[Federal Register Volume 61, Number 163 (Wednesday, August 21, 1996)]
[Notices]
[Pages 43281-43283]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-21320]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37577; File No. SR-CBOE-96-55]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Partial Accelerated Approval of Proposed Rule Change by 
Chicago Board Options Exchange, Incorporated Relating to its System for 
Suspending the Retail Automatic Execution System for Equity Options in 
the Event of News Announcements Near the Close of Trading

August 15, 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 August 
14, 1996, the Chicago Board Options Exchange, Incorporated (``CBOE'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I and II

[[Page 43282]]

below, which Items have been prepared by the CBOE. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons, and to grant accelerated approval to the 
portion of the proposal to extend the pilot program pending the 
Commission's review of the proposed rule change.

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

    The CBOE seeks permanent approval of a program for suspending the 
Exchange's automatic execution system in the event of news 
announcements near the close of trading, as described in Interpretation 
and Policy .01 under CBOE Rule 6.6. The Exchange also proposes to 
continue the pilot program pending consideration of the request for 
permanent approval.
    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 purpose of the proposed rule change is to make permanent the 
Exchange's system that suspends its automatic execution system in the 
event of news announcements near the close of trading, as described in 
Interpretation and Policy .01 under CBOE Rule 6.6.\1\ The Exchange is 
also proposing continuation of the pilot operation of the system while 
the proposal for permanent status is being considered by the 
Commission.
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    \1\ The 30-day pilot was proposed in File No. SR-CBOE-96-37. See 
Securities Exchange Act Release No. 37380 (June 28, 1996). The pilot 
was extended for an additional 15 days in File No. SR-CBOE-96-53. 
See Securities Exchange Act Release No. 37505 (July 31, 1996).
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    The automatic RAES suspension system is designed to respond to the 
problem presented when issuers of stocks underlying options make 
significant news announcements during the ten minutes after the close 
of trading in stocks when options continue to trade.\2\ The system 
monitors news wires during this period, and automatically suspends the 
Exchange's Retail Automatic Execution System in options on stocks that 
are the subject of such announcements in order to prevent automatic 
executions at prices that do not reflect the news. This program has 
been in place on a pilot basis since July 1, 1996, to enable the 
Exchange to evaluate it before deciding whether to adopt it on a 
permanent basis.
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    \2\ CBOE may soon propose reducing to five minutes the time when 
options continue to trade after the close of stock trading. So long 
as options trade for any period of time after the close of stock 
trading, CBOE believes it would need to maintain the system for 
suspending RAES in the event of news announcements during this 
period. Only if options trading and stock trading close concurrently 
would there be no need for such a system. CBOE does not support 
concurrent closings because this would not allow time for closing 
options prices to be determined based on closing stock prices, or 
for participants to open or close options positions for hedging 
purposes based on closing stock prices. For a more detailed 
discussion of the reasons for continuing to trade options after the 
close of trading in the primary markets for underlying stocks and 
the problems this presents for RAES, see the discussion in SR-CBOE-
96-37, which proposed the initial 30-day pilot in the system that is 
the subject of this filing, notice of which was given in Securities 
Exchange Act Release No. 37380 (June 28, 1996).
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    Based on its experience with the pilot operation of the system, the 
Exchange has now determined to propose its adoption on a permanent 
basis. During the first four weeks of the pilot operation of the 
system, the Exchange believes that it performed as intended to suspend 
RAES in particular classes of options each time there was a news 
announcement pertaining to an underlying stock during the period of 
time when options continued to trade after the close of trading in 
underlying stocks. The Exchange submitted a report of the operation of 
the pilot from July 1, 1996 through July 26, 1996 to the Commission. 
The report shows that during this period, RAES was suspended a total of 
90 times and was reinstated after suspension 36 times. Although the 
news announcements covered a range of subjects, at least 15 were 
earnings reports, evidencing that many issuers continue to release such 
news after the close of stock trading while options continue to be 
traded. Of the 90 suspensions, 26 were in classes in which there were 
RAES-eligible orders after the suspension. Of the 132 RAES-eligible 
orders in these classes, 69 were executed after RAES was reactivated 
(63 of which related to a single suspension and subsequent reactivation 
of RAES in connection with the release of earnings for IBM), and 63 
were rerouted as follows: to PAR terminals (30 orders), to printers at 
the post (4 orders), to members' booths (22 orders), or to the limit 
order book (7 orders). Forty-five of these rerouted orders (71%) were 
filled in the auction market. Eighteen orders during the pilot period 
expired unfilled. Because these orders were all submitted at or after 
the close of stock trading and related to options on stocks that were 
the subject of post-close news announcements, the Exchange believes 
that it is reasonable to conclude they were entered for the purpose of 
taking advantage of prices that had not been adjusted to reflect news 
announcements. Accordingly, the Exchange believes that the system 
appears to have worked as intended to prevent the execution of these 
orders at inappropriate prices, while permitting most orders to be 
executed at prices established in the auction market. The Exchange 
notes that reactivation of RAES was generally not a significant factor 
in the execution of these orders (with the one exception of the IBM 
orders noted above), because most had already been executed in the 
auction market by the time RAES was reactivated.
    The Exchange believes that the pilot operation of the RAES 
suspension system demonstrated that it is able to prevent the automatic 
execution of option orders at inappropriate prices while avoiding any 
negative impact on the operation of the Exchange. For this reason, the 
Exchange believes the system should be approved on a permanent basis, 
and that to do so is consistent with the objectives of Section 6(b)(5) 
of the Act, in that it will help to assure that option orders are 
executed at fair prices in the event of significant news announcements, 
which serves to promote just and equitable principles of trade and to 
protect investors and the public interest.

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 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.

[[Page 43283]]

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.
    The Exchange has requested that the Commission approve on an 
accelerated basis pursuant to Section 19(b)(2) of the Act the portion 
of the proposed rule change that proposes continuation of the pilot 
operation of the RAES suspension system pending consideration by the 
Commission to approve the system on a permanent basis. In that regard 
the Commission finds it 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, to permit CBOE to continue the pilot operation of 
the system while the Commission considers CBOE's proposal to implement 
the system on a permanent basis. The Commission notes that the Exchange 
has not reported any significant problems with the operation of the 
system to date.
    The Commission finds good cause for approving this proposed rule 
change 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 this 
portion of the proposal is appropriate because it is to be implemented 
for a limited period pending the review by the Commission of the 
Exchange's proposal to seek permanent approval of the pilot program. 
During this period all orders will be handled in accordance with the 
terms of the pilot, as previously approved by the Commission.
    Accordingly, the Commission believes that it is consistent with 
Section 6(b)(5) of the Act to approve an extension of the pilot 
program, on an accelerated basis.

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. 20549. Copies of such filing will also be available 
for inspection and copying at the principal office of CBOE. All 
submissions should refer to the file number in the caption above and 
should be submitted by September 11, 1996.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\3\ that the portion of the proposed rule change requesting the 
continuation of the pilot is approved on an accelerated basis, pending 
Commission review of the proposal requesting permanent approval.

    \3\ 15 U.S.C. 78s(b)(2).
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    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. 96-21320 Filed 8-20-96; 8:45 am]
BILLING CODE 8010-01-M