[Federal Register Volume 61, Number 215 (Tuesday, November 5, 1996)]
[Notices]
[Pages 56983-56985]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-28385]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37890; File Nos. SR-Amex-96-37, SR-NYSE-96-30, and SR-
Phlx-96-43]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by the American 
Stock Exchange, Inc., New York Exchange, Inc., and Philadelphia Stock 
Exchange, Inc., Relating to an Extension of Certain Market-Wide Circuit 
Breaker Provisions

October 29, 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 October 3, 1996, the American Stock Exchange, Inc. 
(``Amex''); on October 15, 1996, the New York Stock Exchange, Inc. 
(``NYSE''); and on October 22, 1996, the Philadelphia Stock Exchange, 
Inc. (``Phlx'') respectively (each individually referred to herein as 
an ``Exchange'' and to two or more collectively referred to as 
``Exchanges'', filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') the proposed rule changes relating to the 
extension of certain market-wide circuit breaker provisions as 
described in Items I, II, and III below, which Items have been prepared 
by the Exchanges. The Phlx submitted to the Commission Amendment No. 1 
to its proposal on October 28, 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 240.19b-4.
    \3\ In Amendment No. 1, the Phlx requested an extension of its 
pilot program for a six month period ending on April 30, 1997, 
rather than the one year period originally requested. See Letter 
from Murray L. Ross, Secretary, Phlx, to Alton Harvey, Office Chief, 
Office of Market Watch (``OMW''), Division of Market Regulation 
(``Market Regulation''), Commission, dated October 28, 1996.
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I. Self-Regulatory Organizations' Statement of the Terms of Substance 
of the Proposed Rule Changes

    The Exchanges propose to extend for six month (i.e., until April 
30, 1997) their existing circuit breaker pilot programs which expire on 
October 31, 1996.

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

    In their filing with the Commission, the Exchanges included 
statements concerning the purpose of and basis for the proposed rule 
changes. The text of these statements may be examined at the places 
specified in Item V 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
    In 1988, the Commission approved circuit breaker rule proposals by 
the Exchanges;\4\ and in July, 1996, the Commission approved the first 
major set of changes to the circuit breaker rules.\5\ To summarize, the 
original circuit breaker rules provided that trading would halt for one 
hour if the Dow Jones Industrial Average (``DJIA'') \6\ was to decline 
250 points from its previous day's closing level and, thereafter, 
trading would halt for an additional two hours if the DJIA declined 400 
points from its previous day's close. Further, the original rules also 
provided for the Exchanges to conduct an abbreviated reopening session 
if the circuit breaker trigger levels were reached during the last 
hour, but before the last half-hour of trading, or during the last two 
hours, but before the last hour of trading. The original circuit 
breaker proposals were approved on a pilot basis, and have

[[Page 56984]]

been extended annually on that basis since.\7\
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    \4\ See Securities Exchange Act Release Nos. 26198 (October 19, 
1988), 53 FR 41637 (Amex, Chicago Board Options Exchange, 
Incorporated (``CBOE''), National Association of Securities Dealers 
(``NASD'') and NYSE); 26218 (October 26, 1988), 53 FR 44137 (Chicago 
Stock Exchange (``CHX'')); 26357 (December 14, 1988), 53 FR 51182 
(Boston Stock Exchange (``BSE'')); 26368 (December 16, 1988), 53 FR 
51942 Pacific Stock Exchange (``PSE'')); 26386 (December 22, 1988), 
53 FR 52904 (Phlx); and 26440 (January 17, 1989), (Cincinnati Stock 
Exchange (``CSE'')).
    \5\ See Securities Exchange Act Release Nos. 37457 (July 19, 
1996) 61 FR 39176 (NYSE); 37458 (July 19, 1996), 61 FR 39167 (Amex); 
and 37459 (July 19, 1996), 61 FR 39172 (BSE, CBOE, CHX, and Phlx).
    \6\ ``Dow Jones Industrial Average'' is a service mark of Dow 
Jones & Company, Inc.
    \7\ See supra note 4. 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 National Association of 
Securities Dealers' (``NASD'') policy statement expires on December 
31, 1997. See Securities Exchange Act Release No. 36563 (December 7, 
1995), 60 FR 64084. The Commission approved on a permanent basis the 
proposals by the CBOE, CSE, and 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).
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    In July of 1996, the Commission approved proposals by the Exchanges 
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.\8\ Now, if the DJIA declines by 250 points, trading will 
halt for one-half hour, and if the DJIA declines further by 400 points, 
trading will halt for one hour. Also, the Commission approved the 
Exchanges eliminating references in their rules 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 during the last hour, but before the last half-hour 
of trading, or during the last two hours, but before the last hour of 
trading.\9\
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    \8\ See supra note 5.
    \9\ Id.
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    The Exchanges believe that it is appropriate to extend their 
respective circuit breaker pilot programs for at least another six 
months. Although the Exchanges have not had to implement the circuit 
breaker provisions subsequent to the revisions approved in July, 1996, 
the Exchanges continue to believe that these revised time periods will 
be sufficient to provide a meaningful ``time out'' for participants to 
evaluate changing market conditions, without unduly constraining 
trading activity. Accordingly, the Exchanges propose that an initial 
extension of at least six months be granted to provide them with 
additional time to continue appraising the effectiveness of the reduced 
time periods for halting trading.
    The Exchanges also represent that they will use the six-month 
extension to review the adequacy of the current circuit breaker trigger 
levels, which have remained the same 250/400 point level ever since the 
pilot programs were first adopted in 1988.\10\ The Commission believes 
that increases in the circuit breaker trigger levels to reflect current 
market levels should be developed by the Exchanges as soon as possible.
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    \10\ See supra note 4.
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2. Statutory Basis
    The basis under the Act for this proposed rule change is the 
requirement under Section 6(b)(5) that an exchange have rules that are 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to foster cooperation 
and coordination with persons engaged in regulating, clearing, 
settling, processing information with respect to, and facilitating 
transactions in securities, to remove impediments to protect and 
perfect the mechanism of a free and open market and a national market 
system, and in general, to protect investors and the public interest.
    The proposed rule changes are consistent with Section 6(b)(5) of 
the Act in that they are designed to promote just and equitable 
principles of trade. The Exchanges believe that extending their circuit 
breaker rules is consistent with these objectives in that the 
additional time will provide market participants with a reasonable 
opportunity to continue assessing the viability of the reduced time 
periods in the event of a circuit breaker trading halt, and also, to 
address the adequacy of the current circuit breaker trigger levels.

B. Self-Regulatory Organizations' Statement 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' Statement on Comments on the Proposed 
Rule Change 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 these extensions to 
circuit breaker rules prior to the 30th day after publication of the 
proposed rule change in the Federal Register.

IV. Commission's Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    After careful review of the Exchanges' 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).\11\ 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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    \11\ 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.12 These 
market-wide circuit breakers were intended to provide market 
participants with an opportunity to reestablish an equilibrium between 
buying and selling interest by providing a reasonable opportunity to 
become aware of and respond to a sudden, potentially destabilizing 
market decline. In approving these proposals, the Commission also noted 
that an Interim Report of the Working Group on Financial Markets 
(``Working Group'') 13 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.\14\ 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.\15\ 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 providecoordinated means to address 
potentially destabilizing market volatility.\16\
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    \12\ See supra note 4.
    \13\ 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.
    \14\ Id.
    \15\ Id.
    \16\ 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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[[Page 56985]]

    The Commission continues to believe that the market-wide trading 
halt proposals are consistent with Section 6 of the Act \17\ 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. In particular, the Commission believes that the circuit 
breaker rules reflect an appropriate coordinated effort by the equities 
and futures markets to halt trading for a brief period in all stocks, 
stock options, stock index options, stock index futures, and options on 
stock index futures when the equity market experiences a potentially 
destabilizing intra-day decline. The Commission also believes that the 
proposed extension of the circuit breaker rules by the Exchanges will 
serve to maintain the coordinated approach that now exists for trading 
halts that are applicable during large, rapid market declines.
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    \17\ 15 U.S.C. 78f(b).
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    While the Commission is approving the NYSE, Amex, and Phlx's 
proposals today in order to maintain coordinated trading halt 
procedures across all equity markets, the Commission continues to have 
significant concerns that the levels for triggering the trading halts 
need to be increased to reflect the market rise since the breakers' 
inception. As the Commission noted when the rule changes shortening the 
circuit breaker halts were adopted in July 1996,\18\ the 154% increase 
in market levels since 1988 necessitates increases in the circuit 
breaker trigger levels so as to prevent unnecessary application of the 
breakers. The continued rise in the DJIA since July further reinforces 
the Commission's concerns in this area. Specifically, when the circuit 
breaker rules were adopted in 1988, the 250-point and 400-point 
triggers represented one-day declines of 12% and 19%, respectively, in 
the DJIA. At current market levels, these triggers represent declines 
of only 4.1% and 6.6%, respectively.\19\ Thus, the maintenance of the 
trigger levels at 250 and 400 points for eight years while the market 
has risen substantially has acted to effectuate a significant de facto 
diminution of the price movement that would cause a market-wide trading 
halt.
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    \18\ See supra note 5.
    \19\ These figures are based on the DJIA close of 6094.23 on 
October 18, 1996.
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    The Commission has serious doubts whether a 4.1% decline warrants a 
market-wide halt. In this regard, the Commission notes that the 1988 
threshold of a 12% decline in the DJIA for the first trading halt has 
been reached only once since 1945, during the 508-point (22.63%) 
decline on October 19, 1987; whereas the current 4.1% threshold for the 
first trading halt has been reached on 13 separate occasions since 
1945.
    The original intent of circuit breakers was to provide a brief 
``timeout'' only during an extraordinary market decline. The Working 
Group envisioned that the circuit breaker levels would be reevaluated 
periodically and adjusted to reflect market levels.\20\ The Commission 
strongly urges the markets to reach a consensus as soon as possible on 
the size of increases in the current trigger levels required to ensure 
that cross-market trading halts are imposed only during market declines 
of historic proportions. Accordingly, the Commission is approving the 
extensions of circuit breakers for only a six-month period, rather than 
for a year as in the past. During the next six months, the Commission 
expects that the markets will promptly reevaluate and adjust circuit 
breaker trigger levels in order to prevent imposing cross-market 
trading halts that are not justified by the overall magnitude of a 
market decline. Moreover, the Commission expects the markets to provide 
the Commission with their proposals for new trigger levels by February 
3, 1997.
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    \20\ See supra note 13.
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    Nevertheless, in order to maintain the coordination of circuit 
breaker procedures across the nation's stock, options, and futures 
exchanges, the Commission has determined that it is appropriate to 
approve the Exchanges' proposals to extend their current circuit 
breaker rules for an additional six months. The Commission believes 
that this extension will provide more than sufficient time for the 
Exchanges to agree on the proper trigger levels and procedures under 
prevailing market levels, as well as to submit proposals to the 
Commission and for the Commission to act on the markets' proposals. 
Accordingly, the Commission finds good cause for approving the 
Exchanges' proposed rule changes prior to the thirtieth day after the 
date of publication of notice of filing thereof in the Federal Register 
because there are no changes being made to the current provisions which 
were approved in July, 1996. Accelerated approval will enable the 
circuit breaker pilots to continue on an uninterrupted basis, and 
ensure continued coordination among the Exchanges. Due to the 
importance of these circuit breakers for market confidence, soundness, 
and integrity, it is necessary and appropriate that these procedures 
continue uninterrupted. Therefore, the Commission believes that 
granting accelerated approval of the proposed rule changes is 
appropriate and consistent with Sections 6 and 19(b)(2) of the Act.

V. 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 Nos. SR-Amex-96-37, SR-NYSE-96-30, and 
SR-Phlx-96-43 and should be submitted by November 26, 1996.

VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\21\ that the proposed rule changes (SR-Amex-96-37, SR-NYSE-96-30, 
and SR-Phlx-96-43) are hereby approved until April 30, 1997.

    \21\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 96-28385 Filed 11-4-96; 8:45 am]
BILLING CODE 8010-01-M