Self-Regulatory Organizations; Notice of Filing and Order Granting Accelerated Approval of Proposed Rule Change, as Amended, by Chicago Board Options Exchange, Incorporated Relating to a Pilot Operation of a System for Monitoring News Announcements Made After the Close of Trading in the Primary Market for the Underlying Stock

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-37380; File No. SR-CBOE-96-37]

Self-Regulatory Organizations; Notice of Filing and Order

Granting Accelerated Approval of Proposed Rule Change, as Amended, by

Chicago Board Options Exchange, Incorporated Relating to a Pilot

Operation of a System for Monitoring News Announcements Made After the

Close of Trading in the Primary Market for the Underlying Stock

June 28, 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 June 17, 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 CBOE.

The Exchange submitted to the Commission Amendment Nos. 1 \3\ and 2 \4\

to the proposed rule change on June 26, 1996. The Commission is

publishing this notice, as amended, to solicit comments on the proposed

rule change from interested persons.

---------------------------------------------------------------------------

\1\ 15 U.S.C. 78s(b)(1).

\2\ 17 CFR 240.19b-4.

\3\ In Amendment No. 1, the Exchange makes several

clarifications to the proposed pilot. See Letter from Michael L.

Meyer, Attorney, Schiff Hardin & Waite, to John Ayanian, Attorney,

Office of Market Supervision (``OMS''), Division of Market

Regulation (``Market Regulations''), Commission, dated June 26, 1996

(``Amendment No. 1'').

\4\ In Amendment No. 2, the Exchange clarifies that it intends

to turn on the system each day a few minutes prior to the 3:00 p.m.

central time close of trading in the primary market, in order to be

certain that the system is operating by the time the primary market

closes. Letter from Michael L. Meyer, Attorney, Schiff Hardin &

Waite, to John Ayanian, Attorney, OMS, Market Regulation,

Commission, dated June 26, 1996 (``Amendment No. 2'').

---------------------------------------------------------------------------

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

of the Proposed Rule Change

The Exchange proposes to institute a pilot test of a system that,

shortly before

[[Page 35283]]

the close of trading each day, will monitor news announcements

pertaining to underlying securities, and will automatically suspend the

Exchange's automatic execution system in respect of options on those

securities that are the subject of such announcements. The text of the

proposed rule change 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, CBOE 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 CBOE 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 Exchange proposes to establish a limited pilot test of an

automated system that would monitor news wires received at the Exchange

shortly before the close of trading each day, and would suspend the

Exchange's automatic order execution system in a class of equity

options whenever there is a news announcement pertaining to the

security underlying options of that class. Options on equity securities

are currently traded on CBOE until 3:10 p.m. central time on each

trading day, which is 10 minutes after the close of trading on the

primary market's for underlying securities. The Exchange notes that

this additional period of options trading after the underlying market

has closed is provided to accommodate orders to buy or sell options at

prices that reflect the closing prices of the underlying securities.

The Exchange has experienced difficulties when issuers of underlying

stocks make significant news announcements after the 3:00 p.m. central

time close of trading in the underlying stocks, but before options

cease trading at 3:10 p.m. central time. The Exchange believes that

because these issuers are often unaware of or indifferent to the fact

that options trading on their stocks continues for 10 minutes after the

stocks cease to trade, they do not wait until 3:10 p.m. central time to

make these announcements. According to the Exchange, it is not uncommon

for significant news announcements to be made between 3:00 p.m. and

3:10 p.m., when options are still traded primary markets. These

announcements often require an immediate adjustment to the prices of

series of options on the stock in question, to take into account the

likely affect of the announcement on the market price of the underlying

stock, even through the stock is not then trading in its primary

market. The Exchange believes that until such option prices are

adjusted, the Exchange's retail automatic execution system (``RAES'')

may be providing automatic executions of customer orders at prices that

do not reflect the current state of the market.

Currently, CBOE addresses this occurrence by positioning two Floor

Officials in close communication with newsreaders in the Exchange's

Control Room beginning shortly before 3:00 p.m. central time. If a

significant news announcement is made, these two Floor Officials may

exercise their authority under Exchange Rule 6.6(a) to declare a

``fast'' market, in the interest of maintaining a fair and orderly

market, in the class or classes of options affected by the news

announcement, and then to suspend RAES in respect of those classes as

authorized under Rule 6.6(b)(v). The Exchange believes that there are

at least two difficulties with this approach. First, it depends on the

continuous availability of two Floor Officials at a critical time prior

to the close of options trading when they might be needed to attend to

other matters. Second, even if two Floor Officials are available, it

still can take 30 seconds or more after a news announcement is received

before the Floor Officials are able to suspend RAES, during which time

a considerable number of orders may be automatically executed at

inappropriate prices.

In response to these problems, CBOE developed a system that can

monitor news wires during the 10 minutes following the close of trading

in primary stock markets while options are still traded, and

automatically suspend RAES in all series of options on those stocks

that are the subject of news announcements. This permits RAES to be

turned off at virtually the same time as the news item appears on the

wire. According to the Exchange, when RAES is turned off, customer

orders that might otherwise have been automatically executed will

instead be automatically routed to the Public Automated Routing System

(``PAR'') workstation \5\ at the appropriate trading post, where they

can be immediately executed at the then current price almost as quickly

as if they had received automatic execution in RAES.

---------------------------------------------------------------------------

\5\ 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.

---------------------------------------------------------------------------

The Exchange notes that the automatic news monitor cannot determine

the significance of a particular announcement, and will automatically

suspend RAES in a class of options whenever there is any news

announcement pertaining to its underlying stock. Because significant

news announcements, however, tend to be concentrated during the period

immediately following the close of trading in primary stock markets,

CBOE intends to operate its new system only during the time from just

before 3:00 p.m. central time to the close of options trading on CBOE

at 3:10 p.m. central time, when it is not expected that there will be

very many ``false alarm'' announcements. Additionally, two Floor

Officials will promptly be informed each time RAES is automatically

turned off in response to a news announcement, and if enough time

remains before the 3:10 p.m. central time close of options trading, the

Floor Officials should be able to evaluate the significance of the

announcement, and if it is not significant or if there has been time

for prices to have been adjusted, to turn on RAES for the remainder of

the trading session.\6\

---------------------------------------------------------------------------

\6\ The Commission expects that if there is enough time before

the close of options trading, and the news is not significant or if

there has been time for prices to have been adjusted, the Floor

Officials will resume RAES operations for the subject options class.

---------------------------------------------------------------------------

In order to test the effectiveness of this automatic system in

actual market conditions, CBOE proposes to implement it in respect of

various classes of options during a 30-day pilot period.\7\ The

Exchange believes that this will enable it to evaluate how quickly the

automatic system if able to respond to news announcements, how many, if

any, false alarms are received, how quickly customer orders are able to

be rerouted and executed over the PAR system, and whether Floor

Officials are able to make an evaluation of the situation and restore

the operation of RAES in the limited time available after there has

been an automatic suspension of RAES. If after the 30-day pilot period

[[Page 35284]]

CBOE desires to implement the automatic system on a permanent basis for

all classes of equity options, CBOE will make a subsequent filing to

this effect under Section 19(b)(2) of the Act.

---------------------------------------------------------------------------

\7\ The Exchange will issue a circular to its membership

outlining the terms of the pilot and the classes that will be

included in it. Telephone conversation between Michael L. Meyer,

Schiff Hardin & Waite, and Sharon Lawson and John Ayanian, OMS,

Market Regulation, Commission, on June 25, 1996.

---------------------------------------------------------------------------

CBOE believes that the implementation of a pilot test of a system

that, if successful, would permit the continued availability of CBOE's

automatic execution system for public customer orders during the period

when options are traded after the close of trading in the primary

markets for underlying stocks and would assure that these orders are

executed at fair prices in the event of significant news announcements,

is in the interest of promoting just and equitable principles of trade

and protecting investors and the public interest, and thus is

consistent with the objectives of Section 6(b)(5) of the Act.

B. Self-Regulatory Organization's Statement on Burden on Competition

CBOE does not believe that the proposed rule change will impose any

burden on competition.

C. Self-Regulatory Organization's Statement 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

The Exchange has requested that the proposed rule change be given

accelerated effectiveness pursuant to Section 19(b)(2) of the Act. 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) thereunder.

The Commission believes that the Exchange's proposal provides a

reasonable method of testing a system to address pending news

announcements after the close of trading in the primary market for the

underlying securities.\8\ The Commission notes that the test will be

limited to news announcements after the close of trading in the primary

market for the underlying stock, while continuing to (1) ensure prompt

execution of customer orders in the particular class subject to a news

announcement by rerouting such orders to a PAR workstation and (2) make

RAES executions available in classes of options not subject to news

announcements during the time when options continue to be traded after

the close of trading in the primary market for underlying stocks.

---------------------------------------------------------------------------

\8\ See Amendment No. 2, supra note 4.

---------------------------------------------------------------------------

As noted, the CBOE intends to evaluate the pilot in several

respects to determine if it wants to implement the system on a

permanent basis.\9\ The CBOE will provide the Commission with the

analysis of the pilot.

---------------------------------------------------------------------------

\9\ The pilot expires at 3:10 p.m. central time on July 26,

1996. Any request for an extension of the pilot period or request

for permanent approval of the system would have to be submitted to

the Commission pursuant to Section 19(b)(2) of the Act.

---------------------------------------------------------------------------

The Commission finds good cause for approving this proposed rule

change, as amended, on an accelerated basis prior to the thirtieth day

after the date of publication of notice thereof in the Federal

Register. Specifically, the Commission believes that accelerated

approval of the proposal, as amended, is appropriate because it is to

be implemented for a limited 30-day period which will provide CBOE with

the time to test the effectiveness of the system.

Accordingly, the Commission believes that it is consistent with

Section 6(b)(5) of the Act to approve the proposed rule change, as

amended, on an accelerated basis.

IV. Solicitation of Comments

Interested persons are invited to submit written data, views and

arguments concerning the foregoing and Amendment Nos. 1 and 2. Persons

making written submissions should file six copies thereof with the

Secretary, Securities and Exchange Commission, 450 Fifth Street, N.W.,

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 in the Commission's Public

Reference Section, 450 Fifth Street, N.W., Washington, DC 20549. Copies

of such filing will also be available for inspection and copying at the

principal office of CBOE. All submissions should refer to File No. SR-

CBOE-96-37 and should be submitted by July 26, 1996.

V. Conclusion

It is therefore ordered, pursuant to Section 19(b)(2) of the Act,

that the proposed rule change (File No. SR-CBOE-96-37), as amended, is

hereby approved for a 30-day pilot period, on an accelerated basis.

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\10\

---------------------------------------------------------------------------

\10\ 17 CFR 200.30-3(a)(12).

---------------------------------------------------------------------------

Jonathan G. Katz,

Secretary.

[FR Doc. 96-17149 Filed 7-3-96; 8:45 am]

BILLING CODE 8010-01-M