[Federal Register Volume 61, Number 234 (Wednesday, December 4, 1996)]
[Notices]
[Pages 64405-64406]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-30812]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37988; File No. SR-CBOE-96-71]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Incorporated Relating to 
the Closing Time for Equity and Narrow-Based Index Options

November 26, 1996.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 \2\ thereunder, notice is hereby given 
that on November 20, 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 self-regulatory organization. The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.
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    \1\ 15 U.S.C. Sec. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange proposes to amend its rules governing the hours of 
trading in equity options and narrow-based index options. After the 
change, the Exchange will close trading in equity and narrow-based 
index options at 3:02 p.m. (Chicago time) instead of at 3:10 p.m. 
(Chicago time), as is the case now. 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, 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
    The purpose of the proposed rule change is to change the close of 
the normal trading hours in equity and narrow-based index options from 
3:10 p.m. (Chicago time) to 3:02 p.m. (Chicago time). After the change, 
the time of the close of trading in these CBOE options will more 
closely correspond to the normal time set for the close of trading on 
the primary exchanges listing the stocks underlying the CBOE options. 
The primary exchanges generally close at 3:00 p.m. (Chicago time).
    When the Exchange determined to change its closing time for equity 
options and narrow-based index options, it determined that there were 
still reasons to continue trading options for some period of time after 
the close of trading of the primary markets for the underlying 
securities. Specifically, the extended period allows options traders to 
respond to late reports of closing prices over the consolidated tape. 
If the price of a late reported trade on an underlying security was 
substantially different from the previous reported price, the extended 
trading session would give options traders the opportunity to bring 
options quotes into line with the closing price of the underlying 
security. However, because of improvements in the processing and 
reporting of transactions, there are usually no significant delays in 
the reporting of closing prices. Therefore, a ten minute session is no 
longer needed to trade options after the underlying securities close 
trading.
    The Exchange believes the need to continue trading options for some 
period of time after the close of trading on the primary markets for 
the underlying securities outweighs the obvious problems with 
continuing to trade options while stocks are longer traded. The 
Exchange has learned through experience with a 3:10 close that pricing 
aberrations can occur if an option is traded when the underlying stock 
is no longer trading. There is obviously a close relationship in the 
price of the underlying stock and the overlying option. As a result, it 
is difficult for the market to price options accurately when the 
underlying security is not trading. It is for this reason that the halt 
of trading in an underlying security is a factor to be considered in 
determining whether to halt trading in the overlying option under CBOE 
Rule 6.3.
    In recent weeks, the Exchange has become particularly cognizant of 
the pricing problems that result when the Exchange remains open after 
the close of the primary exchange for the underlying stocks. A number 
of issuers have adopted the practice of disseminating important 
corporate news after the close of trading on the primary exchange. 
Issuers often wait until after 3:00 p.m. Chicago time to release the 
news because they realize that the news might have a short-term 
disruptive effect on the market price of the stock that can be 
minimized if investors are able to digest the significance of the news 
after the markets have closed and overnight. However, despite efforts 
of the Exchange to remind issuers that most Exchange products trade 
until 3:10 p.m., important corporate news is often disseminated between 
3:00 p.m. and 3:10 p.m. As a result, the Exchange is often deluged with 
option orders after a significant news announcement after 3:00 p.m., 
most often between 3:02 p.m. and 3:10 p.m. These orders have a 
disruptive effect on the market at a time when the Exchange is 
attempting to close in a fair and orderly fashion.\3\ Among the 
possible deleterious effects is that customer orders might not be 
filled as quickly as they might otherwise be filled in more normal 
conditions. In addition, orders regularly are routed through the 
Exchange's Retail Automatic Execution System (``RAES'') and are 
executed in rapid succession on markets that have not had a chance to 
be updated to reflect the significant news.\4\ Weighing the benefits to 
be

[[Page 64406]]

obtained by a brief extended trading session against the difficulties 
presented when options trade after the underlying securities have 
closed, the Exchange has determined that a two minute extended session 
is the correct balance.
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    \3\ Although the Exchange has the ability to call a ``fast'' 
market under current Exchange Rule 6.6 in an effort to deal with the 
problems caused by news announcements after 3:00 p.m., this 
procedure requires the assessment of the situation by two Floor 
Officials. As a result, the Rule 6.6 procedure does not permit the 
Exchange to act quickly enough to prevent the possible deleterious 
effects of an unexpected news announcement.
    \4\ Orders routed through the RAES system are assigned execution 
prices instantaneously as determined by the prevailing market quotes 
that exist at the time of the order's entry into the system. As a 
result, these orders might be assigned a price before the market-
makers will have had the chance to update the quotes based upon the 
unexpected news announcement. To respond to the problem presented 
when issuers make significant news announcements during the ten 
minute period after the close of trading in stocks, the Exchange 
filed a rule with the Commission which permits the Exchange to 
employ a system to suspend the operation of the RAES system in the 
event of news announcements near the close of trading. See 
Securities Exchange Act Release No. 37885 (October 29, 1996), 61 FR 
56724 (approving CBOE-96-55).
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    The Exchange also proposes to change the closing time for narrow-
based indexes under Rule 24.6 because these indexes are subject to the 
same pricing problems as options on individual stocks. A significant 
news announcement on one component of a narrow-based index could have a 
significant effect on that index. The Exchange is not at this time 
proposing to change the closing time of 3:15 p.m. for broad-based index 
options because it is unlikely that a significant news announcement by 
the issuer of one component stock of a broad-based index is likely to 
have a significant effect on the price of that broad-based index.
    The Exchange is also proposing to amend Interpretations .02 and .03 
of its trading rotation rule, Rule 6.2, to reflect the changes in the 
closing time for stock options and narrow-based index options from 3:10 
p.m. to 3:02 p.m. Chicago time. A change would also be made to allow a 
closing rotation in non-expiring options to be held five minutes after 
news of such rotation is disseminated. Currently, the rule requires 
notice of ten minutes before a closing rotation may be held.
    Finally, the Exchange is proposing to amend Interpretation .01 to 
Rule 6.1 to make it clear that the Board may designate a person or 
persons to change the hours for the trading of options when unusual 
conditions exist. This change is consistent with the Exchange's current 
Rule 24.6.
2. Statutory Basis
    The proposed rule changes further the objectives of Section 6(b)(5) 
of the Act, in that they are designed to promote just and equitable 
principles of trade, and to remove impediments to and perfect the 
mechanism of a free and open market and a national market system.

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

    The Exchange states that it believes that the proposed rule change 
will impose no 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.

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.

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. Sec. 552, will be available for inspection and copying at 
the Commission's Public Reference Room. 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-CBOE-96-71 and 
should be submitted by December 26, 1996.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\5\
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    \5\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-30812 Filed 12-3-96; 8:45 am]
BILLING CODE 8010-01-M