[Federal Register Volume 60, Number 63 (Monday, April 3, 1995)]
[Notices]
[Pages 16895-16896]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-8090]



-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35538; File No. SR-CBOE-95-18]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by the Chicago 
Board Options Exchange, Inc. Relating to Fractional Changes for Bids 
and Offers in Stocks Priced Below $10

March 27, 1995.
    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, 1995, 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 and 
II below, which Items have been prepared by the self-regulatory 
organization. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.

    \1\15 U.S.C. 78s(b)(1) (1988).
    \2\17 CFR 240.19b-4 (1994).
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The CBOE proposes to amend its rule respecting the permissible 
fractional changes that may be made for bids and offers in stocks and 
related instruments that are priced below $10 per share.
    The Exchange requests the Commission to find good cause, pursuant 
to section 19(b) (2) of the Act, for approving the proposed rule change 
prior to the thirtieth day after publication in the Federal Register.

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 III below. The self-regulatory 
organization has prepared summaries, set forth in Section 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
    The proposed rule change increases from $1 to $10 the price level 
below which stocks or other designated instruments may be traded in 
sixteenths, i.e., 1/16 of $1 ($.0625). CBOE Rule 30.33, Fractional 
Changes for Bids and Offers, currently requires bids and offers in 
stocks (and other instruments that may be traded on the Exchange 
pursuant to Chapter 30 of the CBOE Rules) with a price of $1 or less to 
be made at a variation of at least \1/8\ of ($.125).\3\ Currently, the 
rule only permits variations of as little as \1/16\ of $1 for bids and 
offers in stocks and other instruments that have a price below $1 but 
above $.25 per share. Bids and offers in stocks with prices of less 
than $.25 per share may be varied by as little as \1/32\ of $1 per 
share ($.03125).

    \3\The Commission notes that the CBOE currently does not trade 
any securities pursuant to Chapter 30 of the CBOE rules except for 
SuperShares, which are traded in thirtyseconds. Therefore, the Rule 
change will not impact any transactions presently effected on the 
Exchange.
---------------------------------------------------------------------------

    The Exchange believes that by increasing the number of stocks and 
other instruments eligible to be traded in sixteenths, the Exchange 
will be better able to compete for listings in instruments, such as 
warrants. In fact, the Exchange's proposal is identical to a proposal 
of the American Stock Exchange (``Amex''), which recently was approved 
by the Commission.\4\ The Exchange believes that trading in sixteenths 
will improve the market for securities trading under $10 by promoting 
greater liquidity and providing for superior executions of retail and 
professional orders. Also, the proposal is responsible to the 
recommendations of the Division of Market Regulation in its Market 2000 
Study that the exchanges convert to a minimum variation of one-
sixteenth as soon as possible.\5\

    \4\See Securities Exchange Act Release No. 35537 (March 27, 
1995) (File No. SR-Amex-95-02) (``Amex Order'').
    \5\Division of Market Regulation, SEC, Market 2000: An 
Examination of Current Equity Market Developments (January 1994), at 
18 (``Market 2000 Study'').
---------------------------------------------------------------------------

    In 1992, participants of the Intermarket Trading System (ITS'')\6\ 
met to discuss the need to make changes to the ITS to accommodate 
increased trading of securities priced sixteenths. The Exchange 
anticipates that further [[Page 16896]] consultations will be held 
between ITS participants to explain to each of them the necessity of 
making system changes to accommodate the trading through ITS of CBOE 
instruments priced under $10.\7\

    \6\ITS is a subsystem of the National Market System approved by 
the Commission pursuant to Section 11A of the Act, 15 U.S.C. 
Sec. 78k-1 (1988). It facilities intermaket trading in exchange-
listed equity securities based on the current quotation information 
emanating from the linked markets. For a discussion of ITS, see 
Market 2000 Study, supra note 2, at App. II. Participants of ITS 
include the Amex, Boston Stock Exchange, CBOE, Chicago Stock 
Exchange, Cincinnati Stock Exchange, New York Stock Exchange, 
Pacific Stock Exchange, Philadelphia Stock Exchange, and the 
National Association of Securities Dealers.
    \7\At the February 1995 meeting of the ITS Operating Committee, 
the ITS participants approved enhancements to ITS to permit trading 
in sixteenths for Amex-listed securities priced under $10.
---------------------------------------------------------------------------

2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
Section 6(b) of the Act in general and with Section 6(b)(5) in 
particular in that it is designed to promote just and equitable 
principles of trade, to foster cooperation with persons engaged in 
facilitating and clearing transactions in securities, and to protect 
investors and 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 Purpose 
of Rule Change Received From Members, Participants or Others

    No written comments were either solicited or received.

III. 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. Sec. 552, will be available for inspection and copying at 
the Commission's Public Reference Section, 450 Fifth Street, N.W., 
Washington, D.C. 20549. 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-95-18 and should be 
submitted by [insert date 21 days from date of publication].
IV. Commission's Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    The Commission finds that the proposed rule change to increase from 
$1 to $10 the price level below which equity securities may be traded 
in sixteenths, and at or above which equity securities may be traded in 
eighths, is consistent with the requirements of the Act and the rules 
and regulations thereunder applicable to a national securities 
exchange, and, in particular, with the requirements of Sections 6(b) 
and 11A.\8\ The Commission believes the proposal is consistent with the 
Section 6(b)(5) requirements that the rules of an exchange be designed 
to promote just and equitable principles of trade, to prevent 
fraudulent and manipulative acts, and, in general, to protect investors 
and the public interest. Additionally, the Commission believes that the 
proposal is consistent with Section 11A, which requires the Commission 
to facilitate the establishment of a national market system. Pursuant 
to Section 11A, a national market system should assure, among other 
things, fair competition between the exchanges, economically efficient 
execution of securities transactions and the practicability of brokers 
executing investors' orders in the best market.

    \8\15 U.S.C. 78f(b) and 78k-1 (1988).
---------------------------------------------------------------------------

    Although the CBOE currently does not trade any securities that 
would be affected by the proposal, the rule change to allow trading in 
sixteenths for securities priced under $10 will make the CBOE's Rule 
consistent with the recently approved Amex Rule, and will allow the 
Exchange to trade any future equity listings in sixteenths.
    The Commission generally believes that market quality should be 
enhanced by applying a minimum fractional change of \1/16\, rather than 
\1/8\, to securities selling below $10. The Commission believes that 
decreasing such trading variations should help to produce more accurate 
pricing of such securities and can result in tighter quotations. In 
addition, if the quoted markets are improved by the reduced minimum 
tick fluctuations, the change could result in added benefits to the 
market such as increased liquidity in stocks priced below $10.\9\ The 
Commission believes that decreasing such trading variations should help 
to produce more accurate pricing of such securities and can result in 
tighter quotations.

    \9\The rule change is consistent with the recommendation of the 
Division of Market Regulation (the ``Division'') in its Market 2000 
Study, in which the Division noted that the \1/8\ minimum variation 
can cause artificially wide spreads and hinder prices inside the 
prevailing quote. See Division of Market Regulation, SEC, Market 
2000: An Examination of Current Equity Market Developments (January 
1994), at 18.
---------------------------------------------------------------------------

    In addition, the Commission believes that the proposal could lead 
to increased competition between the exchanges pursuant to Section 11A 
of the Act. As noted above, ITS participants now have the capability to 
trade securities priced below $10 in sixteenths.\10\ Should the CBOE 
begin trading equity securities, customers should be able to receive a 
better, more competitive price in securities priced below $10 if they 
are quoted in sixteenths.

    \10\See Amex Order, supra note 4.
---------------------------------------------------------------------------

    The Commission finds good cause for approving the proposed rule 
change prior the thirtieth day after the date of publication of notice 
of filing thereof in the Federal Register. The Commission believes that 
accelerated approval of the proposal is appropriate in order to allow 
the CBOE to permit equities priced below $10 to be traded in 
sixteenths. Further, the Amex proposal to allow trading in sixteenths 
for Amex-listed securities priced below $10 was noticed previously in 
the Federal Register for the full statutory period and the Commission 
did not receive any comments on it.\11\

    \11\See Securities Exchange Act Release No. 35338 (February 7, 
1995), 60 FR 8432 (February 14, 1995) (File No. SR-Amex-95-02).
---------------------------------------------------------------------------

    It Is Therefore Ordered, pursuant to Section 19(b)(2)\12\ that the 
proposed rule change is hereby approved on an accelerated basis.

    \12\15 U.S.C. 78s(b)(2) (1988).
---------------------------------------------------------------------------

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\

    \13\17 CFR 200.30-3(a)(12) (1994).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-8090 Filed 3-31-95; 8:45 am]
BILLING CODE 8010-01-M