[Federal Register Volume 63, Number 206 (Monday, October 26, 1998)]
[Notices]
[Pages 57145-57146]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-28595]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40564; File No. SR-CBOE-98-26]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Inc.; Order Approving Proposed Rule Change to Schedule Quarterly 
Closing Rotations

October 16, 1998.

I. Introduction

    On June 16, 1998, the Chicago Board Options Exchange, Inc. 
(``CBOE'' or ``Exchange'') submitted to the Securities

[[Page 57146]]

and Exchange Commission (``SEC'' or ``Commission''), pursuant to 
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ 
and Rule 19b-4 thereunder,\2\ a proposed rule change to provide for a 
closing rotation in Exchange-traded options on the last trading day of 
each calendar quarter.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    The proposed rule change was published for comment in the Federal 
Register on August 10, 1998.\3\ No comments were received on the 
proposal. This order approves the proposal.
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    \3\ Exchange Act Release No. 40287 (Aug. 3, 1998), 63 FR 42649.
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II. Description of the Proposal

    The CBOE is proposing to add Interpretation .05 under Rule 6.2 that 
would provide for a closing rotation to be held in options traded on 
the CBOE floor on the last trading day of each calendar quarter. Also, 
the Exchange is setting forth the procedures to be followed in holding 
these closing rotations. As with other trading rotations that are 
provided for currently under Rule 6.2, the Order Book Official, with 
the approval of two Floor Officials, may deviate from these procedures 
in handling a closing rotation. In addition, the appropriate Floor 
Procedure Committee may determine not to hold a closing rotation for a 
particular class of options for a calendar quarter, in which case prior 
notice will be provided to the Exchange's membership.
    The Exchange has noticed recently that on the last trading day of 
each calendar quarter there is increased order flow in Exchange-traded 
options and in the underlying securities, particularly at the end of 
that trading day. Many large money managers adjust their positions at 
the end of the calendar quarter because of tax considerations and 
reporting requirements. As a result of this activity in both the 
underlying and options markets at the end of the calendar quarter, the 
last sale print for many stocks is often delayed, sometimes well beyond 
the close on the options market. To account for late prints and 
increased order flow at the end of the day, the Exchange believes it is 
important to provide for a closing rotation in Exchange-traded options 
at the end of each calendar quarter. These rotations will allow 
Exchange members to adjust the options prices in line with the prices 
of the underlying securities; to avoid potential capital and/or margin 
deficiencies for traders with hedged positions involving the options 
and the underlying securities. The closing rotation will also give 
investors and other interested parties more accurate closing prices for 
CBOE options on these high volume days.
    Although the Exchange has the authority now under Rule 6.2 to call 
for closing rotations any time the circumstances warrant, it determined 
to add this interpretation to the Rule so Floor Officials do not have 
to make the determination of whether to order a closing rotation each 
quarter in many different options classes. Also, by adding this 
Interpretation to its Rules it will give member firms and customers 
advance notice of the Exchange's intention of holding closing rotations 
on these four days each year so they can act accordingly.
    For quarterly closing rotations, unless otherwise directed by Floor 
Officials or the appropriate Floor Procedures Committee, the only 
orders that may participate in the closing rotation are those that are 
received before the normal close of the trading day, i.e., generally 
3:02 p.m. for equity and narrow-based index options and 3:15 p.m. for 
broad-based index options. The Exchange's Retail Automatic Execution 
System (``RAES'') \4\ will not be available during the closing 
rotation.
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    \4\ RAES is the Exchange's automatic execution system for small 
public customer market or marketable limit orders.
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III. Discussion

    The Commission finds that the proposed rule change is consistent 
with Section 6 the Act \5\ and the rules and regulations thereunder 
applicable to a national securities exchange. In particular, the 
Commission finds that the proposal is consistent with the Section 
6(b)(5) \6\ requirements that the rules of an exchange be designed to 
perfect the mechanism of a free and open market and a national market 
system, and, in general, protect investors and the public interest. In 
addition, the Commission finds that the proposed rule change is 
consistent with Section 11A of the Act.\7\ Specifically, the Commission 
believes the proposal is consistent with Section 11 A(a)(1)(C)(iii).\8\ 
In that provision, Congress found that it is in the public interest and 
appropriate for the protection of investors and the maintenance of fair 
and orderly markets to assure the availability to brokers, dealers, and 
investors of information with respect to quotations for and 
transactions in securities.\9\
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    \5\ 15 U.S.C. 78f(b).
    \6\ 15 U.S.C. 78f(b)(5).
    \7\ 15 U.S.C. 78k-1.
    \8\ 15 U.S.C. 78k-1(a)(1)(C)(iii).
    \9\ In approving this rule, the Commission has considered the 
proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
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    The Exchange represents that on the last trading day of each 
calendar quarter there is increased order flow in Exchange-traded 
options and in the underlying securities, particularly at the end of 
that trading day. As a result of this increased volume, the last sale 
print for many stocks is often delayed. Accordingly, CBOE members must 
delay the final pricing of their option contracts causing potential 
capital and/or margin problems for traders with hedged positions 
involving the options and the underlying securities. The Commission 
believes that holding a closing rotation on the last day of each 
calendar quarter may give investors more timely and accurate closing 
prices for CBOE options on these days. By improving market 
participants' access to more accurate quotes, the proposal is 
consistent with Section 11A.
    Moreover, the Commission notes that pursuant to Exchange Rule 6.2, 
the appropriate Floor Procedure Committee, or any two Floor Officials, 
may direct that one or more trading rotations be held at any time to 
aid in producing a fair and orderly market.\10\ While recognizing that 
under current Exchange rules trading rotations can be held at any time, 
the Commission believes that by scheduling these closing rotations in 
advance, Exchange members may be better prepared to participate in 
these rotations and this may result in more orderly and efficient 
markets.
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    \10\ See CBOE Rule 6.2, Trading Rotations.
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\11\ that the proposed rule change (SR-CBOE-98-26) is approved as 
amended.
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    \11\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-28595 Filed 10-23-98; 8:45 am]
BILLING CODE 8010-01-M