[Federal Register Volume 65, Number 217 (Wednesday, November 8, 2000)]
[Notices]
[Pages 67022-67023]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-28594]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43493; File No. SR-CBOE-00-04]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Inc.; Order Granting Approval to Proposed Rule Change to Amend and 
Codify Equity Options Post Telephone Policy

October 30, 2000.

I. Introduction

    On February 25, 2000, the Chicago Board Options Exchange, Inc. 
(``CBOE'' or ``Exchange'') filed with 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 to expand the existing CBOE 
policy governing the use of telephones at equity option trading posts 
to conform it to the CBOE's current index option trading post telephone 
policy by allowing for the receipt of orders over outside telephone 
lines, from any source, directly at equity trading posts. On August 29, 
2000, the Commission published the proposed rule change in the Federal 
Register.\3\ The Commission received no comments on the proposal. This 
order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 43194 (August 22, 
2000), 65 FR 52457 (August 29, 2000).
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II. Description of the Proposal

    In this proposed rule change, CBOE seeks to expand its existing 
policy governing the use of telephones at equity option trading 
posts\4\ to make it more consistent with the CBOE's current index 
option trading post telephone policy by allowing for the receipt of 
orders over outside telephone lines, from any source, directly at 
equity trading posts, and to incorporate that policy into the 
Exchange's rules. The proposed rule change is more limited than the 
current telephone policy for the index option post, however, in that it 
would generally allow for the receipt of orders directly at the post 
over outside telephone lines only when the order(s) are placed during 
outgoing telephone calls. The Exchange seeks to codify and amend its 
current equity option post telephone policy to make clear to member and 
member organizations the Exchange's position with respect to the use of 
telephones at equity option posts. The proposed policy would supercede 
previous policies concerning the use of telephones at equity option 
trading posts set forth in CBOE Regulatory Circulars.
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    \4\ Equity trading posts are all trading posts that are under 
the jurisdiction of the Equity Floor Procedure Committee (all 
trading posts except DJX, NDX, OEX and SPX), including Designated 
Primary Market maker crowds.
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    Regarding the history of CBOE's equity option trading post 
telephone policy, the CBOE first proposed a telephone policy for equity 
option posts in 1993.\5\ That initial policy prohibited any orders from 
being transmitted over the outside telephone lines to the equity option 
posts, but allowed for orders to be transmitted via intra-floor lines 
from one point on the Exchange floor to another. In 1996, the Exchange 
modified its telephone policy at equity posts to allow orders of CBOE 
market makers to be received over the outside telephone lines directly 
at the trading posts, which remains the current policy.\6\ The proposed 
rule change would expand this policy by permitting the receipt of off-
floor orders from any source (i.e., members, broker-dealers, non-
broker-dealer, or public customers) over outside telephone lines 
directly at the equity trading posts during outgoing telephone calls, 
but would limit the orders to those transmitted to the equity posts 
pursuant to a telephone call initiated at the post (i.e., an outgoing 
call).\7\ According to CBOE, the proposed rule change would make the 
CBOE's telephone policy for equity option posts more consistent with 
the current policy at the OEX post in place since 1998.\8\
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    \5\ See Securities Exchange Act Release No. 33701 (March 2, 
1994), approving SR-CBOE-93-24.
    \6\ RG 97-92, the latest Regulatory Circular reflecting CBOE's 
current equity telephone policy, was approved by the Commission in 
Securities Exchange Act Release No. 37876, 61 FR 56728 (November 4, 
1996), and modified in Securities Exchange Act Release No, 39331, 62 
FR 62650 (November 24, 1997).
    \7\ In adopting this change, the CBOE wants to provide more 
immediate access into its trading crowds to its customers. The 
Exchange believes that this expansion in access is necessary to 
allow the CBOE to continue to satisfy is customers in an 
increasingly competitive environment.
    \8\ The OEX pit telephone policy is set forth in CBOE's 
Regulatory Circular, RG-98-09, which was approved in Securities 
Exchange Act Release No. 39435, 62 FR 66157 (December 17, 1997), 
CBOE's current proposal for the equity option post differs somewhat 
from its OEX policy contained in the above-noted Regulatory 
Circular. RG-98-09 allows floor brokers to take telephone orders 
using their dedicated telephone lines at the OEX pit, while the 
current proposal would allow all members to receive telephone orders 
(with the outgoing call limitation) over the equity option post 
general telephone lines, with members using PIN access codes to 
access the lines. CBOE represents that space limitations at the 
equity option post would prohibit the use of dedicated lines. 
Further, CBOE represents that, in contract to the OEX post, order-
taking at the equity option post is not limited to floor brokers, as 
Designated Primary Market Makers (``DPM'') can also act as floor 
brokers pursuant to existing CBOE rules. Telephone call from Timothy 
Thompson, Director, Regulatory Affairs, CBOE and Angelo Evangelou, 
Attorney, CBOE to Geoffrey Pemble, Attorney, Division of Market 
Regulation, SEC (October 26, 2000).
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III. Discussion

    After careful review, 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 
and, in particular, with Sections 6(b)(5) and 6(b)(8) of the Act.\9\ 
Section 6(b)(5) requires, among other things, that the rules of an 
exchange be designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to 
facilitate

[[Page 67023]]

transactions in securities, to remove impediments to and perfect the 
mechanisms of a free and open market and a national market system, and, 
in general, to protect investors and the public interest.\10\ Section 
6(b)(5) also requires that those rules not be designed to permit unfair 
discrimination between customers, issuers, brokers, or dealers. Section 
6(b)(8) of the Act requires that the rules of an exchange not impose 
any burden on competition not necessary or appropriate in furtherance 
of the purpose of the Act.
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    \9\ 15 U.S.C. 78f(b)(5) and (b)(8).
    \10\ In approving this rule, the Commission notes that it has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
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    Under the current policy, the only orders for equity options that 
may be received at the post directly via telephone lines from off-floor 
locations are off-floor orders of CBOE market makers. The proposed rule 
change would expand this policy by permitting the receipt of off-floor 
orders from any source (i.e., members, broker-dealers, non-broker-
dealers, or public customers) over outside telephone lines directly at 
the equity trading posts during outgoing telephone calls. The proposed 
rule change would only allow for such orders to be transmitted to the 
equity posts pursuant to a telephone call initiated at the post (an 
outgoing call), while permitting CBOE market makers to continue to 
transmit orders over the telephone lines from off the floor directly to 
the equity trading posts (via incoming calls).
    The Commission finds that the proposed rule is consist with, and 
furthers the objectives of, Section 6(b)(5) \11\ of the Act in that it 
is designed to improve communication to and from the Exchange's trading 
floor in a manner that promotes just and equitable principles of trade, 
prevents fraudulent and manipulative acts and practices, and maintains 
fair and orderly markets. Specifically, the Commission notes that the 
limits on telephone use proposed by the CBOE are consistent with the 
goals of the Act. In this regard, the commission believes that it is 
reasonable for CBOE to codify its current policy permitting CBOE market 
makers to send orders to the trading floor via incoming calls (a 
benefit that is not enjoyed by other types of members and public 
customers). This policy allows CBOE market makers to transmit their 
orders more efficiently at those times when they are required to be off 
the floor. In the Commission's view, it is also reasonable for the 
Exchange to now allow orders from any other source to go directly to 
the post as long as those orders are placed in outgoing calls only.
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    \11\ 15 U.S.C. 78f(b)(5).
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    The Commission further believes that the proposed rule change 
modifies the Exchange's communication system in a way that provides for 
equitable access to the Exchange floor among members, broker-dealers, 
non-broker-dealers, and public customers (both institutional and 
retail) alike. Accordingly, the Commission finds that the proposal is 
consistent with the requirement of Section 6(b)(8) \12\ of the Act, 
which requires that the proposed rule change not impose any burden on 
competition not necessary or appropriate in furtherance of the Act's 
purposes.
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    \12\ 15 U.S.C. 78f(6)(8).
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    The Exchange has indicated that it intends to police compliance 
with the conditions applicable to the use of telephones at the equity 
trading posts (including the requirement that any member or associated 
person receiving orders over outside telephone lines be properly 
qualified pursuant to CBOE rules to do so) through complaints from 
Exchange members at the post, as well as observations of Floor 
Officials and Exchange staff. The Exchange has further indicated that 
CBOE's Equity Floor Procedure Committee will be responsible for 
implementing this policy in conformity with Exchange Rules and 
provisions of the Act, including approving access and the phone 
technology, and will decide any other issues relating to this 
policy.\13\ Finally, the CBOE Department of Financial and Sales 
Practice Compliance will be required to review and approve all 
applications relating to the policy to ensure that the applicant is 
intending to transact business which the applicant is authorized to 
transact.
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    \13\ According to CBOE, responsibility for accepting orders from 
a wide range of customers will be borne by the member firms. Floor 
brokers accepting orders in this manner would be required to be 
qualified pursuant to Exchange Rule 91. As is the case with brokers 
accepting orders of public customers over OEX post telephones, any 
broker speaking directly with a public customer is required to be 
Series 7 qualified and registered with the Exchange by a member 
organization approved to conduct non-member customer business.
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    The Commission believes that proper surveillance is an essential 
component of any policy telephone access to an exchange's trading 
floor. Especially important in this case is ensuring that the CBOE's 
surveillance efforts prevent individuals who are not properly qualified 
to take public orders for securities (i.e. non-Series 7 qualified 
Exchange employees) from interacting with the public. The Commission 
finds that the safeguards proposed above by the CBOE are consistent 
with the prevention of fraudulent and manipulative acts and practices, 
as required under Section 6(b)(5).

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\14\ that the proposed rule change (SR-CBOE-00-04) is approved.
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    \14\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulations, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-28594 Filed 11-7-00; 8:45 am]
BILLING CODE 8010-01-M