[Federal Register Volume 67, Number 43 (Tuesday, March 5, 2002)]
[Notices]
[Pages 10026-10028]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-5143]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45479; File No. SR-CBOE-2001-62]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Inc. Relating to Minimum 
Trading Increments for Spread, Straddle, and Combination Orders in 
Options on the S&P 500 Index

February 26, 2002.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 
1934,\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that on 
December 13, 2001, the Chicago Board Options Exchange, Inc. (``CBOE'' 
or the ``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 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested parties.
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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

    CBOE proposes to amend CBOE Rule 6.42, Minimum Increments for Bids 
and Offers, to require that bids and offers on spread, straddle, or 
combination orders in options on the S&P 500 Index, except for box 
spreads, be expressed in decimal increments no smaller than $0.05. The 
text of the proposed rule change appears below. New text is in italics.

Chicago Board Options Exchange, Incorporated Rules

* * * * *

Chapter VI--Doing Business on the Exchange Floor

Section C: Trading Practices and Procedures
* * * * *
Rule 6.42. Minimum Increments for Bids and Offers
    The Board of Directors may establish minimum trading increments for 
options traded on the Exchange. When the Board of Directors determines 
to change the trading increments, the Exchange will designate such 
change as a stated policy, practice, or interpretation with respect to 
the administration of Rule 6.42 within the meaning of subparagraph 
(3)(A) of subsection 19(b) of the Exchange Act and will file a rule 
change for effectiveness upon filing with the Commission, provided, 
however, that no change may be made to the minimum trading increment as 
set forth in this Rule for options trading in decimals that is 
inconsistent with the Decimals Implementation Plan (``Plan'') submitted 
to the Commission on July 24, 2000, and that otherwise changes the 
minimum trading increment for options trading in decimals unless the 
change has been filed with the Commission pursuant to rule 19b-4(f)(6) 
under section 19(b) of the Exchange Act. Subject to the foregoing, the 
following minimum trading increments shall apply to options traded on 
the Exchange:
    (1) Subject to paragraph (2) below, bids and offers shall be 
expressed in decimal increments no smaller than $0.10 for option 
classes trading in decimals or eighths of $1 (e.g., 3\1/8\) for option 
classes trading in fractions, unless a different increment is approved 
by the appropriate Floor Procedure Committee for an option contract of 
a particular series.
    (2) Bids and offers for all option series quoted below $3 a 
contract shall be expressed in decimal increments no smaller than $0.05 
for options trading in decimals or sixteenths of a dollar (e.g., \1/
16\) for options trading in fractions.
    (3) Bids and offers on spread, straddle, or combination orders as 
defined in Rule 6.53 may be expressed in any decimal or fractional 
price regardless of the minimum increments otherwise appropriate to the 
individual legs of the order. Notwithstanding the foregoing sentence, 
bids and offers on spread, straddle or combination orders in options on 
the S&P 500 Index, except for box spreads, shall be expressed in 
decimal increments no smaller than $0.05. Spread, straddle or 
combination orders expressed in net price increments that are not 
multiples of the minimum increment are not entitled to the same 
priority under Rule 6.45 as such orders expressed in increments that 
are multiples of the minimum increment.
Interpretations and Policies
    .01-.04 Unchanged.
    .05  For purposes of this rule, ``box spread'' means an aggregation 
of positions in a long call option and short put option with the same 
exercise price (``buy side'') coupled with a long put option and short 
call option with the same exercise price (``sell side'') all of which 
have the same aggregate current underlying value, and are structured as 
either: (A) a ``long box spread'' in which the sell side exercise price 
exceeds the buy side exercise price or (B) a ``short box spread'' in 
which the buy side exercise price exceeds the sell side exercise price.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, 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, Proposed Rule Change

1. Purpose
    CBOE Rule 6.42 establishes the minimum trading increments for 
options traded on the Exchange. CBOE Rule 6.42(1) provides that, 
subject to Rule 6.42(2), bids and offers shall be expressed in decimal 
increments no smaller than $0.10 unless a different increment is 
approved by the appropriate Floor Procedure Committee for an option 
contract of a particular

[[Page 10027]]

series. CBOE Rule 6.42(2) provides that bids and offers for all option 
series quoted below $3.00 a contract shall be expressed in decimal 
increments no smaller than $0.05. CBOE Rule 6.42(3) provides that bids 
and offers on spread, straddle, or combination orders as defined in 
CBOE Rule 6.53 may be expressed in any decimal or fractional price 
regardless of the minimum increments otherwise appropriate to the 
individual legs of the order.\3\
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    \3\ See Securities Exchange Release No. 34-34764 (September 30, 
1994), 59 FR 51223 (October 7, 1994) (order approving amendments to 
CBOE Rule 6.42).
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    The proposed rule change amends CBOE Rule 6.42(3) to require that 
bids and offers on spread,\4\ straddle,\5\ or combination \6\ orders in 
options on the S&P 500 Index (``SPX''), excluding box spreads, be 
expressed in decimal increments no smaller than $0.05. Expressing 
spread, straddle and combination orders in decimal increments no 
smaller than $0.05 will increase the efficiency of SPX traders in 
executing these types of orders. In addition, the proposed rule change 
adds new interpretation .05 to CBOE to define the term ``box spreads.'' 
\7\
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    \4\ A spread order is an order to buy a stated number of option 
contracts and to sell the same number of option contracts, or 
contracts representing the same number of shares at option, of the 
same class of options. CBOE Rule 6.53(d).
    \5\ A straddle order is an order to buy a number of call option 
contracts and the same number of put option contracts on the same 
underlying security which contracts have the same exercise price and 
expiration date; or an order to sell a number of call option 
contracts and the same number of put option contracts on the same 
underlying security which contracts have the same exercise price and 
expiration date. For example, an order to buy two XYZ July 50 calls 
and to buy two July 50 XYZ puts is a straddle order. In the case of 
adjusted option contracts, a straddle order need not consist of the 
same number of put and call contracts if such contracts both 
represent the same number of shares at option. CBOE Rule 6.53(f).
    \6\ A combination order is an order involving a number of call 
option contracts and the same number of put option contracts in the 
same underlying security. In the case of adjusted option contracts, 
a combination order need not consist of the same number of put and 
call contracts if such contracts both represent the same number of 
shares at option. CBOE Rule 6.53(e).
    \7\ Under the proposed rule change, the term ``box spread'' is 
defined to mean an aggregation of positions in a long call option 
and a short put option with the same exercise price (``buy side'') 
coupled with a long put option and short call option with the same 
exercise price (``sell side'') all of which have the same underlying 
component or index and time expiration, and are based on the same 
aggregate current underlying value, and are structured as either: 
(A) a ``long box spread'' in which the sell side exercise price 
exceeds the buy side exercise price or (B) a ``short box spread'' in 
which the buy side exercise price exceeds the sell side exercise 
price. In other words, a box spread is a synthetic long position at 
one strike price and a synthetic short position at another strike 
price.
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    Spread, straddle, and combination orders are complex and multi-part 
orders, which involve special pricing and handling. A member holding a 
spread, straddle or combination order typically bids and offers on the 
basis of a total debit or credit for the order.\8\ After a spread, 
straddle, or combination order has been executed at the total debit or 
credit, the parties to the trade record on a trade ticket the contract 
quantities and prices for each component option of the order. This task 
is straightforward and uncomplicated when the total debit or credit for 
a spread, straddle, or combination trade is expressed in the minimum 
increment under CBOE Rule 6.42.\9\
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    \8\ For example, if option A is bought at 5 and option B sold at 
6, the order is executed at a net credit of one, or if option A is 
sold at 5.10 and option B is bought at 6.10, the order is executed 
at a net debit of one.
    \9\ For example, assume the market for the December SPX 1150 
calls is 18 bid, 19 asked, and the market for the December SPX 1175 
calls is 6.50 bid and 7.50 asked. The fair value of a call spread 
comprised of these two options is 11.50 (the difference between the 
prices quoted for each option). If an order to buy 100 of the 1150 
calls and to sell 100 of the 1175 calls is quoted and executed at a 
net debit of 11.50 (expressed in a multiple of the minimum 
increment), the parties to the trade can easily determine and record 
on a trade ticket a price for each component option that comprises 
the spread. Any combination of purchase and sale prices within the 
quoted ranges for the component options that yield a net debit or 
credit of 11.50 could be used (e.g., 18.50 for the 1150 calls, and 7 
for the 1175 calls).
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    When spread, straddle and combination orders are expressed in 
increments smaller than $0.05, it results in ``split'' prices for each 
of the component options in order to reach the quoted debit or credit 
price and thus ``split'' contract quantities. SPX traders, particularly 
floor brokers, have found that when such orders are expressed in 
decimal increments smaller than $0.05, it is difficult and time 
consuming for the parties to perform the mathematical calculations to 
break down the order into the required contract quantities and 
prices.\10\ This difficulty is exacerbated when the quantity of such an 
order is an odd lot quantity (such as 106 contracts). The result is 
that on active trading days, SPX floor brokers executing these types of 
orders cannot be as efficient in representing other customer orders 
that they are holding.
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    \10\ Using the example in footnote 9, if instead the call spread 
is quoted and executed at a net debit of 11.48 instead of 11.50, in 
order to determine prices for the component options that are 
expressed in a multiple of $0.05 the trader must perform a series of 
calculations. In this case, the trader might determine that the 
trade must be split up into a 40 contract spread that traded at a 
net debit of 11.45 and a 60 contract spread that traded at a net 
debit of 11.50, which together yield a net debit of 11.48 for the 
entire order.
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    CBOE believes that the proposed rule change will enable SPX traders 
to more efficiently execute these types of transactions by permitting 
the parties to execute the trades more expeditiously and with less 
component parts in the transaction. In addition, CBOE believes that the 
proposed rule change is appropriate given the complexity of these 
orders, the size of the underlying S&P 500 index, and the participants 
in the SPX market, which are primarily institutional.
2. Statutory Basis
    The proposed rule change is consistent with and furthers the 
objectives of Section 6(b)(5) of the Act.\11\ It is designed to promote 
just and equitable principles of trade, and protect investors and the 
public interest by increasing the efficiency of execution for spread, 
straddle and combination orders in SPX options.
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    \11\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    CBOE does not believe that the proposed rule change will impose a 
burden on competition that is not necessary or appropriate in 
furtherance of 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

    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

[[Page 10028]]

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 Section. Copies of such filing will also be available 
for inspection and copying at the principal office of CBOE. All 
submissions should refer to File No. SR-CBOE-2001-62 and should be 
submitted by March 26, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-5143 Filed 3-4-02; 8:45 am]
BILLING CODE 8010-01-U