[Federal Register Volume 60, Number 193 (Thursday, October 5, 1995)]
[Notices]
[Pages 52231-52232]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-24797]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36302; File No. SR-CBOE-95-34]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Inc., Relating to the 
Interruption of the Retail Automated Execution System Following Certain 
Analyst's Reports

September 29, 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 July 12, 
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, II, and III 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

    The CBOE proposes to promulgate a policy concerning the application 
of CBOE Rule 6.6, ``Unusual Market Conditions,'' in the circumstance 
where the Exchange has determined that the televised reporting of a 
particular securities analyst has had a regular, albeit short-lived, 
destabilizing impact on the options market.\1\ Specifically, the 
Exchange proposes to declare a ``fast'' market for a short period of 
time each day for options of the class or classes of stock(s) 
identified in the analyst's report and to temporarily deactivate the 
Exchange's Retail Automated Execution System (``RAES'') for the 
affected options until the stock prices in the primary market and 
options prices in RAES have adjusted, which is likely to occur within 
one or two minutes following the report. The Exchange plans to announce 
the policy through a regulatory circular to its members.

    \1\ CBOE Rule 6.6 allows two or more floor officials, because of 
an influx of orders or other unusual conditions or circumstances, 
and in the interest of maintaining a fair and orderly market, to 
declare the market in one or more classes of option contracts to be 
``fast.'' Under CBOE Rule 6.6, the floor officials declaring the 
fast market have the power to take actions that are deemed necessary 
in the interest of maintaining a fair and orderly market.
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    The text of the proposal 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 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), of the 
most significant aspects of such statements.

[[Page 52232]]


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

    The purpose of the proposal is to implement procedures in response 
to a situation currently confronting the Exchange whereby a well-known 
securities analyst presents over cable television, at the same time 
each day, an exclusive report of his analysis of a specific identified 
company or companies, often involving conjecture concerning a future 
transaction or development with respect to the company or companies. 
According to the Exchange, each day's broadcast often causes an 
immediate and significant impact on the market price of the stock(s) 
identified in the report. This permits certain viewers of the televised 
report, utilizing high speed computers, to transmit options orders to 
buy or sell options covering the stock(s) in question (depending on 
whether the report is ``bullish'' or ``bearish'') through RAES before 
either the price of the stock(s) in the primary market or the prices of 
options governing the stock(s) in RAES have had time to adjust. The 
Exchange states that the result is an abuse of the RAES system, in as 
much as, for a short period of time, persons entering computerized 
options orders in RAES are able to obtain automatic executions at 
prices that are no longer current, simply because there has not been 
sufficient time to adjust prices in RAES. According to the CBOE, the 
ability of certain persons to ``game'' the system in this way operates 
to the disadvantage of CBOE market makers who are obligated under 
Exchange rules to take the other side of the orders.
    In response to this situation, the CBOE's Market Performance 
Committee, which consists of floor officials who are authorized under 
CBOE Rule 6.6 to take such action as is deemed necessary to maintain a 
fair and orderly market in response to unusual market conditions, has 
determined that the market in options of the class or classes covering 
the stock that is the subject of the televised report will be declared 
``fast'' for a short period of time each day, commencing at the time 
the analyst's report is aired, at which time RAES will be deactivated 
temporarily by the Exchange's control room in the affected class or 
classes of options. RAES will be reactivated at the post with the 
consent of two floor officials as soon as stock prices in the primary 
market and options prices in RAES have adjusted, which is likely to 
occur within one or two minutes following the report. CBOE members will 
be notified of both the deactivation of RAES in particular classes of 
options and its reactivation by means of (1) a message to members that 
will print at each post on the trading floor, and (2) a message over 
the Exchange's TextNet system, which has terminals at various places 
around the Exchange floor.
    The Exchange believes that this policy will help to encourage more 
active market maker participation in RAES without harming the intended 
beneficiaries of RAES, i.e., public customers who submit small orders. 
In addition, the CBOE notes that even for the few minutes when RAES is 
deactivated, the trading crowd will continue to have the responsibility 
to fill customer orders according to CBOE rules, including the firm 
quote rule.
    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 promote just 
and equitable principles of trade, to remove impediments to and perfect 
the mechanism of a free and open market and a national market system, 
and to 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

    Within 35 after the publication of this notice in the Federal 
Register or within such longer period (i) as the Commission may 
designate up to 90 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 change, or
    (b) Institute proceedings to determine whether the proposed rule 
change 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, D.C. 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, N.W., 
Washington, D.C. 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 October 26, 
1995.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\2\

    \2\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-24797 Filed 10-4-95; 8:45 am]
BILLING CODE 8010-01-M