[Federal Register Volume 61, Number 234 (Wednesday, December 4, 1996)]
[Notices]
[Pages 64405-64406]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-30812]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37988; File No. SR-CBOE-96-71]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Chicago Board Options Exchange, Incorporated Relating to
the Closing Time for Equity and Narrow-Based Index Options
November 26, 1996.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 \2\ thereunder, notice is hereby given
that on November 20, 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 self-regulatory organization. The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. Sec. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The Exchange proposes to amend its rules governing the hours of
trading in equity options and narrow-based index options. After the
change, the Exchange will close trading in equity and narrow-based
index options at 3:02 p.m. (Chicago time) instead of at 3:10 p.m.
(Chicago time), as is the case now. 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, the self-regulatory organization
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 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
The purpose of the proposed rule change is to change the close of
the normal trading hours in equity and narrow-based index options from
3:10 p.m. (Chicago time) to 3:02 p.m. (Chicago time). After the change,
the time of the close of trading in these CBOE options will more
closely correspond to the normal time set for the close of trading on
the primary exchanges listing the stocks underlying the CBOE options.
The primary exchanges generally close at 3:00 p.m. (Chicago time).
When the Exchange determined to change its closing time for equity
options and narrow-based index options, it determined that there were
still reasons to continue trading options for some period of time after
the close of trading of the primary markets for the underlying
securities. Specifically, the extended period allows options traders to
respond to late reports of closing prices over the consolidated tape.
If the price of a late reported trade on an underlying security was
substantially different from the previous reported price, the extended
trading session would give options traders the opportunity to bring
options quotes into line with the closing price of the underlying
security. However, because of improvements in the processing and
reporting of transactions, there are usually no significant delays in
the reporting of closing prices. Therefore, a ten minute session is no
longer needed to trade options after the underlying securities close
trading.
The Exchange believes the need to continue trading options for some
period of time after the close of trading on the primary markets for
the underlying securities outweighs the obvious problems with
continuing to trade options while stocks are longer traded. The
Exchange has learned through experience with a 3:10 close that pricing
aberrations can occur if an option is traded when the underlying stock
is no longer trading. There is obviously a close relationship in the
price of the underlying stock and the overlying option. As a result, it
is difficult for the market to price options accurately when the
underlying security is not trading. It is for this reason that the halt
of trading in an underlying security is a factor to be considered in
determining whether to halt trading in the overlying option under CBOE
Rule 6.3.
In recent weeks, the Exchange has become particularly cognizant of
the pricing problems that result when the Exchange remains open after
the close of the primary exchange for the underlying stocks. A number
of issuers have adopted the practice of disseminating important
corporate news after the close of trading on the primary exchange.
Issuers often wait until after 3:00 p.m. Chicago time to release the
news because they realize that the news might have a short-term
disruptive effect on the market price of the stock that can be
minimized if investors are able to digest the significance of the news
after the markets have closed and overnight. However, despite efforts
of the Exchange to remind issuers that most Exchange products trade
until 3:10 p.m., important corporate news is often disseminated between
3:00 p.m. and 3:10 p.m. As a result, the Exchange is often deluged with
option orders after a significant news announcement after 3:00 p.m.,
most often between 3:02 p.m. and 3:10 p.m. These orders have a
disruptive effect on the market at a time when the Exchange is
attempting to close in a fair and orderly fashion.\3\ Among the
possible deleterious effects is that customer orders might not be
filled as quickly as they might otherwise be filled in more normal
conditions. In addition, orders regularly are routed through the
Exchange's Retail Automatic Execution System (``RAES'') and are
executed in rapid succession on markets that have not had a chance to
be updated to reflect the significant news.\4\ Weighing the benefits to
be
[[Page 64406]]
obtained by a brief extended trading session against the difficulties
presented when options trade after the underlying securities have
closed, the Exchange has determined that a two minute extended session
is the correct balance.
---------------------------------------------------------------------------
\3\ Although the Exchange has the ability to call a ``fast''
market under current Exchange Rule 6.6 in an effort to deal with the
problems caused by news announcements after 3:00 p.m., this
procedure requires the assessment of the situation by two Floor
Officials. As a result, the Rule 6.6 procedure does not permit the
Exchange to act quickly enough to prevent the possible deleterious
effects of an unexpected news announcement.
\4\ Orders routed through the RAES system are assigned execution
prices instantaneously as determined by the prevailing market quotes
that exist at the time of the order's entry into the system. As a
result, these orders might be assigned a price before the market-
makers will have had the chance to update the quotes based upon the
unexpected news announcement. To respond to the problem presented
when issuers make significant news announcements during the ten
minute period after the close of trading in stocks, the Exchange
filed a rule with the Commission which permits the Exchange to
employ a system to suspend the operation of the RAES system in the
event of news announcements near the close of trading. See
Securities Exchange Act Release No. 37885 (October 29, 1996), 61 FR
56724 (approving CBOE-96-55).
---------------------------------------------------------------------------
The Exchange also proposes to change the closing time for narrow-
based indexes under Rule 24.6 because these indexes are subject to the
same pricing problems as options on individual stocks. A significant
news announcement on one component of a narrow-based index could have a
significant effect on that index. The Exchange is not at this time
proposing to change the closing time of 3:15 p.m. for broad-based index
options because it is unlikely that a significant news announcement by
the issuer of one component stock of a broad-based index is likely to
have a significant effect on the price of that broad-based index.
The Exchange is also proposing to amend Interpretations .02 and .03
of its trading rotation rule, Rule 6.2, to reflect the changes in the
closing time for stock options and narrow-based index options from 3:10
p.m. to 3:02 p.m. Chicago time. A change would also be made to allow a
closing rotation in non-expiring options to be held five minutes after
news of such rotation is disseminated. Currently, the rule requires
notice of ten minutes before a closing rotation may be held.
Finally, the Exchange is proposing to amend Interpretation .01 to
Rule 6.1 to make it clear that the Board may designate a person or
persons to change the hours for the trading of options when unusual
conditions exist. This change is consistent with the Exchange's current
Rule 24.6.
2. Statutory Basis
The proposed rule changes further the objectives of Section 6(b)(5)
of the Act, in that they are designed to promote just and equitable
principles of trade, and to remove impediments to and perfect the
mechanism of a free and open market and a national market system.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange states that it 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
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
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.
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. Sec. 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
Exchange. All submissions should refer to File No. SR-CBOE-96-71 and
should be submitted by December 26, 1996.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\5\
---------------------------------------------------------------------------
\5\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-30812 Filed 12-3-96; 8:45 am]
BILLING CODE 8010-01-M
