[Federal Register Volume 61, Number 214 (Monday, November 4, 1996)]
[Notices]
[Pages 56724-56726]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-28181]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37885; File No. SR-CBOE-96-55]
Self-Regulatory Organizations; Order Granting Permanent Approval
of a Pilot Program Proposed 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
October 29, 1996.
I. Introduction
On August 14, 1996, the Chicago Board Options Exchange,
Incorporated (``CBOE''), filed a proposed rule change 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\ to seek 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.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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Notice of the proposal was published for comment and appeared in
the Federal Register on August 21, 1996.\3\ On October 17, 1996, the
Exchange filed with the Commission, Exhibit A to the proposal which
sets forth the text of the proposed rule change.\4\ No comment letters
were received on the proposed rule change. This order approves the
Exchange's proposal.
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\3\ The Commission concurrently granted accelerated approval of
the Exchange's request to extend the program pending consideration
of the request for permanent approval. See Securities Exchange Act
Release No. 37577 (August 15, 1996), 61 FR 43281 (``Release No.
37577'').
\4\ Exhibit A was mistakenly omitted from the original proposal.
The exhibit reflects minor and non-substantive changes to
Interpretation and Policy .01 under CBOE Rule 6.6. The changes to
the text of the proposed rule, as originally proposed in SR-CBOE-96-
37, merely eliminate words associated with the pilot status of the
program. See Letter from Michael Meyer, Attorney, Schiff Hardin &
Waite, to John Ayanian, Attorney, Office of Market Supervision
(``OMS''), Division of Market Regulation (``Market Regulation''),
Commission, dated October 15, 1996 (``CBOE Letter'').
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II. Description of the Proposal
The Exchange proposes to make permanent the Exchange's system that
suspends its Retail Automatic Execution System (``RAES'') in the event
of news announcements near the close of
[[Page 56725]]
trading, as described in Interpretation .01 under CBOE Rule 6.6.\5\
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\5\ 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). The
pilot was then extended pending Commission review of the Exchange's
request for permanent approval. See Release No. 37577, supra note 3.
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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.\6\ The system
monitors news wires during this period, and automatically suspends RAES
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.
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\6\ 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. The orders that expired unfilled were marketable
limit orders submitted at or after the close of stock trading, that
were not longer marketable in the auction market following the RAES
suspension for the subject options classes.\7\ 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.
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\7\ Telephone conversation between Mike Meyer, Attorney, Schiff
Hardin & Waite, and Holly Smith, Associate Director, and John
Ayanian, Attorney, OMS, Market Regulation, Commission, on August 15,
1996.
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III. Commission Finding and Conclusions
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) of the Act.\8\
Specifically, the Commission finds that the Exchange's proposal strikes
a reasonable balance between the Commission's mandates under Section
6(b)(5) to remove impediments to and perfect the mechanism of a free
and open market and a national market system, while protecting
investors and the public interest.
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\8\ 15 U.S.C. 78f(b)(5).
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The Commission believes that the proposed rule change provides a
reasonable method of suspending RAES for a limited period in a
particular options class that is subject to a news announcement near
the close of trading in the underlying security. The Commission notes
that the Exchange has not reported any significant problems with the
operation of the system to date. Upon reviewing the Exchange's report
regarding the operation of the system during the pilot, the Commission
believes that the proposed system should help to prevent the execution
of trades at inaccurate quotes while continuing to ensure prompt and
accurate execution of customer orders in the particular class subject
to a news announcement.
The Commission also believes that the proposed rule change is
reasonable because during the time when options continue to be traded
after the close of trading in the primary market for underlying stocks
(1) RAES executions will still be available in classes of options not
subject to news announcements; and (2) orders for an options class
subject to a news announcement that would have been routed to RAES will
be automatically re-routed to a PAR workstation, a floor broker printer
in the trading crowd, or to the appropriate member firm booth, where
they can be immediately executed at the then current price.
Accordingly, the Commission believes that the Exchange's electronic
Order Routing System should provide small investors an efficient and
effective method for order execution in circumstances where RAES is
turned off pursuant to this proposed rule change.
The Commission expects the Exchange to monitor the system and
ensure that (1) the system responds to news announcements, and if the
system responds to an item disseminated over the wires that is not
``news'' related, that RAES operations for the particular options class
will be resumed as soon as possible; \9\ (2) if there is enough time
before the close of options trading, and if options prices have been
adjusted to reflect the current state of the market, that Floor
Officials will resume RAES operations for the subject options class;
and (3) market orders and marketable limit orders that are still
marketable, receive efficient and accurate executions after being re-
routed in the manner described above.
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\9\ For example, block transactions in a given stock are
sometimes disseminated by a news service. When this occurs near or
after the close of trading, the identification of the stock triggers
an automatic suspension of RAES under the system. The CBOE has
indicated that in such circumstances, RAES will be immediately
reactivated, if time remains before the close of options trading.
See CBOE Letter, supra note 4.
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[[Page 56726]]
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\10\ that the proposed rule change (File No. SR-CBOE-96-55) is
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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\
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\11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-28181 Filed; 11-1-96; 8:45 am]
BILLING CODE 8010-01-M
