[Federal Register Volume 62, Number 99 (Thursday, May 22, 1997)]
[Notices]
[Pages 28095-28096]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-13459]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38642; File No. SR-PSE-96-41]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change by the Pacific Stock Exchange, Inc. Establishing a 1:02 p.m. 
Closing Time for Equity Options Trading

May 14, 1997.

I. Introduction

    On October 25, 1996, the Pacific Stock Exchange, Inc. (``PCX'' 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\
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    \1\ 15 U.S.C. Sec. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    Notice of the substance of the proposed rule change was provided by 
issuance of a release \3\ and by publication in the Federal 
Register.\4\ No comments were received. This order approves the 
proposed rule change.
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    \3\ Securities Exchange Act Release No. 37920 (November 4, 
1996).
    \4\ 61 FR 58434 (November 14, 1996).
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II. Description of the Proposal

    The Exchange proposes to amend Rule 4.2, Commentary .01 to change 
the 1:10 p.m. closing time for equity options to 1:02 p.m.\5\ 
Currently, the ten minute period for trading equity options after the 
close of the underlying securities allows options traders to respond to 
late reports of closing prices over the consolidated tape. The proposed 
change will result in the close of trading in

[[Page 28096]]

equity options at 1:02 p.m. instead of the existing close of 1:10 p.m.
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    \5\ All time references are in Pacific Time.
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    The Exchange also proposes to amend Rule 6.64, Commentary .01(b), 
regarding transactions which may be effected in a class of options 
after the close, to conform to the change to a 1:02 p.m. close. 
Finally, the Exchange proposes to amend Rule 7.15, which specifies a 
cut-off time of 1:20 p.m. or a time designated to be five minutes after 
the close for preparing or submitting either a memorandum to exercise 
or an ``exercise advice'' for the exercise of index option contracts. 
The Exchange proposes to eliminate the references to 1:20 p.m. so that 
under amended Rule 7.15 such memoranda and advices will have to be 
submitted no later than five minutes after the close of index option 
trading.\6\
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    \6\ The Exchange is not proposing to change the related rule on 
equity options, Rule 6.24, which provides for an exercise cut-off 
time of 2:30 p.m.
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III. 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).\7\ 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 the mechanism of a free and open 
national market, and in general, to further investor protection and the 
public interest.
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    \7\ 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 options at 1:02 p.m., versus 
the existing 1:10 p.m. close. Changing the closing time for these 
options to 1:02 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.
    As discussed in similar rule filings submitted to the Commission, 
the Chicago Board Options Exchange, Inc. (``CBOE'') and the American 
Stock Exchange, Inc. (``Amex'') state 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.\8\ 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. As a result, the exchanges 
are often deluged with option orders as a result of such significant 
news announcements after 3:00 p.m. The exchanges state that these 
orders may have a disruptive effect on the options market at a time 
when the exchanges are attempting to close in a fair and orderly 
fashion.
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    \8\ See SR-CBOE-96-71 and SR-AMEX-96-45.
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    Accordingly, the Commission finds that a closing time of 1:02 p.m. 
for equity 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 finds that it is reasonable for the Exchange to 
amend Rule 7.15 to remove the reference to the closing time, and 
instead to specify that index option stock contract exercise notices 
must be given five minutes after the close of trading. Finally, the 
Commission finds it is reasonable for the Exchange to amend Rules 6.64, 
Commentary .01(b) and 7.15 to conform to the change to a 1:02 p.m. 
close.
    It is contemplated that the Exchange will implement this rule 
change on or about June 23, 1997.\9\
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    \9\ Phone conversation between Michael Pearson, Exchange and 
Janice Mitnick, Commission, May 14, 1997.
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IV. 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,\10\ that the proposed rule change (SR-PSE-96-41) is approved.

    \10\ 15 U.S.C. Sec. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 97-13459 Filed 5-21-97; 8:45 am]
BILLING CODE 8010-01-M