Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change by the Chicago Board Options Exchange, Incorporated Relating to the Closing Time for Equity and Narrow-Based Index Options

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-37988; File No. SR-CBOE-96-71]

Self-Regulatory Organizations; Notice of Filing of Proposed Rule

Change by the Chicago Board Options Exchange, Incorporated Relating to

the Closing Time for Equity and Narrow-Based Index Options

November 26, 1996.

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

(``Act''),\1\ and Rule 19b-4 \2\ thereunder, notice is hereby given

that on November 20, 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 self-regulatory organization. The Commission is publishing this

notice to solicit comments on the proposed rule change from interested

persons.

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

\2\ 17 CFR 240.19b-4.

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

Substance of the Proposed Rule Change

The Exchange proposes to amend its rules governing the hours of

trading in equity options and narrow-based index options. After the

change, the Exchange will close trading in equity and narrow-based

index options at 3:02 p.m. (Chicago time) instead of at 3:10 p.m.

(Chicago time), as is the case now. 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, 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 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

1. Purpose

The purpose of the proposed rule change is to change the close of

the normal trading hours in equity and narrow-based index options from

3:10 p.m. (Chicago time) to 3:02 p.m. (Chicago time). After the change,

the time of the close of trading in these CBOE options will more

closely correspond to the normal time set for the close of trading on

the primary exchanges listing the stocks underlying the CBOE options.

The primary exchanges generally close at 3:00 p.m. (Chicago time).

When the Exchange determined to change its closing time for equity

options and narrow-based index options, it determined that there were

still reasons to continue trading options for some period of time after

the close of trading of the primary markets for the underlying

securities. Specifically, the extended period allows options traders to

respond to late reports of closing prices over the consolidated tape.

If the price of a late reported trade on an underlying security was

substantially different from the previous reported price, the extended

trading session would give options traders the opportunity to bring

options quotes into line with the closing price of the underlying

security. However, because of improvements in the processing and

reporting of transactions, there are usually no significant delays in

the reporting of closing prices. Therefore, a ten minute session is no

longer needed to trade options after the underlying securities close

trading.

The Exchange believes the need to continue trading options for some

period of time after the close of trading on the primary markets for

the underlying securities outweighs the obvious problems with

continuing to trade options while stocks are longer traded. The

Exchange has learned through experience with a 3:10 close that pricing

aberrations can occur if an option is traded when the underlying stock

is no longer trading. There is obviously a close relationship in the

price of the underlying stock and the overlying option. As a result, it

is difficult for the market to price options accurately when the

underlying security is not trading. It is for this reason that the halt

of trading in an underlying security is a factor to be considered in

determining whether to halt trading in the overlying option under CBOE

Rule 6.3.

In recent weeks, the Exchange has become particularly cognizant of

the pricing problems that result when the Exchange remains open after

the close of the primary exchange for the underlying stocks. A number

of issuers have adopted the practice of disseminating important

corporate news after the close of trading on the primary exchange.

Issuers often wait until after 3:00 p.m. Chicago time to release the

news because they realize that the news might have a short-term

disruptive effect on the market price of the stock that can be

minimized if investors are able to digest the significance of the news

after the markets have closed and overnight. However, despite efforts

of the Exchange to remind issuers that most Exchange products trade

until 3:10 p.m., important corporate news is often disseminated between

3:00 p.m. and 3:10 p.m. As a result, the Exchange is often deluged with

option orders after a significant news announcement after 3:00 p.m.,

most often between 3:02 p.m. and 3:10 p.m. These orders have a

disruptive effect on the market at a time when the Exchange is

attempting to close in a fair and orderly fashion.\3\ Among the

possible deleterious effects is that customer orders might not be

filled as quickly as they might otherwise be filled in more normal

conditions. In addition, orders regularly are routed through the

Exchange's Retail Automatic Execution System (``RAES'') and are

executed in rapid succession on markets that have not had a chance to

be updated to reflect the significant news.\4\ Weighing the benefits to

be

[[Page 64406]]

obtained by a brief extended trading session against the difficulties

presented when options trade after the underlying securities have

closed, the Exchange has determined that a two minute extended session

is the correct balance.

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\3\ Although the Exchange has the ability to call a ``fast''

market under current Exchange Rule 6.6 in an effort to deal with the

problems caused by news announcements after 3:00 p.m., this

procedure requires the assessment of the situation by two Floor

Officials. As a result, the Rule 6.6 procedure does not permit the

Exchange to act quickly enough to prevent the possible deleterious

effects of an unexpected news announcement.

\4\ Orders routed through the RAES system are assigned execution

prices instantaneously as determined by the prevailing market quotes

that exist at the time of the order's entry into the system. As a

result, these orders might be assigned a price before the market-

makers will have had the chance to update the quotes based upon the

unexpected news announcement. To respond to the problem presented

when issuers make significant news announcements during the ten

minute period after the close of trading in stocks, the Exchange

filed a rule with the Commission which permits the Exchange to

employ a system to suspend the operation of the RAES system in the

event of news announcements near the close of trading. See

Securities Exchange Act Release No. 37885 (October 29, 1996), 61 FR

56724 (approving CBOE-96-55).

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The Exchange also proposes to change the closing time for narrow-

based indexes under Rule 24.6 because these indexes are subject to the

same pricing problems as options on individual stocks. A significant

news announcement on one component of a narrow-based index could have a

significant effect on that index. The Exchange is not at this time

proposing to change the closing time of 3:15 p.m. for broad-based index

options because it is unlikely that a significant news announcement by

the issuer of one component stock of a broad-based index is likely to

have a significant effect on the price of that broad-based index.

The Exchange is also proposing to amend Interpretations .02 and .03

of its trading rotation rule, Rule 6.2, to reflect the changes in the

closing time for stock options and narrow-based index options from 3:10

p.m. to 3:02 p.m. Chicago time. A change would also be made to allow a

closing rotation in non-expiring options to be held five minutes after

news of such rotation is disseminated. Currently, the rule requires

notice of ten minutes before a closing rotation may be held.

Finally, the Exchange is proposing to amend Interpretation .01 to

Rule 6.1 to make it clear that the Board may designate a person or

persons to change the hours for the trading of options when unusual

conditions exist. This change is consistent with the Exchange's current

Rule 24.6.

2. Statutory Basis

The proposed rule changes further the objectives of Section 6(b)(5)

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

principles of trade, and to remove impediments to and perfect the

mechanism of a free and open market and a national market system.

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

The Exchange states that it believes that the proposed rule change

will impose no 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 days of the date of 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 reasons 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, 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. Sec. 552, will be available for inspection and copying at

the Commission's Public Reference Room. 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 No. SR-CBOE-96-71 and

should be submitted by December 26, 1996.

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\5\

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\5\ 17 CFR 200.30-3(a)(12).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 96-30812 Filed 12-3-96; 8:45 am]

BILLING CODE 8010-01-M