[Federal Register Volume 62, Number 99 (Thursday, May 22, 1997)]
[Notices]
[Pages 28082-28084]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-13403]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38543; File No. SR-CBOE-96-71]
Self-Regulatory Organizations; Chicago Board Options Exchange,
Inc.; Order Approving Proposed Rule Change and Notice of Filing and
Order Granting Accelerated Approval of Amendment No. 1 Relating to the
Establishment of a 3:02 p.m. Closing Time for Equity and Narrow-Based
Index Options Trading
May 14, 1997.
I. Introduction
On October 25, 1996, the Chicago Board Options Exchange, Inc.
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange
Commission (``SEC'' or ``Commission'') a proposed rule change pursuant
to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'')
\1\ and Rule 19b-4 thereunder.\2\ On February 24, 1997, the Exchange
filed an amendment to the rule proposal.\3\
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\1\ U.S.C. Sec. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Letter from Timothy Thompson, Senior Attorney, CBOE, to
Janice Mitnick, Attorney, Division of Market Regulation, Commission,
dated February 24, 1997 (``Amendment No. 1''). Amendment No. 1
describes the purpose for the proposed change to the required notice
period, from ten minutes to five, prior to the commencement of a
trading rotation.
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Notice of the substance of the proposed rule change was provided by
issuance of a release \4\ and by publication in the Federal
Register.\5\ No comments were received. This order approves the
proposed rule change, as amended, and solicits comments on Amendment
No. 1.
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\4\ Securities Exchange Act Release No. 37988 (November 26,
1996).
\5\ 61 FR 64405 (December 4, 1996).
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II. Description of the Proposal
The exchange proposes to amend Rule 6.1, Interpretation .01 and
Rule 24.6 governing the hours of trading in equity options and narrow-
based index options. Currently, the ten minute period for trading
equity and narrow-based index options after the close of the underlying
stocks allows options traders to respond to late reports of closing
prices over the consolidated tape. The proposed rule change will result
in the close of trading in equity and narrow-based index options at
3:02 p.m.\6\ instead of the existing close of 3:10 p.m.
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\6\ All time references are in Central Time.
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The Exchange also proposes to amend its rules to provide for a five
minute notice period before a trading rotation may begin after the
close of trading. Currently, a ten minute notice must be given under
CBOE Rule 6.2, Interpretation .02. The Exchange states that it is now
able to send notice to its members of its intent to have a closing
rotation almost instantaneously.\7\ The Exchange also proposes to amend
its trading rotation rule, Interpretations .01 and .03 and Rule 6.2, to
reflect the changes in the closing time from 3:10 p.m. to 3:02 p.m. for
equity options and narrow-based index options.
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\7\ See Amendment No. 1.
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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.
II. Discussion
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, Section 6(b)(5).\8\ Section 6(b)(5) requires, among other
things, that the rules of an exchange be designed to promote just and
equitable principles of trade, perfect
[[Page 28083]]
the mechanism of a free and open national market, and in general, to
further investor protection and the public interest.
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\8\ 15 U.S.C. Sec. 78f(b)(5).
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The Commission believes that it is reasonable for the Exchange to
amend its rules to close trading in equity and narrow-based index
options at 3:02 p.m., versus the existing 3:10 p.m. close. Changing the
closing time for these options to 3:02 p.m. preserves the Exchange's
stated need to continue trading options for some period of time after
the close of trading in the underlying securities. The Exchange has
stated that this two minute extension from the close of the stock
markets will allow options traders to respond to late reports of
closing prices over the consolidated tape, thereby bringing options
quotes into line with the closing price of the underlying security. Due
to improvements in the processing and reporting of transactions, the
Exchange believes that two minutes of options trading after the
underlying equities close is sufficient to bring options quotes into
line with the closing prices of the underlying securities.
In determining an appropriate closing time, the Exchange has also
considered problems that might result when the Exchange remains open
after the close of the primary exchange for the underlying stocks. The
Exchange states that a number of issuers have adopted the practice of
disseminating important corporate news after the close of trading on
the primary equity exchange in order to minimize the short-term
disruptive effect of the news on the market price of the stock by
allowing investors the opportunity to digest the significance of the
news after the markets have closed. These announcements, if made while
options markets are still trading, impact narrow-based index options,
as well as equity options, because a significant news announcement on
one component of a narrow-based index may have substantial impact on
that index. Despite the fact that most Exchange products trade until
3:10 p.m., important corporate news is often disseminated between 3:00
and 3:10 p.m. Consequently, the Exchange states that it is often
deluged with option orders as a result of a significant news
announcement after 3:00 p.m., most often made between 3:02 p.m. and
3:10 p.m. The Exchange has found that these orders have a disruptive
effect on the options market at a time when the Exchange is attempting
to close in a fair and orderly fashion.\9\ The Exchange also states
that as a result of these news announcements, orders are regularly
routed through the Exchange's Retail Automatic Execution System
(``RAES'') and executed in rapid succession on markets that have not
had a chance to be updated to reflect the significant news.\10\ The
Exchange states that a change in the options trading close to 3:02 p.m.
would limit the disruptive effect on Exchange products that these
significant news announcements can create.
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\9\ The Exchange notes that although it 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 Exchange believes that 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.
\10\ 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 minutes 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.
Securities Exchange Act Release No. 37885 (October 29, 1996), 61 FR
56724 (approving CBOE-96-55).
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Accordingly, the Commission finds that a closing time of 3:02 p.m.
for equity and narrow-based index options is a reasonable means to
address the Exchange's desire to balance the need for some extended
trading period with the need to prevent negative impact from issuers'
major news announcements made while only the options markets remain
open.
The Commission also believes that it is reasonable for the Exchange
to amend its rules to provide for a five minute notice period before a
trading rotation may begin after the close of trading. The Exchange
states that it is now able to send notice to its members of its intent
to have a closing rotation almost instantaneously. The Commission
concurs with the Exchange that it is appropriate to reduce the notice
period, permitting the Exchange to allow the establishment of closing
prices in as timely a manner as possible. The Commission also finds
that the change from a ten minute notice to a five minute notice is
reasonable in light of the Exchange's goal of appropriately
disseminating information of a trading rotation while establishing
closing prices in a timely manner.
Finally, the Commission finds that it is reasonable for the
Exchange to amend Rule 6, Interpretations and Policies .01 to conform
to Rule 24.6 clarifying that either the Board or its designee may
change the hours of the trading of options when unusual conditions
occur. The rule change will provide the Exchange with the necessary
flexibility in order to respond to unusual market conditions.
It is contemplated that the Exchange will implement this rule
change on or about June 23, 1997.\11\
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\11\ Phone conversation between Timothy Thompson, Exchange and
Janice Mitnick, Commission, May 14, 1997.
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The Commission finds good cause for approving Amendment No. 1 to
the filing prior to the 30th day after the date of publication of the
notice of the filing. Amendment No. 1 merely serves to effect a
clarification to the Exchange's proposal and does not materially affect
the substance of the proposal.\12\ Accordingly, the Commission believes
there is good cause, consistent with Sections 6(b)(5) and 19(b)(2) of
the Act, to approve Amendment No. 1 to the proposal on an accelerated
basis.
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\12\ See n.3, supra.
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning Amendment No. 1. 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 in the Commission's Public Reference Room. Copies of such
filing will also be available for inspection and copying at the
principal office of the CBOE. All submissions should refer to File No.
SR-CBOE-96-71, and should be submitted by June 12, 1997.
V. Conclusion
For the reasons discussed above, the Commission finds that the
proposal is consistent with the Act, and, in particular, Section 6 of
the Act.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\13\ that the proposed rule change (SR-CBOE-96-71) is approved.
\13\ 15 U.S.C. Sec. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\14\
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\14\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-13403 Filed 5-21-97; 8:45 am]
BILLING CODE 8010-01-M
