Federal Register / Vol. 62, No. 207 / Monday, October 27, 1997 / Notices 55663

1Congress intended that exchanges have the

primary responsibility for the formulation and

enforcement of the regulation of exchange market

making. See Report of the Senate Banking, Housing

and Urban Affairs Committee, Senate Report No.

94–75, April 14, 1975, to accompany S. 249, at p.

15. Section 11(b) of the Exchange Act and Exchange

Act Rule 11b–1 codify that policy. In fact, certain

of the obligations imposed on CBOE market-makers

by CBOE rules are mandated by Rule 11b–1.

2Exchange Act Rule 11b–1(a)(2)(v) requires to

CBOE to have procedures ‘‘to provide for effective

and systematic surveillance of the activities’’ of its

market-makers.

subject to the other conditions in the

application.

6. The Company’s Independent

Directors will review quarterly all

information concerning co-investment

opportunities during the preceding

quarter to determine whether the

conditions in the application were

complied with.

7. The Company will maintain the

records required by section 57(f)(3) of

the Act as if each of the investments

permitted under these conditions were

approved by the Company’s

Independent Directors under section

57(f).

8. No Independent Director of the

Company will be a director or general

partner of any Company Affiliate with

which the Company co-invests.

For the SEC, by the Division of Investment

Management, under delegated authority.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–28365 Filed 10–24–97; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–39261; File No. SR–CBOE–

97–50]

Self-Regulatory Organizations; Notice

of Filing of Proposed Rule Change by

the Chicago Board Options Exchange,

Inc. to Relating to ‘‘Go Along’’ Orders

October 20, 1997.

Pursuant to Section 19(b)(1) of the

Securities Exchange Act of 1934

(‘‘Act’’), 15 U.S.C. 78s(b)(1), notice is

hereby given that on September 25,

1997, the Chicago Board Options

Exchange, Inc. (‘‘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 selfregulatory organization. The

Commission is publishing this notice to

solicit comments on the proposed rule

change from interested persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The CBOE proposes to issues a

regulatory circular which would

establish the representation of ‘‘go

along’’ orders on the floor of the

Exchange as a violation of just and

equitable principles of trade pursuant to

Exchange Rule 4.1. The text of the

proposed rule change is available at the

Office of the Secretary, CBOE and at the

Commission.

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

self-regulatory organization 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 self-regulatory organization 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 Purposes of, and

Statutory Basis for, the Proposed Rule

Change

1. Purpose

The purpose of the proposed rule

change is to prohibit floor brokers from

representing or executing ‘‘go along’’

orders (as further described below) on

the floor of the Exchange. The

representation or execution of such

orders will be considered an act

inconsistent with just and equitable

principles of trade pursuant to Exchange

Rule 4.1. The Exchange proposes to set

forth the prohibition against the

representation of ‘‘go along’’ orders in a

regulatory circular describing the types

of conduct which would be considered

to be violative of just and equitable

principles of trade.

Definition of ‘‘Go Along’’ Orders:

Generally, a ‘‘go along’’ order, or a ‘‘not

held with the crowd’’ order, is an order

that instructs a floor broker to bid or

offer (as appropriate for the type of

order) at the price established by the

other participants in the trading crowd.

Generally, the customer will specify

whether the order is to buy or sell, the

number of contracts, the series, and the

strike price. Typically, the floor broker

will be instructed to buy when the

majority of the of the market-makers

participating on a trade are selling.

These orders often are placed by marketmaking firms as a side business, by

upstairs broker-dealers who want to

participate in ‘‘market making,’’ and by

specialists on other exchanges. These

orders are entered in both multiplytraded and singly listed option classes.

As proposed, such an order would be

prohibited even if the bid or offer does

not match exactly the price established

by the other participants in the trading

crowd as long as the customer has given

the broker discretion to determine what

to bid or offer based upon the prices

established by the other participants.

Rationale for the Prohibition Against

‘‘Go Along Orders’’: The Exchange

believes that the continued

representation of this class of orders on

the floor of the Exchange poses a serious

threat to the continued viability of the

CBOE market-maker system, as

explained below.

The execution of ‘‘go along’’ orders

provides a disincentive to the

transaction of a market-making business

and thus, threatens the continued

viability of the market-making system.

The CBOE believes its market-marker

system has, since its inception,

provided liquid, deep, fair, and reliable

markets for hundreds of option classes

in thousands of different series. These

liquid markets are brought about

through the efforts of numerous marketmakers who are willing to take on

various affirmative obligations in

exchange for the opportunity to stand in

a trading crowd and trade with and

against other market participants. The

various affirmative obligations are

established by Exchange rules,1

including Rule 8.7 which, among other

things, requires market-makers to

‘‘engage * * * in dealings for his own

account when there exists, or it is

reasonably anticipated that there will

exist, a lack of price continuity, a

temporary disparity between the supply

of and demand for a particular option

contract, or a temporary distortion of the

price relationships between option

contracts of the same class.’’ Rule 8.7.03

imposes distribution of activity

requirements on market-markers. Rule

8.51 obligates market-makers to honor

disseminated market quotes. In addition

to being required to meet the above

obligations, CBOE market-makers are

subject to plenary oversight and

regulation by the CBOE.2 In short, the

system of affirmative obligations and

oversight embodied in CBOE Rules

subjects market-makers to a great deal of

responsibility, in order to assure the

quality and liquidity of the CBOE

markets.

The CBOE believes that ‘‘go along’’

orders interfere with this obligationopportunity trade-off of Exchange

market-making. Essentially, those
55664 Federal Register / Vol. 62, No. 207 / Monday, October 27, 1997 / Notices

3Although these orders have been employed for

years, the possibility that market-makers might

decide to forgo market-making to trade from off of

the floor is greater now than ever before. The

Commission’s approval of risk-based haircuts has

reduced the traditional advantages market-makers

have had in the area of capital charges and margin.

In addition, the technological advancement of order

delivery systems continues to erode the time and

place priority that has been one of the inducements

to accepting the risks of market-making. 4 15 U.S.C. 78f(b)(5).

market participants, generally

professional traders, who enter ‘‘goalong’’ orders are attempting to realize

the opportunity of market-making

without accepting any of the

obligations. In addition, by their nature,

‘‘go along’’ orders do not provide any

incremental liquidity or price discovery

because the market participant entering

the ‘‘go along’’ order is merely trading

at a price at which the market-makers

were willing to trade. These market

participants, as customers, however, are

not obligated to fulfill any of the

obligations of market-makers and their

activity is typically not subject to

Commission or Exchange oversight.

These orders can be entered from off the

floor of the exchange and can be

canceled at the complete discretion of

the customer. Therefore, these orders

dilute the participation of those marketmakers who do provide liquidity on a

continual basis both in good times and

in bad.

Likewise, common sense dictates

these orders do not provide any price

discovery. As explained further below,

options are priced in an efficient market

such as the CBOE by the skill of the

individual market-makers and their

ability to employ complex pricing

models and strategies. ‘‘Go along’’

orders add nothing to this process, but

simply piggyback on the expertise and

experience of those participants who

have taken on affirmative obligations

and have put their capital at risk.

The potential danger of this type of

activity and any other activity that

provides a disincentive to marketmaking is that this activity could lead to

an irremediable decline of CBOE’s

existing market-making system and the

protections to public investors that that

system provides. It is hard work for

CBOE market-makers to stand in crowds

and fulfill their numerous obligations

under Exchange rules. The regulation to

which market-makers are subject may be

necessary, but it is burdensome. If the

rules of the Exchange allow a trader to

send such orders from off the floor

whenever he wants and to be able to

cancel the orders at will, without having

an affirmative obligation to stand

behind any quotes and without being

subject to oversight, more and more

market-makers may decide to engage in

such activity and forgo the numerous

risks involved in market-making.3 The

resultant decline in liquidity and capital

would inevitably compromise the

quality of CBOE’s markets and harm the

public. Ultimately, the proliferation of

this type of activity could even threaten

the viability of CBOE’s markets.

Ironically, these orders rely on the

pricing efficiency of a market to be

effective; yet, these orders interfere with

that pricing efficiency.

Although a ‘‘go along’’ order may

have some upper or lower limit price

(but often it does not), the essence of a

‘‘go along’’ order is that it relies on the

pricing of the market-makers in the

crowd. A person entering a ‘‘go along’’

order, therefore, does not make any

independent market judgment on the

price of the option. It is the dependence

upon the actions of the market-makers

who establish the prices and provide

liquidity that makes this type of order

objectionable. Although market orders

arguably also rely on the pricing of the

market-makers, market orders do not

provide a disincentive to market-making

as ‘‘go along’’ orders do. Even if ‘‘go

along’’ orders or similar orders were

entered on the floor of the New York

Stock Exchange or another stock

exchange, the Exchange does not believe

these orders would be as objectionable

in the context of a stock exchange as

they are on the CBOE options floor,

because of the nature of the pricing of

these difference securities. On any given

market there is only one market (bid and

offer) for a particular stock. The price is

determined according to the

fundamentals of the issuer and

according to the principles of supply

and demand for the shares of the stock.

Conversely, for any given underlying

stock, there may be markets for twenty

or more different puts and calls.

Because options are derivative

securities, the markets on these puts and

calls are affected by information about

the markets for the underlying securities

and related interests, but also by

complex mathematical formulas and

volatility assumptions. The pricing of

options is a necessary and critical

function performed by market-makers

and because of the complexity involved

and the individual assumptions

required it is obviously a function for

which market-makers take a proprietary

interest. Therefore, the use of an order

to replicate the actions of the marketmakers and to dilute their participation

in a trade provides a disincentive to a

market-maker to meet his affirmative

obligations and to develop pricing

formulas and strategies.

The prohibition of these types of

orders does not limit market

accessibility.

The Exchange understands the

Commission’s concern with ensuring

the accessibility of public markets to

orders from all market participants. The

proposed prohibition would not be a

prohibition against any category of

market participants but against a type of

activity that threatens the system itself.

The prohibition would not limit access

to CBOE markets to any person who has

access to the market currently; any

participant who currently employs ‘‘go

along’’ orders would be entitled to enter

limit orders, market orders, and any

number of contingency orders. By

specifying that the broker representing

the order should trade with the marketmakers in the crowd, the order ensures

that these orders will be inaccessible to

those market-makers.

The restriction is also designed to

assure equal regulation of and a fair

competition among all persons making

markets on the CBOE, thus serving these

important purposes of the Act.

Individuals sending these types of

orders as a pattern of behavior are

attempting to act as market-makers

without fulfilling affirmative

obligations. Any person who wishes to

compete as a market-maker in CBOE

securities can do so by becoming a

CBOE member and subjecting himself to

the same restrictions, obligations, and

surveillance as every other CBOE

market-maker. There is no burden on

competition or unfair limit on market

access to require all competitors to play

by the same ground rules.

The CBOE believes that its marketmarker system has served and continues

to serve the public well by providing

deep and liquid markets for hundreds of

classes of options listed on the

Exchange. As a result, the Exchange

believes it is appropriate to prohibit

activity that threatens this system

without any resulting public benefit.

2. Statutory Basis

By prohibiting certain types of orders

that interfere with the continued

performance of the CBOE market-maker

system and assuring equal regulation of

and a fair competition among all

persons making markets on the CBOE,

CBOE believes that the proposed rule

change is consistent with and furthers

the objectives of Section 6(b)(5) of the

Act 4 in that it is designed to perfect the

mechanisms of a free and open market

and to protect investors and the public

interest.
Federal Register / Vol. 62, No. 207 / Monday, October 27, 1997 / Notices 55665

B. Self-Regulatory Organization’s

Statement on Burden on Competition

The Exchange does not believe that

the proposed rule change will impose

any inappropriate burden on

competition.

C. Self-Regulatory Organization’s

Statement on Comments on the

Proposed Rule Change Received From

Members, Participants, or Others

No written comments were either

solicited or received.

III. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Action

Within 35 days of the 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 the 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.

Persons making written submissions

should file six copies thereof with the

Secretary, Securities and Exchange

Commission, 450 Fifth Street, N.W.,

Washington, D.C. 20549. 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–97–50 and should be

submitted by November 13, 1997.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–28307 Filed 10–24–97; 8:45 am]

BILLING CODE 8010–01–M

DEPARTMENT OF STATE

[Public Notice No. 2620]

Advisory Committee on International

Law; Meeting Notice

A meeting of the Advisory Committee

on International Law will take place on

Monday, November 17, 1997, from

10:00 a.m. to approximately 4:00 p.m.,

as necessary, in Room 1406 of the

United States Department of State, 2201

C Street, N.W., Washington, D.C. The

meeting will be chaired by the Legal

Adviser of the Department of State,

David R. Andrews, and will be open to

the public up to the capacity of the

meeting room. The meeting will focus

on developments involving the

International Court of Justice and the

International Law Commission, work on

an International Criminal Court, the

International Criminal Tribunals for the

former Yugoslavia and Rwanda, and

other current developments.

Entry to the building is controlled and

will be facilitated by advance

arrangements. Members of the public

desiring access to the session should, by

November 13, 1997, notify the Office of

the Assistant Legal Adviser for United

Nations Affairs (telephone (202) 647–

2767) of their name, Social Security

number, date of birth, professional

affiliation, address and telephone

number in order to arrange admittance.

This includes both government and

non-government attendees. All

attendees must use the ‘‘C’’ Street

entrance. One of the following valid Ids

will be required for admittance: Any

U.S. driver’s license with photo, a

passport, or a U.S. Government agency

ID.

Dated: October 8, 1997.

John R. Crook,

Assistant Legal Adviser for United Nations

Affairs; Executive Director, Advisory

Committee of International Law.

[FR Doc. 97–28387 Filed 10–24–97; 8:45 am]

BILLING CODE 4710–08–M

DEPARTMENT OF TRANSPORTATION

Aviation Proceedings, Agreements

Filed During the Week Ending October

17, 1997

The following Agreements were filed

with the Department of Transportation

under the provisions of 49 U.S.C. 412

and 414. Answers may be filed within

21 days of date of filing.

Docket Number: OST–97–3007

Date Filed: October 14, 1997

Parties: Members of the International

Air Transport Association

Subject:

PTC12 Telex Mail Vote 892

Algeria-U.S. fares r1–5

Corrections—Telexes TE421/TE425

Intended effective date: November 1,

1997

Docket Number: OST–97–3008

Date Filed: October 14, 1997

Parties: Members of the International

Air Transport Association

Subject:

COMP Mail Vote 893—Reso 011a

Scandinavia-Gdansk/Poznan/Szczecin

mileage sectors

Intended Effective Date: November

1,1997

Docket Number: OST–97–3009

Date Filed: October 14, 1997

Parties: Members of the International

Air Transport Association

Subject:

PTC31 S/CIRC 0032 dated October 10,

1997

Circle Pacific Expedited Resos

002f (r1) & 073c (r2)

Tables—PTC31 S/CIRC Fares 0009

dated

October 10, 1997.

Intended effective date: expedited

November 15, 1997

Paulette V. Twine,

Documentary Services

[FR Doc. 97–28326 Filed 10–24–97; 8:45 am]

BILLING CODE 4910–62–P

DEPARTMENT OF TRANSPORTATION

Notice of Application for Certificates of

Public Convenience and Necessity and

Foreign Air Carrier Permits Filed Under

Subpart Q During the Week Ending

October 17, 1997

The following Applications for

Certificates of Public Convenience and

Necessity and Foreign Air Carrier

Permits were filed under Subpart Q of

the Department of Transportation’s

Procedural Regulations (See 14 CFR

302.1701 et. seq.). The due date for

Answers, Conforming Applications, or

Motions to Modify Scope are set forth

below for each application. Following

the Answer period DOT may process the

application by expedited procedures.

Such procedures may consist of the

adoption of a show-cause order, a

tentative order, or in appropriate cases

a final order without further

proceedings.

Docket Number: OST–97–3004.

Date Filed: October 14, 1997.

Due Date for Answers, Conforming

Applications, or Motion to Modify

Scope: November 11, 1997.

Description: Application of Prestige

Airways, Inc., formerly NavCom

Aviation II, Inc. d/b/a Prestige Airways,