[Federal Register Volume 60, Number 38 (Monday, February 27, 1995)]
[Notices]
[Pages 10621-10624]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-4705]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35397; File No. SR-CBOE-95-05]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Changes by the Chicago Board Options Exchange, Incorporated, Related to
Certain Procedures Regarding Trading Halts, Trading Suspensions, the
Reopening of Trading After a Trading Halt or Suspension, and the Shut
Down of RAES
February 21, 1995.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on January
18, 1995, the Chicago Board Options Exchange, Inc. (``CBOE'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule changes 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 changes from interested persons.
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Changes
The CBOE proposes to amend its rules and Regulatory Circulars RG94-
17 and RG93-58 (formerly RG92-40) to conform to existing practice
regarding (1) the factors the Exchange considers in deciding whether to
halt or suspend trading and (2) the circumstances under which trading
is generally halted or suspended by the Exchange. The CBOE also
proposes to establish procedures for the resumption of trading after a
halt or suspension is lifted, and to grant the Control Room the
authority to turn off the Retail Automatic Execution System (``RAES'')
with respect to a stock option if the Control Room receives a credible
indication that trading in the underlying stock has been halted.
The text of the proposed rule changes is available at the Office of
the Secretary, CBOE and at the Commission.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Changes
In its filing with the Commission, CBOE included statements
concerning the purpose of and the basis for the proposed rule changes
and discussed any comments it received on the proposed rule changes.
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 parts of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Changes
The purpose of the proposed rule changes is to conform the rules to
existing practice both regarding the factors considered in a decision
to halt or suspend trading and regarding the circumstances under which
trading generally will be halted or suspended, to establish procedures
for the resumption of trading after a halt or suspension is lifted, and
to grant the Control Room the authority to turn off RAES if the Control
Room receives a credible indication that trading has stopped in the
underlying stock.
Status of Rotation as Factor Considered in Halt or Suspension
Specifically, the proposal would amend Rules 6.3(a), 6.4(a) and
24.7(a) to include the status of the trading rotation\1\ as a factor
that may be considered in a decision whether to halt or suspend
trading. Although it is not presently explicit in the rules, it is
current practice to consider the rotation status in deciding whether to
halt or suspend trading. For example, if the rotation is near
completion, Floor Officials or the Exchange may decide it is in the
interest of a fair and orderly market to complete the rotation before
calling a halt or suspension in trading. The proposed amendment to the
rules would notify members and the public that, when deciding whether
to halt trading, Floor Officials may consider the extent to which the
rotation has been completed and other factors regarding the status of
the rotation. When deciding whether to suspend trading, the Board of
Directors similarly would be able to consider the extent to which the
rotation is completed or other factors regarding the status of the
rotation.
\1\A ``trading rotation'' is a series of very brief time periods
during each of which bids, offers, and transactions in only a
single, specified option contract can be made. See CBOE Rule 6.2.
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Regulatory Halt
The proposal would add Interpretation .04 to Rule 6.3 and
Interpretation .01 to Rule 6.4 to state the current practice that, in
general, trading in a stock option will be halted when a regulatory
halt in the underlying stock has occurred in the primary market for
that stock. Any two Floor Officials may halt trading in any security in
the interests of a fair and orderly market for a period not in excess
of two consecutive business days. [[Page 10622]]
Similiarly, the proposal would state the current practice that, in
general, trading in a stock option will be suspended when a regulatory
suspension in the underlying stock has occurred in the primary market
for that stock. In the case of a regulatory suspension, the Board of
Directors is authorized to suspend trading in any security in the
interests of a fair and orderly market from an indefinite period.
Rules 6.3 and 6.4 list factors considered in deciding whether to
halt or suspend trading. These factors are currently considered in
deciding whether to halt trading in the related stock option. Moreover,
generally, when a regulatory halt in the underlying stock has been
declared in the primary market, the Exchange will decide to halt or
suspend trading in the overlying stock option. The Exchange believes
that the close relationship between the underlying stock and the
pricing of stock options overlying that security typically justify such
a result. When a regulatory halt is declared in the underlying stock,
it often is because some news is pending regarding the underlying stock
and the primary market wants to allow time for the dissemination of
such news. For the same reason, it generally is appropriate in that
circumstance to halt trading in the overlying stock option. By addition
the proposed interpretations to Rules 6.3 and 6.4, CBOE would inform
members and the public of the existence of this general practice to
halt or suspend trading in a stock option when a regulatory halt in the
underlying stock has been declared.
The proposal also would amend Rules 6.3(a)(iii) and 6.4(a)(ii) to
clarify that these rules are only applicable in the case of a security
other than an option. Securities other than options include, for
example, the securities traded at CBOE which are subject to Chapter 30
of the CBOE Rules. Securities presently subject to Chapter 30 are:
Stock, warrants (which term includes currency and index warrants except
as otherwise expressly provided or as the context otherwise requires),
UIT interest, and such other securities instruments, and contracts as
the Board of Directors may from time to time declare are subject to
Chapter 30. The changes are necessary to clarify that Rules 6.3(a)(iii)
and 6.4(a)(ii) do not apply to stock options or any other options
traded at CBOE, but only to securities traded at CBOE other than
options.
Circuit Breaker Halts
The proposal also would delete Rule 6.3A, which provides for a halt
in trading of all equity and index options when there has been a floor-
wide New York Stock Exchange halt or suspension as a result of
activation of circuit breakers on the New York Stock Exchange. This
rule is unnecessary because the only circumstances under which Rule
6.3A could apply are situations that Rule 6.3B already expressly
governs. There are only two circuit breakers that lead to a New York
Stock Exchange floor-wide halt--when there has been a Dow Jones
Industrial Average drop of 250 or more points below its closing value
on the previous trading day and when on the same day there is a
cumulative drop of 400 or more points from the previous day's closing
value. Rule 6.3B already governs trading halts under both of these
circumstances. Under Rule 6.3B, the mandatory circuit breaker halt
would terminate automatically after the expiration of the applicable
one hour or two hour time period.
The proposal would eliminate the requirements contained in Rule
6.3A that, prior to a reopening rotation, (i) an additional
determination must be made that a halt or suspension is not in effect
in the primary market where the underlying security for each class of
options is traded; (ii) a determination must be made, in the case of
index options, that a halt or suspension is not in effect in the
primary market of the securities constituting 50% or more of the index
value; and (iii) two Floor Officials, in consultation with a designated
senior executive officer, must conclude in their judgment that the
interests of a fair and orderly market are served by a resumption of
trading. After a circuit breaker halt, therefore, trading would resume
automatically unless the Exchange affirmatively acted to declare a
further halt or suspension pursuant to other rules, such as Rules 6.3,
6.4 or 24.7.
CBOE believes that trading should resume after a circuit breaker
halt, subject only to these normal rules regarding trading halts and
suspensions. Pursuant to Rules 6.3, 6.4 and 24.7, a halt or suspension
in the underlying security (to which Rule 6.3A refers) is among the
factors considered in the decision to suspend or halt trading, but this
factor does not necessarily require a halt or suspension nor limit the
Exchange's ability to exercise judgment in these circumstances. CBOE
believes that the interests of a fair and orderly market are better
served when the rules allow Exchange officials the discretion to
evaluate market conditions and circumstances and to exercise their
judgment as to when to halt or suspend trading, without the
restrictions on the exercise of that judgment that are contained in
Rule 6.3A.
Reopening After Circuit Breaker Halt
The proposal also would eliminate the requirement in Rule 6.3A
that, if trading is halted due to activation of circuit breakers,
reopening rotations shall be held. Rule 6.3A apparently makes a
reopening rotation mandatory and prevents Exchange officials from
reopening without a rotation. CBOE believes the interests of a fair and
orderly market are better served when the rules allow Exchange
officials the discretion to evaluate market conditions and
circumstances and to exercise their judgment as to whether to reopen
with or without a rotation.
Procedures regarding reopening after a halt triggered by circuit
breakers will be added by amending Rule 6.3B, Interpretation .02. The
amended Interpretation .02 would require a reopening rotation unless
two Floor Officials, or an Order Book Official acting on authorization
from a senior Exchange official, conclude it is appropriate under the
circumstances to employ a different method of reopening, including but
not limited to, no rotation, an abbreviated rotation, or a variation in
the manner of the rotation. The purpose of amended Interpretation .02
to Rule 6.3B is to grant Floor Officials the discretion to deviate from
a typical reopening rotation after the expiration of a circuit breaker
halt. Order Book Officials would also have this discretion, but only if
a senior Exchange official authorized such discretion. This could be
accomplished by the senior Exchange official making a general
announcement to all Order Book Officials.
The CBOE believes it is reasonable to presume that a reopening
rotation will be held after a circuit breaker halt because, after a
floor-wide halt, it is physically difficult to have two Floor Officials
available at each trading post to make a decision regarding the
resumption of trading. The presumption allows for a universal treatment
of the reopening after a circuit breaker halt, yet still permits
appropriate Exchange officials to exercise judgment to deviate from
this presumed course of action when a different method of reopening is
appropriate.
Corresponding Amendments to Regulatory Circulars
Regulatory Circular RG94-17
The proposal would amend Regulatory Circular RG94-17, which
addresses inter-exchange procedures in volatile markets, to make it
consistent [[Page 10623]] with the proposed amended Interpretation .02
to Rule 6.3B. Regulatory Circular RG94-17 discusses CBOE's procedures
during a halt in options trading due to a Dow Jones Industrial Average
drop of 250 or more points below its closing value on the previous
trading day or a cumulative drop of 400 points in the Dow Jones
Industrial Average on the same day. Pursuant to the proposed change to
Interpretation .02 to Rule 6.3B, after the expiration of the one hour
or two hour period set forth in Rule 6.3B, a reopening rotation would
be held in each class of options unless two Floor Officials (or an
Order Book Official acting upon authorization from a senior Exchange
official) conclude a different method of reopening is appropriate.
Additionally, RG94-17 would be amended to delete the requirements
contained in Rule 6.3A that, before reopening after a circuit breaker
halt, the Exchange must verify that (1) there is no halt or suspension
in effect in the primary market where the underlying stock is traded
and (2) with respect to an index option, there is no halt or suspension
in the primary market of the securities constituting 50% of the index.
Regulatory Circular RG93-58
The proposal would amend Regulatory Circular RG93-58 (RG93-58 is a
reprint of Regulatory Circular RG92-40 dated, July 8, 1992), which
addresses trading halt policy regarding options on individual equity
securities, to make the circular consistent with the proposed amendment
to Rule 6.3. Regulatory Circular RG93-58 would be further amended to
state that it does not address the Exchange's trading halt policy when
a halt has been declared as a result of the operation of a circuit
breaker pursuant to Rule 6.3B, due to a 250 or 400 point intra-day drop
of the Dow Jones Industrial Average.
Consistent with Rule 6.3, RG93-58 would be amended so that two
Floor Officials may exercise judgment regarding trading halts and so
that the concurrence of a senior Exchange staff official would not be
required. Presently, Rule 6.3 provides that a decision as to whether to
halt trading may be made by any ``two Floor Officials,'' so this
amendment to RG93-58 would make the guidelines in RG93-58 consistent
with Rule 6.3. Furthermore, Floor Officials need to be able to exercise
their judgment without obtaining the concurrence of a senior Exchange
staff official, because it may be physically difficult for a senior
Exchange staff official to be present at all trading posts during
circumstance where a trading halt may be simultaneously necessary in
multiple options classes.
Regulatory Circular RE93-58 provides Floor Officials with non-
mandatory guidelines to assist them in their decision regarding a
trading halt. Pursuant to Rule 6.3, ``[a]ny two Floor Officials may
halt trading in any security in the interests of a fair and orderly
market.'' Floor Officials are free to exercise judgment and discretion
in deciding whether to halt trading. The language of Rule 6.3 is
discretionary and does not require that Floor Officials declare a
trading halt, so proposed amendments to various paragraphs of RG93-58
delete language which would limit Floor Officials' discretion by
imposing mandatory criteria.
The proposal would further amend RG93-58 to reflect CBOE's general
practice, as set forth in the proposed interpretation to Rule 6.3, to
halt trading in an overlying stock option when a regulatory halt in the
underlying stock has been declared in the primary market for that
stock.
RG93-58 would be further amended to delete the requirement that, in
connection with a halt due to no last sale and/or quotation
dissemination either by the Exchange or to the Options Price Reporting
Authority (``OPRA''),\2\ trading may only resume 15 minutes after
notification to the news wire services. The guidelines provide that the
news wire services will be notified of the dissemination difficulty.
However, under such circumstances, since trading presumably would have
been proceeding in other markets, it is important for the options
market to resume trading as soon as practical after the dissemination
difficulty which led to the halt is no longer present. CBOE believes
that waiting 15 minutes to resume trading would be inordinately long
and may be contrary to the interests of a fair and orderly market.
Nonetheless, the proposed amendments would specifically state CBOE`s
general practice to notify member firms and news wire services before
the resumption of trading.
\2\OPRA is a National Market System Plan approved by the
Commission pursuant to Section 11A of the Act and Rule 11A3-2.
Securities Exchange Act Release No. 17638 (Mar. 18, 1981).
OPRA provides for the collection and dissemination of last sale
and quotation information on options that are traded on the five
exchanges participating in the plan. The exchanges include the CBOE,
the Philadelphia Stock Exchange, the American Stock Exchange, the
Pacific Stock Exchange, and the New York Stock Exchange.
The OPRA plan was implanted in response to directives of the SEC
that provisions be made for the Consolidated reporting of
transactions in eligible options contracts listed and traded on
national securities exchanges.
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The language in paragraph one of RG93-58 would be further amended
to clarify that there is a preference, but not a requirement, to halt
trading if two Floor Officials believe that the dissemination problem
will last more than 15 minutes. The language would be further amended
to clarify that, if the two Floor Officials believe that the
dissemination problem will be resolved within the next 15 minutes, then
there is no preference for a halt--even if that expectation proves to
be incorrect. The present language would be further amended to clarify
that trading ordinarily will continue if two Floor Officials believe it
is likely the dissemination problem will be resolved in less than 15
minutes. THe present language appears to require trading to continue
under such circumstances. Again, these guidelines should not limit
Floor Officials' discretion, since Rule 6.3 provides for discretion in
such circumstances. If a systems problem prevented CBOE or OPRA from
disseminating CBOE's last sale or quote data, this would be an unusual
market condition and, pursuant to Rule 6.3, two Floor Officials may
halt trading.
The proposed amendments would delete the requirement in paragraph
four of RG93-58 that, in connection with a primary market floor-wide
trading halt and despite the determination by two Floor Officials that
sufficient markets will support trading other than at the primary
market, trading may resume only upon a one hour notification to the
news wire services. Again, since trading of the underlying stock is
continuing at an exchange other than the primary exchange, the CBOE
believes that waiting one hour to resume options trading at the CBOE
could be inordinately long and might be contrary to the interests of a
fair and orderly market. Instead, paragraphs one and six of RG93-58
would be amended so that the guidelines for the resumption of trading
would be consistent with Rule 6.3(b), which provides that trading in a
security that has been the subject of a halt may resume upon a
determination by two Floor Officials that the conditions which led to
the halt are no longer present, or that the interests of a fair and
orderly market are best served by a resumption of trading. However, the
proposed amendments would specifically state CBOE's general practice to
notify member firms and news wire services before the resumption of
trading.
RAES
Finally, the proposal would add Interpretation. 05 to Rule 6.3 to
grant authority to the senior person then in [[Page 10624]] charge of
the Exchange's Control Room to turn off RAES with respect to a stock
option if that senior person confirms that the Control Room has
received a credible indication (including, but not limited to,
information from the trading crowd)\3\ that trading in the underlying
stock has been halted or suspended. After exercising such authority,
that senior person would need to immediately seek confirmation of this
decision from two Floor Officials. The purpose of this interpretation
is to prevent orders from being placed on RAES during the interval
after the trading in the underlying stocks has been halted or suspended
but before two Floor Officials have declared a trading halt pursuant to
Rule. 6.3(a) or before a Post Director or Order Book Official has
suspended trading pursuant to Interpretation .01 to Rule 6.3. This
interpretation is necessary because, when a stock halts due to pending
news, the direction of the effect of the news may be anticipated and,
while Floor Officials are being called to a post to decide whether to
halt trading, firms could place an order on RAES which could be
detrimental to the market makers signed onto the system. Under the
current Interpretations to Rule 6.3, the Post Director or Order Book
Official must turn off RAES concurrently with any suspension of
trading. If an ``ST'' symbol (for an exchange listed security) or an
``H'' symbol (for a security traded primarily in the over-the-counter
market) is displayed on the Class Display Screen that displays current
market information for the underlying security, the Order Book Official
or Post Director may suspend trading in the related equity option for a
period not to exceed five minutes and concurrently shall turn off RAES
applicable to the affected options class or classes.\4\ The Control
Room, however, may receive information that trading has stopped in the
underlying stock before the Post Director or Order Book Official sees
the ``ST'' symbol or ``H'' symbol on the Class Display Screen for the
underlying stock. Consequently, it is important for the Control Room to
have authority to turn off RAES without being required to wait for the
``ST'' or ``H'' symbol to appear on the class display screen or for the
Post Director or Order Book Official to act.
\3\BOE represents that if information of an impending halts or
suspension comes from the trading crowed or from a source other than
hard information in the Control Room, the senior person in charge of
the Control Room would first verify it before turning off RAES. To
verify the existence of a trading halt or suspension, the senior
person would rely upon hard information in the Control Room
including (1) the quote of the underlying security being pulled from
the Class Display Screen, (2) an ST or H appearing on the Class
Display Screen via the Consolidated Tape Association, (3) a print-
out in the Control Room confirming the halt or suspension of trading
in the underlying security, and (4) notification of the trading halt
or suspension via the ``Hoot and Holler'' system. The Hoot and
Holler system is a voice linkage between all of the exchanges and
the Commission. Telephone conversation between Edward Joyce, CBOE,
and John Ayanian, Attorney, Office of Market Supervision (``OMS''),
Division of Market Regulation (``Division''), Commission, on
Thursday, February 16, 1995.
\4\See Securities Exchange Act Release No. 34126 (May 27, 1994),
59 FR 29309 (June 6, 1994) (Approval Order giving the Order Book
Officials or the Post Director the authority to suspend trading, and
to turn off RAES for the affected options class or class whenever
trading in the underlying security is halted).
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The proposal would provide that the Post Director, Order Book
Official, or their representative will re-start RAES after the trading
halt or suspension has ceased. This would be consistent with Rules
6.8(f) and 24.15(f), which provide that each day RAES is available, a
Post Director or his representative will start RAES.
Conclusion
CBOE believes that the proposed rule changes are consistent with
and further the objectives of Section 6(b)(5) of the Act, in that the
rule changes are designed to perfect the mechanism of a free and open
market and to protect investors and the public interest by enabling
Floor Officials to evaluate and consider market conditions and
circumstances in determining whether to halt or suspend trading and in
deciding on a method to reopen trading after a halt or suspension. CBOE
believes that the proposed rule change regarding the authority of the
Control Room to turn off RAES with respect to a stock option upon
credible information that trading in the underlying stock has been
halted is also consistent with and furthers the objectives of Section
6(b)(5) of the Act, in that it is designed to perfect the mechanism of
a free and open market.
B. Self-Regulatory Organization's Statement on Burden on Competition
CBOE does not believe that the proposed rule changes will impose
any burden on competitions.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Changes Received from Members, Participants or Others
No written comments were solicited or received with respect to the
proposed rule changes.
III. Date of Effectiveness of the Proposed Rule Changes 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 80 days of such date if it finds such longer period to
be appropriate and publishes its reason for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve such proposed rule changes, or
(B) Institute proceedings to determine whether the proposed rule
changes should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549.
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule changes that are filed
with the Commission, and all written communications relating to the
proposed rule changes 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 in the Commission's Public Reference Section, 450 Fifth Street,
NW., Washington, DC 20549. Copies of such filing will also be available
for inspection and copying at the principal office of CBOE. All
submission should refer to file number SR-CBOE-95-05 and should be
submitted by March 20, 1995.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\5\
\5\17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-4705 Filed 2-24-95; 8:45 am]
BILLING CODE 8101-01-M