63658 Federal Register / Vol. 65, No. 206 / Tuesday, October 24, 2000 / Notices

5See Securities Exchange Act Release No. 40875

(December 31, 1998), 64 FR 1842 (January 12, 1999)

(File Nos. SR–CBOE–98–25; Amex–98–22; PCX–98–

33; and Phlx–98–36) (increasing position limits for

standardized equity options to 13,500, 22,500,

31,500, 60,000, and 75,000).

6See Securities Exchange Act Release No. 40969

(January 22, 1999), 64 FR 4911 (February 1, 1999)

(File No. SR–CBOE–98–23); Securities Exchange

Act Release No. 41011 (February 1, 1999), 64 FR

6405 (February 9, 1999) (File No. SR–Amex–98–38).

7According to CBOE, OEX is the only American

style broad-based index option traded on the

Exchange. The Exchange stated that a front month

limitation was established for the OEX index option

when the Exchange initially sought to increase the

position limits for the option. Other broad-based

index options traded on the Exchange are European

style options, and therefore can only be exercised

on the expiration date. Telephone conversation

between Pat Cerny, Director, Department of Market

Regulation, CBOE, and Joseph Corcoran, Attorney,

Division of Market Regulation, Commission, on

October 12, 2000. 8 15 U.S.C. 78f(b)(5).

9 17 CFR 200.30–3(a)(12).

1 15 U.S.C. 78s(b)(1).

2A 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. See CBOE Rule 6.53(e).

contracts.5 The Commission also

approved the elimination of position

and exercise limits for certain broadbased index option contracts for a 2–

year pilot program.6 The highest equity

option position limit tier is now 75,000

contracts. As a comparison, market

capitalization for IBM, which has a base

position limit of 75,000 contracts, is

approximately $191 billion, while the

market capitalization for NDX with a

25,000/15,000 position limit is over $4.2

trillion. Additionally, the average daily

volume and open interest in NDX has

increased by approximately 150% since

October 1999 (see Exhibit B). Based on

these statistics and the recent position

limit relief granted for standardized

equity options, the CBOE believes it is

reasonable to allow for changes to the

position and exercise limits for NDX

index options.

With respect to the near term

limitation, the Exchange believes that

the rationale for imposing such a

limitation is not applicable to the NDX.

Historically, a front month limitation

was established for American style

broad-based index options as a measure

to lessen market volatility experienced

at the close of trading on expiration

when stock/index programs were

unwound.7 However, these conditions

are not relevant for the NDX. NDX is a

European style contract with a

settlement value based on a volume

weighting of opening stock prices as

reported within the first five (5) minutes

of trading. Additionally, it should be

noted that the CBOE’s surveillance

procedures during the week of

expiration include communication with

NASD Regulation to determine whether

there are any concerns regarding

potential manipulation in the securities,

which comprise the NASDAQ 100. Staff

believes that the front month limit for

NDX options is not necessary, and that

it only provides a further restriction to

the investing public, and, therefore,

should be eliminated. Eliminating the

front month position and exercise limits

for NDX index options may bring

additional depth an liquidity, in terms

of both volume and open interest, to the

NDX without significantly increasing

concern regarding intermarket

manipulations or disruptions of the

index options or the underlying

component securities.

2. Statutory Basis

The CBOE believes the proposed rule

change is consistent with and the

furthers the objectives of Section

6(b)(5) 8 of the Act in that it is designed

to remove impediments to a free and

open market and to protect investors

and the public interest.

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.

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 and 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 selfregulatory 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 is

consistent with the Act. Persons making

written submissions should file six

copies thereof with the Secretary,

Securities and Exchange Commission,

450 Fifth Street, N.W., Washington, D.C.

20549–0609. 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 the CBOE. All

submissions should refer to File No.

SR–CBOE–00–14 and should be

submitted by November 14, 2000.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.9

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–27238 Filed 10–23–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–43452; File No. SR–CBOE–

00–40]

Self-Regulatory Organizations; Notice

of Filing of Proposed Rule Change by

the Chicago Board Options Exchange,

Inc. Relating to SPX Combination

Orders

October 17, 2000.

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

Securities Exchange Act of 1934

(‘‘Act’’),1 is hereby given that on August

17, 2000, the Chicago Board Options

Exchange, Inc. (‘‘CBOE’’ or ‘‘Exchange’’)

filed with the Securities and Exchange

Commission (‘‘SEC’’ or ‘‘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 persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The CBOE proposes to adopt CBOE

Rule 24.20, ‘‘SPX Combination Orders,’’

to allow S&P 500 Index option (‘‘SPX’’)

traders to print and execute orders for

SPX options and orders for hedging

transactions in SPX combination orders

(‘‘combos’’) 2 outside of the prevailing

Federal Register / Vol. 65, No. 206 / Tuesday, October 24, 2000 / Notices 63659

3For purposes of proposed CBOE Rule 24.20, the

‘‘delta’’ is the number of SPX combos required to

establish a delta neutral hedge with an SPX option

position, based on the value of the underlying S&P

500 futures contract. See CBOE Rule 24.20(a)(2).

4For example, the purchase of 100 SPX puts with

a 30 delta would require the purchase of 30 ‘‘long’’

SPX combos (30 long SPX calls and 30 short SPX

puts of the same series) to be hedged delta neutral.

5CBOE Rule 6.45(e) provides, in part, that when

a member holding a combination order and bidding

or offering in a multiple of 1⁄16 on the basis of a total

credit or debit for the order has determined that the

order may not be executed by a combination of

transactions with the bids and offers displayed in

the customer limit order book or announced by

members in the trading crowd, then the order may

be executed as a combination at the total debit or

credit with one other member without giving

priority to bids or offers of members in the trading

crowd that are no better than the bids or offers

comprising such total debit or credit and bids and

offers in the customer limit order book, provided at

least one leg of the order would trade at a price that

is better than the corresponding bid or offer in the

book.

bid or offer (‘‘out-of-range’’) at any time

during the trading day, at the prices

originally quoted for each option so long

as each option when originally quoted

would not trade at a price outside the

displayed bids or offers in the trading

crowd or bids or offers in the SPX

customer limit order book. The member

initiating the orders must indicate the

delta 3 of the options he wishes to trade

and must bid and offer for each of the

options and each of the legs of the SPX

combo on the basis of the total debit or

credit. The text of the proposed rule

appears below. Proposed new language

is in italics.

SPX Combination Orders

Rule 24.20(a) For purposes of this rule, the

following terms shall have the following

meanings:

(1) An ‘‘SPX combination’’ is an order

combining a long SPX call and a short SPX

put of the same series, or an order combining

a short SPX call and a long SPX put of the

same series.

(2) A ‘‘delta’’ is the number of SPX

combinations required to establish a delta

neutral hedge with an SPX option position,

based on the value of the underlying S&P

futures contract.

(b) Notwithstanding any other rules of the

Exchange, orders for SPX options executed in

conjunction with SPX combination orders

may be transacted in the following manner:

(i) A member holding an order(s) to

purchase or sell SPX options must indicate

the delta of the option and must bid or offer

for each option and each of the legs of a

combination order(s) on the basis of the total

debit or credit. At the time they are originally

quoted, the prices quoted for the options and

each leg of the combination order(s) must be

such that none would trade at a price outside

the currently displayed bids or offers in the

trading crowd or bids or offers in the SPX

customer limit order book.

(ii) The option order(s) and each leg of the

combination order(s) may be executed

immediately or at any time during the

trading day. If the orders are not executed

immediately, the option order(s) and each leg

of the combination order(s) may be printed

at their originally quoted prices in order to

achieve the total debit or credit agreed to for

the entire transaction.

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

The purpose of the proposed rule

change is to establish a new rule, CBOE

Rule 24.20, that will facilitate the use of

SPX combination orders (‘‘SPX

combos’’) to hedge positions in SPX

options. The proposed new rule would

allow SPX traders to print and execute

orders for SPX options, and orders for

hedging transactions in SPX combos,

outside of the prevailing bid or offer

(‘‘out-of-range’’) at any time during the

trading day, at the prices originally

quoted for each option, so long as each

option when originally quoted would

not trade at a price outside the

displayed bids or offers in the trading

crowd or bids or offers in the SPX

customer limit order book.

According to the CBOE, SPX traders

commonly hedge their positions in SPX

options with SPX combos, also called

‘‘synthetic futures,’’ which are created

by combining long (short) SPX calls

with short (long) SPX puts of the same

series, in lieu of hedging with the actual

S&P 500 Index futures contract. The

individual legs of the SPX combo are

priced so that a value for the SPX combo

is established which is equivalent to the

value of a future at a level at which the

trader wishes to make the underlying

futures market ‘‘static.’’ Then, based on

the ‘‘underlying’’ value established by

the SPX combo that has been quoted,

the trader will request a market for the

options that he wishes to trade, and will

indicate the delta of the option. An SPX

trader will execute SPX combos in

conjunction with transactions in SPX

options, taking into account the delta of

the particular option, so that the

combined positions will create a ‘‘delta

neutral’’ hedge, i.e., a position that has

no market exposure.4

According to the CBOE, proposed

CBOE Rule 24.20 will alleviate a

reoccurring problem faced by SPX

traders executing SPX combo orders.

According to the CBOE, current CBOE

Rules provide that a combination order

(and any spread order) may be executed

only so long as no leg of the order

would trade at a price outside the

currently displayed bids or offers in the

trading crowd or bids or offers in the

customer limit order book.5 The prices

of the options and the legs of the SPX

combo can, and frequently do, move

away quickly from the market that

prevailed when the options were

originally quoted (and away from the

level at which the trader sought to

reproduce the value of the underlying

future). If the market moves before the

trader is able to effect all of the required

transactions, the trader cannot complete

the strategy as originally designed

because the options or the legs of the

SPX combo, if traded at the originally

quoted prices, would trade out-of-range.

Proposed CBOE Rule 24.20 would

allow an SPX trader who is unable to

complete the transactions before the

market moves the component options

away from the displayed bids or offers

to print and execute the orders at any

time during the trading day at the

originally quoted prices. Proposed

CBOE Rule 24.20 would permit these

orders to be transacted in this manner

only if two conditions are satisfied: (1)

the member initiating the orders

indicates the delta (as defined in

proposed CBOE Rule 24.20(a)(2)) of the

options he wishes to trade and bids and

offers for each of the options each of the

legs of the SPX combo on the basis of

the total debit or credit; and (2) at the

time they are quoted, the options and

the leges of the SPX combo are quoted

so that none would trade at a price

outside the currently displayed bids or

offers in the crowds or bids or offer in

the book.

The CBOE notes that a delta neutral

SPX combo trade is designed so that

market movement will have no impact

on the resulting position. The delta

made known to the participants to the

trade is used to establish the hedge ratio

required to keep the trade market

neutral. Therefore, whether the

component options of a delta neutral

SPX combo are traded immediately or

later, the Exchange beleives the SPX

trader should be allowed to print the

options at the original quotes (which

represent the level at which the

underlying future was ‘‘frozen’’) because

63660 Federal Register / Vol. 65, No. 206 / Tuesday, October 24, 2000 / Notices

6See Chicago Mercantile Exchange Rule 542,

which provides that spread and combination

transactions involving options need not satisfy the

requirement that at least one leg must be within the

price range established during the trading session

whenever the spread or combination involves one

or more contract months which have an established

price range.

7 17 CFR 200.30–3(a)(12).

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b–4.

3See Letter from Paul O’Kelly, Executive Vice

President, CHX, to Katherine England, Assistant

Director, Division of Market Regulation,

Commission, dated August 15, 2000. (‘‘Amendment

No. 1’’). In Amendment No. 1, the Exchange

clarified how specialists would utilize the proposed

enhanced liquidity function, and deleted a portion

of the proposed rule text that would have permitted

a specialist to switch to manual execution mode in

unusual trading situations after, among other

things, seeking relief from a member of the

the originally quoted prices were tied to

the delta of the options.

The following example illustrates

how proposed CBOE Rule 24.20 would

operate: Assume that the S&P 500 Index

September futures contract is trading at

1495 and an SPX trader requests quotes

for the SPX September 1495 call and

September 1495 put, for the purpose of

pricing an SPX combo that will

reproduce the S&P 500 future at 1495.

Assume the September 1495 call and

September 1495 put are each quoted at

12 bid, 121⁄8 asked. Assume that the

trader then requests quotes for the 30

delta SPX September 1480 puts, based

on the underlying futures value of 1495,

and receives a quote of 6 bid, 61⁄8 asked.

The trader agrees to buy 100 of the 1480

puts at 61⁄8 and to hedge these agrees to

buy 30 September 1495 calls at 12 and

to sell 30 September 1495 puts at 12 (30

‘‘long’’ combos). Now assume that the

market rallies five points, to a new

underlying futures level of 1500, before

these orders can be executed. The

September 1495 call is now trading at

15, the September 1495 put at 10 and

the September 1480 puts at 45⁄8. Under

current Exchange rules, the trader could

purchase the 1480 puts at 61⁄8, but could

not execute the legs of the SPX combo

at 12 because they would trade out-ofrange of the current displayed market.

Proposed CBOE Rule 24.20 would allow

the parties to the trade to print and

execute the orders at the original quotes,

12 and 61⁄8, because the options would

not have traded outside the displayed

bids or offers in the crowd or in the

book (12 bid, 121⁄8 asked: 6 bid, 61⁄8

asked), and because the transaction as

agreed to at a futures level of 1495 had

market neutrality and would not have

been affected by the five point market

rally (the gain on the SPX combo of 5

points × 30 contracts x 500 multiplier =

$75,000, is offset by the loss on the 1480

puts of 1.5 × 100 contracts × 500 =

$75,000).

When an SPX combo transaction is

effected out-of-range pursuant to

proposed CBOE Rule 24.20, that fact

will be denoted in the Exchange’s

disseminated quote by an ‘‘indicator.’’

The Exchange believes the proposed

CBOE Rule 24.20 will give both

customers and traders of SPX options an

efficient means of hedging positions in

SPX options, benefiting the

marketplace. The Exchange believes that

as a result of proposed CBOE Rule

24.20, SPX combo trading will become

more consistent with current pricing

practices in the futures markets 6 and

the over-the-counter market, enabling

the Exchange to compete more

effectively with these markets and

offering Exchange members and their

customers greater flexibility.

The CBOE believes that the proposed

rule will allow for the efficient conduct

of SPX combo orders and will be

beneficial to both customers and traders.

Accordingly, the CBOE believes that the

proposed rule change is consistent with

and furthers the objectives of Section

6(b) of the Act, in general, and Section

6(b)(5), in particular, in that is designed

to facilitate transactions in securities, to

perfect the mechanisms of a free and

open market and to protect investors

and the public interest.

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 that is 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

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 by order approve such proposed

rule change, or 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

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 the CBOE. All

submission should refer to File No. SR–

CBOE–00–40 and should be submitted

by November 14, 2000.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.7

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–27239 Filed 10–23–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–43443; File No. SR–CHX–

00–20]

Self-Regulatory Organizations Chicago

Stock Exchange, Inc.; Order Granting

Approval of Proposed Rule Change

and Amendment No. 1 by the Chicago

Stock Exchange, Incorporated Relating

to Automatic Execution of Orders for

Nasdaq/NM Securities

October 13, 2000.

I. Introduction

On June 9, 2000, the Chicago Stock

Exchange, Incorporated (‘‘CHX’’ 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 automatic execution of

orders for Nasdaq/NM Securities. On

August 18, 2000, the Exchange filed

Amendment No. 1, to the proposed rule

change.3