Self-Regulatory Organizations; Notice of Filing and Order Granting Accelerated Approval of Proposed Rule Change by the American Stock Exchange, Inc., New York Exchange, Inc., and Philadelphia Stock Exchange, Inc., Relating to an Extension of Certain Market-Wide Circuit Breaker Provisions

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-37890; File Nos. SR-Amex-96-37, SR-NYSE-96-30, and SR-

Phlx-96-43]

Self-Regulatory Organizations; Notice of Filing and Order

Granting Accelerated Approval of Proposed Rule Change by the American

Stock Exchange, Inc., New York Exchange, Inc., and Philadelphia Stock

Exchange, Inc., Relating to an Extension of Certain Market-Wide Circuit

Breaker Provisions

October 29, 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 October 3, 1996, the American Stock Exchange, Inc.

(``Amex''); on October 15, 1996, the New York Stock Exchange, Inc.

(``NYSE''); and on October 22, 1996, the Philadelphia Stock Exchange,

Inc. (``Phlx'') respectively (each individually referred to herein as

an ``Exchange'' and to two or more collectively referred to as

``Exchanges'', filed with the Securities and Exchange Commission

(``Commission'' or ``SEC'') the proposed rule changes relating to the

extension of certain market-wide circuit breaker provisions as

described in Items I, II, and III below, which Items have been prepared

by the Exchanges. The Phlx submitted to the Commission Amendment No. 1

to its proposal on October 28, 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 240.19b-4.

\3\ In Amendment No. 1, the Phlx requested an extension of its

pilot program for a six month period ending on April 30, 1997,

rather than the one year period originally requested. See Letter

from Murray L. Ross, Secretary, Phlx, to Alton Harvey, Office Chief,

Office of Market Watch (``OMW''), Division of Market Regulation

(``Market Regulation''), Commission, dated October 28, 1996.

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I. Self-Regulatory Organizations' Statement of the Terms of Substance

of the Proposed Rule Changes

The Exchanges propose to extend for six month (i.e., until April

30, 1997) their existing circuit breaker pilot programs which expire on

October 31, 1996.

II. Self-Regulatory Organizations' Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule Changes

In their filing with the Commission, the Exchanges included

statements concerning the purpose of and basis for the proposed rule

changes. The text of these statements may be examined at the places

specified in Item V 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

In 1988, the Commission approved circuit breaker rule proposals by

the Exchanges;\4\ and in July, 1996, the Commission approved the first

major set of changes to the circuit breaker rules.\5\ To summarize, the

original circuit breaker rules provided that trading would halt for one

hour if the Dow Jones Industrial Average (``DJIA'') \6\ was to decline

250 points from its previous day's closing level and, thereafter,

trading would halt for an additional two hours if the DJIA declined 400

points from its previous day's close. Further, the original rules also

provided for the Exchanges to conduct an abbreviated reopening session

if the circuit breaker trigger levels were reached during the last

hour, but before the last half-hour of trading, or during the last two

hours, but before the last hour of trading. The original circuit

breaker proposals were approved on a pilot basis, and have

[[Page 56984]]

been extended annually on that basis since.\7\

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\4\ See Securities Exchange Act Release Nos. 26198 (October 19,

1988), 53 FR 41637 (Amex, Chicago Board Options Exchange,

Incorporated (``CBOE''), National Association of Securities Dealers

(``NASD'') and NYSE); 26218 (October 26, 1988), 53 FR 44137 (Chicago

Stock Exchange (``CHX'')); 26357 (December 14, 1988), 53 FR 51182

(Boston Stock Exchange (``BSE'')); 26368 (December 16, 1988), 53 FR

51942 Pacific Stock Exchange (``PSE'')); 26386 (December 22, 1988),

53 FR 52904 (Phlx); and 26440 (January 17, 1989), (Cincinnati Stock

Exchange (``CSE'')).

\5\ See Securities Exchange Act Release Nos. 37457 (July 19,

1996) 61 FR 39176 (NYSE); 37458 (July 19, 1996), 61 FR 39167 (Amex);

and 37459 (July 19, 1996), 61 FR 39172 (BSE, CBOE, CHX, and Phlx).

\6\ ``Dow Jones Industrial Average'' is a service mark of Dow

Jones & Company, Inc.

\7\ See supra note 4. 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 National Association of

Securities Dealers' (``NASD'') policy statement expires on December

31, 1997. See Securities Exchange Act Release No. 36563 (December 7,

1995), 60 FR 64084. The Commission approved on a permanent basis the

proposals by the CBOE, CSE, and 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).

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In July of 1996, the Commission approved proposals by the Exchanges

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.\8\ Now, if the DJIA declines by 250 points, trading will

halt for one-half hour, and if the DJIA declines further by 400 points,

trading will halt for one hour. Also, the Commission approved the

Exchanges eliminating references in their rules 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 during the last hour, but before the last half-hour

of trading, or during the last two hours, but before the last hour of

trading.\9\

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\8\ See supra note 5.

\9\ Id.

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The Exchanges believe that it is appropriate to extend their

respective circuit breaker pilot programs for at least another six

months. Although the Exchanges have not had to implement the circuit

breaker provisions subsequent to the revisions approved in July, 1996,

the Exchanges continue to believe that these revised time periods will

be sufficient to provide a meaningful ``time out'' for participants to

evaluate changing market conditions, without unduly constraining

trading activity. Accordingly, the Exchanges propose that an initial

extension of at least six months be granted to provide them with

additional time to continue appraising the effectiveness of the reduced

time periods for halting trading.

The Exchanges also represent that they will use the six-month

extension to review the adequacy of the current circuit breaker trigger

levels, which have remained the same 250/400 point level ever since the

pilot programs were first adopted in 1988.\10\ The Commission believes

that increases in the circuit breaker trigger levels to reflect current

market levels should be developed by the Exchanges as soon as possible.

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\10\ See supra note 4.

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2. Statutory Basis

The basis under the Act for this proposed rule change is the

requirement under Section 6(b)(5) that an exchange have rules that are

designed to prevent fraudulent and manipulative acts and practices, to

promote just and equitable principles of trade, to foster cooperation

and coordination with persons engaged in regulating, clearing,

settling, processing information with respect to, and facilitating

transactions in securities, to remove impediments to protect and

perfect the mechanism of a free and open market and a national market

system, and in general, to protect investors and the public interest.

The proposed rule changes are consistent with Section 6(b)(5) of

the Act in that they are designed to promote just and equitable

principles of trade. The Exchanges believe that extending their circuit

breaker rules is consistent with these objectives in that the

additional time will provide market participants with a reasonable

opportunity to continue assessing the viability of the reduced time

periods in the event of a circuit breaker trading halt, and also, to

address the adequacy of the current circuit breaker trigger levels.

B. Self-Regulatory Organizations' Statement 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' Statement on Comments on the Proposed

Rule Change 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 these extensions to

circuit breaker rules prior to the 30th day after publication of the

proposed rule change in the Federal Register.

IV. Commission's Findings and Order Granting Accelerated Approval of

Proposed Rule Change

After careful review of the Exchanges' 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).\11\ 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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\11\ 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.12 These

market-wide circuit breakers were intended to provide market

participants with an opportunity to reestablish an equilibrium between

buying and selling interest by providing a reasonable opportunity to

become aware of and respond to a sudden, potentially destabilizing

market decline. In approving these proposals, the Commission also noted

that an Interim Report of the Working Group on Financial Markets

(``Working Group'') 13 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.\14\ 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.\15\ 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 providecoordinated means to address

potentially destabilizing market volatility.\16\

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\12\ See supra note 4.

\13\ 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.

\14\ Id.

\15\ Id.

\16\ 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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[[Page 56985]]

The Commission continues to believe that the market-wide trading

halt proposals are consistent with Section 6 of the Act \17\ 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. In particular, the Commission believes that the circuit

breaker rules reflect an appropriate coordinated effort by the equities

and futures markets to halt trading for a brief period in all stocks,

stock options, stock index options, stock index futures, and options on

stock index futures when the equity market experiences a potentially

destabilizing intra-day decline. The Commission also believes that the

proposed extension of the circuit breaker rules by the Exchanges will

serve to maintain the coordinated approach that now exists for trading

halts that are applicable during large, rapid market declines.

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\17\ 15 U.S.C. 78f(b).

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While the Commission is approving the NYSE, Amex, and Phlx's

proposals today in order to maintain coordinated trading halt

procedures across all equity markets, the Commission continues to have

significant concerns that the levels for triggering the trading halts

need to be increased to reflect the market rise since the breakers'

inception. As the Commission noted when the rule changes shortening the

circuit breaker halts were adopted in July 1996,\18\ the 154% increase

in market levels since 1988 necessitates increases in the circuit

breaker trigger levels so as to prevent unnecessary application of the

breakers. The continued rise in the DJIA since July further reinforces

the Commission's concerns in this area. Specifically, when the circuit

breaker rules were adopted in 1988, the 250-point and 400-point

triggers represented one-day declines of 12% and 19%, respectively, in

the DJIA. At current market levels, these triggers represent declines

of only 4.1% and 6.6%, respectively.\19\ Thus, the maintenance of the

trigger levels at 250 and 400 points for eight years while the market

has risen substantially has acted to effectuate a significant de facto

diminution of the price movement that would cause a market-wide trading

halt.

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\18\ See supra note 5.

\19\ These figures are based on the DJIA close of 6094.23 on

October 18, 1996.

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The Commission has serious doubts whether a 4.1% decline warrants a

market-wide halt. In this regard, the Commission notes that the 1988

threshold of a 12% decline in the DJIA for the first trading halt has

been reached only once since 1945, during the 508-point (22.63%)

decline on October 19, 1987; whereas the current 4.1% threshold for the

first trading halt has been reached on 13 separate occasions since

1945.

The original intent of circuit breakers was to provide a brief

``timeout'' only during an extraordinary market decline. The Working

Group envisioned that the circuit breaker levels would be reevaluated

periodically and adjusted to reflect market levels.\20\ The Commission

strongly urges the markets to reach a consensus as soon as possible on

the size of increases in the current trigger levels required to ensure

that cross-market trading halts are imposed only during market declines

of historic proportions. Accordingly, the Commission is approving the

extensions of circuit breakers for only a six-month period, rather than

for a year as in the past. During the next six months, the Commission

expects that the markets will promptly reevaluate and adjust circuit

breaker trigger levels in order to prevent imposing cross-market

trading halts that are not justified by the overall magnitude of a

market decline. Moreover, the Commission expects the markets to provide

the Commission with their proposals for new trigger levels by February

3, 1997.

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\20\ See supra note 13.

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Nevertheless, in order to maintain the coordination of circuit

breaker procedures across the nation's stock, options, and futures

exchanges, the Commission has determined that it is appropriate to

approve the Exchanges' proposals to extend their current circuit

breaker rules for an additional six months. The Commission believes

that this extension will provide more than sufficient time for the

Exchanges to agree on the proper trigger levels and procedures under

prevailing market levels, as well as to submit proposals to the

Commission and for the Commission to act on the markets' proposals.

Accordingly, the Commission finds good cause for approving the

Exchanges' proposed rule changes prior to the thirtieth day after the

date of publication of notice of filing thereof in the Federal Register

because there are no changes being made to the current provisions which

were approved in July, 1996. Accelerated approval will enable the

circuit breaker pilots to continue on an uninterrupted basis, and

ensure continued coordination among the Exchanges. Due to the

importance of these circuit breakers for market confidence, soundness,

and integrity, it is necessary and appropriate that these procedures

continue uninterrupted. Therefore, the Commission believes that

granting accelerated approval of the proposed rule changes is

appropriate and consistent with Sections 6 and 19(b)(2) of the Act.

V. 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 at the

Commission's Public Reference Section, 450 Fifth Street, N.W.,

Washington, D.C. 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-Amex-96-37, SR-NYSE-96-30, and

SR-Phlx-96-43 and should be submitted by November 26, 1996.

VI. Conclusion

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

Act,\21\ that the proposed rule changes (SR-Amex-96-37, SR-NYSE-96-30,

and SR-Phlx-96-43) are hereby approved until April 30, 1997.

\21\ 15 U.S.C. 78s(b)(2).

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For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\22\

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\22\ 17 CFR 200.30-3(a)(12).

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[FR Doc. 96-28385 Filed 11-4-96; 8:45 am]

BILLING CODE 8010-01-M