[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