[Federal Register: December 8, 1999 (Volume 64, Number 235)] [Notices] [Page 68706-68707] From the Federal Register Online via GPO Access [wais.access.gpo.gov] [DOCID:fr08de99-92] ======================================================================= ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-42190; File No. SR-CBOE-99-32] Self-Regulatory Organizations; Order Approving a Proposed Rule Change by the Chicago Board Options Exchange, Inc. to Change the Participation Entitlement of Designated Primary Market-Makers December 1, 1999. I. Introduction On June 23, 1999, the Chicago Board Options Exchange, Inc. (``CBOE'' 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\ Rule 19b-4 thereunder,\2\ a proposed rule change to modify the participation entitlement of designated primary market-makers (``DPMs''). The proposed rule change was published in the Federal Register on September 30, 1999.\3\ The Commission did not receive any comments on the proposed rule change. This order approves the proposed rule change. --------------------------------------------------------------------------- \1\ 15 U.S.C. 78s(b)(1). \2\ 17 CFR 140.19b-4. \3\ Securities Exchange Act Release No. 41904 (September 22, 1999), 64 FR 52813. --------------------------------------------------------------------------- II. Description of the Proposed Rule Change A DPM's right to participate as a principal in a transaction is generally governed by the principles of time and price priority as set forth in CBOE Rule 6.45. Under this rule, if a DPM is first to respond with the best bid (offer) to a member who is not acting on behalf of the DPM and who has requested a market, the DPM is entitled to 100 percent participation in any resulting transaction. In addition, CBOE Rule 8.80(c)(7)(ii) grants each DPM a right to participate ``pro- rata,'' with market-makers present in the trading crowd. This pro-rata right applies to any transaction in a security allocated to the DPM if the DPM's previously established bid (offer) was equal to the highest bid (lowest offer) in the trading crowd, even is the DPM's bid (offer) is not entitled to priority under CBOE Rule 6.45.\4\ --------------------------------------------------------------------------- \4\ The right of a DPM to participate pro-rata, however, does not include trades executed on the Exchange's Retail Automatic Exchange System (``RAES''). --------------------------------------------------------------------------- The Exchange has not previously defined the term ``Pro-rata.'' The Modified Trading System Appointments Committee (``MTS'' Committee''),\5\ however, has interpreted a participation entitlement in transactions that occur in a DPM's allocated security (when the DPM's previously established principal bid (offer) was equal to the highest bid (lowest offer) in the trading crowd) to be as follows: an initial 40 percent participation right; a 30 percent participation right for securities with an average daily volume during the previous calendar quarter of at least 2,501 contracts; and no guaranteed participation right when the average daily volume in a security during the previous calendar quarter exceeded 5,000 contracts. In addition, the MTS Committee established a 40 percent participation level for all multiply-traded securities. --------------------------------------------------------------------------- \5\ The MTS Committee is responsible for appointing DPMs and overseeing the Exchange's DPM program. --------------------------------------------------------------------------- The Exchange now proposes to change the participation level. The Exchange proposes to fix the DPM participation right at 30 percent for transactions in all DPM allocated securities that occur at the DPM's previously established principal bid or offer. The 30 percent participation right would apply equally to all allocated securities regardless of their contract volume or whether they are multiply- traded. The proposal to set the DPM participation right at 30 percent for all DPM allocated securities does not, however, affect the MTS Committee's authority to establish a lower participation right for new DPM appointments or as a remedial action against a DPM that has failed to perform satisfactorily. III. Discussion After careful review, the Commission finds the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange.\6\ In particular, the Commission finds that the proposal is consistent with Section 6(b)(5) \7\ because it is designed to remove impediments to and perfect the mechanism of a free and open market. --------------------------------------------------------------------------- \6\ In approving this proposal, the Commission has considered its impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f). \7\ 15 U.S.C. 78f(b)(5). --------------------------------------------------------------------------- The proposed rule change amends the Exchange's established policy relating to the level of DPM participation in transactions occurring at the DPM's previously established bid (offer) for securities allocated to the DPM. Now, instead of staggering the amount of DPM participation based on either the [[Page 68707]] security's average daily volume or its status as multiply-traded, the participation amount will be a simple fixed percentage. Each DPM will be entitled to the same participation amount regardless of the security's volume or status. The Commission agrees with the Exchange's assertion that the proposal should foster a more equitable result than under the current staggered approach. Now, all DPMs will be entitled to the same amount of participation regardless of the security. Moreover, the fixed percentage should be easier to apply than the current formula. Therefore, the proposal should improve the operation of the DPM program. The Commission notes that the DPM participation right was established as an incentive to spark interest in the DPM program and to entice DPMs to remain in the program. This purpose is still valid today as the DPM program expands floor-wide. DPMs assume additional affirmative obligations, which are not required of other members. These additional obligations include, among other things, the obligation to be present at the trading post throughout the business day, the obligation to participate at all times in automated execution and order handling systems such as RAES, and the obligation to act as an order book official and maintain the public order book. These additional obligations are required of all DPMs regardless of the volume or multiply-traded status of the DPM's allocated security and, thus, the Exchange's proposal to establish a flat participation entitlement appears reasonable and fair. IV. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,\8\ that the proposed rule change (SR-CBOE-99-32) is approved. \8\ 15 U.S.C. 78s(b)(2). --------------------------------------------------------------------------- For the Commission, by the Division of Market Regulation, pursuant to delegated authority.\9\ --------------------------------------------------------------------------- \9\ 17 CFR 200.30-3(a)(12). --------------------------------------------------------------------------- Jonathan G. Katz, Secretary. [FR Doc. 99-31779 Filed 12-7-99; 8:45 am] BILLING CODE 8010-01-M