The Chicago Board Options Exchange, Inc. (CBOE) is proposing to amend Rule 8.7, Obligations of Market-Makers, to: (i) eliminate the provision providing for bids (offers) to be no more than $1 lower (higher) than the last preceding transaction plus or minus the aggregate change in the last sale price of the underlying, and (ii) modify the provision pertaining to trades that are more than $0.25 below parity.
Rule 8.7 currently provides, in part, that Market-Makers are expected ordinarily, except in unusual market conditions, not to bid more than $1 lower or offer more than $1 higher than the last preceding transaction price for the particular option contract plus or minus the aggregate change in the last sale price of the underlying security since the time of the last preceding transaction for the particular option contract (the “one point” rule). In addition, Market-Makers are expected ordinarily, except in usual market conditions, to refrain from purchasing a call option or a put option at a price more than $0.25 below parity. In the case of calls, parity is measured by the bid in the underlying security, and in the case of puts, parity is measured by the offer in the underlying security (the “parity” rule).
First, the CBOE is proposing to eliminate the one point rule because, as the CBOE points out, various market changes have rendered the rule obsolete and unnecessary. Second, at this time the CBOE is proposing to retain the parity rule as a guideline but to modify it to provide that an amount larger than $0.25 may be appropriate when considering the particular market conditions (not just unusual market conditions as the rule currently states). The rule is also being revised to provide that the $0.25 guideline may be increased, or the parity rule waived, by the CBOE on a series-by-series basis. The CBOE believes that revising the $0.25 parity rule in this manner modernizes the guideline to reflect market changes (including those discussed above) and will provide more flexibility to take into consideration the particular trading in a security, including but not limited to the underlying market price, market conditions, and applicable minimum bid/ask width requirements for a given options series.