[Federal Register Volume 63, Number 247 (Thursday, December 24, 1998)]
[Notices]
[Pages 71322-71325]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-34126]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40805; File No. SR-PCX-98-53]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval of Proposed Rule Change by the Pacific
Exchange, Inc. Relating to Options Floor Trading Halts and Suspensions
December 17, 1998.
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 6, 1998,\3\ the Pacific Exchange, Inc. (``PCX'' or
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I and II below, which Items have been prepared by the PCX. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons. For the reasons discussed
below, the Commission is granting accelerated approval of the proposed
rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ On December 4, 1998, the PCX submitted Amendment No. 1 to
the proposed rule change. Amendment No. 1 clarifies certain defined
terms in the rule language and makes additional non-substantive
textual changes. See letter from Robert Pacileo, Jr., Staff
Attorney, PCX, to Mignon McLemore, Attorney, Division of Market
Regulation, Commission, dated December 3, 1998.
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The PCX is proposing to amend its Rule 6.65 on Options Floor
Trading Halts and Suspensions to include guidelines to assist Floor
Officials in their decisions regarding trading halts in equity options.
The text of the proposed rule change is set forth below. Proposed new
language is in italics.
para. 5079 Trading Halts and Suspensions
Rule 6.65(a)-(b)--No Change.
(c) Options Floor Trading Halt Guidelines. Trading halts are, by
definition, unusual market conditions. Accordingly, all of the precise
circumstances at the time a trading halt cannot be anticipated. An
evaluation of all circumstances at the time a trading halt is under
consideration is critical. Except as provided below, to ensure
consistent application of the Exchange's trading halt guidelines, the
concurrence of two Floor Officials and a senior Exchange Official is
required. Bearing in mind the need to exercise discretion in
[[Page 71323]]
response to particular circumstances as they occur, the following are
guidelines for trading halts at the Exchange under varying
circumstances:
(1) No last sale and/or quotation dissemination either by the
Exchange or by OPRA. At the outset, a time-critical review by two Floor
Officials and a senior Exchange Official (the ``group'') will be made
of the circumstances causing the failure of dissemination. If it is
believed by the group that the dissemination will resume in less than
15 minutes, trading ordinarily will continue and a message will be
given to the news wire services announcing the dissemination
difficulty. If it is believed by this group that the dissemination
problem will extend beyond 15 minutes, the two Floor Officials, in
their discretion, may impose a halt on all trading in affected
securities. In any event, two Floor Officials may permit trading to
continue for more than 15 minutes after a failure of dissemination only
with the concurrence of a senior Exchange Official. Trading may resume
upon a determination by the group that the conditions that led to the
halt are no longer present or that the interests of a fair and orderly
market are best served by a resumption of trading. Generally the
Exchange will notify member firms and the news wire services of the
resumption of trading.
(2) Primary market halts trading in one or more securities for
regulatory reasons. Upon notification by the primary market of a
regulatory trading halt of an individual equity security in the primary
market, the Exchange may impose a trading halt in the individual stock
option overlying the security so halted. Trading will resume upon a
determination by two Floor Officials that the conditions that led to
the halt are no longer present or that the interests of a fair and
orderly market are best served by a resumption of trading.
(3) Primary market non-regulatory trading halt in one or more
equity securities. Upon notification by the primary market of a non-
regulatory trading halt of an individual equity security in the primary
market, any two Floor Officials, in their discretion, may impose a
trading halt in the individual stock option overlying the security so
halted. Trading may resume upon a determination by two Floor Officials
that the conditions that led to the halt are no longer present or that
the interests of a fair and orderly market are best served by a
resumption of trading. Generally the Exchange will notify member firms
and the news wire services of the resumption of trading.
(4) The primary market halts trading floor-wide. If the primary
market halts trading floor-wide, the Exchange will halt trading in all
individual equity options overlying the securities so halted in the
primary market and will assess the viability of markets in the
underlying securities, as measured by transactions and by share volume.
In the event that it is determined by two Floor Officials, with the
concurrence of a senior Exchange Official, that sufficient markets will
support trading other than on the primary exchange, the Exchange will
resume trading. Generally the Exchange will notify member firms and the
news wire services of the resumption of trading.
(5) Primary market is open but is unable to disseminate last sale
or quotation information. The Exchange's options trading ordinarily
will remain open for trading unless, in the opinion of two Floor
Officials, the absence of disseminated information will impede the
ability of market makers to maintain fair and orderly markets in the
option. The concurrence of a senior Exchange Official is required if
more than one option class is affected.
(6) Over-the-counter quote dissemination halt. Two Floor Officials,
in their discretion, may halt trading in options overlying over-the-
counter securities affected by such a quote dissemination halt upon
first notification of the dissemination halt. Trading may resume upon a
determination by two Floor Officials that the conditions that led to
the halt are no longer present or that the interests of a fair and
orderly market are best served by a resumption of trading. Generally
the Exchange will notify member firms and the news wire services of the
resumption of trading.
(7) Expiration Friday trading in individual equity options. In the
event that any of the foregoing should occur on expiration Friday, it
is the preference of the Exchange to allow trading to continue on that
date. This will be a primary consideration in the assessments to be
made by the Floor Officials and the Senior Exchange Official.
(8) Dissemination of news after the close of trading in the primary
market. Any two Floor Officials may halt trading in any security in the
event of disseminated news that causes the Floor Officials to believe
that trading in options should be halted to allow market participants
an opportunity to consider the effect of the news on pricing of trades.
Two Floor Officials and a senior Exchange Official will then decide
whether and, if so, when to recommence trading. This may occur after
the primary market of the underlying security has closed for the day,
in which event, the decision may be to not resume trading until the
next trading day or to have a closing rotation after appropriate
notification to the public.
Commentary:
.03 For purposes of this Rule, a ``regulatory halt'' is a halt
that is initiated by a regulatory authority in the primary market and a
``non-regulatory halt'' is a halt initiated by floor staff or at the
request of a Market Maker or Trading Crowd in the primary market. For
example, regulatory halts may be initiated by Exchange Staff in the
primary market if listing or maintenance requirements are not met; if
there is a need for dissemination of news regarding market developments
or material information; or at the request of the issuer. Examples of
non-regulatory halts in the primary market would be requests by Floor
Members due to an influx, or imbalance of orders, or by Floor Officials
due to volatility in market conditions; or natural disasters.
* * * * *
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 PCX 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 II 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
Background. Circuit Breakers are coordinated cross-market trading
halts that are intended to help avoid a systematic breakdown when a
severe one-day market drop of historic propositions prevents the
financial markets from operating in an orderly manner. The objective of
trading halts (i.e.,circuit breakers) is to stop trading when there is
a severe market decline such that liquidity and credit dry up and
prices threaten to free fall.\4\ The Securities and futures markets
introduced circuit breakers in order to offer investors an opportunity
to assess
[[Page 71324]]
information and positions when the markets experienced a severe, rapid
decline.\5\
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\4\ See Exchange Act Release No. 39846 (April 9, 1998), 63 FR
18477 (April 15, 1998).
\5\ Id.
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In 1988, the Commission approved various exchanges' circuit breaker
proposals, along with the PCX's and the NASD's circuit breaker policy
statements in response to the October 19, 1987 market drop. The
Commission stated in its approval order that the circuit breaker
proposals would provide market participants with an opportunity during
a severe market decline to reestablish an equilibrium between buying
and selling interests in a more orderly fashion.\6\
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\6\ Id.
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The current PCX Rule 6.65 provides for trading halts and
suspensions for equity options whenever the Exchange deems such action
appropriate in the interests of a fair and orderly market and to
protect investors. The PCX also has a policy which sets forth
guidelines for trading halts in equity options at the Exchange under
varying circumstances. The proposed rule change would codify the
Exchange's policy regarding guidelines for trading halts by describing
several situations which may require trading halts. The situations are:
(1) No last sale and/or quotation dissemination either by the Exchange
or by the Options Price Reporting Authority (''OPRA''); (2) Primary
market halts trading in one or more securities for regulatory reasons;
(3) Primary market non-regulatory trading halt in one or more equity
securities; (4) The Primary market halts trading floor-wide; (5)
Primary market is open but is unable to disseminate last sale or
quotation information; (6) Over-the-counter quote dissemination halt;
(7) Expiration Friday trading in individual equity options; and (8)
Dissemination of news after the close of trading in the primary market.
The Commission approved a similar change to the Chicago Board Options
Exchange (``CBOE'') rule and policy regarding trading halts in equity
options.\7\
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\7\ See CBOE Regulatory Circular RG92-40, dated July 8, 1992, or
CBOE Regulatory Circular RG93-58, dated November 10, 1993, (CBOE
Circular 92-40 reissued); Exchange Act Rel. No. 25906 (July 13,
1988), 53 FR 27249 (July 919, 1988) (order approving CBOE's trading
halt policy for individual equity options). See also CBOE Regulatory
Circular RF95-51, dated June 14, 1995; Exchange Act Rel. No. 35789
(May 31, 1995), 60 FR 30127 (June 7, 1995) (order approving
amendment to CBOE's trading halt policy for individual equity
options to reflect amendments to CBOE Rule 6.3).
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Proposal. The Exchange is proposing to amend Rule 6.65 on Options
Floor Trading Halts and Suspensions to include non-mandatory guidelines
to assist Floor Officials in their decisions regarding trading halts.
Trading halts are, by definition, unusual market conditions.
Accordingly, all of the precise circumstances of a trading halt cannot
be anticipated. An evaluation of all the circumstances at the time a
trading halt is under consideration is critical. Bearing in mind the
need to exercise discretion in response to particular circumstances as
they occur, the PCX proposes the following guidelines for trading halts
at the Exchange.
First, when there is no last sale and/or quotation dissemination
either by the Exchange or by the OPRA, the PCX proposes that, after
review by two Floor Officials and a senior Exchange Official, if it is
believed that the dissemination will resume in less than 15 minutes,
trading ordinarily will continue and a message will be given to the
news wire services announcing the dissemination difficulty. In
addition, if it is believed by this group that the dissemination
problem will extend beyond 15 minutes,the two Floor Officials, in their
discretion, may impose a halt on all trading in affected securities. In
any event, two Floor Officials may permit trading to continue for more
than 15 minutes after a failure of dissemination only with the
concurrence of a senior Exchange Officials. Trading may resume upon a
determination by the group that the condition that led to the halt are
no longer present or that the interests of a fair and orderly market
are best served by a resumption of trading.
Second, when the primary market halts trading in one or more
securities for regulatory reasons, the Exchange proposes that trading
in the individual stock option overlying a stock that has been halted
for regulatory reasons generally will halt immediately upon the
notification thereof by the primary market.\8\
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\8\ As stated in proposed commentary .03, a ``regulatory halt''
is a halt that is initiated by a regulatory authority in the primary
market and a ``non-regulatory halt'' is a halt initiated by floor
staff or at the request of a Market Maker or Trading Crowd in the
primary market. For example, regulatory halts may be initiated by
Exchange Staff in the primary market if listing or maintenance
requirements are not met; if there is a need for dissemination of
news regarding market developments or material information; or at
the request of the issuer. Examples of non-regulatory halts in the
primary market would be requests by Floor Members due to an influx,
or imbalance of orders, or by Floor Officials due to volatility in
market conditions; or natural disasters.
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Third, the Exchange proposes that, upon notification by the primary
market of a non-regulatory trading halt of an individual equity
security in the primary market, any two Floor Officials, in their
discretion, may impose a trading halt in the individual stock option
overlying the security so halted.
Fourth, when the primary market halts trading floor-wide, the
Exchange proposes that trading will halt in all individual equity
options overlying the securities so halted in the primary market and
will assess the viability of markets in the underlying securities, as
measured by transactions and by share volume. In the event that it is
determined by two Floor Officials, with the concurrence of a senior
Exchange Official, that sufficient markets will support trading other
than on the primary exchange, the Exchange will resume trading.
Fifth, the Exchange proposes that when the primary market is open
but is unable to disseminate last sale or quotation information,
options trading ordinarily will remain open for trading unless, in the
option of two Floor Officials, the absence of disseminated information
will impede the ability of market makers to maintain fair and orderly
markets in the option. The concurrence of a senior Exchange Official is
required if more than one option class is affected.
Sixth, the Exchange further proposes that, in the event of an over-
the-counter quote dissemination halt, two Floor Officials, in their
discretion, may halt trading in options overlying over-the-counter
securities affected by such a quote dissemination halt upon first
notification of the dissemination halt.
Seventh, the Exchange proposes that, in the event that any of the
foregoing should occur on expiration Friday, it is the preference of
the Exchange to allow trading to continue on that date. This will be a
primary consideration in the assessment to be made by the Floor
Officials and the senior Exchange Official.
Eighth, the Exchange proposes that any two Floor Officials may halt
trading in any security in the event of disseminated news after the
close of trading in the primary market that causes the Floor Officials
to believe that trading in options should be halted to allow market
participants an opportunity to consider the effect of the news on
pricing of trades. Two Floor Officials and a senior Exchange Official
will than decide whether and, if so, when to recommence trading. This
may occur after the primary market of the underlying security has
closed for the day, in which event, the decision may be to not resume
trading until the next trading day or to have a closing rotation after
appropriate notification to the public.
Finally, when regard to any of the aforementioned circumstances,
the
[[Page 71325]]
Exchange proposes that trading may resume upon a determination by two
Floor Officials that the conditions that led to the halt are no longer
present or that the interests of a fair and orderly market are best
served by a resumption of trading. Generally the Exchange will notify
member firms and the news wire services of the resumption of trading.
2. Statutory Basis
The PCX believes the proposed rule change is consistent with
Section 6(b) \9\ of the Act, in general, and furthers the objectives of
Section 6(b)(5),\10\ in particular, in that it is designed 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 and, in general to protect investors and the public
interest.
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\9\ 15 U.S.C. 78f(b).
\10\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The PCX 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
The PCX neither solicited nor received written comments on the
proposed rule change.
III. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, NW, Washington, DC 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 Room. Copies of such filing will also be
available for inspection and copying at the principal office of the
PCX. All submissions should refer to File No. SR-PCX-98-53 and should
be submitted by January 14, 1999.
IV. Commission's Finding and Order Granting Accelerated Approval of
Proposed Rule Change
The Commission finds, for the reasons set forth below, 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, with the requirements of
Section 6(b) \11\ of the Act. Specifically, the Commission believes the
proposals is consistent with the Section 6(b)(5) \12\ requirements that
the rules of an exchange be designed 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 facilitation transactions in
securities, to remove impediments to and perfect the mechanism of a
free and open market and national market system and, in general, to
protect investors and the public.\13\
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\11\ 15 U.S.C. 78f(b).
\12\ 15 U.S.C. 78f(b)(5).
\13\ In approving this rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. The Commission believes that this rule will
improve market efficiency by providing uniform guidelines for
Exchange Floor Officials in the event that the circumstances
outlined in the proposed rule occur. The Commission further believes
that the rule will have little, if any, adverse impact on
competition. 15 U.S.C. 78c(f).
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The Commission finds good cause for approving the proposed rule
change prior to the thirtieth day after the date of publication of
notice thereof in the Federal Register. The Commission believes that
approval of the proposal should enhance market efficiency by providing
additional clarity to the Exchange's existing trading halt policy for
options on individual equity securities. Furthermore, outlining
conditions which require an option trading halt should help lessen
confusion for market participants, thereby facilitating the maintenance
of a fair and orderly market. The Commission notes that the proposed
rule change should be particularly helpful during times of high
volatility in the market. The Commission also notes that this proposal
is similar to a proposal filed by CBOE on October 5, 1987. After the
notice and comment period, the Commission approved CBOE's proposal.\14\
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\14\ See supra, note 7.
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Given the Commission's prior approval of a similar proposal and the
immediate need to provide uniform guidelines for Exchange Floor
Officials in handling trading halts and suspensions, the Commission
deems it appropriate to approve the proposed rule change on an
accelerated basis. The Commission believes it is consistent with
Section 6(b)(5) \15\ and Section 19(b)(2) \16\ of the Act to grant
accelerated approval to the proposed rule change.
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\15\ 15 U.S.C. 78f(b)(5).
\16\ 15 U.S.C. 78s(b)(2).
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It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change (SR-PCX-98-53) is approved on an
accelerated basis.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\17\
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\17\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-34126 Filed 12-23-98; 8:45 am]
BILLING CODE 8010-01-M