[Federal Register Volume 61, Number 177 (Wednesday, September 11, 1996)]
[Notices]
[Pages 47992-47993]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-23123]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37633; File No. SR-CBOE-96-36]
Self-Regulatory Organizations; Order Approving a Proposed Rule
Change by the Chicago Board Options Exchange, Incorporated Relating to
the Deactivation of RAES During Unusual Market Activity
September 4, 1996.
I. Introduction
On June 12, 1996, the Chicago Board Options Exchange, Incorporated
(``CBOE'' or ``Exchange'') 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 allow the interruption
of the Exchange's Retail Automatic Execution System (``RAES'') due to
unusual market activity. The proposed rule change was published for
comment and appeared in the Federal Register on July 3, 1996.\3\ No
comments were received regarding the proposal. This order approves the
Exchange's proposal.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 37364 (June 25,
1996), 61 FR 34911.
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II. Description of the Proposal
The Exchange proposes to add a new paragraph (e) to CBOE Rule 6.6
that will authorize Order Book Officials (``OBOs'') and, in the case of
options traded at Designated Primary Market Maker (``DPM'') stations,
Post Directors to deactivate RAES for a period not to exceed five
minutes 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, provided that the necessary
conditions provided for in Rule 6.6 have been met.\4\
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\4\ The Exchange represents that two Floor Officials will
promptly exercise their authority under Rule 6.6 once notified of
the RAES deactivation by the OBO or Post Director. The proposal also
provides that the two Floor Officials will make all further
determinations pursuant to Rule 6.6 regarding the particular options
class once they arrive at the particular trading post, but until
such time the OBO or Post Director can reactivate RAES if they
determine such action is in the interest of a fair and orderly
market. Telephone conversation between Michael Meyer, Schiff Hardin
& Waite, and John Ayanian, Attorney, Office of Market Supervision,
Division of Market Regulation, Commission, on August 27, 1996.
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The Exchange believes that this proposed rule change should allow a
more immediate response to temporary order imbalances related to market
disruptions in stocks that underlie options traded on CBOE caused by
certain events, such as significant news announcements. The Exchange
believes that 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. The
Exchange notes that 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, the Exchange believes
that customers may receive executions at stale prices, which may be
more favorable, or less favorable, than fair market price.
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. The
Exchange believes that 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 prices that do not reflect the
current state of the market during the several minutes that it could
take for two Floor Officials to declare a fast market. The Exchange
believes that by authorizing OBOs and Post Directors to turn off RAES
for up to five minutes during unusual market activity, the response
time to such a situation will be considerably shortened, and the number
of executions at inaccurate prices should be reduced accordingly.
Currently, Post Directors or OBOs are authorized to suspend trading in
specific classes of options for up to five minutes when there is a
trading halt of suspension of trading in the underlying security in the
primary market pursuant to CBOE Rule 6.3. The Exchange notes that the
OBOs and Post Directors, in those situations, are able to deal quickly
and on an interim basis when an immediate response is necessary,
pending further consideration of the matter by two Floor Officials.
The Exchange anticipates that in most instances where RAES is
deactivated by
[[Page 47993]]
an OBO or Post Director, the period of time when RAES is unavailable
should be very brief, lasting fewer 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 orders in accordance with
Exchange rules, including the firm quote rule.\5\ Accordingly, orders
that would have been routed to RAES will be automatically re-routed to
a Public Automated Routing System (``PAR'') workstation,\6\ 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.
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\5\ 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.
\6\ A PAR workstation is an automated, computer-based
workstation that provides users with the ability to execute trades,
transmit trade reports, and enter other data and commands at the
touch of a screen, thereby eliminating the delay inherent in a
keyboard-based system.
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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 to each trading post
on the floor and is transmitted to terminals throughout the floor over
the Exchange's TextNet system.
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.\7\
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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\7\ 15 U.S.C. 78f(b)(5).
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The Commission believes that the proposed rule change is reasonable
in that it provides Post Directors and OBOs the limited authority to
suspend RAES for no more than five minutes in a particular options
classes during unusual market conditions. The Commission believes that
Post Directors and OBOs are appropriate parties, to exercise this
limited authority, in part, because of (1) their knowledge of assigned
options classes, (2) their close proximity with the trading crowd, and
(3) their clearly defined administrative role with the Exchange.
Accordingly, the Commission believes that Post Directors and OBOs
should be able to initially assess market conditions and deactivate
RAES for this limited period, thereby reducing the potential for orders
being executed at inaccurate prices until Floor Officials can further
assess the market conditions. The Commission notes that the standard
for OBOs and Post Directors to deactivate RAES is the same standard
used by Floor Officials to declare a fast market, which in turn,
authorizes Floor Officials to deactivate RAES if they determine that
such action is in the interest of maintaining a fair and orderly
market.
The Commission notes that two Floor Officials, once immediately
notified by the OBO or the Post Director of the RAES deactivation, must
promptly determine whether to (1) immediately reactivate RAES pursuant
to Rule 6.6(c); or (2) declare a fast market pursuant to Rule 6.6(b) in
order to continue the deactivation of RAES for that particular options
class.\8\ Under no circumstances, can the deactivation of RAES continue
for more than five minutes, unless two Floor Officials declare a fast
market pursuant to Rule 6.6(b).\9\
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\8\ The Commission understands that if two Floor Officials
declare a fast market, they have the authority to, among other
things, continue the deactivation of RAES, suspend the firm quote
requirement of Rule 8.51(a), or take such other actions as are
deemed necessary in the interest of maintaining a fair and orderly
market. See CBOE Rule 6.6(b).
\9\ The Commission notes that the five-minute period is an
absolute time limit imposed by the Exchange on Post Director and OBO
directed RAES deactivations. Accordingly, the Commission expects
that in most situations, two Floor Officials should be able to
exercise their authority under Rule 6.6 before the five-minute
period has expired.
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Additionally, the Commission believes that the proposed rule change
is reasonable because during this limited five-minute period when RAES
is deactivated by the Post Director or OBO, orders 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 ORS 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 that such authority as proposed herein, will
only be exercised when unusual market conditions exist, and for the
shortest time possible. As a general matter, the commission prefers
that automated systems such as RAES remain operational at all times.
While extreme circumstances may call for the deactivation of the
system, it should only be done when absolutely necessary.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\10\ that the proposed rule change (File No. SR-CBOE-96-36) is
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. 96-23123 Filed 9-10-96; 8:45 am]
BILLING CODE 8010-01-M
