[Federal Register Volume 59, Number 3 (Wednesday, January 5, 1994)]
[Notices]
[Pages 639-640]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-145]


[[Page Unknown]]

[Federal Register: January 5, 1994]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-33401; File No. SR-CHX-93-29]

 

Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; 
Order Granting Accelerated Approval to Proposed Rule Change Relating to 
Extended Trading Hours for the Chicago Stock Basket

December 29, 1993.
    On October 27, 1993, the Chicago Stock Exchange, Inc. (``CHX'' 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\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to extend the trading hours for 
the Chicago Stock Basket (``CXM'').
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    \1\15 U.S.C. 78s(b)(1) (1988).
    \2\17 CFR 240.19b-4 (1991).
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    The proposed rule change was published for comment in Securities 
Exchange Act Release No. 33241 (November 23, 1993), 58 FR 63407 
(December 1, 1993). No comments were received on the proposal.
    The CHX's primary trading session, including trading of the CXM, 
currently ends at 3 Central time (4 Eastern time).\3\ The CXM is a 
standardized basket product consisting of twenty-five shares of each of 
the stocks included in the Chicago Mercantile Exchange's (``Merc'') 
``MMI'' futures contract. That contract is based on the American Stock 
Exchange's (``Amex'') Major Market Index (``MMI''), a broad-based 
price-weighted index of twenty stocks listed on the New York Stock 
Exchange (``NYSE'').\4\
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    \3\See Article IX, Rule 10 of the CHX Rules.
    \4\For further discussion of the terms of the CXM contract and 
the market structure for trading the CXM, see Securities Exchange 
Act Release No. 33053 (October 15, 1993), 58 FR 54610 (October 22, 
1993) (File No. SR-CHX-93-18) (``CXM Approval Order'').
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    The Exchange proposes to extend the hours for trading the CXM until 
3:15 Central time (4:15 Eastern time). This proposal will make the 
trading hours of the CXM consistent with the trading hours of 
derivative products that are based on the same index as the CXM and 
other derivative products that could be used as a hedge against the 
CXM. According to the Exchange, similar trading hours should provide 
risk management benefits when trading the CXM.
    The Exchange states that the proposed rule change is consistent 
with section 6(b)(5) of the Act in that it is designed to promote just 
and equitable principles of trade, to remove impediments to and perfect 
the mechanism of a free and open market and a national market system 
and, in general, to protect investors and the public interest.
    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange, and, in 
particular, with the requirements of section 6(b).\5\ In particular, 
the Commission believes the proposal is consistent with the section 
6(b)(5) 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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    \5\15 U.S.C. 78f(b) (1988).
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    In recent years, concerns have been raised about the role that 
index-related trading strategies (e.g., use of the equity cash market 
to hedge positions in stock index futures and options contracts) played 
in increasing market volatility.\6\ As a result, the Commission has, 
among other things, encouraged the national securities exchanges to 
list and trade standardized baskets of stocks.\7\ The Commission 
believes that, in comparison to other methods of portfolio trading, 
basket products, such as the CXM, are an efficient means to make 
investment decisions based on the direction of standardized measures of 
stock market performance, and may enhance the market's ability to 
absorb program trading.\8\
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    \6\See, e.g., SEC, Division of Market Regulation, The October 
1987 Market Break (February 1988).
    \7\In addition to the CXM, the Commission has approved the 
trading of market baskets on the NYSE and the Chicago Board Options 
Exchange (``CBOE''). See Securities Exchange Act Release Nos. 27382 
(October 26, 1989), 54 FR 45834 (October 31, 1989) (File No. SR-
NYSE-89-05) (approving trading of basket of stocks comprising the 
Standard & Poor's (``S&P'') 500 Portfolio Index); and 27383 (October 
26, 1989), 54 FR 45846 (October 31, 1989) (File No. SR-CBOE-88-20) 
(approving trading of basket of stocks comprising the S&P 100 and 
S&P 500 Indexes).
    \8\See CXM Approval Order, supra, note 4.
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    The Commission has concluded that extending the trading hours for 
the CXM will enhance market participants' ability to use that basket 
for hedging purposes. The CXM offers a highly correlative hedge to the 
Merc's ``MMI'' futures contract. In addition, the CXM could be used to 
offset a position in the options on the MMI futures contract that are 
traded on the Merc; in the options on the MMI that are traded on the 
Amex; or in derivative products on other broad-based stock market 
indexes.\9\ At the moment, however, CXM trading ends at 3 Central time 
(4 Eastern time), while trading of such derivative products continues 
until 3:15 Central time (4:15 Eastern time). The Commission recognizes 
that the current lack of coordination may hinder market participants' 
ability to adjust their risk in response to late price movements in the 
derivatives market.
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    \9\For example, the promotional literature for the CXM 
illustrates how that basket could be used as a hedge against the S&P 
100 options contract.
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    Accordingly, the Commission believes that synchronizing the close 
of trading for the CXM with the close of trading for such derivative 
products will allow market participants to hedge their positions more 
effectively. Specifically, traders and investors will be able to employ 
closing strategies that reflect price movements that take place during 
the last fifteen minutes of derivatives trading, as well as complete 
last sale information for the various indexes' component stocks. To the 
extent that the CHX proposal will promote fair hedging opportunities, 
the Commission finds that extended trading hours should increase volume 
in the CXM, thereby adding to the depth and liquidity of the market for 
that basket product.\10\
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    \10\The Commission used a similar rationale in approving 
extended trading hours for stock index options. See Securities 
Exchange Act Release No. 22957 (February 27, 1986), 51 FR 7869 
(March 6, 1986) (File Nos. SR-CBOE-85-49, SR-Amex-86-02 and SR-NYSE-
86-06). See also Securities Exchange Act Release No. 31591 (December 
11, 1992), 57 FR 60253 (December 18, 1992) (File No. SR-Amex-92-18) 
(approving trading of portfolio depository receipts until 4:15 
Eastern time).
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    The Commission finds good cause for approving the proposed rule 
change prior to the thirtieth day after the date of publication of the 
notice of filing thereof. The CHX proposal is designed to eliminate a 
barrier to fair hedging opportunities; accelerated approval thereof 
will allow the resulting risk management benefits for traders and 
investors to be realized immediately. In addition, the proposed rule 
change was published in the Federal Register for the full statutory 
period and no comments were received on any aspect of the proposal.
    It is therefore ordered, Pursuant to section 19(b)(2) of the 
Act,\11\ that the proposed rule change (SR-CHX-93-29) is approved.

    \11\15 U.S.C. 78s(b)(2) (1988).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\17 CFR 200.30-3(a)(12) (1991).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-145 Filed 1-4-94; 8:45 am]
BILLING CODE 8010-01-M