Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change by the Chicago Board Options Exchange, Inc., Relating to the Interruption of the Retail Automated Execution System Following Certain Analyst's Reports

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-36302; File No. SR-CBOE-95-34]

Self-Regulatory Organizations; Notice of Filing of Proposed Rule

Change by the Chicago Board Options Exchange, Inc., Relating to the

Interruption of the Retail Automated Execution System Following Certain

Analyst's Reports

September 29, 1995.

Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934

(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on July 12,

1995, the Chicago Board Options Exchange, Inc. (``CBOE'' or

``Exchange'') filed with the Securities and Exchange Commission

(``SEC'' or ``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.

I. Self-Regulatory Organization's Statement of the Terms of Substance

of the Proposed Rule Change

The CBOE proposes to promulgate a policy concerning the application

of CBOE Rule 6.6, ``Unusual Market Conditions,'' in the circumstance

where the Exchange has determined that the televised reporting of a

particular securities analyst has had a regular, albeit short-lived,

destabilizing impact on the options market.\1\ Specifically, the

Exchange proposes to declare a ``fast'' market for a short period of

time each day for options of the class or classes of stock(s)

identified in the analyst's report and to temporarily deactivate the

Exchange's Retail Automated Execution System (``RAES'') for the

affected options until the stock prices in the primary market and

options prices in RAES have adjusted, which is likely to occur within

one or two minutes following the report. The Exchange plans to announce

the policy through a regulatory circular to its members.

\1\ CBOE Rule 6.6 allows two or more floor officials, because of

an influx of orders or other unusual conditions or circumstances,

and in the interest of maintaining a fair and orderly market, to

declare the market in one or more classes of option contracts to be

``fast.'' Under CBOE Rule 6.6, the floor officials declaring the

fast market have the power to take actions that are deemed necessary

in the interest of maintaining a fair and orderly market.

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The text of the proposal 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), of the

most significant aspects of such statements.

[[Page 52232]]

(A) Self-Regulatory Organization's Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule Change

The purpose of the proposal is to implement procedures in response

to a situation currently confronting the Exchange whereby a well-known

securities analyst presents over cable television, at the same time

each day, an exclusive report of his analysis of a specific identified

company or companies, often involving conjecture concerning a future

transaction or development with respect to the company or companies.

According to the Exchange, each day's broadcast often causes an

immediate and significant impact on the market price of the stock(s)

identified in the report. This permits certain viewers of the televised

report, utilizing high speed computers, to transmit options orders to

buy or sell options covering the stock(s) in question (depending on

whether the report is ``bullish'' or ``bearish'') through RAES before

either the price of the stock(s) in the primary market or the prices of

options governing the stock(s) in RAES have had time to adjust. The

Exchange states that the result is an abuse of the RAES system, in as

much as, for a short period of time, persons entering computerized

options orders in RAES are able to obtain automatic executions at

prices that are no longer current, simply because there has not been

sufficient time to adjust prices in RAES. According to the CBOE, the

ability of certain persons to ``game'' the system in this way operates

to the disadvantage of CBOE market makers who are obligated under

Exchange rules to take the other side of the orders.

In response to this situation, the CBOE's Market Performance

Committee, which consists of floor officials who are authorized under

CBOE Rule 6.6 to take such action as is deemed necessary to maintain a

fair and orderly market in response to unusual market conditions, has

determined that the market in options of the class or classes covering

the stock that is the subject of the televised report will be declared

``fast'' for a short period of time each day, commencing at the time

the analyst's report is aired, at which time RAES will be deactivated

temporarily by the Exchange's control room in the affected class or

classes of options. RAES will be reactivated at the post with the

consent of two floor officials as soon as stock prices in the primary

market and options prices in RAES have adjusted, which is likely to

occur within one or two minutes following the report. CBOE members will

be notified of both the deactivation of RAES in particular classes of

options and its reactivation by means of (1) a message to members that

will print at each post on the trading floor, and (2) a message over

the Exchange's TextNet system, which has terminals at various places

around the Exchange floor.

The Exchange believes that this policy will help to encourage more

active market maker participation in RAES without harming the intended

beneficiaries of RAES, i.e., public customers who submit small orders.

In addition, the CBOE notes that even for the few minutes when RAES is

deactivated, the trading crowd will continue to have the responsibility

to fill customer orders according to CBOE rules, including the firm

quote rule.

The CBOE believes that the proposed rule change is consistent with

Section 6(b) of the Act, in general, and furthers the objectives of

Section 6(b)(5), in particular, in that 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 CBOE does not believe that the proposed rule 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

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 after the 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 reason 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 NW., 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 at 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 the file

number in the caption above and should be submitted by October 26,

1995.

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\2\

\2\ 17 CFR 200.30-3(a)(12) (1994).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 95-24797 Filed 10-4-95; 8:45 am]

BILLING CODE 8010-01-M