[Federal Register Volume 60, Number 167 (Tuesday, August 29, 1995)]
[Notices]
[Pages 44921-44923]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-21356]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36135; File No. SR-CBOE-95-44]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by the Chicago 
Board Options Exchange, Inc., Relating to the Implementation of Systems 
Changes That Automate Certain Trading Suspensions in Options

August 22, 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 August 
16, 1995, the Chicago Board Options Exchange, Inc. (``CBOE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I and II below, which Items have been prepared by the self-
regulatory organization. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Currently, CBOE Rule 6.3, ``Trading Halts,'' Interpretation and 
Policy .01, provides that a Post Director\1\ or the OBO at a station 
may suspend trading (including a rotation) for a class or classes of 
option contracts traded at the station for not longer than five minutes 
whenever trading in the underlying exchange-listed security is halted 
or suspended in the primary market, but only if the trading halt or 
suspension is evidenced by an ``ST'' symbol (for an exchange-listed 
security) or an ``H'' symbol (for a security traded primarily in the 
over-the-counter market) that appears on the Class Display Screen for 
that underlying security, or the trading halt or suspension is verified 
by the senior person then in charge of the Exchange's control room. The 
CBOE proposes to amend Exchange Rule 6.3, Interpretation and Policy .01 
to implement systems changes that will provide automatic, computerized 
procedures to suspend trading in specified options classes whenever 
there is a halt or suspension of trading in an exchange-listed 
underlying security in the primary market as evidenced by the 
dissemination by that market of an ``ST'' symbol. The automatic trading 
suspension will apply only to options on exchange-listed securities. 
For options on securities traded in the over-the-counter market, a Post 
Director or OBO will act, as currently provided for, to suspend options 
trading when trading in the underlying security has been halted or 
suspended.

    \1\A Post Director is an Exchange employee at a trading post 
whose function is to assist the Order Book Official (``OBO'') and 
the Designated Primary Market Maker at each station at the post.
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    The text of the proposal is available at the Office of the 
Secretary, CBOE and the Commission.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the self-regulatory organization 
included statements concerning the purpose of and basis for the 
proposed rule change and discussed any comments it received on the 
proposed rule change. The text of these statements may be examined at 
the places specified in Item IV below. The self-regulatory organization 
has prepared summaries, set forth in sections (A), (B), and (C) below, 
of the most significant aspects of such statements.

(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    The purpose of the proposed rule change is to amend CBOE Rule 6.3, 
Interpretation and Policy .01 to reflect systems changes that will 
provide automatic procedures to suspend trading in specified classes of 
options when trading in the underlying exchange-traded security is 
halted or suspended in the primary market. Currently, under CBOE Rule 
6.3, a Post Director or OBO acts to suspend trading in affected classes 
of options on the CBOE whenever trading in an underlying security is 
halted or suspended in the primary market. Under CBOE Rule 6.3, 
Interpretation and Policy .01, the suspension can remain in effect for 
up to five minutes; any suspension of trading longer than five minutes 
may only be declared by two Floor Officials pursuant to CBOE Rule 
6.3(a).
    According to the Exchange, the first indication that trading in an 
underlying exchange-listed security has been halted or suspended in the 
primary market is usually the appearance on the Class Display Screen 
for the underlying security of an ``ST'' symbol dissemination by the 
primary market.\2\ Since it may take a Post Director or an OBO some 
period of time (which could be 30 seconds or more) to take note of such 
an indication and act to suspend trading in the affected options, an 
alert trader may observe the ST symbol, correctly surmise why trading 
has been suspended, and buy or sell options before trading in the 
options is suspended, thereby taking advantage of orders entered prior 
to the time of the suspension of trading of the underlying security.

    \2\It has been the Exchange's experience that the New York Stock 
Exchange (``NYSE'') and the American Stock Exchange (``Amex''), 
which are the primary markets for most of the stocks underlying 
options traded on the CBOE, may be relied upon to disseminate an 
``ST'' symbol immediately upon suspension of trading in any stock.
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    The CBOE believes that the shorter the delay between the time 
trading in an underlying security is suspended in the primary market 
and the time the CBOE suspends trading in the related option, the less 
opportunity there is for this type of trading activity to take place. 
To this end, the CBOE has developed, and proposes to implement, an 
automated, computerized procedure that is capable of reading the market 
data feed from the primary exchange market\3\ (currently 

[[Page 44922]]
available from the NYSE and the Amex) and suspending trading on the 
floor and turning off the Retail Automatic Execution System (``RAES'') 
for a specific class or classes of options whenever trading is 
suspended and an ``ST'' symbol appears for the underlying exchange-
listed security. By eliminating the delay occasioned by the need for 
human intervention, the automated procedure will permit the suspension 
of options trading at virtually the same instant as the ``ST'' symbol 
first appears.

    \3\The Consolidated Tape Association (``CTA''), which consists 
of the Amex, the Boston Stock Exchange, the CBOE, the Chicago Stock 
Exchange, the Cincinnati Stock Exchange, the National Association of 
Securities Dealers, the NYSE, the Philadelphia Stock Exchange, and 
the Pacific Stock Exchange, established the Consolidated Tape to 
disseminate last sale transaction information for trades executed on 
any of the member exchanges or through NASDAQ. The Securities 
Information Automation Corporation (``SIAC''), a subsidiary of the 
NYSE and the Amex, conducts the day-to-day operations of the 
Consolidated Tape. SIAC makes this information available to all 
subscribers to the Consolidated Tape; the information disseminated 
for each transaction includes the stock symbol, the volume of the 
trade in round lots, and the price at which the transaction was 
executed. Information the trading in a stock has been halted also 
appears on the Consolidated Tape.
    The Exchange notes that options trading suspensions that are 
implemented automatically by computer pursuant to the proposed 
procedure will be subject to the same conditions and limitations that 
apply to suspensions declared by a Port Director or OBO under existing 
CBOE Rule 6.3, Interpretation and Policy .01. That is, no trading 
suspension may exceed five minutes in duration unless it has been 
declared by two Floor Officials, and successive five-minute trading 
suspensions may not be combined. Any longer suspensions of trading may 
be declared only by two Floor Officials pursuant to CBOE Rule 6.3(a). 
Notice of the automatic suspension of options trading shall be 
disseminated to the trading floor and over the Options Price Reporting 
Authority (``OPRA'') by disseminating a ``T'' symbol and quotation 
designation 998-999. The CBOE states that the time and duration of the 
suspension shall be reflected in the Exchange's time and sales display, 
which is made available through vendor networks.
    In addition, the proposal makes a technical correction to CBOE Rule 
6.3, Interpretation and Policy .01 by eliminating the reference therein 
to Exchange Rule 6.3A, which has been rescinded.
    By eliminating the delay between the suspension of trading in an 
underlying security and the suspension of trading in related options, 
the CBOE believes that the proposed rule change is consistent with 
Section 6(b) of the Act, in general, and furthers the objectives of 
Section 6(b)(5), in particular, in that it is designed to prevent 
fraudulent and manipulative acts and practices, promote just and 
equitable principles of trade and protect investors and the public 
interest.

(B) Self-Regulatory Organization's Statement on Burden on Competition

    The CBOE does not believe that the proposed rule change will impose 
any burden on competition.

(C) Self-Regulatory Organization's Statement on Comments on the 
Proposed Rule Change Received from Members, Participants or Others

    No written comments were solicited or received with respect to the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The CBOE has requested that the proposed rule change be given 
accelerated effectiveness pursuant to Section 19(b)(2) of the Act. The 
CBOE states that the Exchange has devoted considerable resources to 
developing a computer program that permits the automatic suspension of 
trading immediately upon the appearance of the ``ST'' symbol indicating 
that trading in an underlying exchange-listed security has been 
suspended. The Exchange believes that it furthers the protection of 
investors and the public interest to eliminate any delay between the 
time trading is suspended in an underlying security and the time 
trading in the related options is suspended. Because the CBOE has 
developed and tested the computer program, the Exchange believes it 
should be permitted to implement the program as soon as possible. The 
CBOE further claims that the proposed rule change effects a change in 
an existing trading system of the Exchange that does not significantly 
affect the protection of investors or the public interest, does not 
impose any significant burden on competition, and does not have the 
effect of limiting the access to or availability of the system, and 
accordingly should be approved on an accelerated basis.
    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, the requirements of Section 6(b)(5) thereunder\4\ in that 
the proposal is designed to perfect the mechanism of a free and open 
market and to protect investors and the public interest. Specifically, 
the proposal will allow the Exchange of implement a program that 
provides an automatic, computerized suspension of trading and 
disengagement of RAES in specified options classes when trading in the 
underlying exchange-listed security is suspended or halted in the 
primary market. According to the CBOE, the proposed computer program is 
currently able to read the market data feed from the NYSE and Amex and 
immediately suspend trading in a specific options class or classes 
whenever an ``ST'' symbol appears in connection with the underlying 
security, thereby eliminating the potential delay present in the 
current system, which requires action by a Post Director or OBO to 
suspend options trading in response to a trading halt in the underlying 
security.

    \4\15 U.S.C. Sec. 78f(b)(5) (1982).
    Accordingly, the Commission believes that the proposal will protect 
investors by enhancing the Exchange's existing ability under CBOE Rule 
6.3, Interpretation and Policy .01 to implement a temporary suspension 
of options trading when an ``ST'' symbol appears. The Commission notes 
that options trading suspensions implemented automatically pursuant to 
the proposal will be subject to the same conditions and limitations 
that are currently provided in CBOE Rule 6.3, Interpretation and Policy 
.01. Specifically, no trading suspension under CBOE Rule 6.3, 
Interpretation and Policy .01 may exceed five minutes, unless it has 
been declared by two Floor Officials pursuant to CBOE Rule 6.3(a), and 
successive five-minutes trading suspensions may not be combined. In 
addition, the CBOE will disseminate notice of an automatic suspension 
of trading to the trading floor and over OPRA. Moreover, the time and 
duration of the suspension will be reflected in the Exchange's time and 
sales display, which is made available through vendor networks.
    The Commission believes that it is reasonable for the CBOE to rely 
on the accuracy of the ``ST'' symbol. In this regard, the Commission 
notes that CBOE Rule 6.3, Interpretation and Policy .01 currently 
allows an OBO or Post Director to suspend options trading when an 
``ST'' symbol appears. The CBOE states that the data feed from the 
primary market is reliable and that an ``ST'' symbol has never been 
disseminated inaccurately.\5\ In addition, the Commission notes that it 
is the policy of the Exchange to contact the primary market immediately 
after an ``ST'' symbol appears to verify the trading halt in the 
underlying security and to determine the reasons for the 

[[Page 44923]]
suspension of trading in the underlying security.\6\

    \5\Telephone conversation between Michael Meyer, Schiff Hardin & 
Waite, and Yvonne Fraticelli, Attorney, Options Branch, Division of 
Market Regulation, Commission, on August 18, 1995.
    \6\Id.
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    The Commission also finds that the proposal to delete an inaccurate 
reference to CBOE Rule 6.3A is consistent with the Act because it 
clarifies CBOE Rule 6.3 and helps to ensure the accuracy of the 
rule.\7\

    \7\CBOE Rule 6.3A, ``Equity Market Trading Halt,'' required the 
Exchange to halt trading in all stock options and all stock index 
options when trading in stocks on the NYSE had been halted or 
suspended as a result of the activation of circuit breakers on the 
NYSE. CBOE Rule 6.3A has been deleted from the CBOE's rules. See 
Securities Exchange Act Release No. 35789 (May 31, 1995), 60 FR 
30127 (June 7, 1995) (order approving File No. SR-CBOE-95-05).
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    Finally, the Commission finds good cause for approving the proposed 
rule change prior to the thirtieth day after the date of publication of 
notice thereof in the Federal Register because the proposal automates a 
function currently allowed under CBOE Rule 6.3 to suspend promptly 
options trading when the primary market has suspended trading in the 
underlying security. The proposal is also consistent with, and helps to 
implement, CBOE Rule 6.3, Interpretation and Policy .04, which provides 
that 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. 
For these reasons, the Commission believes it is consistent with 
Sections 19(b)(2) and 6(b)(5) of the Act to approve the proposed rule 
change on an accelerated basis.

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 change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change 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 at the 
Commission's Public Reference Section, 450 Fifth Street, NW., 
Washington, DC. Copies of such filing will also be available for 
inspection and copying at the principal office of the above-mentioned 
self-regulatory organization. All submissions should refer to the file 
number in the caption above and should be submitted by September 19, 
1995.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\8\ that the proposed rule change (File No. SR-CBOE-95-44), is 
approved.

    \8\15 U.S.C. Sec. 78s(b)(2) (1982).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\

    \9\17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-21356 Filed 8-28-95; 8:45 am]
BILLING CODE 8010-01-M