[Federal Register Volume 61, Number 130 (Friday, July 5, 1996)]
[Notices]
[Pages 35282-35284]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-17149]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37380; File No. SR-CBOE-96-37]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval of Proposed Rule Change, as Amended, by
Chicago Board Options Exchange, Incorporated Relating to a Pilot
Operation of a System for Monitoring News Announcements Made After the
Close of Trading in the Primary Market for the Underlying Stock
June 28, 1996.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on June 17, 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 CBOE.
The Exchange submitted to the Commission Amendment Nos. 1 \3\ and 2 \4\
to the proposed rule change on June 26, 1996. The Commission is
publishing this notice, as amended, to solicit comments on the proposed
rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ In Amendment No. 1, the Exchange makes several
clarifications to the proposed pilot. See Letter from Michael L.
Meyer, Attorney, Schiff Hardin & Waite, to John Ayanian, Attorney,
Office of Market Supervision (``OMS''), Division of Market
Regulation (``Market Regulations''), Commission, dated June 26, 1996
(``Amendment No. 1'').
\4\ In Amendment No. 2, the Exchange clarifies that it intends
to turn on the system each day a few minutes prior to the 3:00 p.m.
central time close of trading in the primary market, in order to be
certain that the system is operating by the time the primary market
closes. Letter from Michael L. Meyer, Attorney, Schiff Hardin &
Waite, to John Ayanian, Attorney, OMS, Market Regulation,
Commission, dated June 26, 1996 (``Amendment No. 2'').
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to institute a pilot test of a system that,
shortly before
[[Page 35283]]
the close of trading each day, will monitor news announcements
pertaining to underlying securities, and will automatically suspend the
Exchange's automatic execution system in respect of options on those
securities that are the subject of such announcements. The text of the
proposed rule change 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, CBOE 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 CBOE 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 Exchange proposes to establish a limited pilot test of an
automated system that would monitor news wires received at the Exchange
shortly before the close of trading each day, and would suspend the
Exchange's automatic order execution system in a class of equity
options whenever there is a news announcement pertaining to the
security underlying options of that class. Options on equity securities
are currently traded on CBOE until 3:10 p.m. central time on each
trading day, which is 10 minutes after the close of trading on the
primary market's for underlying securities. The Exchange notes that
this additional period of options trading after the underlying market
has closed is provided to accommodate orders to buy or sell options at
prices that reflect the closing prices of the underlying securities.
The Exchange has experienced difficulties when issuers of underlying
stocks make significant news announcements after the 3:00 p.m. central
time close of trading in the underlying stocks, but before options
cease trading at 3:10 p.m. central time. The Exchange believes that
because these issuers are often unaware of or indifferent to the fact
that options trading on their stocks continues for 10 minutes after the
stocks cease to trade, they do not wait until 3:10 p.m. central time to
make these announcements. According to the Exchange, it is not uncommon
for significant news announcements to be made between 3:00 p.m. and
3:10 p.m., when options are still traded primary markets. These
announcements often require an immediate adjustment to the prices of
series of options on the stock in question, to take into account the
likely affect of the announcement on the market price of the underlying
stock, even through the stock is not then trading in its primary
market. The Exchange believes that until such option prices are
adjusted, the Exchange's retail automatic execution system (``RAES'')
may be providing automatic executions of customer orders at prices that
do not reflect the current state of the market.
Currently, CBOE addresses this occurrence by positioning two Floor
Officials in close communication with newsreaders in the Exchange's
Control Room beginning shortly before 3:00 p.m. central time. If a
significant news announcement is made, these two Floor Officials may
exercise their authority under Exchange Rule 6.6(a) to declare a
``fast'' market, in the interest of maintaining a fair and orderly
market, in the class or classes of options affected by the news
announcement, and then to suspend RAES in respect of those classes as
authorized under Rule 6.6(b)(v). The Exchange believes that there are
at least two difficulties with this approach. First, it depends on the
continuous availability of two Floor Officials at a critical time prior
to the close of options trading when they might be needed to attend to
other matters. Second, even if two Floor Officials are available, it
still can take 30 seconds or more after a news announcement is received
before the Floor Officials are able to suspend RAES, during which time
a considerable number of orders may be automatically executed at
inappropriate prices.
In response to these problems, CBOE developed a system that can
monitor news wires during the 10 minutes following the close of trading
in primary stock markets while options are still traded, and
automatically suspend RAES in all series of options on those stocks
that are the subject of news announcements. This permits RAES to be
turned off at virtually the same time as the news item appears on the
wire. According to the Exchange, when RAES is turned off, customer
orders that might otherwise have been automatically executed will
instead be automatically routed to the Public Automated Routing System
(``PAR'') workstation \5\ at the appropriate trading post, where they
can be immediately executed at the then current price almost as quickly
as if they had received automatic execution in RAES.
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\5\ A PAR workstation is an automated, computer-based
workstation that provides users with the ability to execute trades,
transmit trade reports, and enter other data and commands at the
touch of a screen, thereby eliminating the delay inherent in a
keyboard-based system.
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The Exchange notes that the automatic news monitor cannot determine
the significance of a particular announcement, and will automatically
suspend RAES in a class of options whenever there is any news
announcement pertaining to its underlying stock. Because significant
news announcements, however, tend to be concentrated during the period
immediately following the close of trading in primary stock markets,
CBOE intends to operate its new system only during the time from just
before 3:00 p.m. central time to the close of options trading on CBOE
at 3:10 p.m. central time, when it is not expected that there will be
very many ``false alarm'' announcements. Additionally, two Floor
Officials will promptly be informed each time RAES is automatically
turned off in response to a news announcement, and if enough time
remains before the 3:10 p.m. central time close of options trading, the
Floor Officials should be able to evaluate the significance of the
announcement, and if it is not significant or if there has been time
for prices to have been adjusted, to turn on RAES for the remainder of
the trading session.\6\
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\6\ The Commission expects that if there is enough time before
the close of options trading, and the news is not significant or if
there has been time for prices to have been adjusted, the Floor
Officials will resume RAES operations for the subject options class.
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In order to test the effectiveness of this automatic system in
actual market conditions, CBOE proposes to implement it in respect of
various classes of options during a 30-day pilot period.\7\ The
Exchange believes that this will enable it to evaluate how quickly the
automatic system if able to respond to news announcements, how many, if
any, false alarms are received, how quickly customer orders are able to
be rerouted and executed over the PAR system, and whether Floor
Officials are able to make an evaluation of the situation and restore
the operation of RAES in the limited time available after there has
been an automatic suspension of RAES. If after the 30-day pilot period
[[Page 35284]]
CBOE desires to implement the automatic system on a permanent basis for
all classes of equity options, CBOE will make a subsequent filing to
this effect under Section 19(b)(2) of the Act.
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\7\ The Exchange will issue a circular to its membership
outlining the terms of the pilot and the classes that will be
included in it. Telephone conversation between Michael L. Meyer,
Schiff Hardin & Waite, and Sharon Lawson and John Ayanian, OMS,
Market Regulation, Commission, on June 25, 1996.
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CBOE believes that the implementation of a pilot test of a system
that, if successful, would permit the continued availability of CBOE's
automatic execution system for public customer orders during the period
when options are traded after the close of trading in the primary
markets for underlying stocks and would assure that these orders are
executed at fair prices in the event of significant news announcements,
is in the interest of promoting just and equitable principles of trade
and protecting investors and the public interest, and thus is
consistent with the objectives of Section 6(b)(5) of the Act.
B. Self-Regulatory Organization's Statement on Burden on Competition
CBOE does not believe that the proposed rule change will impose any
burden on competition.
C. Self-Regulatory Organization's Statement 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 Exchange has requested that the proposed rule change be given
accelerated effectiveness pursuant to Section 19(b)(2) of the Act. 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.
The Commission believes that the Exchange's proposal provides a
reasonable method of testing a system to address pending news
announcements after the close of trading in the primary market for the
underlying securities.\8\ The Commission notes that the test will be
limited to news announcements after the close of trading in the primary
market for the underlying stock, while continuing to (1) ensure prompt
execution of customer orders in the particular class subject to a news
announcement by rerouting such orders to a PAR workstation and (2) make
RAES executions available in classes of options not subject to news
announcements during the time when options continue to be traded after
the close of trading in the primary market for underlying stocks.
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\8\ See Amendment No. 2, supra note 4.
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As noted, the CBOE intends to evaluate the pilot in several
respects to determine if it wants to implement the system on a
permanent basis.\9\ The CBOE will provide the Commission with the
analysis of the pilot.
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\9\ The pilot expires at 3:10 p.m. central time on July 26,
1996. Any request for an extension of the pilot period or request
for permanent approval of the system would have to be submitted to
the Commission pursuant to Section 19(b)(2) of the Act.
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The Commission finds good cause for approving this proposed rule
change, as amended, on an accelerated basis prior to the thirtieth day
after the date of publication of notice thereof in the Federal
Register. Specifically, the Commission believes that accelerated
approval of the proposal, as amended, is appropriate because it is to
be implemented for a limited 30-day period which will provide CBOE with
the time to test the effectiveness of the system.
Accordingly, the Commission believes that it is consistent with
Section 6(b)(5) of the Act to approve the proposed rule change, as
amended, on an accelerated basis.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing and Amendment Nos. 1 and 2. Persons
making written submissions should file six copies thereof with the
Secretary, Securities and Exchange Commission, 450 Fifth Street, N.W.,
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 in the Commission's Public
Reference Section, 450 Fifth Street, N.W., Washington, DC 20549. Copies
of such filing will also be available for inspection and copying at the
principal office of CBOE. All submissions should refer to File No. SR-
CBOE-96-37 and should be submitted by July 26, 1996.
V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change (File No. SR-CBOE-96-37), as amended, is
hereby approved for a 30-day pilot period, on an accelerated basis.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\10\
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\10\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 96-17149 Filed 7-3-96; 8:45 am]
BILLING CODE 8010-01-M