[Federal Register Volume 61, Number 145 (Friday, July 26, 1996)]
[Notices]
[Pages 39172-39174]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-19034]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37459; File Nos. SR-BSE-96-4, SR-CBOE-96-27, SR-CHX-96-
20, SR-Phlx-96-12]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by the Boston 
Stock Exchange, Inc., Chicago Board Options Exchange, Incorporated, 
Chicago Stock Exchange, Inc., and Philadelphia Stock Exchange Inc., 
Relating to Amendments to Trading Halts Due to Extraordinary Market 
Volatility (``Certain Market-Wide Circuit Breaker Provisions'')

July 19, 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 July 12, 1996, the Chicago Stock Exchange, Incorporated (``CHX''); 
on July 15, 1996 the Boston Stock Exchange, Inc. (``BSE''); on July 17, 
1996 the Chicago Board Options Exchange, Incorporated (``CBOE''); and 
on July 18, 1996 the Philadelphia Stock Exchange, Inc. (``Phlx''), 
respectively (each individually referred to herein as an ``Exchange'' 
and two or more collectively referred to as ``Exchanges''), filed with 
the Securities and Exchange Commission (``SEC'' or ``Commission'') 
proposed rule changes as described in Items I, II, and III below, which 
Items have been prepared by the self-regulatory organizations. The Phlx 
submitted to the Commission Amendment No. 1 to its proposal on July 19, 
1996.\3\ The Commission is publishing this notice to solicit comments 
on the proposed rule changes from interested persons. As discussed 
below the Commission is also granting accelerated approval of these 
proposed rule changes.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.194-4.
    \3\ In Amendment No. 1, the Phlx indicated that the pilot period 
extension of its circuit breaker program will expire on October 31, 
1996. See Letter from Murray L. Ross, Secretary, Phlx, to Chester 
McPherson, Attorney, Office of Market Supervision (``OMS''), 
Division of Market Regulation (``Market Regulation''), Commission, 
dated July 18, 1996.
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I. Self-Regulatory Organizations' Statement of the Terms of Substance 
of the Proposed Rule Changes

    In 1988, the Commission approved circuit breaker rules proposals by 
the Exchanges.\4\ In general, the Exchanges' circuit breaker rules 
provide that trading would halt for one hour if the Dow Jones 
Industrial Average (``DJIA'') \5\ were to decline 250 points from its 
previous day's closing level and, thereafter, trading would halt for an 
additional two hours if the DJIA were to decline 400 points from its 
previous day's close.
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    \4\ In 1988, the Commission approved the following circuit 
breaker proposals by the self-regulatory organizations (``SROs'') on 
a pilot basis: See Securities Exchange Act Release Nos. 26198 
(October 19, 1988), 53 FR 41637 (American Stock Exchange (``AMEX''), 
National Association of Securities Dealers (``NASD'') and New York 
Stock Exchange (``NYSE'')); 26218 (October 26, 1988), 53 FR 44137 
(CHX); 26357 (December 14, 1988), 53 FR 51182 (BSE); and 26386 
(December 22, 1988), 53 FR 52904 (Phlx). Since the initial approval 
of the circuit breaker rules on a pilot basis, the Commission has 
extended the pilot program each year. The most recent extensions 
expire on October 31, 1996 for the Amex, NYSE and Phlx, and on 
October 31, 1997 for the BSE and CHX. See Securities Exchange Act 
Release No. 36414 (Oct. 25, 1995) 60 FR 55630. The Commission 
approved on a permanent basis the proposals by the CBOE, Cincinnati 
Stock Exchange (``CSE'') and Pacific Stock Exchange (``PSE''). See 
Securities Exchange Act Release Nos. 26198 (October 19, 1988), 53 FR 
41637 (CBOE); 26440 (January 10, 1989) 54 FR 1830 (CSE); and 26368 
(December 16, 1988), 53 FR 51942 (PSE).
    \5\ ``Dow Jones Industrial Average'' is a service mark of Dow 
Jones & Company, Inc.
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    The Exchanges' rules further provide that if the 250-point trigger 
is reached during the last hour but before the last half-hour of 
scheduled trading, or the 400-point trigger is reached during the last 
two hours, but before the last hour of trading, the Exchanges may then 
use abbreviated reopening procedures either to permit trading to reopen 
before the established close, or to establish closing prices. However, 
if the 250-point trigger is reached during the last half-hour, or if 
the 400-point trigger is reached during the last hour, the Exchanges 
shall not reopen for trading on that day.
    The Exchanges propose to amend their circuit breaker rules to 
modify the time periods for halting trading on the Exchanges when the 
DJIA has declined by 250 or 400 points. The Exchanges propose to revise 
those time periods to one-half hour and one hour, respectively, from 
the one hour and two hours. The Exchanges also are proposing to amend 
their rules to eliminate the reference to using abbreviated reopening 
procedures either to permit trading to reopen before the scheduled 
closing or to establish new last sales prices if trigger values are 
reached in the last one-half hour or hour of trading.

II. Self-Regulatory Organizations' Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Changes

    In their filings with the Commission, the self-regulatory 
organizations included statements concerning the purpose of and basis 
for the proposed rule changes and discussed any comments it received on 
the proposed rule changes. The text of these statements may be examined 
at the places specified in Item IV below. The self-regulatory 
organizations have prepared summaries, set forth in Sections A, B, and 
C below, of the most significant aspects of such statements.

A. Self-Regulatory Organizations' Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Changes

1. Purpose
    The Exchanges believe that it is appropriate to reduce the time 
period during which trading will be halted, particularly given the 
current level of automation support for trading process. The Exchanges 
believe that these revised time periods should be sufficient to provide 
a meaningful ``time out'' for participants to evaluate changing market 
conditions, without unduly constraining trading activity. The Exchanges 
are not proposing, at this time, to revise the 250/400 point trigger.
    With respect to the use of abbreviated reopening procedures, the 
Exchanges

[[Page 39173]]

also are proposing to amend their rules to eliminate the reference to 
using abbreviated reopening procedures either to permit trading to 
reopen before the scheduled closing or to establish new last sales 
prices if trigger values are reached in the last one-half hour or hour 
of trading.\6\
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    \6\ The PSE and CSE have general rules that require them to halt 
trading during the intermarket circuit breakers. See supra note 4. 
Consequently, they do not need to file conforming rule changes 
because their circuit breaker halts will automatically conform to 
the shortened halt periods adopted by the other exchanges. See 
Letters to Howard L. Kramer, Associate Director, OMS, Market 
Regulation, Commission, from David P. Semak, Vice President, 
Regulation, PSE, dated July 17, 1996; and Adam W. Gurwitz, Director 
of Legal Affairs, CSE, dated July 17, 1996.
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    In conjunction with its proposed amendment to its circuit breaker 
rules, the BSE also has filed to renumber Section 34, Chapter II of its 
rules as Section 34A, and to add a new section, Section 34B (Limitation 
on Trading During Significant Market Moves). This new section would 
adopt the language contained in the NYSE's Rule 80A(c) pertaining to 
the execution of index arbitrage orders during periods of significant 
market declines and advances. The BSE believes that the codification of 
this limitation will prevent orders that are prohibited in the primary 
market during periods of market stress from finding a safe harbor on 
the Exchange. In addition, the Exchange seeks to delete the redundant 
``80A'' language contained in the Procedures for Competing Specialist 
contained in Chapter XV, Section 18, No. 14.
2. Statutory Basis
    The proposed rule changes are consistent with Section 6(b)(5) of 
the Act in that it is designed to promote just and equitable principles 
of trade. The Exchanges believe that amending their circuit breaker 
rules is consistent with these objectives in that the revised trading 
halt periods still provide market participants with a reasonable 
opportunity to become aware of and respond to significant price 
movements, thereby facilitating, in an orderly manner, the maintenance 
of an equilibrium between buying and selling interest.

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

    The Exchanges do not believe that any burden will be placed on 
competition as a result of the proposed rule change.

C. Self-Regulatory Organizations' Statements on Comments on the 
Proposed Rule Changes Received From Members, Participants or Others

    Comments were neither solicited nor received with respect to the 
proposed rule changes.

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

    The Exchanges request that the Commission finds good cause pursuant 
to Section 19(b)(2) of the Act for approving the proposed amendments to 
their circuit breaker rules prior to the 30th day after publication of 
the proposed rule change in the Federal Register.

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 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 Nos. SR-BSE-96-4, SR-CBOE-96-27, SR-
CHX-96-20, and SR-Phlx-96-12 and should be submitted by August 16, 
1996.

V. Commission's Findings and Order Granting Accelerated Approval of 
Proposed Rule Changes

    After careful review of the Exchange's proposed amendments to their 
circuit breaker rules and for the reasons discussed below, the 
Commission believes that the proposed rule changes are consistent with 
the requirements of the Act and the rules and regulations thereunder 
applicable to a national securities exchange, and, in particular, with 
the requirements of Section 6(b).\7\ Specifically, the Commission 
believes the proposals are consistent with the Section 6(b)(5) 
requirements that the rules of an exchange be 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, 
to prevent fraudulent and manipulative acts, and, in general, to 
protect investors and the public interest.
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    \7\ 15 U.S.C. 78f(b).
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    In 1988, the Commission approved circuit breaker proposals by the 
SROs as a coordinated mechanism to deal with potential strains that may 
develop during periods of extreme market volatility.\8\ These market-
wide circuit breakers were intended to provide market participants with 
an opportunity to reestablish an equilibrium between buying and selling 
interest by ensuring that they had a reasonable opportunity to become 
aware of and respond to significant movements. In approving these 
proposals, the Commission also noted that an Interim Report of the 
Working Group on Financial Markets (``Working Group'') \9\ had 
recommended that in periods of rapid market decline that threaten to 
create panic conditions, trading halts and reopening procedures should 
be coordinated within the financial market place.\10\ Specifically, the 
Working Group recommended that all U.S. markets for equity and equity-
related products--stocks, individual stock options, stock index 
options, and stock index futures--halt trading during such periods of 
market volatility.\11\ These recommendations, in part, were in response 
to the events of October 19, 1987, when the DJIA declined over 22.6%. 
The futures exchanges also adopted analogous trading halts to provide 
coordinated means to address potentially destabilizing market 
volatility.\12\
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    \8\ See supra note 4.
    \9\ The Working Group on Financial Markets was established by 
the President in March 1988 in response to the 1987 market break. It 
consisted of the Under Secretary for Finance of the Department of 
the Treasury and the Chairmen of the Commission, the Commodity 
Futures Trading Commission, and the Board of Governors of the 
Federal Reserve System. Its mandate was to determine the extent to 
which coordinated regulatory action was necessary to strengthen the 
nation's financial markets.
    \10\ See supra note 4.
    \11\ Id.
    \12\ See Letter from Todd E. Petzel, Vice President, Financial 
Research, Chicago Mercantile Exchange (``CME''), to Jean A. Webb, 
Secretary, Commodity Futures Trading Commission (``CFTC''), dated 
September 1, 1988. See also letters to Jean A. Webb, Secretary, 
CFTC, from Paul J. Draths, Vice President and Secretary, Chicago 
Board of Trade (``CBT''), dated July 29, 1988; Michael Braude, 
President, Kansas City Board of Trade (``KCBT''), dated August 10, 
1988; and Milton M. Stein, Vice President, Regulation and 
Surveillance, New York Futures Exchange (``NYFE''), dated September 
2, 1988.
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    Since the implementation of the circuit breakers, the DJIA has 
risen

[[Page 39174]]

significantly. The 250 point and 400 point triggers, which represented 
12% and 19% of the DJIA when implemented, now represent 4.5% and 7% of 
the DJIA. The self-regulatory organizations and members of the industry 
have continued to study the circuit breaker rules and to consider the 
possible effects of triggering the current circuit breakers in light of 
the rise in the DJIA since their implementation.
    While the Exchanges evaluate the need to change their circuit 
breaker trigger levels, the Commission believes, in the near term, it 
is reasonable for the Exchanges to shorten the length of trading halts. 
The Exchanges believe and the Commission agrees that, with advances in 
technology and increases in the operational capacity of the markets, 
the current length of the trading halts may not be necessary for market 
participants to become aware of and respond to significant price 
movements. The shorter time periods proposed by the Exchanges for 
halting all trades should be sufficient to allow market participants to 
evaluate and act on changing market conditions without unduly 
constraining market activities.
    Moreover, the Commission believes that shortening the length of 
trading halts does not need to be delayed pending the resolution of 
other circuit breaker issues. While an examination of the broader 
issues of raising the circuit breaker triggers may be warranted, the 
trading halt periods should be shortened irrespective of the level of 
the trigger points. Nevertheless, the Commission encourages the 
Exchanges and members of the industry to continue to evaluate the 
trigger levels for trading halts in light of the changing circumstances 
of the market since 1988.
    The Exchanges further propose to amend their rules to eliminate the 
provisions for conducting an abbreviated trading session either to 
permit trading to reopen before the scheduled closing or to establish 
new last sales prices if the 250-point trigger is reached within one 
hour of the scheduled close of trading for the day, or if the 400-point 
trigger is reached within two hours of the scheduled close of trading 
for the day.
    With the Exchanges' current proposals, the circuit breaker rules 
would conform with those filed by the NYSE and the Amex.\13\ Circuit 
breaker rules are a coordinated effort by the equities and futures 
markets to halt trading in all stocks stock options, stock index 
options, stock index futures, and options on stock index futures when 
the DJIA reaches certain established trigger values. The Commission 
believes that the proposed amendments by the Exchanges would serve to 
maintain the coordinated approach that now exists for trading halts 
that are applicable during large, rapid market declines, and are 
therefore consistent with Section 6 of the Act \14\ in that they are 
designed to remove impediments to, and perfect the mechanism of, a free 
and open market, and to protect investors and the public interest.
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    \13\ See Securities Exchange Act Release Nos. 37457 (July 19, 
1996) (NYSE); 37458 (July 19, 1996) (Amex).
    \14\ 15 U.S.C. 78f(b).
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    The BSE also is proposing to renumber Section 34, Chapter II of its 
rules as Section 34A, and to add a new section, Section 34B. This 
addition would codify the BSE's practice pertaining to index arbitrage 
orders during periods of significant market declines and advances. The 
current practice of the BSE is that on any day when the DJIA has 
advances by 50 points or more from its closing value on the previous 
day, it requires all index arbitrage orders to buy any component stock 
of the S&P 500 Stock Price Index \15\ to be entered with the 
instruction ``buy minus.'' If on that same day the DJIA subsequently 
reaches a value that is 25 points or less above the closing value on 
the previous trading day, this requirement would no longer apply.
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    \15\ ``Standard & Poor's 500 Stock Price Index'' is a service 
mark of Standard & Poor's Corporation.''
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    Section 34B also would codify a similar practice of the BSE when 
the DJIA has declined by 50 points or more from its closing value on 
the previous trading day. Then, all index arbitrage orders to sell must 
be entered with the instruction ``sell plus;'' and if on that day the 
DJIA subsequently reaches a value that is 25 points or less below the 
closing value on the previous trading day, the requirement does not 
apply.
    The addition of Section 34B now brings the BSE in line with the 
other exchanges that have already codified this practice, and will 
prevent orders that are prohibited in the primary market during a 
period of market stress from finding a safe harbor on the Exchange. 
Section 34B would also make the index arbitrage language contained in 
the Exchange's procedures for Competing Specialist in Chapter XV, 
Section 18, No. 14 redundant; therefore, the Commission also approves 
the deletion of this now redundant language.
    The Commission believes that the BSE's proposal to renumber Section 
34 as 34A, and add new Section 34B is consistent with the requirements 
of Section 6(b)(5) of the Act \16\ and the rules and regulations 
thereunder applicable to a national securities exchange in that they 
are designed to remove impediments to, and perfect the mechanism of, a 
free and open market, and to protect investors and the public interest.
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    \16\ 15 U.S.C. Sec. 78f(b).
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    The Commission finds good cause for approving the proposed rule 
changes prior to the thirtieth day after the date of publication of the 
proposals in the Federal Register. The Commission believes that the 
circuit breaker mechanisms should be coordinated across the U.S. 
equity, futures and options markets to be effective in time of market 
volatility. In light of the Commission's approval today of analogous 
proposals by the NYSE and Amex, it is important that the Exchanges' 
circuit breaker procedures be approved simultaneously to preserve 
market uniformity. Based on the above, the Commission, therefore, finds 
that there is good cause, consistent with Section 6(b)(5) of the 
Act,\17\ to accelerate approval of the amended proposed rule 
changes.\18\
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    \17\ Id.
    \18\ The Commission finds good cause to approve the BSE's 
changes to its Section 34 because they merely clarify current BSE 
practice.
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    The Exchanges' proposals, as well as the new NYSE and Amex circuit 
breaker proposals,\19\ will become effective on July 22, 1996.
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    \19\ See supra note 13.
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VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\20\ that proposed rule changes (SR-BSE-96-4, SR-CBOE-9627, SR-CHX-
96-20, and SR-Phlx-96-12) are approved and effective on July 22, 1996.

    \20\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-19034 Filed 7-25-96; 8:45 am]
BILLING CODE 8010-01-M