[Federal Register Volume 70, Number 1 (Monday, January 3, 2005)]
[Notices]
[Pages 128-131]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-28671]
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SECURITIES AND EXCHANGE COMMISSION
[Docket No. 34-50924; File No. SR-CBOE-2004-67]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing of Proposed Rule Change and Amendment
No. 1 Thereto Relating To Split Price Priority
December 23, 2004.
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 October 20, 2004, the Chicago Board Options Exchange, Incorporated
(``CBOE'' or the ``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 CBOE.
On December 17, 2004, CBOE amended the proposed rule change
(``Amendment No. 1'').\3\ The Commission is publishing this notice to
solicit comments on the proposed rule change, as amended, from
interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ In Amendment No. 1, CBOE amended the proposed rule change
to: (i) Remove the parenthetical ``(or a reasonably larger number)''
from current CBOE Rule 6.47(a) and from the proposed rule text of
CBOE Rule 6.47(b); and (ii) revise proposed Interpretations and
Policies .01 to clarify that if a floor broker is required to yield,
he must yield to ``orders for the accounts of non-members.''
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
CBOE proposes to amend its split price trading rule. The text of
the proposed rule change, as amended, is set forth below. Proposed new
language is in italics; deletions are in [brackets].
* * * * *
Rule 6.47. Priority on Split Price Transactions Occurring in Open
Outcry
(a) Purchase or sale priority. If a member purchases (sells) one or
more option contracts of a particular series at a particular price or
prices, he shall, at the next lower (higher) price at which a
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member other than the Board Broker or Order Book Official is bidding
(offering), have priority in purchasing (selling) up to the equivalent
number [(or a reasonably larger number)] of option contracts of the
same series that he purchased (sold) at the higher (lower) price or
prices, but only if his bid (offer) is made promptly and the purchase
(sale) so effected represents the opposite side of a transaction with
the same order or offer (bid) ass the earlier purchase or purchases
(sale or sales). This paragraph only applies to transactions effected
in open outcry.
(b) [Sale priority. If a member sells one or more option contracts
of a particular series at a particular price or prices, he shall, at
the next higher price at which a member other than the Board Broker or
Order Book Official is offering, have priority in selling up to the
equivalent number (or a reasonably larger number) of option contracts
of the same series that he sold at the lower price or prices, but only
if his offer is made promptly and the sale so effected represents the
opposite side of a transaction with the same order or bid as the
earlier sale or sales. This paragraph only applies to transactions
effected in open outcry.] Purchase or sale priority for orders of 100
contracts or more. If a member purchases (sells) fifty or more option
contracts of a particular series at a particular price or prices, he
shall, at the next lower (higher) price have priority in purchasing
(selling) up to the equivalent number of option contracts of the same
series that he purchased (sold) at the higher (lower) price or prices,
but only if his bid (offer is made promptly and the purchase (sale) so
effected represents the opposite side of a transaction with the same
order or offer (bid) as the earlier purchase or purchases (sale or
sales). The appropriate Exchange committee may increase the ``minimum
qualifying order size'' above 100 contracts for all products under its
jurisdiction. Announcements regarding changes to the minimum qualifying
order size shall be made via Regulatory Circular. This paragraph only
applies to transactions effected in open outcry.
(c) No Change.
Interpretations and Policies. * * *
.01 Floor brokers are able to achieve split price priority in
accordance with paragraphs (a) and (b) above. Provided, however, that a
floor broker who bids (offers) on behalf of a non-market-maker CBOE
member broker-dealer (``CBOE member BD'') must ensure that the CBOE
member BD qualifies for an exemption from Section 11(a)(1) of the
Exchange Act or that the transaction satisfies the requirements of
Exchange Act Rule 11a2-2(T), otherwise the floor broker must yield
priority to orders for the accounts of non-members.
* * * * *
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 Exchange included statements
concerning the purpose of and basis for the proposed rule change, as
amended, 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 parts of
such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
I. Purpose
CBOE Rule 6.47 establishes priority principles for split-price
transactions. Generally, a member buying (selling) at a particular
price shall have priority over other members in purchasing (selling) up
to an equivalent number of contracts of the same at the next lower
(higher) price. Awarding split price priority serves as an inducement
to members to bid (offer) more aggressively for an order that may
require a split-price execution by giving them priority at the next
lower (higher) price point. For example, assume the market is $1.00-
1.20, 300-up when a floor broker (``FB'') receives instructions from a
customer that it would like to buy 500 options at a price or prices no
higher than $1.20. The FB could attempt to execute the order in open
outcry at a price better than the displayed market of $1.20. Assume a
market maker (``MM'') in the crowd is willing to sell 250 contracts at
$1.15 provided he can also sell the remaining 250 contracts at $1.20.
Under current rules, that MM could offer $1.15 for 250 contracts and
then, by virtue of the split price priority rule, he/she would have
priority for the balance of the order (up to 250 contracts) over other
crowd members. If executed, the resulting net price of $1.175 is better
than the current displayed market of $1.20, which results in a better
fill for the customer.\4\
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\4\ If successful, two trades will be reported (at $1.15 and
1.20) and the net price result to the customer will be $1.175.
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One limitation on the ability of crowd participants to use the
split price priority rule is the rule's requirement that orders in the
limit order book (``book'') have priority over the member attempting to
fill the balance of the order at the split price. Using the example
above, if the $1.20 price represented orders in the book, those orders
would have priority over the MM at $1.20. This means that a MM who is
willing to trade at $1.15 and $1.20 may be completely unwilling to
trade at the better price of $1.15 if he/she cannot trade the balance
of the order at $1.20 because of the requirement to yield to existing
customer interest in the book. This jeopardizes the FB's ability to
execute the first part of the order at a price of $1.15, thereby
potentially making it difficulty to achieve price improvement for the
customer on CBOE. Instead, the order may trade at another exchange that
has no impediments, i.e., no customer interest at those price levels.
Accordingly, the purpose of this proposal is to adopt a limited
exception to the existing priority requirement.
Under the newly-proposed paragraph (b) to CBOE Rule 6.47, a member
with an order for at least 100 contracts and who buys (sells) at least
50 contracts at a particular price would have priority over all others
in purchasing (selling) up to an equivalent number of contracts of the
same order at the next lower (higher) price.\5\ Using the above
example, the MM trading at $1.15 would have priority over members and
orders in the book at $1.20 to trade at $1.20 with the balance of the
order in the trading crowd. The Exchange believes that the proposal
would lead to more aggressive quoting by MMS, which in turn could lead
to better executions. As indicated above, a MM might be willing to
trade at a better price for a portion of an order if he/she were
assured of trading with the balance of the order at the next pricing
increment. As a result, FBs representing orders in the trading crowd
might receive better-priced executions. As proposed, the appropriate
Exchange committee would have the ability to increase the minimum
qualifying order size to a number larger than 100 contracts. Any
changes, which would have to apply to all products under the
committee's jurisdiction, would be announced to the membership a via
Regulatory Circular.
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\5\ Orders for less than 100 contracts would be unaffected by
this proposal. The Exchange also would take the opportunity to
consolidate current paragraphs (a) and (b) into one paragraph
(paragraph (a)). This consolidation would not effect the operation
of the rule in any way; it simply would make the rule shorter.''
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The Exchange believes that it would be reasonable to make a limited
exception to the customer priority rule
[[Page 130]]
to allow split price trading. In this regard, the proposed exception
would be similar in operation to the limited priority exception that
exists for complex orders (contained in CBOE Rules 6.45 and 6.45A). The
complex order priority exception generally provides that a crowd member
affecting a qualifying complex order may trade ahead of the book on one
side of the order provided the other side of the order betters the
book. This exception was intended to facilitate the trading of complex
orders, which by virtue of their multi-legged composition could be more
difficult to trade without a limited exception to the priority rule for
one of the legs. The purpose behind the proposed split-price priority
exception is the same--to facilitate the execution of large orders,
which by virtue of their size and the need to execute them at multiple
prices may be difficult to execute without a limited exception to the
priority rules. The proposed exception would operate in the same manner
as the complex order exception by allowing a member affecting a trade
that betters the market to have priority on the balance of that trade
at the next pricing increment, even if there are orders in the book at
the same price.
To address potential concerns regarding section 11(a) of the
Act,\6\ the Exchange proposes to adopt new Interpretations and Policies
.01 (``I&P'') to CBOE Rule 6.47. Section 11(a) generally prohibits
members of national securities exchanges from effecting transactions
for the member's own account, absent an exemption. With respect to the
proposal, there could be situations where because of the limited
exception to customer priority, orders on behalf of members could trade
ahead of orders of nonmembers in violation of section 11(a).\7\ The
proposed I&P would make clear that FBs may avail themselves of the
split-price priority rule, but that they would be obligated to ensure
compliance with section 11(a). In this regard, a FB bidding (offering)
on behalf of a non-market-maker CBOE member broker-dealer (``CBOE
member BD'') would be required to ensure that the CBOE member BD
qualifies for an exemption from section 11(a)(1) of the Act or that the
transaction satisfies the requirements of Rule 11a2-2(T). Otherwise,
the FB would be required to yield priority to order for the account of
non-members. The Exchange further proposed to amend paragraph (a) of
Rule 6.47 to remove the parenthetical (``or a reasonably larger
number'').\8\ The Exchange believes the language to be necessary to
achieve the intent of the rule, which is to allow FBs to have priority
for up to an equivalent number of contracts purchased or sold at the
preceding price, as specified in the rule.
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\6\ 15 U.S.C. 78k(a).
\7\ For example, assume FB A walks into the trading crowd
attempting to find a crowd member willing to effect a split-price
transaction. FB B, who is representing either a proprietary or
member BD order, expresses interest. In this instance, section 11(a)
could be implicated, absent an exemption.
\8\ See Amendment No. 1.
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2. Statutory Basis
For the above reasons, the Exchange believes that the proposed rule
change would enhance competition. Thus, CBOE believes that the proposal
is consistent with the Act and the rules and regulations under the Act
applicable to a national securities exchange and, in particular, the
requirements of section 6(b) \9\ of the Act. Specifically, the Exchange
believes that the proposed rule change is consistent with the section
6(b) \10\ 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.
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\9\ 15 U.S.C. 78(f)(b).
\10\ 15 U.S.C. 78(f)(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
CBOE does not believe that the proposed rule change, as amended,
would impose any burden on competition 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
The Exchange neither solicited nor received written comments on 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:
(A) By order approve such proposed rule change, as amended, or
(B) Institute proceedings to determine whether the proposed rule
change, as amended, 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. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an e-mail to [email protected]. Please include
File Number SR-CBOE-2004-67 on the subject line.
Paper Comments
Send paper comments in triplicate to Jonathan G. Katz,
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW.,
Washington, DC 20549-0609.
All submissions should refer to File Number SR-CBOE-2004-67. This
file number should be included on the subject line if e-mail is used.
To help the Commission process and review your comments more
efficiently, please use only one method. The Commission will post all
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). 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 of inspection
and copying in the Commission's Public Reference Section, 450 Fifth
Street, NW., Washington, DC 20549. Copies of such filing also will be
available for inspection and copying at the principal office of the
CBOE. All comments received will be posted without change; the
Commission does not edit personal identifying information from
submissions. You should submit only information that you wish to make
available publicly.
All submissions should refer to File Number SR-CBOE-2004-67 and
should be submitted on or before January 24, 2005.
[[Page 131]]
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\11\
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\11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-28671 Filed 12-30-04; 8:45 am]
BILLING CODE 8010-01-M