[Federal Register Volume 61, Number 130 (Friday, July 5, 1996)]
[Notices]
[Pages 35282-35284]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-17149]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37380; File No. SR-CBOE-96-37]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change, as Amended, by 
Chicago Board Options Exchange, Incorporated Relating to a Pilot 
Operation of a System for Monitoring News Announcements Made After the 
Close of Trading in the Primary Market for the Underlying Stock

June 28, 1996.
    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 June 17, 1996, the Chicago Board Options Exchange, Incorporated 
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by the CBOE. 
The Exchange submitted to the Commission Amendment Nos. 1 \3\ and 2 \4\ 
to the proposed rule change on June 26, 1996. The Commission is 
publishing this notice, as amended, to solicit comments on the proposed 
rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, the Exchange makes several 
clarifications to the proposed pilot. See Letter from Michael L. 
Meyer, Attorney, Schiff Hardin & Waite, to John Ayanian, Attorney, 
Office of Market Supervision (``OMS''), Division of Market 
Regulation (``Market Regulations''), Commission, dated June 26, 1996 
(``Amendment No. 1'').
    \4\ In Amendment No. 2, the Exchange clarifies that it intends 
to turn on the system each day a few minutes prior to the 3:00 p.m. 
central time close of trading in the primary market, in order to be 
certain that the system is operating by the time the primary market 
closes. Letter from Michael L. Meyer, Attorney, Schiff Hardin & 
Waite, to John Ayanian, Attorney, OMS, Market Regulation, 
Commission, dated June 26, 1996 (``Amendment No. 2'').
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to institute a pilot test of a system that, 
shortly before

[[Page 35283]]

the close of trading each day, will monitor news announcements 
pertaining to underlying securities, and will automatically suspend the 
Exchange's automatic execution system in respect of options on those 
securities that are the subject of such announcements. 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 Exchange proposes to establish a limited pilot test of an 
automated system that would monitor news wires received at the Exchange 
shortly before the close of trading each day, and would suspend the 
Exchange's automatic order execution system in a class of equity 
options whenever there is a news announcement pertaining to the 
security underlying options of that class. Options on equity securities 
are currently traded on CBOE until 3:10 p.m. central time on each 
trading day, which is 10 minutes after the close of trading on the 
primary market's for underlying securities. The Exchange notes that 
this additional period of options trading after the underlying market 
has closed is provided to accommodate orders to buy or sell options at 
prices that reflect the closing prices of the underlying securities. 
The Exchange has experienced difficulties when issuers of underlying 
stocks make significant news announcements after the 3:00 p.m. central 
time close of trading in the underlying stocks, but before options 
cease trading at 3:10 p.m. central time. The Exchange believes that 
because these issuers are often unaware of or indifferent to the fact 
that options trading on their stocks continues for 10 minutes after the 
stocks cease to trade, they do not wait until 3:10 p.m. central time to 
make these announcements. According to the Exchange, it is not uncommon 
for significant news announcements to be made between 3:00 p.m. and 
3:10 p.m., when options are still traded primary markets. These 
announcements often require an immediate adjustment to the prices of 
series of options on the stock in question, to take into account the 
likely affect of the announcement on the market price of the underlying 
stock, even through the stock is not then trading in its primary 
market. The Exchange believes that until such option prices are 
adjusted, the Exchange's retail automatic execution system (``RAES'') 
may be providing automatic executions of customer orders at prices that 
do not reflect the current state of the market.
    Currently, CBOE addresses this occurrence by positioning two Floor 
Officials in close communication with newsreaders in the Exchange's 
Control Room beginning shortly before 3:00 p.m. central time. If a 
significant news announcement is made, these two Floor Officials may 
exercise their authority under Exchange Rule 6.6(a) to declare a 
``fast'' market, in the interest of maintaining a fair and orderly 
market, in the class or classes of options affected by the news 
announcement, and then to suspend RAES in respect of those classes as 
authorized under Rule 6.6(b)(v). The Exchange believes that there are 
at least two difficulties with this approach. First, it depends on the 
continuous availability of two Floor Officials at a critical time prior 
to the close of options trading when they might be needed to attend to 
other matters. Second, even if two Floor Officials are available, it 
still can take 30 seconds or more after a news announcement is received 
before the Floor Officials are able to suspend RAES, during which time 
a considerable number of orders may be automatically executed at 
inappropriate prices.
    In response to these problems, CBOE developed a system that can 
monitor news wires during the 10 minutes following the close of trading 
in primary stock markets while options are still traded, and 
automatically suspend RAES in all series of options on those stocks 
that are the subject of news announcements. This permits RAES to be 
turned off at virtually the same time as the news item appears on the 
wire. According to the Exchange, when RAES is turned off, customer 
orders that might otherwise have been automatically executed will 
instead be automatically routed to the Public Automated Routing System 
(``PAR'') workstation \5\ at the appropriate trading post, where they 
can be immediately executed at the then current price almost as quickly 
as if they had received automatic execution in RAES.
---------------------------------------------------------------------------

    \5\ A PAR workstation is an automated, computer-based 
workstation that provides users with the ability to execute trades, 
transmit trade reports, and enter other data and commands at the 
touch of a screen, thereby eliminating the delay inherent in a 
keyboard-based system.
---------------------------------------------------------------------------

    The Exchange notes that the automatic news monitor cannot determine 
the significance of a particular announcement, and will automatically 
suspend RAES in a class of options whenever there is any news 
announcement pertaining to its underlying stock. Because significant 
news announcements, however, tend to be concentrated during the period 
immediately following the close of trading in primary stock markets, 
CBOE intends to operate its new system only during the time from just 
before 3:00 p.m. central time to the close of options trading on CBOE 
at 3:10 p.m. central time, when it is not expected that there will be 
very many ``false alarm'' announcements. Additionally, two Floor 
Officials will promptly be informed each time RAES is automatically 
turned off in response to a news announcement, and if enough time 
remains before the 3:10 p.m. central time close of options trading, the 
Floor Officials should be able to evaluate the significance of the 
announcement, and if it is not significant or if there has been time 
for prices to have been adjusted, to turn on RAES for the remainder of 
the trading session.\6\
---------------------------------------------------------------------------

    \6\ The Commission expects that if there is enough time before 
the close of options trading, and the news is not significant or if 
there has been time for prices to have been adjusted, the Floor 
Officials will resume RAES operations for the subject options class.
---------------------------------------------------------------------------

    In order to test the effectiveness of this automatic system in 
actual market conditions, CBOE proposes to implement it in respect of 
various classes of options during a 30-day pilot period.\7\ The 
Exchange believes that this will enable it to evaluate how quickly the 
automatic system if able to respond to news announcements, how many, if 
any, false alarms are received, how quickly customer orders are able to 
be rerouted and executed over the PAR system, and whether Floor 
Officials are able to make an evaluation of the situation and restore 
the operation of RAES in the limited time available after there has 
been an automatic suspension of RAES. If after the 30-day pilot period

[[Page 35284]]

CBOE desires to implement the automatic system on a permanent basis for 
all classes of equity options, CBOE will make a subsequent filing to 
this effect under Section 19(b)(2) of the Act.
---------------------------------------------------------------------------

    \7\ The Exchange will issue a circular to its membership 
outlining the terms of the pilot and the classes that will be 
included in it. Telephone conversation between Michael L. Meyer, 
Schiff Hardin & Waite, and Sharon Lawson and John Ayanian, OMS, 
Market Regulation, Commission, on June 25, 1996.
---------------------------------------------------------------------------

    CBOE believes that the implementation of a pilot test of a system 
that, if successful, would permit the continued availability of CBOE's 
automatic execution system for public customer orders during the period 
when options are traded after the close of trading in the primary 
markets for underlying stocks and would assure that these orders are 
executed at fair prices in the event of significant news announcements, 
is in the interest of promoting just and equitable principles of trade 
and protecting investors and the public interest, and thus is 
consistent with the objectives of Section 6(b)(5) of the Act.

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 the Proposed Rule Change 
Received from Members, Participants or Others

    No written comments were solicited or received with respect to the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    The Exchange has requested that the proposed rule change be given 
accelerated effectiveness pursuant to Section 19(b)(2) of the Act. 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 the 
requirements of Section 6(b)(5) thereunder.
    The Commission believes that the Exchange's proposal provides a 
reasonable method of testing a system to address pending news 
announcements after the close of trading in the primary market for the 
underlying securities.\8\ The Commission notes that the test will be 
limited to news announcements after the close of trading in the primary 
market for the underlying stock, while continuing to (1) ensure prompt 
execution of customer orders in the particular class subject to a news 
announcement by rerouting such orders to a PAR workstation and (2) make 
RAES executions available in classes of options not subject to news 
announcements during the time when options continue to be traded after 
the close of trading in the primary market for underlying stocks.
---------------------------------------------------------------------------

    \8\ See Amendment No. 2, supra note 4.
---------------------------------------------------------------------------

    As noted, the CBOE intends to evaluate the pilot in several 
respects to determine if it wants to implement the system on a 
permanent basis.\9\ The CBOE will provide the Commission with the 
analysis of the pilot.
---------------------------------------------------------------------------

    \9\ The pilot expires at 3:10 p.m. central time on July 26, 
1996. Any request for an extension of the pilot period or request 
for permanent approval of the system would have to be submitted to 
the Commission pursuant to Section 19(b)(2) of the Act.
---------------------------------------------------------------------------

    The Commission finds good cause for approving this proposed rule 
change, as amended, 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 the proposal, as amended, is appropriate because it is to 
be implemented for a limited 30-day period which will provide CBOE with 
the time to test the effectiveness of the system.
    Accordingly, the Commission believes that it is consistent with 
Section 6(b)(5) of the Act to approve the proposed rule change, as 
amended, on an accelerated basis.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing and Amendment Nos. 1 and 2. Persons 
making written submissions should file six copies thereof with the 
Secretary, Securities and Exchange Commission, 450 Fifth Street, N.W., 
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 in the Commission's Public 
Reference Section, 450 Fifth Street, N.W., Washington, DC 20549. Copies 
of such filing will also be available for inspection and copying at the 
principal office of CBOE. All submissions should refer to File No. SR-
CBOE-96-37 and should be submitted by July 26, 1996.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (File No. SR-CBOE-96-37), as amended, is 
hereby approved for a 30-day pilot period, on an accelerated basis.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\10\
---------------------------------------------------------------------------

    \10\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Jonathan G. Katz,
Secretary.
[FR Doc. 96-17149 Filed 7-3-96; 8:45 am]
BILLING CODE 8010-01-M