[Federal Register Volume 61, Number 129 (Wednesday, July 3, 1996)]
[Notices]
[Pages 34911-34912]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-16921]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-37364; File No. SR-CBOE-96-36]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Inc. Relating to the 
Interruption of RAES Due to Unusual Market Activity

June 25, 1996.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on June 12, 1996, the Chicago 
Board Options Exchange, Incorporated (``CBOE'' or ``Exchange'') filed 
with the Securities and Exchange Commission (``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.
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    \1\ 15 U.S.C. 78s(b)(1) (1988).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The CBOE proposes to amend CBOE Rule 6.6, Unusual Market 
Conditions, to give the Order Book Official (``OBO'') or the Post 
Director authority to turn off the Exchange's Retail Automatic 
Execution System (``RAES'') for a class or classes of options and for a 
short period of time when, in the judgement of that OBO or Post 
Director, there is unusual market activity in such options or their 
underlying securities.

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 add a new paragraph 
(e) to CBOE Rule 6.6 that will authorize OBOs, and, in the case of 
options traded at Designated Primary Market-Maker (``DPM'') stations, 
Post Directors temporarily to deactivate RAES in specified classes of 
options traded at the posts where such persons are stationed when in 
their judgement such action is warranted by an influx of orders or 
other unusual market conditions in such options or their underlying 
securities and the OBO or Post Director determines that such action is 
appropriate in the interests of maintaining a fair and orderly market. 
Whenever such action is taken, notice thereof shall immediately be 
given to two Floor Officials who may continue the deactivation of RAES 
for more than five minutes or take such actions as they deem necessary 
pursuant to their authority under Rule 6.6.
    This rule change is being proposed to permit a more immediate 
response to events, such as significant news announcements, that can 
cause temporary order imbalances and otherwise disrupt the market for 
stocks that underlie options traded on CBOE. In these situations stock 
prices may move sharply, and Exchange market-makers may not have time 
to adjust their options quotes in the numerous series of options that 
overlie these stocks. This may result in published options quotes that 
do not reflect current stock prices. Because orders sent to RAES are 
executed automatically at published quotations, customers may receive 
executions at unrealistic prices, some at a price more favorable than 
fair market prices and some less favorable than fair market prices.
    Exchange Rule 6.6 currently authorizes two Floor Officials to 
respond to this situation by declaring the market in particular classes 
of options to be ``fast,'' and then turning off RAES (and taking other 
action) until there has been time for prices to be adjusted. Because of 
the speed with which computerized order routing systems can direct 
orders to RAES, and because RAES itself provides for instantaneous 
automatic executions, there can be a significant number of executions 
at stale prices during the several minutes that it might take for two 
Floor Officials to declare a fast market. By authorizing OBOs and Post 
Directors to turn off RAES for up to five minutes, the response time to 
such a situation will be considerably shortened, and the number of 
executions at stale prices should be reduced accordingly. In this 
respect, the proposed rule change is not unlike the recently approved 
rule change that authorized Post Directors or OBOs to suspend trading 
in specified classes of options for up to five minutes when there is a 
trading halt or suspension of trading in the underlying security in the 
primary market.\2\ There, as is proposed here, authority is given to 
the OBO or Post Director to deal quickly and on an interim basis with a 
situation where immediate response is called for, pending further 
consideration of the matter by two Floor Officials.
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    \2\ File No. SR-CBOE-95-44 approved in Exchange Act Release No. 
36135 (August 22, 1995), 60 FR 44921.
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    It is anticipated that in most instances where RAES is deactivated 
by an OBO or Post Director, the period of time when RAES is unavailable 
should be very brief, lasting less than five minutes. Even then, orders 
will continue to be delivered to the trading crowd via the Exchange's 
electronic order routing system (``ORS'') and the trading crowd will 
remain obligated to fill customer

[[Page 34912]]

orders in accordance with Exchange rules, including the firm quote 
rule.\3\
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    \3\ The firm quote rule, which obligates the trading crowd to 
fill public orders for up to 10 contracts at published quotes, 
remains in effect unless suspended by two Floor Officials acting 
under Rule 6.6(b) in the event of a fast market. The proposed rule 
change would not authorize an OBO or DPM to declare a fast market or 
suspend the firm quote rule.
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    Members will be notified of any deactivation of RAES in particular 
classes of options by an OBO or a Post Director pursuant to proposed 
Rule 6.6(e) by means of a message that is printed at each trading post 
on the floor and is transmitted to terminals throughout the floor over 
the Exchange's TextNet system.
    The Exchange believes that the proposed rule change is consistent 
with and furthers the objectives of Section 6(b)(5) of the Act in that, 
by permitting the Exchange to act expeditiously to prevent automatic 
executions of options transactions at stale prices in the event of 
significant news announcements or other potentially disruptive 
situations, 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 Exchange does not believe that the proposed 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

    Written comments on the proposed rule change were neither solicited 
nor received.

III. Date of Effectiveness of the Proposed Rule Change 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 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons 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, N.W., 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 in 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 File No. 
SR-CBOE-96-36 and should be submitted by July 24, 1996.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\4\
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    \4\ 17 CFR 200.30-3(a) (12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-16921 Filed 7-2-96; 8:45 am]
BILLING CODE 8010-01-M