[Federal Register Volume 61, Number 126 (Friday, June 28, 1996)]
[Notices]
[Pages 33788-33789]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-16521]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37348; File No. SR-CBOE-96-19]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Inc.; Order Approving Proposed Rule Change and Notice of Filing and 
Order Granting Accelerated Approval of Amendment Thereto Relating to 
Eligibility Requirements for Participation on the RAES System in SPX 
Options

June 21, 1996.

I. Introduction

    On March 18, 1996, the Chicago Board Options Exchange, Inc. 
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'' or ``SEC''), pursuant to Section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder, \2\ a proposal to amend one of the Rule 24.16 requirements 
market makers in Standard & Poor's 500 Stock Index (``SPX'') options 
must meet to qualify for participation in the Retail Automatic 
Execution System (``RAES''). The proposed rule change was published for 
comment and appeared in the Federal Register on April 15, 1996.\3\ No 
comments were received regarding the proposal. On March 27, 1996, the 
CBOE

[[Page 33789]]

submitted Amendment No. 1 to its proposal.\4\ This order approves the 
proposal.
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    \1\ 15 U.S.C. Sec. 78s(b)(1) (1988).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 37078 (April 5, 
1996), 61 FR 16514.
    \4\ Amendment No. 1 effects a technical change to the proposal 
by replacing the term ``regulatory circular'' with the term 
``proposed rule change'' in three different places in the filing; 
the last sentence of Item 1, the first line of Item 9, and the last 
sentence of Section I of Exhibit 1. Letter from Timothy Thompson, 
CBOE, to Michael Walinskas, Special Counsel, Office of Market 
Supervision, Division of Market Regulation, Commission, dated March 
21, 1996 (``Amendment No. 1'').
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II. Description of the Proposal

    The purpose of the proposed rule change is to amend one of the four 
Rule 24.16 requirements SPX market makers must meet to qualify for 
participation in RAES. RAES is the Exchange's automatic execution 
system for small (generally fewer than 10 contracts) public customer 
market or marketable limit orders. When RAES receives an order, the 
system automatically will attach to the order its execution price, 
determined by the prevailing market quote at the time of the order's 
entry into the system. A buy order will pay the offer; a sell order 
will sell at the bid. An eligible SPX market maker who is signed onto 
the system at the time the order is received will be designated to 
trade with the public customer order at the assigned price.
    Rule 24.16(a)(iv), RAES Eligibility in SPX, currently states that 
for a market maker to qualify to participate in SPX RAES that market 
maker must: (A) be approved under Exchange rules as a market maker with 
a letter of guarantee, (B) maintain his principal business on the CBOE 
as a market maker, (C) execute at least seventy-five percent of his 
market maker contracts for the preceding month in SPX options (``75% 
SPX requirement''), and (D) execute at least seventy-five percent of 
his market maker trades for the preceding month in SPX options in 
person. These requirements generally seek to ensure that those market 
makers who are satisfying the public customer orders at the prevailing 
bid or offer are the same market makers who have made a commitment to 
make markets on a regular basis at the SPX post.
    According to the Exchange, however, a number of market makers who 
regularly make markets in SPX nevertheless fail to execute seventy-five 
percent of their market maker contracts for the preceding month in SPX 
options. In many cases, these market makers fail to meet the 75% SPX 
requirement because they execute a large percentage of contracts in S&P 
100 (``OEX'') options on the floor of the Exchange to hedge their SPX 
positions. Because SPX and OEX options are legitimate hedge vehicles 
for each other, the Exchange does not believe a market maker who makes 
markets regularly in SPX options, but who employs these hedge 
strategies, should be prevented from contributing to the Exchange's 
efforts to execute small public customer RAES orders. Consequently, the 
Exchange proposes that the 75% SPX requirement be reduced to a 50% 
requirement.

III. Discussion

    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, the requirements of Section 6(b)(5),\5\ in that it is 
designed to promote just and equitable principles of trade, prevent 
fraudulent and manipulative acts and practices, and maintain fair and 
orderly markets.
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    \5\ 15 U.S.C. Sec. 78f(b)(5) (1988).
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    In its filing, the Exchange states that the proposed change should 
increase the number of market makers available to execute public 
customer RAES orders, while ensuring that the orders are filled by 
market makers who are best equipped to handle these orders. Hence, the 
50% requirement would ensure that a market maker assigned a RAES trade 
would have transacted at least as many market maker contracts in SPX 
options as that market maker had transacted in all other products on 
the CBOE floor combined. Moreover, the Exchange notes that the 
requirement of its Rule 24.16(b) that any market maker who has logged 
onto RAES at any time during an expiration month must continue to do so 
each time he is present in the trading crowd until the next expiration 
will continue to apply. The Exchange believes that this should ensure 
that a larger number of market makers generally will be available to 
participate on RAES on any particular day.
    The Commission believes that the presence of an adequate number of 
market makers protects investors and contributes to the maintenance of 
a fair and orderly market. The Commission believes that the proposal 
furthers this goal by helping the Exchange to maintain the continued 
availability of RAES for SPX options, thereby contributing to the 
effective and efficient execution of public investor orders at the best 
available prices. The Commission agrees with the CBOE that lowering the 
75% SPX requirement to one of 50% will ensure that the affected market 
makers will continue to be those best equipped to handle RAES orders in 
SPX options given that at least half of their CBOE transactions will 
continue to be in SPX options.
    The Commission finds good cause for approving Amendment No. 1 to 
the proposed rule change prior to the thirtieth day after the date of 
publication of notice thereof in the Federal Register. Amendment No. 1 
merely serves to effect technical changes to the Exchange's proposal 
and does not materially affect the proposal.\6\ Accordingly, the 
Commission believes there is good cause, consistent with Sections 
6(b)(5) and 19(b)(2) of the Act, to approve Amendment No. 1 to the 
proposal on an accelerated basis.
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    \6\ See Amendment No. 1, supra note 4.
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 1. 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 in 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-96-19 and should 
be submitted by July 19, 1996.

V. Conclusion

    For the reasons discussed above, the Commission finds that the 
proposal is consistent with the Act, and, in particular, Section 6 of 
the Act.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\7\ that the proposed rule change (File No. SR-CBOE-96-19) is 
approved.

    \7\ 15 U.S.C. Sec. 78s(b)(2) (1988).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-16521 Filed 6-27-96; 8:45 am]
BILLING CODE 8010-01-M