[Federal Register Volume 61, Number 145 (Friday, July 26, 1996)]
[Notices]
[Pages 39172-39174]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-19034]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37459; File Nos. SR-BSE-96-4, SR-CBOE-96-27, SR-CHX-96-
20, SR-Phlx-96-12]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval of Proposed Rule Change by the Boston
Stock Exchange, Inc., Chicago Board Options Exchange, Incorporated,
Chicago Stock Exchange, Inc., and Philadelphia Stock Exchange Inc.,
Relating to Amendments to Trading Halts Due to Extraordinary Market
Volatility (``Certain Market-Wide Circuit Breaker Provisions'')
July 19, 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 July 12, 1996, the Chicago Stock Exchange, Incorporated (``CHX'');
on July 15, 1996 the Boston Stock Exchange, Inc. (``BSE''); on July 17,
1996 the Chicago Board Options Exchange, Incorporated (``CBOE''); and
on July 18, 1996 the Philadelphia Stock Exchange, Inc. (``Phlx''),
respectively (each individually referred to herein as an ``Exchange''
and two or more collectively referred to as ``Exchanges''), filed with
the Securities and Exchange Commission (``SEC'' or ``Commission'')
proposed rule changes as described in Items I, II, and III below, which
Items have been prepared by the self-regulatory organizations. The Phlx
submitted to the Commission Amendment No. 1 to its proposal on July 19,
1996.\3\ The Commission is publishing this notice to solicit comments
on the proposed rule changes from interested persons. As discussed
below the Commission is also granting accelerated approval of these
proposed rule changes.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.194-4.
\3\ In Amendment No. 1, the Phlx indicated that the pilot period
extension of its circuit breaker program will expire on October 31,
1996. See Letter from Murray L. Ross, Secretary, Phlx, to Chester
McPherson, Attorney, Office of Market Supervision (``OMS''),
Division of Market Regulation (``Market Regulation''), Commission,
dated July 18, 1996.
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I. Self-Regulatory Organizations' Statement of the Terms of Substance
of the Proposed Rule Changes
In 1988, the Commission approved circuit breaker rules proposals by
the Exchanges.\4\ In general, the Exchanges' circuit breaker rules
provide that trading would halt for one hour if the Dow Jones
Industrial Average (``DJIA'') \5\ were to decline 250 points from its
previous day's closing level and, thereafter, trading would halt for an
additional two hours if the DJIA were to decline 400 points from its
previous day's close.
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\4\ In 1988, the Commission approved the following circuit
breaker proposals by the self-regulatory organizations (``SROs'') on
a pilot basis: See Securities Exchange Act Release Nos. 26198
(October 19, 1988), 53 FR 41637 (American Stock Exchange (``AMEX''),
National Association of Securities Dealers (``NASD'') and New York
Stock Exchange (``NYSE'')); 26218 (October 26, 1988), 53 FR 44137
(CHX); 26357 (December 14, 1988), 53 FR 51182 (BSE); and 26386
(December 22, 1988), 53 FR 52904 (Phlx). Since the initial approval
of the circuit breaker rules on a pilot basis, the Commission has
extended the pilot program each year. The most recent extensions
expire on October 31, 1996 for the Amex, NYSE and Phlx, and on
October 31, 1997 for the BSE and CHX. See Securities Exchange Act
Release No. 36414 (Oct. 25, 1995) 60 FR 55630. The Commission
approved on a permanent basis the proposals by the CBOE, Cincinnati
Stock Exchange (``CSE'') and Pacific Stock Exchange (``PSE''). See
Securities Exchange Act Release Nos. 26198 (October 19, 1988), 53 FR
41637 (CBOE); 26440 (January 10, 1989) 54 FR 1830 (CSE); and 26368
(December 16, 1988), 53 FR 51942 (PSE).
\5\ ``Dow Jones Industrial Average'' is a service mark of Dow
Jones & Company, Inc.
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The Exchanges' rules further provide that if the 250-point trigger
is reached during the last hour but before the last half-hour of
scheduled trading, or the 400-point trigger is reached during the last
two hours, but before the last hour of trading, the Exchanges may then
use abbreviated reopening procedures either to permit trading to reopen
before the established close, or to establish closing prices. However,
if the 250-point trigger is reached during the last half-hour, or if
the 400-point trigger is reached during the last hour, the Exchanges
shall not reopen for trading on that day.
The Exchanges propose to amend their circuit breaker rules to
modify the time periods for halting trading on the Exchanges when the
DJIA has declined by 250 or 400 points. The Exchanges propose to revise
those time periods to one-half hour and one hour, respectively, from
the one hour and two hours. The Exchanges also are proposing to amend
their rules to eliminate the reference to using abbreviated reopening
procedures either to permit trading to reopen before the scheduled
closing or to establish new last sales prices if trigger values are
reached in the last one-half hour or hour of trading.
II. Self-Regulatory Organizations' Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Changes
In their filings with the Commission, the self-regulatory
organizations included statements concerning the purpose of and basis
for the proposed rule changes and discussed any comments it received on
the proposed rule changes. The text of these statements may be examined
at the places specified in Item IV below. The self-regulatory
organizations have prepared summaries, set forth in Sections A, B, and
C below, of the most significant aspects of such statements.
A. Self-Regulatory Organizations' Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Changes
1. Purpose
The Exchanges believe that it is appropriate to reduce the time
period during which trading will be halted, particularly given the
current level of automation support for trading process. The Exchanges
believe that these revised time periods should be sufficient to provide
a meaningful ``time out'' for participants to evaluate changing market
conditions, without unduly constraining trading activity. The Exchanges
are not proposing, at this time, to revise the 250/400 point trigger.
With respect to the use of abbreviated reopening procedures, the
Exchanges
[[Page 39173]]
also are proposing to amend their rules to eliminate the reference to
using abbreviated reopening procedures either to permit trading to
reopen before the scheduled closing or to establish new last sales
prices if trigger values are reached in the last one-half hour or hour
of trading.\6\
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\6\ The PSE and CSE have general rules that require them to halt
trading during the intermarket circuit breakers. See supra note 4.
Consequently, they do not need to file conforming rule changes
because their circuit breaker halts will automatically conform to
the shortened halt periods adopted by the other exchanges. See
Letters to Howard L. Kramer, Associate Director, OMS, Market
Regulation, Commission, from David P. Semak, Vice President,
Regulation, PSE, dated July 17, 1996; and Adam W. Gurwitz, Director
of Legal Affairs, CSE, dated July 17, 1996.
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In conjunction with its proposed amendment to its circuit breaker
rules, the BSE also has filed to renumber Section 34, Chapter II of its
rules as Section 34A, and to add a new section, Section 34B (Limitation
on Trading During Significant Market Moves). This new section would
adopt the language contained in the NYSE's Rule 80A(c) pertaining to
the execution of index arbitrage orders during periods of significant
market declines and advances. The BSE believes that the codification of
this limitation will prevent orders that are prohibited in the primary
market during periods of market stress from finding a safe harbor on
the Exchange. In addition, the Exchange seeks to delete the redundant
``80A'' language contained in the Procedures for Competing Specialist
contained in Chapter XV, Section 18, No. 14.
2. Statutory Basis
The proposed rule changes are consistent with Section 6(b)(5) of
the Act in that it is designed to promote just and equitable principles
of trade. The Exchanges believe that amending their circuit breaker
rules is consistent with these objectives in that the revised trading
halt periods still provide market participants with a reasonable
opportunity to become aware of and respond to significant price
movements, thereby facilitating, in an orderly manner, the maintenance
of an equilibrium between buying and selling interest.
B. Self-Regulatory Organization's Statements on Burden on Competition
The Exchanges do not believe that any burden will be placed on
competition as a result of the proposed rule change.
C. Self-Regulatory Organizations' Statements on Comments on the
Proposed Rule Changes Received From Members, Participants or Others
Comments were neither solicited nor received with respect to the
proposed rule changes.
III. Date of Effectiveness of the Proposed Rule Changes and Timing for
Commission Action
The Exchanges request that the Commission finds good cause pursuant
to Section 19(b)(2) of the Act for approving the proposed amendments to
their circuit breaker rules prior to the 30th day after publication of
the proposed rule change in the Federal Register.
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, NW., 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 at the
Commission's Public Reference Section, 450 Fifth Street, NW.,
Washington, DC 20549. 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 Nos. SR-BSE-96-4, SR-CBOE-96-27, SR-
CHX-96-20, and SR-Phlx-96-12 and should be submitted by August 16,
1996.
V. Commission's Findings and Order Granting Accelerated Approval of
Proposed Rule Changes
After careful review of the Exchange's proposed amendments to their
circuit breaker rules and for the reasons discussed below, the
Commission believes that the proposed rule changes are consistent with
the requirements of the Act and the rules and regulations thereunder
applicable to a national securities exchange, and, in particular, with
the requirements of Section 6(b).\7\ Specifically, the Commission
believes the proposals are consistent with the Section 6(b)(5)
requirements that the rules of an exchange be designed to promote just
and equitable principles of trade, to remove impediments to and perfect
the mechanism of a free and open market and a national market system,
to prevent fraudulent and manipulative acts, and, in general, to
protect investors and the public interest.
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\7\ 15 U.S.C. 78f(b).
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In 1988, the Commission approved circuit breaker proposals by the
SROs as a coordinated mechanism to deal with potential strains that may
develop during periods of extreme market volatility.\8\ These market-
wide circuit breakers were intended to provide market participants with
an opportunity to reestablish an equilibrium between buying and selling
interest by ensuring that they had a reasonable opportunity to become
aware of and respond to significant movements. In approving these
proposals, the Commission also noted that an Interim Report of the
Working Group on Financial Markets (``Working Group'') \9\ had
recommended that in periods of rapid market decline that threaten to
create panic conditions, trading halts and reopening procedures should
be coordinated within the financial market place.\10\ Specifically, the
Working Group recommended that all U.S. markets for equity and equity-
related products--stocks, individual stock options, stock index
options, and stock index futures--halt trading during such periods of
market volatility.\11\ These recommendations, in part, were in response
to the events of October 19, 1987, when the DJIA declined over 22.6%.
The futures exchanges also adopted analogous trading halts to provide
coordinated means to address potentially destabilizing market
volatility.\12\
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\8\ See supra note 4.
\9\ The Working Group on Financial Markets was established by
the President in March 1988 in response to the 1987 market break. It
consisted of the Under Secretary for Finance of the Department of
the Treasury and the Chairmen of the Commission, the Commodity
Futures Trading Commission, and the Board of Governors of the
Federal Reserve System. Its mandate was to determine the extent to
which coordinated regulatory action was necessary to strengthen the
nation's financial markets.
\10\ See supra note 4.
\11\ Id.
\12\ See Letter from Todd E. Petzel, Vice President, Financial
Research, Chicago Mercantile Exchange (``CME''), to Jean A. Webb,
Secretary, Commodity Futures Trading Commission (``CFTC''), dated
September 1, 1988. See also letters to Jean A. Webb, Secretary,
CFTC, from Paul J. Draths, Vice President and Secretary, Chicago
Board of Trade (``CBT''), dated July 29, 1988; Michael Braude,
President, Kansas City Board of Trade (``KCBT''), dated August 10,
1988; and Milton M. Stein, Vice President, Regulation and
Surveillance, New York Futures Exchange (``NYFE''), dated September
2, 1988.
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Since the implementation of the circuit breakers, the DJIA has
risen
[[Page 39174]]
significantly. The 250 point and 400 point triggers, which represented
12% and 19% of the DJIA when implemented, now represent 4.5% and 7% of
the DJIA. The self-regulatory organizations and members of the industry
have continued to study the circuit breaker rules and to consider the
possible effects of triggering the current circuit breakers in light of
the rise in the DJIA since their implementation.
While the Exchanges evaluate the need to change their circuit
breaker trigger levels, the Commission believes, in the near term, it
is reasonable for the Exchanges to shorten the length of trading halts.
The Exchanges believe and the Commission agrees that, with advances in
technology and increases in the operational capacity of the markets,
the current length of the trading halts may not be necessary for market
participants to become aware of and respond to significant price
movements. The shorter time periods proposed by the Exchanges for
halting all trades should be sufficient to allow market participants to
evaluate and act on changing market conditions without unduly
constraining market activities.
Moreover, the Commission believes that shortening the length of
trading halts does not need to be delayed pending the resolution of
other circuit breaker issues. While an examination of the broader
issues of raising the circuit breaker triggers may be warranted, the
trading halt periods should be shortened irrespective of the level of
the trigger points. Nevertheless, the Commission encourages the
Exchanges and members of the industry to continue to evaluate the
trigger levels for trading halts in light of the changing circumstances
of the market since 1988.
The Exchanges further propose to amend their rules to eliminate the
provisions for conducting an abbreviated trading session either to
permit trading to reopen before the scheduled closing or to establish
new last sales prices if the 250-point trigger is reached within one
hour of the scheduled close of trading for the day, or if the 400-point
trigger is reached within two hours of the scheduled close of trading
for the day.
With the Exchanges' current proposals, the circuit breaker rules
would conform with those filed by the NYSE and the Amex.\13\ Circuit
breaker rules are a coordinated effort by the equities and futures
markets to halt trading in all stocks stock options, stock index
options, stock index futures, and options on stock index futures when
the DJIA reaches certain established trigger values. The Commission
believes that the proposed amendments by the Exchanges would serve to
maintain the coordinated approach that now exists for trading halts
that are applicable during large, rapid market declines, and are
therefore consistent with Section 6 of the Act \14\ in that they are
designed to remove impediments to, and perfect the mechanism of, a free
and open market, and to protect investors and the public interest.
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\13\ See Securities Exchange Act Release Nos. 37457 (July 19,
1996) (NYSE); 37458 (July 19, 1996) (Amex).
\14\ 15 U.S.C. 78f(b).
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The BSE also is proposing to renumber Section 34, Chapter II of its
rules as Section 34A, and to add a new section, Section 34B. This
addition would codify the BSE's practice pertaining to index arbitrage
orders during periods of significant market declines and advances. The
current practice of the BSE is that on any day when the DJIA has
advances by 50 points or more from its closing value on the previous
day, it requires all index arbitrage orders to buy any component stock
of the S&P 500 Stock Price Index \15\ to be entered with the
instruction ``buy minus.'' If on that same day the DJIA subsequently
reaches a value that is 25 points or less above the closing value on
the previous trading day, this requirement would no longer apply.
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\15\ ``Standard & Poor's 500 Stock Price Index'' is a service
mark of Standard & Poor's Corporation.''
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Section 34B also would codify a similar practice of the BSE when
the DJIA has declined by 50 points or more from its closing value on
the previous trading day. Then, all index arbitrage orders to sell must
be entered with the instruction ``sell plus;'' and if on that day the
DJIA subsequently reaches a value that is 25 points or less below the
closing value on the previous trading day, the requirement does not
apply.
The addition of Section 34B now brings the BSE in line with the
other exchanges that have already codified this practice, and will
prevent orders that are prohibited in the primary market during a
period of market stress from finding a safe harbor on the Exchange.
Section 34B would also make the index arbitrage language contained in
the Exchange's procedures for Competing Specialist in Chapter XV,
Section 18, No. 14 redundant; therefore, the Commission also approves
the deletion of this now redundant language.
The Commission believes that the BSE's proposal to renumber Section
34 as 34A, and add new Section 34B is consistent with the requirements
of Section 6(b)(5) of the Act \16\ and the rules and regulations
thereunder applicable to a national securities exchange in that they
are designed to remove impediments to, and perfect the mechanism of, a
free and open market, and to protect investors and the public interest.
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\16\ 15 U.S.C. Sec. 78f(b).
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The Commission finds good cause for approving the proposed rule
changes prior to the thirtieth day after the date of publication of the
proposals in the Federal Register. The Commission believes that the
circuit breaker mechanisms should be coordinated across the U.S.
equity, futures and options markets to be effective in time of market
volatility. In light of the Commission's approval today of analogous
proposals by the NYSE and Amex, it is important that the Exchanges'
circuit breaker procedures be approved simultaneously to preserve
market uniformity. Based on the above, the Commission, therefore, finds
that there is good cause, consistent with Section 6(b)(5) of the
Act,\17\ to accelerate approval of the amended proposed rule
changes.\18\
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\17\ Id.
\18\ The Commission finds good cause to approve the BSE's
changes to its Section 34 because they merely clarify current BSE
practice.
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The Exchanges' proposals, as well as the new NYSE and Amex circuit
breaker proposals,\19\ will become effective on July 22, 1996.
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\19\ See supra note 13.
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VI. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\20\ that proposed rule changes (SR-BSE-96-4, SR-CBOE-9627, SR-CHX-
96-20, and SR-Phlx-96-12) are approved and effective on July 22, 1996.
\20\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\21\
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\21\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-19034 Filed 7-25-96; 8:45 am]
BILLING CODE 8010-01-M
