[Federal Register Volume 65, Number 225 (Tuesday, November 21, 2000)]
[Notices]
[Pages 69977-69979]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-29707]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-43537; File No. SR-CBOE-00-43]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Chicago Board Options Exchange, Inc. Relating to
Participation Rights in Crossing Transactions
November 9, 2000.
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 August 29, 2000, 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 Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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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
The CBOE is proposing certain changes to provisions of its rule
that governs the participation rights of firms crossing orders. The
text of the proposed rule change is set forth below. Additions are
italicized and deletions are bracketed.
* * * * *
Chicago Board Options Exchange, Inc., Rules, Chapter VII, Section D:
Floor Brokers, ``Crossing'' Orders, Rule 6.74
(a)-(c) No change.
(d) Notwithstanding the provisions of paragraphs (a) and (b) of
this Rule, when a Floor Broker holds an equity option order of the
eligible order size or greater (``original order''), the Floor Broker
is entitled to cross a certain percentage of the order with other
[customer] orders [from the same firm from which the original order
originated (``originating firm] that he is holding or in the case of a
public customer order with a facilitation order of the originating firm
(i.e., the firm from which the original customer order originated). The
appropriate Floor Procedure Committee may determine, on a class by
class basis the eligible size for an order that may be transacted
pursuant to this paragraph (d), however, the eligible order size may
not be less than 50 contracts. In accordance with his responsibilities
for due diligence, a Floor Broker
[[Page 69978]]
representing an order of the eligible order size or greater which he
wishes to cross shall request bids and offer for such option series and
make all persons in the trading crowd, including the Order Book
Official, aware of his request.
(i)-(vii) No change.
* * * Interpretations and Policies:
No change.
* * * * *
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 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 Exchange 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
1. Purpose
a. Background. The Commission recently approved a change to
Exchange Rule 6.74 to provide a participation right that entitles
member firms to cross a certain percentage of each order they send to
the floor.\3\
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\3\ See Securities Exchange Act Release No. 42835 (May 26,
2000), 65 FR 35683 (June 5, 2000) (File No. SR-CBOE-99-10).
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Specifically, the rule change provided that after the Floor Broker
representing an order (``original order'') has requested and received a
market from the trading crowd, if the trade takes place at that market,
the Floor Broker is entitled to cross 20% of the contracts remaining in
the original order with another order from the same firm from which the
original order originated.\4\ The participation right applies only
after all public customer orders in the book and represented in the
crowd at the time the market was established have been satisfied.
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\4\ The rule applies equally to a case where the second order is
provided by the firm from its own proprietary account, in which case
the second order is referred to as a ``facilitation order.'' See id.
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If the trade takes place at a price between the best bid and offer
provided by the crowd then, after public customer orders are satisfied,
the Floor Broker will be entitled to cross 40% of the contracts
remaining in the original order.
b. Proposed Changes. The Exchange is proposing to make two changes
to Rule 6.74(d). The first change would make clear that the rule
includes the situation where a Floor Broker is seeking to cross a
solicited order against the original customer order. The second change
would allow the Floor Broker representing the original customer order
to solicit the order to trade against it even if that Floor Broker is
not a nominee of the originating firm.
(i) Application of the rule to solicited orders. The Exchange
states that its recently approved rule governing participation rights
in cross trades was clearly intended to allow the member firm to
receive its participation right when seeking to cross either a
solicited order or a facilitation order against the original customer
order.
The Exchange states that this is indicted by the rule language
itself, which refers to ``other customer orders'' that a Floor Broker
may be seeking to cross against the original order, in addition to--and
as distinct from--``facilitation orders.'' \5\ The Exchange states that
there would have been no reason to distinguish between these types of
orders if the rule was intended to allow the member firm to receive its
participation right only when facilitating a customer order. The
Exchange additionally points out that paragraph (d)(vi) of the rule
specifically indicates that a Floor Broker might be holding either a
solicited or facilitation order.\6\
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\5\ Paragraph (d) of Rule 6.74 states that ``the Floor Broker is
entitled to cross a certain percentage of the order with other
customer orders from the same firm from which the original order
originated (`originating firm') that he is holding or in the case of
a public customer order with a facilitation order of the originating
firm.''
\6\ Paragraph (d)(vi) states: ``A Floor Broker who is holding a
customer order and either a facilitation or solicited order and who
makes a request for a market will be deemed to be representing both
the customer order and either the facilitation order or solicited
order, so that the customer order and the other order will also have
priority over all other orders that were not being represented in
the trading crowd at the time the market was established.''
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Finally, the CBOE notes that in letter that amended the original
proposal of Rule 6.74(d), in response to questions from the
Commission's staff about what type of entity might be solicited to
trade against the original order pursuant to the rule, the Exchange
stated that the ``member firm may solicit a broker-dealer, a public
customer, or any other source from which the firm expects to be able to
find additional liquidity and a better price.'' \7\
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\7\ Letter from Timothy Thompson, Director-Regulatory Affairs,
Legal Department, CBOE, to Nancy Sanow, Division of Market
Regulation (``Division''), the Commission, dated April 10, 2000
(Amendment No. 2 to File No. SR-CBOE-99-10) (``amendment letter'').
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Nonetheless, the CBOE states, a few members of the Exchange have
questioned whether the rule was in fact intended to allow the member
firm to receive a participation right by trading a solicited order
against the original customer order. These members have based their
uncertainty on the text of Rule 6.74(d), which states that ``the Floor
Broker is entitled to cross a certain percentage of the order with
other customer orders from the same firm from which the original order
originated (`originating firm') that he is holding.'' (emphasis added)
These members believe that the term ``customer'' could be read to
mean either a public customer (i.e., a non-broker-dealer) or a client
with which the firm has had a longstanding relationship. According to
the Exchange, however, the aforementioned amendment letter demonstrates
that the term ``customer'' was not intended to be read so
restrictively. Consequently, the Exchange is now proposing to delete
the term ``customer'' from this portion of the rule to make clear that
the solicited order may come from any source.\8\
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\8\ For instance, as clarified by the proposed rule change, the
participation right would apply equally when the Floor Broker seeks
to cross the original order with an order solicited from a market
maker. Telephone conversation between Timothy Thompson, Director-
Regulatory Affairs, Legal Department, CBOE, and Ira L. Brandriss,
Attorney, Division, the Commission, on September 21, 2000.
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(ii) The Floor Broker may solicit the order. As currently written,
the cross participation rule provides that the Floor Broker may cross
the original customer order with other ``orders from the same firm from
which the original order originated (originating firm).'' As such, if
the Floor Broker who is representing the order is not a nominee of the
originating firm but works for a firm that has been given the order to
execute (``executing firm''), the Floor Broker or the executing firm
would not be entitled to obtain the cross participation entitlement
with respect to any order that the Floor Broker or executing firm had
solicited.
After considering the implications of this restriction, the
Exchange has determined to amend the rule so that the Floor Broker's
participation entitlement is not limited to orders from the originating
firm only. The proposed rule change would permit the Floor Broker who
is not a nominee of the originating firm to himself solicit orders,
with the aim of expanding the pool of potential liquidity providers who
will be able to participate in the price
[[Page 69979]]
improvement process that the Exchange believes is encouraged by this
rule.
To permit the Floor Broker who is not a nominee of the originating
firm to solicit orders that will receive the benefit of the cross
participation entitlement, the Exchange is proposing to delete the
phrase that states that the order must be ``from the same firm from
which the original order originated (`originating firm').''
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with and furthers the objectives of section 6(b)(5) \9\ of the Act in
that it is designed to remove impediments to a free and open market and
protecting investors and the public interest.
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\9\ 15 U.S.C. 78f(b)(5).
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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 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 CBOE 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 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 the filing will also be
available for inspection and copying at the principal offices of the
CBOE. All submissions should refer to File No. SR-CBOE-00-43 and should
be submitted by December 12, 2000.
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\10\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\10\
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-29707 Filed 11-20-00; 8:45 am]
BILLING CODE 8010-01-M