[Federal Register Volume 61, Number 135 (Friday, July 12, 1996)]
[Notices]
[Pages 36773-36774]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-17701]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37406; File No. SR-Amex-96-17]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by American Stock Exchange, Inc. Relating to the Closing of 
Equity Option Trading at 4:00 p.m.

July 3, 1996.
    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 May 20, 
1996, the American Stock Exchange, Inc. (``Amex'' 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.

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

    The Amex proposes to amend Rules 1 and 918 to provide for the 
closing of equity option trading at 4:00 p.m.
    The text of the proposed rule change is available at the Office of 
the Secretary, Amex, 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

1. Purpose
    Since 1978, equity options have traded until 4:10 p.m., ten minutes 
beyond the close of trading of the underlying securities to allow 
investors to trade options based upon the final closing prices of those 
underlying securities.\1\ In 1978, frequent delays between the time of 
the execution of the closing transaction and the appearance of the 
trade on the Consolidated Tape Association's Tape A gave rise to time 
lags that, in some instances, were as long as seven minutes after the 
close of trading at 4:00 p.m. Today, due to improvements in trading and 
reporting systems, the dissemination of closing prices is delayed, at 
most, one or two minutes and only in unusual market conditions are any 
significant time lags encountered. Another reason cited in 1978 for 
extending equity options trading until 4:10 p.m. was to give options 
participants additional time to digest the impact of news announcements 
by companies and government agencies who oftentimes released such news 
at 4:00 p.m. or shortly thereafter.\2\
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    \1\ The extension of the trading hours for options by ten 
minutes until 4:10 p.m. (E.S.T.) by the American Stock Exchange 
(``Amex''), the Chicago Board Options Exchange, Incorporated 
(``CBOE''), the Midwest Stock Exchange, Incorporated (``MSE'') (now 
known as the Chicago Stock Exchange, Inc. (``CHX'')), Pacific Stock 
Exchange Incorporated (``PSE''), and the Philadelphia Stock 
Exchange, Inc. (``PHLX'') (collectively referred to as the ``options 
exchanges'') was initially approved by the Commission on a trial 
basis for a four month period beginning on Oct. 23, 1978 and 
extending through Feb. 28, 1979. Securities Exchange Release No. 
15241 (Oct. 18, 1978), 43 FR 49867 (Oct. 25, 1978) (order approving 
File Nos. SR-Amex-78-22, SR-CBOE-78-30, SR-MSE-78-26, SR-PSE-78-17, 
and SR-PHLX-78-18). The Commission approved the continued use by the 
options exchanges of the existing 4:10 p.m. (E.S.T.) closing time 
for standardized options trading through Apr. 28, 1979. Securities 
Exchange Act Release No. 15593 (Feb. 28, 1979), 44 FR 12525 (Mar. 7, 
1979) (order approving File Nos. SR-Amex-79-3, SR-CBOE-79-1, SR-MSE-
79-7, SR-PSE-79-1, and SR-PHLX-79-1). The Commission has since then 
approved on a permanent basis the closing of options trading on the 
options exchanges at 4:10 p.m. (E.S.T.). Securities Exchange Act 
Release No. 15765 (Apr. 27, 1979), 44 FR 26819 (May 7, 1979) (order 
approving File Nos. SR-Amex-79-6, SR-CBOE-79-4, SR-MSE-79-11, SR-
PSE-79-3, and SR-PHLX-79-4).
    \2\ See Release No. 15241, supra note 1.
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    While the Exchange expressed reservations regarding the move to a 
later close, the Amex ultimately acceded to the industry's consensus 
that a 4:10 p.m. close was appropriate. Although the Exchange has made 
efforts to encourage companies and others to withhold significant news 
announcements until after the close of options trading, occasionally, 
such announcements are released between 4:00 and 4:10 p.m. which 
dramatically impact the trading of options. When such instances occur, 
the Exchange has observed that public customers are unable to react as 
quickly as professional traders and accordingly lack the ability to 
give their brokers instructions or take action with regard to orders 
that may have been previously placed on the limit order book. Further, 
because the principal market for the underlying stock is closed, option 
specialists and marketmakers have oftentimes experienced extreme 
difficulty making orderly options markets given their inability to 
hedge or otherwise offset market risk with transactions in the 
underlying stock.
    Therefore, the Exchange now proposes that effective at 4:00 p.m. 
(1) all trading in equity options will cease; (2) all automated order 
routing and execution systems will be turned off; (3) no orders will be 
permitted to be entered on the trading floor; and (4) a closing 
rotation \3\ will be held (a) immediately after the close of trading 
for options whose underlying stocks are traded through the facilities 
of the National Association of Securities Dealers Automated Quotation 
System (Nasdaq); or (b) for options whose underlying stocks trade on 
either the New York Stock Exchange or the Amex, immediately after the 
last sale in the security has been disseminated. No orders may be 
entered, modified or canceled in any option series after 4:00 p.m., 
except on expiration Friday \4\ in expiring option series when orders 
may be entered, modified or canceled until the commencement of the 
closing rotation in such series.\5\
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    \3\ A closing rotation is a trading procedure to determine 
appropriate closing prices or quotes for each series of options on 
an underlying stock.
    \4\ The term ``expiration Friday'' refers to the trading day, 
usually the third Friday of the month, when various stock index 
futures, stock index options, and options on stock index futures 
expire or settle concurrently.
    \5\ The Exchange also is proposing to amend Rule 1 to provide 
that closing transactions may be permitted after 4:00 p.m. where the 
Exchange has determined to permit such transactions pursuant to Rule 
117. Securities Exchange Release No. 37146 (Apr. 26, 1996), 61 FR 
19650 (May 2, 1996) (notice of File No. SR-Amex-96-13).
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    The Exchange believes a return to 4:00 p.m. closing time for equity 
options is necessary and appropriate given the improvements in 
dissemination of closing prices and the limited ability of public 
customers to react to news announcements and changing markets in the 
last ten minutes of trading. Such

[[Page 36774]]

a change in trading hours, however, should not be implemented unless 
all options exchanges agree to similar procedures in order to limit 
confusion by preserving uniformity at the options exchanges especially 
in those classes that are multiply traded.
2. Statutory Basis
    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, to promote just and equitable principles of trade, and is 
not designed to permit unfair discrimination between customers, 
issuers, brokers or dealers.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any inappropriate 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 either solicited or received.

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

    Within 35 days of 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 reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve the 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 at the 
Commission's Public Reference Section, 450 Fifth Street, N.W., 
Washington, D.C. 20549. Copies of such filing will also be available 
for inspection and copying at the principal office of the Exchange. All 
submissions should refer to File No. SR-Amex-96-17 and should be 
submitted by August 2, 1996.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.
Jonathan G. Katz,
Secretary.
[FR Doc. 96-17701 Filed 7-11-96; 8:45 am]
BILLING CODE 8010-01-M