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'')

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