[Federal Register Volume 60, Number 103 (Tuesday, May 30, 1995)]
[Notices]
[Pages 28188-28191]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-13072]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35742; File No. SR-CBOE-95-04]
Self-Regulatory Organizations; Order Approving a Proposed Rule
Change by the Chicago Board Options Exchange, Incorporated, Relating to
Certain Procedures Regarding Trading Rotations and Opening Procedures
May 19, 1995.
I. Introduction
On January 18, 1995, the Chicago Board Options Exchange,
Incorporated (``CBOE'' or ``Exchange'') filed the following proposed
rule changes with the Securities 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\ (1)
Granting two concurring Floor Officials the discretion to call for one
or more trading rotations on any business day pursuant to Rule 6.2; (2)
codifying in Rule 6.2, the current practice of allowing two concurring
Floor Officials the discretion to delay commencement of the opening
rotation in any class of options; (3) granting two concurring Floor
Officials the discretion to delay the commencement of the opening
rotation for index options, and deleting the requirement that any
delays in the opening rotation must be in five minute intervals,
pursuant to Interpretation .03 to Rule 24.13; (4) granting Order Book
Officials the discretion to determine the appropriate rotation order
and manner, or to deviate from a previously established rotation policy
or procedure, pursuant to Rule 6.2; (5) adding Interpretation .04 to
Rule 6.2 to specify that the decision to conduct an abbreviated
rotation is one, but not the only example of a type of rotation
modification that may be employed; (6) granting the Order Book Official
the authority to prescribe that two or more trading rotations be
employed simultaneously pursuant to Rule 6.2; (7) granting two
concurring Floor Officials the authority to commence more than one
trading rotation after 3:10 p.m. (central time) pursuant to
Interpretation .02 to Rule 6.2; (8) clarifying that the factors,
provided in Interpretation .02 to Rule 6.2, to consider in determining
whether to commence more than one trading rotation after 3:10 p.m., are
not limited to those enumerated; (9) clarifying that although closing
rotations are not ordinarily conducted in expiring series of index
options, such closing rotations are not absolutely prohibited pursuant
to Interpretation .03 to Rule 6.2; (10) granting two concurring Floor
Officials the authority to deviate from the procedures for closing
rotations pursuant to Interpretation .03 to Rule 6.2; (11) granting
Order Book Officials the discretion to determine the appropriate
rotation order and manner, or to deviate from a previously established
rotation policy or procedure for index options pursuant to Rule 24.13;
and (12) deleting a portion of Rule 24.13 that requires an Order Book
Official to open the nearest expiration series of index options before
opening the remaining series in a manner she or he deems appropriate.
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
Notice of the proposal was published for comment and appeared in
the Federal Register on February 21, 1995.\3\ No comment letters were
received on the proposed rule changes. This order approves the
Exchange's proposal.
\3\ See Securities Exchange Act Release No. 35369 (February 14,
1995), 60 FR 9702 (February 21, 1995).
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II. Description of Proposal
The CBOE proposes to amend its rules relating to certain procedures
regarding trading rotations\4\ and opening procedures.\5\ First, CBOE
proposes to amend Rule 6.2 to grant two concurring Floor Officials
discretion to direct that one or more trading rotations be employed on
any business day. Currently, Rule 6.2 grants only the Floor Procedures
Committee this discretion. CBOE believes that it is impractical to
assemble the entire Floor Procedures Committee for such as intra-day
decision. CBOE states that under Rule 6.6(b)(iii), two concurring Floor
Officials already have the discretion to call a trading rotation after
the declaration of a fast market. By amending Rule 6.2, this discretion
would not be limited to fast market situations.
\4\ A ``trading rotation'' is a series of very brief time
periods during each of which bids, offers, and transactions in only
a single, specified option contract can be made. See CBOE Rule 6.2.
\5\ See CBOE Rules 6.2 and 24.13.
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CBOE proposes to further amend Rule 6.2 by codifying the current
practice of allowing two concurring Floor Officials to delay
commencement of the opening rotation in any class of options in the
interests of a fair and orderly market. CBOE believes that the rules
should expressly grant Floor Officials the power to react to market
conditions and circumstances by delaying an opening rotation when it is
in the interests of a fair and orderly market. Interpretation .01(b) to
Rule 6.2 currently grants two [[Page 28189]] concurring Floor Officials
the authority to conduct the rotation in a manner other than that set
forth in the Rule, but Rule 6.2 does not state expressly that the Floor
Officials may also delay the opening rotation.
Similarly, CBOE proposes to amend Interpretation .03 to Rule 24.13,
by granting two concurring Floor Officials greater discretion to delay
the commencement of the opening rotation for index options, and by
deleting the requirement that any delays in the opening rotation must
be in five (5) minute intervals. Rather than limiting the circumstances
and the time period in which two concurring Floor Officials may delay
the opening, amended Interpretation .03 would permit Floor Officials to
delay the opening rotation at their discretion in the interests of a
fair and orderly market. The circumstances outlined in current
Interpretation .03 to Rule 24.13, in which two concurring Floor
Officials may delay the opening, would remain as factors that Floor
Officials may consider in deciding whether to delay the opening
rotation. If Floor Officials do in fact delay the opening rotation,
CBOE believes that these officials should be granted greater discretion
to end the delay and commence the opening before the five (5) minute
interval has lapsed, if the circumstances warrant that decision. In
addition, CBOE believes that for lengthy delays, it is impractical to
require two Floor Officials to remain at the index options post for the
sole purpose of declaring successive five minute delays.
CBOE believes that these amendments are consistent with the
amendments proposed for Rule 6.2, which grant two Floor Officials the
authority to delay the opening rotation in any class of options in the
interests of a fair and orderly market. CBOE argues that because
current Interpretation .01 to Rule 24.13 provides that the procedures
for modification of a rotation and other aspects of the rotation set
forth in Rule 6.2 are applicable to index options, the authority
regarding delays in opening contained in Rule 6.2 likewise should apply
to index options.
CBOE also proposes to amend Rule 6.2 to grant Order Book Officials
more discretion regarding the rotation order and manner. CBOE proposes
that if the appropriate Floor Procedures Committee \6\ has not acted to
establish any policy applicable to the particular class of options in
question, then the Order Book Official would be authorized to determine
the appropriate order and manner for conducting the rotation. CBOE
believes this aspect of the rule change would allowed Order Book
Officials to respond to particular circumstances the Floor Procedures
Committee has not considered and to conduct the rotation as is
appropriate under those circumstances.
\6\ The ``appropriate'' Floor Procedures Committee is the
committee that makes policy regarding the particular class of
options in question. See Securities Exchange Act Release No. 35369
(February 14, 1995), 60 FR 9702 (February 21, 1995).
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CBOE also proposes to further amend Rule 6.2, granting the Order
Book Official, with the approval of two concurring Floor Officials, the
authority to deviate from a rotation policy or procedure previously
established by the appropriate Floor Procedures Committee. The Exchange
believes that in certain circumstances, it may be appropriate to
deviate from the established procedure, but it would be impractical to
assemble the Floor Procedure Committee for an intra-day decision
allowing such a deviation. Rule 6.2, as amended, would allow two
concurring Floor Officials to act for the entire committee and approve
or disapprove an Order Book Official's proposed deviation from the
previously established rotation policy or procedure. Currently,
pursuant to Interpretation .01(b) to Rule 6.2, the Order Book Official,
with the approval of two concurring Floor Officials or the Floor
Procedures Committee, may conduct an opening rotation in a manner other
than that set forth in Interpretation .01(b). By amending Rule 6.2,
CBOE proposes to extend this existing policy to all rotations.
CBOE also proposes to add Interpretation .04 to Rule 6.2 to specify
that the decision to conduct an abbreviated rotation is one of the
deviations permitted under the amended rule. Interpretation .04
provides an example of a type of rotation modification, or deviation
from rotation policy or procedure that may be employed, but it is not
intended to be an exclusive list.
CBOE proposes to further amend Rule 6.2 so that the Order Book
Official, or the Floor Procedures Committee, may prescribe that two or
more trading rotations be employed simultaneously. CBOE believes that
it would be impractical to assemble the Floor Procedures Committee for
an intra-day decision regarding simultaneous trading rotations.
CBOE proposes to amend Interpretation .02 to Rule 6.2 to grant two
concurring Floor Officials the authority to commence more than one
trading rotation after 3:10 p.m. (central time), and to clarify that
the reasons stated for allowing two concurring Floor Officials to
conduct a rotation after the close of trading are not exclusive. While
the amended interpretation indicates that, in general, no more than one
trading rotation will be commenced after 3:10 p.m., CBOE believes that
it is in the interests of a fair and orderly market to grant two
concurring Floor Officials the discretion to exercise their judgment in
response to market conditions or circumstances. The amended
interpretation does not enumerate all the possible underlying
conditions and circumstances for commencing more than one trading
rotation after the close of trading. Those listed include the current
practice of employing a trading rotation after the end of normal
trading hours in connection with a year-end rotation or due to the
restart of a rotation which is already in progress. CBOE believes it
may be necessary to continue the rotation after the normal close of
trading in order to complete the rotation for circumstances including,
but not limited to, those stated in the amended interpretation.
Interpretation .03 to Rule 6.2 currently provides that ``a closing
rotation for an expiring series of index options shall not be
employed.'' (Emphasis Added.) Although closing rotations are not
ordinarily employed in expiring series of index options, CBOE believes
it is inappropriate to prohibit closing rotations for such series.
CBOE, therefore, proposes to amend the interpretation to state that a
closing rotation for such expiring series ``is not ordinarily''
employed. CBOE believes the proposed amendment to Interpretation .03 is
necessary to clarify that, unlike the case with equity options, closing
rotations are not ordinarily conducted in expiring series of index
options, but that such closing rotations are not absolutely
prohibited.\7\
\7\ CBOE believes that a system malfunction or a major
announcement in the markets late in the trading day, among other
things, may require a closing rotation for expiring series of index
options in order to accommodate any order flow problems resulting
from such occurrences. Telephone conversation between Edward Joyce,
CBOE, Michael Meyer, Attorney, Schiff, Hardin, and Waite, Michael
Walinskas, Branch Chief, and John Ayanian, Attorney, Office of
Market Supervision (``OMS''), Division of Market Regulation
(``Market Regulation''), Commission, on February 13, 1995.
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Interpretation .03 to Rule 6.2 would also be amended to grant two
concurring Floor Officials the authority to deviate from the procedures
for closing rotations if they determine such deviation is in the
interests of a fair and orderly market. Again, CBOE believes that it is
in the interests of a fair and orderly market to allow two concurring
Floor Officials to exercise their [[Page 28190]] judgment in response
to market conditions and circumstances.
Consistent with the above changes to Rule 6.2 regarding the order
and manner of the rotation, CBOE proposes to amend Rule 24.13 to give
the Order Book Official greater discretion to determine the appropriate
order and manner for conducting the rotation for index options. Similar
to amended Rule 6.2, the Floor Procedures Committees that make policy
for an index option would have the authority to set policy regarding
the order and manner of the opening rotation. If the Floor Procedures
Committee has not acted to establish a policy applicable to a
particular situation, then the Order Book Official would be permitted
to determine the appropriate order and manner for conducting the
opening rotation. Again, as similarly proposed in amended Rule 6.2,
CBOE proposes to further amend Rule 24.13 to grant the Order Book
Official the authority to deviate from the appropriate Floor Procedures
Committee's established procedure regarding the order and manner of the
opening rotation so long as two concurring Floor Officials approve such
as a deviation. CBOE believes that it would be impractical to assemble
a Floor Procedures Committee for an intra-day decision allowing a
deviation from established opening rotation policy or procedure.
CBOE would further amend Rule 24.13 by deleting the provisions that
require the Order Book Official to open the nearest expiration series
first and thereafter open the remaining series in a manner he deems
appropriate. CBOE believes that the Order Book Official should have the
discretion not to open with the nearest expiration series if a
different order would be appropriate under the circumstances.
III. Commission Finding and Conclusions
The Commission finds that the proposed rule changes are consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to a national securities exchange, and, in
particular, the requirements of Section 6(b)(5) of the Act.\8\
Specifically, the Commission believes that the proposed rule changes
are designed to facilitate transactions in securities, to remove
impediments to and perfect the mechanism of a free and open market and
a national market system, and to promote just and equitable principles
of trade.
\8\ 15 U.S.C. 78f(b)(5).
First, the Commission believes that it is appropriate to amend
Rules 6.2 and 24.13 to grant the Order Book Official greater discretion
regarding the rotation order and manner. The Commission notes, however,
that the discretion of the Order Book Official is not absolute. The
Order Book Official may determine, without subsequent approval, the
appropriate order and manner for conducting the rotation only if the
appropriate Floor Procedures Committee has not acted to establish any
policy applicable to the particular class of options in question. The
Order Book Official must otherwise obtain approval from two concurring
Floor Officials to deviate from the order and manner for conducting the
rotation for a particular class of options already established by the
appropriate Floor Procedures Committee. The Commission believes the
proposed amendments to Rule 6.2 and Rule 24.13 are reasonable in view
of the CBOE's intended goal to allow Order Book Officials and Floor
Officials the discretion to exercise their judgment in response to
market conditions or circumstances.
The Commission also believes that it is appropriate to add
Interpretation .04 to Rule 6.2 to state that the decision to conduct an
abbreviated rotation is one example of a deviation from rotation policy
or procedure and one of the modifications of rotation order and manner
that is permitted under Rule 6.2.
Further, the Commission believes that it is appropriate to amend
Rule 6.2 to afford an Order Book Official the discretion to authorize
two or more simultaneous trading rotations. The Commission also finds
that it is appropriate to amend Rule 6.2 to grant two concurring Floor
officials the discretion to direct that one or more trading rotations
be employed on any given business day. Both situations involve an
intra-day decision that, under current Rule 6.2, would require the
entire Floor Procedures Committee to assemble. The Commission agrees
that it may be impractical to assemble the Floor Procedures Committee
for such intra-day decisions. The Commission also believes that by
granting Order Book Officials and Floor Officials the discretion to
evaluate current market conditions and employ the appropriate number of
rotations in response to these conditions, these officials will be
positioned to make informed decisions regarding the manner in which a
rotation can maintain or contribute to the maintenance of a fair and
orderly market.
Further, the Commission believes that the Exchange's proposal to
amend Interpretation .02 to Rule 6.2 to grant two concurring Floor
Officials the authority to commence more than one trading rotation
after 3:10 p.m. (central time) to maintain a fair and orderly market,
is a reasonable response to the Exchange's attempt to respond to
current market conditions. The interpretation is further amended to
clarify that the factors to be considered in determining whether to
commence more than one trading rotation after 3:10 p.m. are not limited
to those enumerated. Although the amended interpretation grants two
concurring Floor Officials the discretion to exercise their judgment in
response to market conditions or circumstances, the Commission supports
CBOE's policy that, in general, no more than one trading rotation will
be commenced after 3:10 p.m.
The Commission also believes that it is reasonable to amend Rule
6.2 by codifying the current practices of allowing two concurring Floor
Officials to delayed commencement of the opening rotation in any class
of options to maintain a fair and orderly market. The proposed
amendment to Rule 6.2 will expressly grant two concurring Floor
Officials the power to react to market conditions and circumstances by
delaying the opening rotation. The Commission believes that the proper
exercise of this authority should contribute to the protection of
investors and the public interest by enabling Floor Officials to
respond to current market conditions in a timely manner.
For the same reason, the Commission also believes that it is
appropriate to amend Interpretation .03 to Rule 24.13 to grant two
concurring Floor Officials greater discretion to delay the commencement
of the opening rotation for index options by deleting the requirement
that any delays in the opening rotation for index options be in five
minute intervals. Specifically, the Commission notes that by deleting
this five minute interval requirement, Floor Officials will be able to
react more promptly to current market conditions and commence the
opening rotation in an interval shorter than five minutes if the
circumstances warrant. By granting Floor Officials the flexibility to
immediately commence an opening rotation, investors may be able to
reduce their exposure to price fluctuations occurring when the index
options markets have a delayed opening and the stock and futures
markets are open. The Commission further notes that for lengthy delays,
it may be impractical to require two Floor Officials to continuously
remain at the index options post for the purpose of declaring
[[Page 28191]] successive five minute delays. The proposed rule change
will provide the Exchange's Floor Officials more flexibility to declare
delayed openings in index options in appropriate circumstances.
Furthermore, the Commission believes it is appropriate to amend
Interpretation .03 to Rule 6.2 to state that a closing rotation for
expiring series of index options ``is not ordinarily'' employed. Under
the current interpretation, a closing rotation for an expiring series
of index options ``shall not be employed.'' The Commission believes
that the proposed amendment to Interpretation .03 should provide CBOE
Floor Officials the opportunity to respond to extraordinary
circumstances including, but not limited to, a system malfunction or a
major announcement in the markets late in the trading day.\9\
\9\ See supra note 7.
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For the same reasons, the Commission also believes that it is
appropriate to amend Interpretation .03 to Rule 6.2 to grant two
concurring Floor Officials the authority to deviate from the procedures
for closing rotations if they determine such deviation is to maintain a
fair and orderly market.
Finally, the Commission believes it is appropriate to delete from
Rule 24.13 the requirement that an Order Book Official open the nearest
expiration series of index options before opening the remaining series.
The Commission believes that the proposed rule change, by permitting
the Order Book Official to exercise his judgment in response to market
conditions or circumstances, is consistent with the purposes of the
Act.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\10\ that the proposed rule changes (File No. SR-CBOE-95-04) are
approved.
\10\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\11\
\11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-13072 Filed 5-26-95; 8:45 am]
BILLING CODE 8010-01-M