[Federal Register Volume 61, Number 129 (Wednesday, July 3, 1996)]
[Notices]
[Pages 34911-34912]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-16921]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37364; File No. SR-CBOE-96-36]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Chicago Board Options Exchange, Inc. Relating to the
Interruption of RAES Due to Unusual Market Activity
June 25, 1996.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on June 12, 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.
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\1\ 15 U.S.C. 78s(b)(1) (1988).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The CBOE proposes to amend CBOE Rule 6.6, Unusual Market
Conditions, to give the Order Book Official (``OBO'') or the Post
Director authority to turn off the Exchange's Retail Automatic
Execution System (``RAES'') for a class or classes of options and for a
short period of time when, in the judgement of that OBO or Post
Director, there is unusual market activity in such options or their
underlying securities.
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
The purpose of the proposed rule change is to add a new paragraph
(e) to CBOE Rule 6.6 that will authorize OBOs, and, in the case of
options traded at Designated Primary Market-Maker (``DPM'') stations,
Post Directors temporarily to deactivate RAES in specified classes of
options traded at the posts where such persons are stationed when in
their judgement such action is warranted by an influx of orders or
other unusual market conditions in such options or their underlying
securities and the OBO or Post Director determines that such action is
appropriate in the interests of maintaining a fair and orderly market.
Whenever such action is taken, notice thereof shall immediately be
given to two Floor Officials who may continue the deactivation of RAES
for more than five minutes or take such actions as they deem necessary
pursuant to their authority under Rule 6.6.
This rule change is being proposed to permit a more immediate
response to events, such as significant news announcements, that can
cause temporary order imbalances and otherwise disrupt the market for
stocks that underlie options traded on CBOE. In these situations stock
prices may move sharply, and Exchange market-makers may not have time
to adjust their options quotes in the numerous series of options that
overlie these stocks. This may result in published options quotes that
do not reflect current stock prices. Because orders sent to RAES are
executed automatically at published quotations, customers may receive
executions at unrealistic prices, some at a price more favorable than
fair market prices and some less favorable than fair market prices.
Exchange Rule 6.6 currently authorizes two Floor Officials to
respond to this situation by declaring the market in particular classes
of options to be ``fast,'' and then turning off RAES (and taking other
action) until there has been time for prices to be adjusted. Because of
the speed with which computerized order routing systems can direct
orders to RAES, and because RAES itself provides for instantaneous
automatic executions, there can be a significant number of executions
at stale prices during the several minutes that it might take for two
Floor Officials to declare a fast market. By authorizing OBOs and Post
Directors to turn off RAES for up to five minutes, the response time to
such a situation will be considerably shortened, and the number of
executions at stale prices should be reduced accordingly. In this
respect, the proposed rule change is not unlike the recently approved
rule change that authorized Post Directors or OBOs to suspend trading
in specified classes of options for up to five minutes when there is a
trading halt or suspension of trading in the underlying security in the
primary market.\2\ There, as is proposed here, authority is given to
the OBO or Post Director to deal quickly and on an interim basis with a
situation where immediate response is called for, pending further
consideration of the matter by two Floor Officials.
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\2\ File No. SR-CBOE-95-44 approved in Exchange Act Release No.
36135 (August 22, 1995), 60 FR 44921.
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It is anticipated that in most instances where RAES is deactivated
by an OBO or Post Director, the period of time when RAES is unavailable
should be very brief, lasting less than five minutes. Even then, orders
will continue to be delivered to the trading crowd via the Exchange's
electronic order routing system (``ORS'') and the trading crowd will
remain obligated to fill customer
[[Page 34912]]
orders in accordance with Exchange rules, including the firm quote
rule.\3\
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\3\ The firm quote rule, which obligates the trading crowd to
fill public orders for up to 10 contracts at published quotes,
remains in effect unless suspended by two Floor Officials acting
under Rule 6.6(b) in the event of a fast market. The proposed rule
change would not authorize an OBO or DPM to declare a fast market or
suspend the firm quote rule.
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Members will be notified of any deactivation of RAES in particular
classes of options by an OBO or a Post Director pursuant to proposed
Rule 6.6(e) by means of a message that is printed at each trading post
on the floor and is transmitted to terminals throughout the floor over
the Exchange's TextNet system.
The Exchange believes that the proposed rule change is consistent
with and furthers the objectives of Section 6(b)(5) of the Act in that,
by permitting the Exchange to act expeditiously to prevent automatic
executions of options transactions at stale prices in the event of
significant news announcements or other potentially disruptive
situations, it is 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, and to protect investors and
the public interest.
(B) Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed change will impose
any burden on competition.
(C) Self-Regulatory Organization's Statement on Comments on the
Proposed Rule Change Received From Members, Participants, or Others
Written comments on the proposed rule change were neither solicited
nor received.
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. 552, will be available for inspection and copying in the
Commission's Public Reference Section, 450 Fifth Street, N.W.,
Washington, D.C. Copies of such filing will also be available for
inspection and copying at the principal office of the above-mentioned
self-regulatory organization. All submissions should refer to File No.
SR-CBOE-96-36 and should be submitted by July 24, 1996.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\4\
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\4\ 17 CFR 200.30-3(a) (12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-16921 Filed 7-2-96; 8:45 am]
BILLING CODE 8010-01-M
