[Federal Register Volume 62, Number 99 (Thursday, May 22, 1997)]
[Notices]
[Pages 28082-28084]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-13403]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38543; File No. SR-CBOE-96-71]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Inc.; Order Approving Proposed Rule Change and Notice of Filing and 
Order Granting Accelerated Approval of Amendment No. 1 Relating to the 
Establishment of a 3:02 p.m. Closing Time for Equity and Narrow-Based 
Index Options Trading

May 14, 1997.

I. Introduction

    On October 25, 1996, the Chicago Board Options Exchange, Inc. 
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``SEC'' or ``Commission'') a proposed rule change pursuant 
to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') 
\1\ and Rule 19b-4 thereunder.\2\ On February 24, 1997, the Exchange 
filed an amendment to the rule proposal.\3\
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    \1\ U.S.C. Sec. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Letter from Timothy Thompson, Senior Attorney, CBOE, to 
Janice Mitnick, Attorney, Division of Market Regulation, Commission, 
dated February 24, 1997 (``Amendment No. 1''). Amendment No. 1 
describes the purpose for the proposed change to the required notice 
period, from ten minutes to five, prior to the commencement of a 
trading rotation.
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    Notice of the substance of the proposed rule change was provided by 
issuance of a release \4\ and by publication in the Federal 
Register.\5\ No comments were received. This order approves the 
proposed rule change, as amended, and solicits comments on Amendment 
No. 1.
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    \4\ Securities Exchange Act Release No. 37988 (November 26, 
1996).
    \5\ 61 FR 64405 (December 4, 1996).
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II. Description of the Proposal

    The exchange proposes to amend Rule 6.1, Interpretation .01 and 
Rule 24.6 governing the hours of trading in equity options and narrow-
based index options. Currently, the ten minute period for trading 
equity and narrow-based index options after the close of the underlying 
stocks allows options traders to respond to late reports of closing 
prices over the consolidated tape. The proposed rule change will result 
in the close of trading in equity and narrow-based index options at 
3:02 p.m.\6\ instead of the existing close of 3:10 p.m.
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    \6\ All time references are in Central Time.
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    The Exchange also proposes to amend its rules to provide for a five 
minute notice period before a trading rotation may begin after the 
close of trading. Currently, a ten minute notice must be given under 
CBOE Rule 6.2, Interpretation .02. The Exchange states that it is now 
able to send notice to its members of its intent to have a closing 
rotation almost instantaneously.\7\ The Exchange also proposes to amend 
its trading rotation rule, Interpretations .01 and .03 and Rule 6.2, to 
reflect the changes in the closing time from 3:10 p.m. to 3:02 p.m. for 
equity options and narrow-based index options.
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    \7\ See Amendment No. 1.
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    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.

II. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange, and in 
particular, Section 6(b)(5).\8\ Section 6(b)(5) requires, among other 
things, that the rules of an exchange be designed to promote just and 
equitable principles of trade, perfect

[[Page 28083]]

the mechanism of a free and open national market, and in general, to 
further investor protection and the public interest.
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    \8\ 15 U.S.C. Sec. 78f(b)(5).
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    The Commission believes that it is reasonable for the Exchange to 
amend its rules to close trading in equity and narrow-based index 
options at 3:02 p.m., versus the existing 3:10 p.m. close. Changing the 
closing time for these options to 3:02 p.m. preserves the Exchange's 
stated need to continue trading options for some period of time after 
the close of trading in the underlying securities. The Exchange has 
stated that this two minute extension from the close of the stock 
markets will allow options traders to respond to late reports of 
closing prices over the consolidated tape, thereby bringing options 
quotes into line with the closing price of the underlying security. Due 
to improvements in the processing and reporting of transactions, the 
Exchange believes that two minutes of options trading after the 
underlying equities close is sufficient to bring options quotes into 
line with the closing prices of the underlying securities.
    In determining an appropriate closing time, the Exchange has also 
considered problems that might result when the Exchange remains open 
after the close of the primary exchange for the underlying stocks. The 
Exchange states that a number of issuers have adopted the practice of 
disseminating important corporate news after the close of trading on 
the primary equity exchange in order to minimize the short-term 
disruptive effect of the news on the market price of the stock by 
allowing investors the opportunity to digest the significance of the 
news after the markets have closed. These announcements, if made while 
options markets are still trading, impact narrow-based index options, 
as well as equity options, because a significant news announcement on 
one component of a narrow-based index may have substantial impact on 
that index. Despite the fact that most Exchange products trade until 
3:10 p.m., important corporate news is often disseminated between 3:00 
and 3:10 p.m. Consequently, the Exchange states that it is often 
deluged with option orders as a result of a significant news 
announcement after 3:00 p.m., most often made between 3:02 p.m. and 
3:10 p.m. The Exchange has found that these orders have a disruptive 
effect on the options market at a time when the Exchange is attempting 
to close in a fair and orderly fashion.\9\ The Exchange also states 
that as a result of these news announcements, orders are regularly 
routed through the Exchange's Retail Automatic Execution System 
(``RAES'') and executed in rapid succession on markets that have not 
had a chance to be updated to reflect the significant news.\10\ The 
Exchange states that a change in the options trading close to 3:02 p.m. 
would limit the disruptive effect on Exchange products that these 
significant news announcements can create.
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    \9\ The Exchange notes that although it 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 Exchange believes that 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.
    \10\ 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 minutes 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. 
Securities Exchange Act Release No. 37885 (October 29, 1996), 61 FR 
56724 (approving CBOE-96-55).
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    Accordingly, the Commission finds that a closing time of 3:02 p.m. 
for equity and narrow-based index options is a reasonable means to 
address the Exchange's desire to balance the need for some extended 
trading period with the need to prevent negative impact from issuers' 
major news announcements made while only the options markets remain 
open.
    The Commission also believes that it is reasonable for the Exchange 
to amend its rules to provide for a five minute notice period before a 
trading rotation may begin after the close of trading. The Exchange 
states that it is now able to send notice to its members of its intent 
to have a closing rotation almost instantaneously. The Commission 
concurs with the Exchange that it is appropriate to reduce the notice 
period, permitting the Exchange to allow the establishment of closing 
prices in as timely a manner as possible. The Commission also finds 
that the change from a ten minute notice to a five minute notice is 
reasonable in light of the Exchange's goal of appropriately 
disseminating information of a trading rotation while establishing 
closing prices in a timely manner.
    Finally, the Commission finds that it is reasonable for the 
Exchange to amend Rule 6, Interpretations and Policies .01 to conform 
to Rule 24.6 clarifying that either the Board or its designee may 
change the hours of the trading of options when unusual conditions 
occur. The rule change will provide the Exchange with the necessary 
flexibility in order to respond to unusual market conditions.
    It is contemplated that the Exchange will implement this rule 
change on or about June 23, 1997.\11\
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    \11\ Phone conversation between Timothy Thompson, Exchange and 
Janice Mitnick, Commission, May 14, 1997.
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    The Commission finds good cause for approving Amendment No. 1 to 
the filing prior to the 30th day after the date of publication of the 
notice of the filing. Amendment No. 1 merely serves to effect a 
clarification to the Exchange's proposal and does not materially affect 
the substance of the proposal.\12\ Accordingly, the Commission believes 
there is good cause, consistent with Sections 6(b)(5) and 19(b)(2) of 
the Act, to approve Amendment No. 1 to the proposal on an accelerated 
basis.
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    \12\ See n.3, supra.
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 1. 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 in the Commission's Public Reference Room. Copies of such 
filing will also be available for inspection and copying at the 
principal office of the CBOE. All submissions should refer to File No. 
SR-CBOE-96-71, and should be submitted by June 12, 1997.

V. Conclusion

    For the reasons discussed above, the Commission finds that the 
proposal is consistent with the Act, and, in particular, Section 6 of 
the Act.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\13\ that the proposed rule change (SR-CBOE-96-71) is approved.

    \13\ 15 U.S.C. Sec. 78s(b)(2).

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[[Page 28084]]

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-13403 Filed 5-21-97; 8:45 am]
BILLING CODE 8010-01-M