[Federal Register Volume 61, Number 163 (Wednesday, August 21, 1996)]
[Notices]
[Pages 43281-43283]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-21320]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37577; File No. SR-CBOE-96-55]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Partial Accelerated Approval of Proposed Rule Change by
Chicago Board Options Exchange, Incorporated Relating to its System for
Suspending the Retail Automatic Execution System for Equity Options in
the Event of News Announcements Near the Close of Trading
August 15, 1996.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on August
14, 1996, the Chicago Board Options Exchange, Incorporated (``CBOE'')
filed with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I and II
[[Page 43282]]
below, which Items have been prepared by the CBOE. The Commission is
publishing this notice to solicit comments on the proposed rule change
from interested persons, and to grant accelerated approval to the
portion of the proposal to extend the pilot program pending the
Commission's review of the proposed rule change.
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The CBOE seeks permanent approval of a program for suspending the
Exchange's automatic execution system in the event of news
announcements near the close of trading, as described in Interpretation
and Policy .01 under CBOE Rule 6.6. The Exchange also proposes to
continue the pilot program pending consideration of the request for
permanent approval.
The text of the proposed rule change is available at the Office of
the Secretary, CBOE and at the Commission.
II. Self-Regulatory Organization's Statement of the Purpose of and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, CBOE 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 IV below. The CBOE 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
The purpose of the proposed rule change is to make permanent the
Exchange's system that suspends its automatic execution system in the
event of news announcements near the close of trading, as described in
Interpretation and Policy .01 under CBOE Rule 6.6.\1\ The Exchange is
also proposing continuation of the pilot operation of the system while
the proposal for permanent status is being considered by the
Commission.
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\1\ The 30-day pilot was proposed in File No. SR-CBOE-96-37. See
Securities Exchange Act Release No. 37380 (June 28, 1996). The pilot
was extended for an additional 15 days in File No. SR-CBOE-96-53.
See Securities Exchange Act Release No. 37505 (July 31, 1996).
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The automatic RAES suspension system is designed to respond to the
problem presented when issuers of stocks underlying options make
significant news announcements during the ten minutes after the close
of trading in stocks when options continue to trade.\2\ The system
monitors news wires during this period, and automatically suspends the
Exchange's Retail Automatic Execution System in options on stocks that
are the subject of such announcements in order to prevent automatic
executions at prices that do not reflect the news. This program has
been in place on a pilot basis since July 1, 1996, to enable the
Exchange to evaluate it before deciding whether to adopt it on a
permanent basis.
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\2\ CBOE may soon propose reducing to five minutes the time when
options continue to trade after the close of stock trading. So long
as options trade for any period of time after the close of stock
trading, CBOE believes it would need to maintain the system for
suspending RAES in the event of news announcements during this
period. Only if options trading and stock trading close concurrently
would there be no need for such a system. CBOE does not support
concurrent closings because this would not allow time for closing
options prices to be determined based on closing stock prices, or
for participants to open or close options positions for hedging
purposes based on closing stock prices. For a more detailed
discussion of the reasons for continuing to trade options after the
close of trading in the primary markets for underlying stocks and
the problems this presents for RAES, see the discussion in SR-CBOE-
96-37, which proposed the initial 30-day pilot in the system that is
the subject of this filing, notice of which was given in Securities
Exchange Act Release No. 37380 (June 28, 1996).
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Based on its experience with the pilot operation of the system, the
Exchange has now determined to propose its adoption on a permanent
basis. During the first four weeks of the pilot operation of the
system, the Exchange believes that it performed as intended to suspend
RAES in particular classes of options each time there was a news
announcement pertaining to an underlying stock during the period of
time when options continued to trade after the close of trading in
underlying stocks. The Exchange submitted a report of the operation of
the pilot from July 1, 1996 through July 26, 1996 to the Commission.
The report shows that during this period, RAES was suspended a total of
90 times and was reinstated after suspension 36 times. Although the
news announcements covered a range of subjects, at least 15 were
earnings reports, evidencing that many issuers continue to release such
news after the close of stock trading while options continue to be
traded. Of the 90 suspensions, 26 were in classes in which there were
RAES-eligible orders after the suspension. Of the 132 RAES-eligible
orders in these classes, 69 were executed after RAES was reactivated
(63 of which related to a single suspension and subsequent reactivation
of RAES in connection with the release of earnings for IBM), and 63
were rerouted as follows: to PAR terminals (30 orders), to printers at
the post (4 orders), to members' booths (22 orders), or to the limit
order book (7 orders). Forty-five of these rerouted orders (71%) were
filled in the auction market. Eighteen orders during the pilot period
expired unfilled. Because these orders were all submitted at or after
the close of stock trading and related to options on stocks that were
the subject of post-close news announcements, the Exchange believes
that it is reasonable to conclude they were entered for the purpose of
taking advantage of prices that had not been adjusted to reflect news
announcements. Accordingly, the Exchange believes that the system
appears to have worked as intended to prevent the execution of these
orders at inappropriate prices, while permitting most orders to be
executed at prices established in the auction market. The Exchange
notes that reactivation of RAES was generally not a significant factor
in the execution of these orders (with the one exception of the IBM
orders noted above), because most had already been executed in the
auction market by the time RAES was reactivated.
The Exchange believes that the pilot operation of the RAES
suspension system demonstrated that it is able to prevent the automatic
execution of option orders at inappropriate prices while avoiding any
negative impact on the operation of the Exchange. For this reason, the
Exchange believes the system should be approved on a permanent basis,
and that to do so is consistent with the objectives of Section 6(b)(5)
of the Act, in that it will help to assure that option orders are
executed at fair prices in the event of significant news announcements,
which serves to promote just and equitable principles of trade and to
protect investors and the public interest.
B. Self-Regulatory Organization's Statement on Burden on Competition
CBOE does not believe that the proposed rule change will impose any
burden on competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
No written comments were solicited or received with respect to the
proposed rule change.
[[Page 43283]]
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve such proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
The Exchange has requested that the Commission approve on an
accelerated basis pursuant to Section 19(b)(2) of the Act the portion
of the proposed rule change that proposes continuation of the pilot
operation of the RAES suspension system pending consideration by the
Commission to approve the system on a permanent basis. In that regard
the Commission finds it is 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) thereunder, to permit CBOE to continue the pilot operation of
the system while the Commission considers CBOE's proposal to implement
the system on a permanent basis. The Commission notes that the Exchange
has not reported any significant problems with the operation of the
system to date.
The Commission finds good cause for approving this proposed rule
change on an accelerated basis prior to the thirtieth day after the
date of publication of notice thereof in the Federal Register.
Specifically, the Commission believes that accelerated approval of this
portion of the proposal is appropriate because it is to be implemented
for a limited period pending the review by the Commission of the
Exchange's proposal to seek permanent approval of the pilot program.
During this period all orders will be handled in accordance with the
terms of the pilot, as previously approved by the Commission.
Accordingly, the Commission believes that it is consistent with
Section 6(b)(5) of the Act to approve an extension of the pilot
program, on an accelerated basis.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing. 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. 552, will be available for inspection and copying in the
Commission's Public Reference Section, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Copies of such filing will also be available
for inspection and copying at the principal office of CBOE. All
submissions should refer to the file number in the caption above and
should be submitted by September 11, 1996.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\3\ that the portion of the proposed rule change requesting the
continuation of the pilot is approved on an accelerated basis, pending
Commission review of the proposal requesting permanent approval.
\3\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\4\
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\4\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-21320 Filed 8-20-96; 8:45 am]
BILLING CODE 8010-01-M