitted by September 29, 2000.


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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-23075 Filed 9-7-00; 8:45 am]
BILLING CODE 8010-01-M