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Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change by the Chicago Board Options Exchange, Inc. To Amend and Codify Its Equity Options Post Telephone Policy

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Start Preamble August 22, 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 February 25, 2000, the Chicago Board Options Exchange, Inc. (“CBOE” or “Exchange”) filed with the Securities and Exchange Commission (“SEC” or “Commission”) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by the CBOE. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons.

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

The CBOE proposes to amend and codify its policy governing the use of member-owned or Exchange-owned telephones on the trading floor with Start Printed Page 52458respect to communications at equity options trading posts.

The text of the proposed rule change is available at the CBOE and at the Commission.

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 of and basis for the proposed rule change and discussed any comments its received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The CBOE 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

The purpose of the proposed rule change is to expand the existing CBOE policy governing the use of telephones at equity option trading posts [3] to make it more consistent with the CBOE's current index option trading post telephone policy by allowing for the receipt of orders over outside telephone lines, from any source, directly at equity trading posts, and to incorporate that policy into the Exchange's rules. However, unlike the current index option post policy, the proposed rule would generally allow for the receipt of orders directly at the post over outside telephone lines only when the order(s) are placed during outgoing telephone calls. The Exchange seeks to codify its current equity option post telephone policy (as modified by the changes proposed in this filing), to make clear to member and member organizations the Exchange's position with respect to the use of telephones at equity option posts and to prevent any misunderstandings regarding the policy, which has been subject to considerable change in recent years. The proposed rule would supersede any previous policies concerning the use of telephones at equity option trading posts established in CBOE Regulatory Circulars.

The proposed change to the equity post telephone policy is the latest in a continual expansion of direct telephone access of orders to the equity option trading posts since a telephone policy for equity option posts was first filed with the Commission in 1993, in SR-CBOE-93-24.[4] That initial policy prohibited any orders from being transmitted over the outside telephone lines to the equity option posts, although at that time, and continuing to the present, orders could be transmitted over the intra-floor lines from one point on the Exchange floor to another. In 1996, the Exchange liberalized its telephone policy at equity posts to allow orders of CBOE market-makers to be received over the outside telephone lines directly to the trading posts. This change allowed CBOE market-makers to transmit their orders more efficiently at those times when they may need to be off the floor.

Thus, under the current policy, the only orders for equity options that may be received at the post directly via telephone lines from off-floor locations are off-floor orders of CBOE market-makers.[5] The proposed amendment would expand this policy by permitting the receipt of off-floor orders from any source (i.e., members, broker-dealers, non-broker-dealers, or public customers) over outside telephone lines directly at the equity trading posts during outgoing telephone calls.[6] However, because the Exchange believes that allowing orders from any source to be telephoned from outside the CBOE facility directly into the equity trading posts could be too disruptive to trading at the posts, the proposed amendment would only allow for such orders to be transmitted to the equity posts pursuant to a telephone call initiated at the post (an outgoing call). CBOE market-makers, however, would still be allowed to transmit orders over the telephone lines from off the floor directly to the equity trading posts.

This liberalization of the Exchange's telephone policy at equity posts is consistent with the recommendation of the Equity Floor Procedure Committee. That Committee, which oversees trading at the equity option posts, believes that the liberalization of this policy will help make the Exchange more efficient by reducing the time it takes to transmit an order and effect a trade on the Exchange. This, in turn, will enable the Exchange to be more competitive, especially since speed of execution is increasingly a basis of competition among markets.

The proposed change makes the policy governing telephone orders at equity options posts more consistent with the comment policy at the OEX post since 1998.[7] As it does at the OEX trading post, the Exchange intends to police compliance with the conditions applicable to the use of telephones at the equity trading posts by means of complaints from Exchange members at the post, as well as observations of Floor Officials and Exchange staff. Further, any individual member or associated person receiving orders over outside telephone lines must be properly qualified under Exchange rules, including those in Chapter IX, to accept such orders.

The Equity Floor Procedure Committee will be responsible for implementing this policy in conformity with Exchange Rules and the Act.[8] The Equity Floor Procedure Committee will approve access and the phone technology, and will decide any other issues relating to this policy. Additionally, the CBOE Department of Financial and Sales Practice Compliance will be required to review and approve all applications relating to the policy to ensure that the applicant is intending to transact business which the applicant is authorized to transact.

The Exchange intends to implement these changes within sixty days after they are approved.

2. Statutory Basis

The Exchange believes that the proposed rule is consistent with, and furthers the objectives of, Section 6(b)(5) [9] of the Act in that it is designed to improve communications to and from the Exchange's trading floor in a manner that promotes just and equitable principles of trade, prevents fraudulent and manipulative acts and practices, and maintains fair and orderly markets.

Start Printed Page 52459

B. Self-Regulatory Organization's Statement on Burden on Competition

The Exchange represents that the proposed rule change will impose no 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 self-regulatory organization consents, the Commission will:

A. by order approve the 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 at the Commission's Public Reference Room. Copies of such filing will also be available for inspection and copying at the principal office of the Exchange. All submissions should refer to File No. SR-CBOE-00-04 and should be submitted by September 19, 2000.

Start Signature

For the Commission, by the Division of Market Regulation, pursuant to delegated authority.[10]

Jonathan G. Katz,


End Signature End Preamble


3.  Equity trading posts are all trading posts that are under the jurisdiction of the Equity Floor Procedure Committee (all trading posts except DJX, NDX, OEX and SPX), including Designated Primary Market-Maker crowds.

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4.  See Securities Exchange Act Release No. 33701 (March 2, 1994).

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5.  RG 97-92 is the latest circular reflecting the current equity telephone policy which was approved by the Commission in Securities Exchange Act Release No. 37876, 61 FR 56728 (November 4, 1996), and in Securities Exchange Act Release No. 39331, 62 FR 62650 (November 24, 1997).

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6.  In adopting this change, the CBOE wants to provide more immediate access into its trading crowds to its customers. The Exchange believes that this expansion in access is necessary to allow the CBOE to continue to satisfy its customers in an increasingly competitive environment.

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7.  The OEX policy is set forth in RG-98-09, which was approved in Securities Exchange Act Release No. 39435, 62 FR 66157 (December 17, 1997).

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8.  Responsibility for accepting orders from a wide range of customers will be borne by the member firms. Floor brokers accepting orders in this manner would be required to be qualified pursuant to Exchange Rule 9.1. As is the case with brokers accepting orders of public customers over OEX post telephones, any broker speaking directly with a public customer is required to be Series 7 qualified and registered with the Exchange by a member organization approved to conduct non-member customer business.

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[FR Doc. 00-21960 Filed 8-28-00; 8:45 am]