[Federal Register Volume 60, Number 103 (Tuesday, May 30, 1995)]
[Notices]
[Pages 28188-28191]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-13072]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-35742; File No. SR-CBOE-95-04]


Self-Regulatory Organizations; Order Approving a Proposed Rule 
Change by the Chicago Board Options Exchange, Incorporated, Relating to 
Certain Procedures Regarding Trading Rotations and Opening Procedures

May 19, 1995.

I. Introduction

    On January 18, 1995, the Chicago Board Options Exchange, 
Incorporated (``CBOE'' or ``Exchange'') filed the following proposed 
rule changes with 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\ (1) 
Granting two concurring Floor Officials the discretion to call for one 
or more trading rotations on any business day pursuant to Rule 6.2; (2) 
codifying in Rule 6.2, the current practice of allowing two concurring 
Floor Officials the discretion to delay commencement of the opening 
rotation in any class of options; (3) granting two concurring Floor 
Officials the discretion to delay the commencement of the opening 
rotation for index options, and deleting the requirement that any 
delays in the opening rotation must be in five minute intervals, 
pursuant to Interpretation .03 to Rule 24.13; (4) granting Order Book 
Officials the discretion to determine the appropriate rotation order 
and manner, or to deviate from a previously established rotation policy 
or procedure, pursuant to Rule 6.2; (5) adding Interpretation .04 to 
Rule 6.2 to specify that the decision to conduct an abbreviated 
rotation is one, but not the only example of a type of rotation 
modification that may be employed; (6) granting the Order Book Official 
the authority to prescribe that two or more trading rotations be 
employed simultaneously pursuant to Rule 6.2; (7) granting two 
concurring Floor Officials the authority to commence more than one 
trading rotation after 3:10 p.m. (central time) pursuant to 
Interpretation .02 to Rule 6.2; (8) clarifying that the factors, 
provided in Interpretation .02 to Rule 6.2, to consider in determining 
whether to commence more than one trading rotation after 3:10 p.m., are 
not limited to those enumerated; (9) clarifying that although closing 
rotations are not ordinarily conducted in expiring series of index 
options, such closing rotations are not absolutely prohibited pursuant 
to Interpretation .03 to Rule 6.2; (10) granting two concurring Floor 
Officials the authority to deviate from the procedures for closing 
rotations pursuant to Interpretation .03 to Rule 6.2; (11) granting 
Order Book Officials the discretion to determine the appropriate 
rotation order and manner, or to deviate from a previously established 
rotation policy or procedure for index options pursuant to Rule 24.13; 
and (12) deleting a portion of Rule 24.13 that requires an Order Book 
Official to open the nearest expiration series of index options before 
opening the remaining series in a manner she or he deems appropriate.

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    Notice of the proposal was published for comment and appeared in 
the Federal Register on February 21, 1995.\3\ No comment letters were 
received on the proposed rule changes. This order approves the 
Exchange's proposal.

    \3\ See Securities Exchange Act Release No. 35369 (February 14, 
1995), 60 FR 9702 (February 21, 1995).
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II. Description of Proposal

    The CBOE proposes to amend its rules relating to certain procedures 
regarding trading rotations\4\ and opening procedures.\5\ First, CBOE 
proposes to amend Rule 6.2 to grant two concurring Floor Officials 
discretion to direct that one or more trading rotations be employed on 
any business day. Currently, Rule 6.2 grants only the Floor Procedures 
Committee this discretion. CBOE believes that it is impractical to 
assemble the entire Floor Procedures Committee for such as intra-day 
decision. CBOE states that under Rule 6.6(b)(iii), two concurring Floor 
Officials already have the discretion to call a trading rotation after 
the declaration of a fast market. By amending Rule 6.2, this discretion 
would not be limited to fast market situations.

    \4\ 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.
    \5\ See CBOE Rules 6.2 and 24.13.
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    CBOE proposes to further amend Rule 6.2 by codifying the current 
practice of allowing two concurring Floor Officials to delay 
commencement of the opening rotation in any class of options in the 
interests of a fair and orderly market. CBOE believes that the rules 
should expressly grant Floor Officials the power to react to market 
conditions and circumstances by delaying an opening rotation when it is 
in the interests of a fair and orderly market. Interpretation .01(b) to 
Rule 6.2 currently grants two [[Page 28189]] concurring Floor Officials 
the authority to conduct the rotation in a manner other than that set 
forth in the Rule, but Rule 6.2 does not state expressly that the Floor 
Officials may also delay the opening rotation.
    Similarly, CBOE proposes to amend Interpretation .03 to Rule 24.13, 
by granting two concurring Floor Officials greater discretion to delay 
the commencement of the opening rotation for index options, and by 
deleting the requirement that any delays in the opening rotation must 
be in five (5) minute intervals. Rather than limiting the circumstances 
and the time period in which two concurring Floor Officials may delay 
the opening, amended Interpretation .03 would permit Floor Officials to 
delay the opening rotation at their discretion in the interests of a 
fair and orderly market. The circumstances outlined in current 
Interpretation .03 to Rule 24.13, in which two concurring Floor 
Officials may delay the opening, would remain as factors that Floor 
Officials may consider in deciding whether to delay the opening 
rotation. If Floor Officials do in fact delay the opening rotation, 
CBOE believes that these officials should be granted greater discretion 
to end the delay and commence the opening before the five (5) minute 
interval has lapsed, if the circumstances warrant that decision. In 
addition, CBOE believes that for lengthy delays, it is impractical to 
require two Floor Officials to remain at the index options post for the 
sole purpose of declaring successive five minute delays.
    CBOE believes that these amendments are consistent with the 
amendments proposed for Rule 6.2, which grant two Floor Officials the 
authority to delay the opening rotation in any class of options in the 
interests of a fair and orderly market. CBOE argues that because 
current Interpretation .01 to Rule 24.13 provides that the procedures 
for modification of a rotation and other aspects of the rotation set 
forth in Rule 6.2 are applicable to index options, the authority 
regarding delays in opening contained in Rule 6.2 likewise should apply 
to index options.
    CBOE also proposes to amend Rule 6.2 to grant Order Book Officials 
more discretion regarding the rotation order and manner. CBOE proposes 
that if the appropriate Floor Procedures Committee \6\ has not acted to 
establish any policy applicable to the particular class of options in 
question, then the Order Book Official would be authorized to determine 
the appropriate order and manner for conducting the rotation. CBOE 
believes this aspect of the rule change would allowed Order Book 
Officials to respond to particular circumstances the Floor Procedures 
Committee has not considered and to conduct the rotation as is 
appropriate under those circumstances.

    \6\ The ``appropriate'' Floor Procedures Committee is the 
committee that makes policy regarding the particular class of 
options in question. See Securities Exchange Act Release No. 35369 
(February 14, 1995), 60 FR 9702 (February 21, 1995).
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    CBOE also proposes to further amend Rule 6.2, granting the Order 
Book Official, with the approval of two concurring Floor Officials, the 
authority to deviate from a rotation policy or procedure previously 
established by the appropriate Floor Procedures Committee. The Exchange 
believes that in certain circumstances, it may be appropriate to 
deviate from the established procedure, but it would be impractical to 
assemble the Floor Procedure Committee for an intra-day decision 
allowing such a deviation. Rule 6.2, as amended, would allow two 
concurring Floor Officials to act for the entire committee and approve 
or disapprove an Order Book Official's proposed deviation from the 
previously established rotation policy or procedure. Currently, 
pursuant to Interpretation .01(b) to Rule 6.2, the Order Book Official, 
with the approval of two concurring Floor Officials or the Floor 
Procedures Committee, may conduct an opening rotation in a manner other 
than that set forth in Interpretation .01(b). By amending Rule 6.2, 
CBOE proposes to extend this existing policy to all rotations.
    CBOE also proposes to add Interpretation .04 to Rule 6.2 to specify 
that the decision to conduct an abbreviated rotation is one of the 
deviations permitted under the amended rule. Interpretation .04 
provides an example of a type of rotation modification, or deviation 
from rotation policy or procedure that may be employed, but it is not 
intended to be an exclusive list.
    CBOE proposes to further amend Rule 6.2 so that the Order Book 
Official, or the Floor Procedures Committee, may prescribe that two or 
more trading rotations be employed simultaneously. CBOE believes that 
it would be impractical to assemble the Floor Procedures Committee for 
an intra-day decision regarding simultaneous trading rotations.
    CBOE proposes to amend Interpretation .02 to Rule 6.2 to grant two 
concurring Floor Officials the authority to commence more than one 
trading rotation after 3:10 p.m. (central time), and to clarify that 
the reasons stated for allowing two concurring Floor Officials to 
conduct a rotation after the close of trading are not exclusive. While 
the amended interpretation indicates that, in general, no more than one 
trading rotation will be commenced after 3:10 p.m., CBOE believes that 
it is in the interests of a fair and orderly market to grant two 
concurring Floor Officials the discretion to exercise their judgment in 
response to market conditions or circumstances. The amended 
interpretation does not enumerate all the possible underlying 
conditions and circumstances for commencing more than one trading 
rotation after the close of trading. Those listed include the current 
practice of employing a trading rotation after the end of normal 
trading hours in connection with a year-end rotation or due to the 
restart of a rotation which is already in progress. CBOE believes it 
may be necessary to continue the rotation after the normal close of 
trading in order to complete the rotation for circumstances including, 
but not limited to, those stated in the amended interpretation.
    Interpretation .03 to Rule 6.2 currently provides that ``a closing 
rotation for an expiring series of index options shall not be 
employed.'' (Emphasis Added.) Although closing rotations are not 
ordinarily employed in expiring series of index options, CBOE believes 
it is inappropriate to prohibit closing rotations for such series. 
CBOE, therefore, proposes to amend the interpretation to state that a 
closing rotation for such expiring series ``is not ordinarily'' 
employed. CBOE believes the proposed amendment to Interpretation .03 is 
necessary to clarify that, unlike the case with equity options, closing 
rotations are not ordinarily conducted in expiring series of index 
options, but that such closing rotations are not absolutely 
prohibited.\7\

    \7\ CBOE believes that a system malfunction or a major 
announcement in the markets late in the trading day, among other 
things, may require a closing rotation for expiring series of index 
options in order to accommodate any order flow problems resulting 
from such occurrences. Telephone conversation between Edward Joyce, 
CBOE, Michael Meyer, Attorney, Schiff, Hardin, and Waite, Michael 
Walinskas, Branch Chief, and John Ayanian, Attorney, Office of 
Market Supervision (``OMS''), Division of Market Regulation 
(``Market Regulation''), Commission, on February 13, 1995.
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    Interpretation .03 to Rule 6.2 would also be amended to grant two 
concurring Floor Officials the authority to deviate from the procedures 
for closing rotations if they determine such deviation is in the 
interests of a fair and orderly market. Again, CBOE believes that it is 
in the interests of a fair and orderly market to allow two concurring 
Floor Officials to exercise their [[Page 28190]] judgment in response 
to market conditions and circumstances.
    Consistent with the above changes to Rule 6.2 regarding the order 
and manner of the rotation, CBOE proposes to amend Rule 24.13 to give 
the Order Book Official greater discretion to determine the appropriate 
order and manner for conducting the rotation for index options. Similar 
to amended Rule 6.2, the Floor Procedures Committees that make policy 
for an index option would have the authority to set policy regarding 
the order and manner of the opening rotation. If the Floor Procedures 
Committee has not acted to establish a policy applicable to a 
particular situation, then the Order Book Official would be permitted 
to determine the appropriate order and manner for conducting the 
opening rotation. Again, as similarly proposed in amended Rule 6.2, 
CBOE proposes to further amend Rule 24.13 to grant the Order Book 
Official the authority to deviate from the appropriate Floor Procedures 
Committee's established procedure regarding the order and manner of the 
opening rotation so long as two concurring Floor Officials approve such 
as a deviation. CBOE believes that it would be impractical to assemble 
a Floor Procedures Committee for an intra-day decision allowing a 
deviation from established opening rotation policy or procedure.
    CBOE would further amend Rule 24.13 by deleting the provisions that 
require the Order Book Official to open the nearest expiration series 
first and thereafter open the remaining series in a manner he deems 
appropriate. CBOE believes that the Order Book Official should have the 
discretion not to open with the nearest expiration series if a 
different order would be appropriate under the circumstances.

III. Commission Finding and Conclusions

    The Commission finds that the proposed rule changes are consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange, and, in 
particular, the requirements of Section 6(b)(5) of the Act.\8\ 
Specifically, the Commission believes that the proposed rule changes 
are designed to facilitate transactions in securities, to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, and to promote just and equitable principles 
of trade.

    \8\ 15 U.S.C. 78f(b)(5).
    First, the Commission believes that it is appropriate to amend 
Rules 6.2 and 24.13 to grant the Order Book Official greater discretion 
regarding the rotation order and manner. The Commission notes, however, 
that the discretion of the Order Book Official is not absolute. The 
Order Book Official may determine, without subsequent approval, the 
appropriate order and manner for conducting the rotation only if the 
appropriate Floor Procedures Committee has not acted to establish any 
policy applicable to the particular class of options in question. The 
Order Book Official must otherwise obtain approval from two concurring 
Floor Officials to deviate from the order and manner for conducting the 
rotation for a particular class of options already established by the 
appropriate Floor Procedures Committee. The Commission believes the 
proposed amendments to Rule 6.2 and Rule 24.13 are reasonable in view 
of the CBOE's intended goal to allow Order Book Officials and Floor 
Officials the discretion to exercise their judgment in response to 
market conditions or circumstances.
    The Commission also believes that it is appropriate to add 
Interpretation .04 to Rule 6.2 to state that the decision to conduct an 
abbreviated rotation is one example of a deviation from rotation policy 
or procedure and one of the modifications of rotation order and manner 
that is permitted under Rule 6.2.
    Further, the Commission believes that it is appropriate to amend 
Rule 6.2 to afford an Order Book Official the discretion to authorize 
two or more simultaneous trading rotations. The Commission also finds 
that it is appropriate to amend Rule 6.2 to grant two concurring Floor 
officials the discretion to direct that one or more trading rotations 
be employed on any given business day. Both situations involve an 
intra-day decision that, under current Rule 6.2, would require the 
entire Floor Procedures Committee to assemble. The Commission agrees 
that it may be impractical to assemble the Floor Procedures Committee 
for such intra-day decisions. The Commission also believes that by 
granting Order Book Officials and Floor Officials the discretion to 
evaluate current market conditions and employ the appropriate number of 
rotations in response to these conditions, these officials will be 
positioned to make informed decisions regarding the manner in which a 
rotation can maintain or contribute to the maintenance of a fair and 
orderly market.
    Further, the Commission believes that the Exchange's proposal to 
amend Interpretation .02 to Rule 6.2 to grant two concurring Floor 
Officials the authority to commence more than one trading rotation 
after 3:10 p.m. (central time) to maintain a fair and orderly market, 
is a reasonable response to the Exchange's attempt to respond to 
current market conditions. The interpretation is further amended to 
clarify that the factors to be considered in determining whether to 
commence more than one trading rotation after 3:10 p.m. are not limited 
to those enumerated. Although the amended interpretation grants two 
concurring Floor Officials the discretion to exercise their judgment in 
response to market conditions or circumstances, the Commission supports 
CBOE's policy that, in general, no more than one trading rotation will 
be commenced after 3:10 p.m.
    The Commission also believes that it is reasonable to amend Rule 
6.2 by codifying the current practices of allowing two concurring Floor 
Officials to delayed commencement of the opening rotation in any class 
of options to maintain a fair and orderly market. The proposed 
amendment to Rule 6.2 will expressly grant two concurring Floor 
Officials the power to react to market conditions and circumstances by 
delaying the opening rotation. The Commission believes that the proper 
exercise of this authority should contribute to the protection of 
investors and the public interest by enabling Floor Officials to 
respond to current market conditions in a timely manner.
    For the same reason, the Commission also believes that it is 
appropriate to amend Interpretation .03 to Rule 24.13 to grant two 
concurring Floor Officials greater discretion to delay the commencement 
of the opening rotation for index options by deleting the requirement 
that any delays in the opening rotation for index options be in five 
minute intervals. Specifically, the Commission notes that by deleting 
this five minute interval requirement, Floor Officials will be able to 
react more promptly to current market conditions and commence the 
opening rotation in an interval shorter than five minutes if the 
circumstances warrant. By granting Floor Officials the flexibility to 
immediately commence an opening rotation, investors may be able to 
reduce their exposure to price fluctuations occurring when the index 
options markets have a delayed opening and the stock and futures 
markets are open. The Commission further notes that for lengthy delays, 
it may be impractical to require two Floor Officials to continuously 
remain at the index options post for the purpose of declaring 
[[Page 28191]] successive five minute delays. The proposed rule change 
will provide the Exchange's Floor Officials more flexibility to declare 
delayed openings in index options in appropriate circumstances.
    Furthermore, the Commission believes it is appropriate to amend 
Interpretation .03 to Rule 6.2 to state that a closing rotation for 
expiring series of index options ``is not ordinarily'' employed. Under 
the current interpretation, a closing rotation for an expiring series 
of index options ``shall not be employed.'' The Commission believes 
that the proposed amendment to Interpretation .03 should provide CBOE 
Floor Officials the opportunity to respond to extraordinary 
circumstances including, but not limited to, a system malfunction or a 
major announcement in the markets late in the trading day.\9\

    \9\ See supra note 7.
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    For the same reasons, the Commission also believes that it is 
appropriate to amend Interpretation .03 to Rule 6.2 to grant two 
concurring Floor Officials the authority to deviate from the procedures 
for closing rotations if they determine such deviation is to maintain a 
fair and orderly market.
    Finally, the Commission believes it is appropriate to delete from 
Rule 24.13 the requirement that an Order Book Official open the nearest 
expiration series of index options before opening the remaining series. 
The Commission believes that the proposed rule change, by permitting 
the Order Book Official to exercise his judgment in response to market 
conditions or circumstances, is consistent with the purposes of the 
Act.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\10\ that the proposed rule changes (File No. SR-CBOE-95-04) are 
approved.

    \10\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\

    \11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-13072 Filed 5-26-95; 8:45 am]
BILLING CODE 8010-01-M