[Federal Register Volume 59, Number 107 (Monday, June 6, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-13607]
[[Page Unknown]]
[Federal Register: June 6, 1994]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34131; File No. SR-PSE-93-26]
Self-Regulatory Organizations; Pacific Stock Exchange, Inc.;
Order Approving and Notice of Filing and Order Granting Accelerated
Approval of Amendment No. 4 to a Proposed Rule Change Relating to the
Size of Orders Eligible for Entry in the Auto-Ex System
May 27, 1994.
On October 15, 1993, the Pacific Stock Exchange, Inc. (``PSE'' or
``Exchange'') submitted to the Securities and Exchange Commission
(``Commission'' or ``SEC''), pursuant to section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act'')\1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to permit the PSE's Options Floor
Trading Committee (``OFTC'') to increase, in one or more classes of
multiply-traded equity options, the size of orders eligible for entry
into the PSE's Automatic Execution System (``Auto-Ex'') to the extent
necessary to match the size of orders eligible for entry into any other
exchange's automated execution system.\3\ Notice of the proposed rule
change appeared in the Federal Register on December 22, 1993.\4\ No
comments were received on the proposed rule change. The PSE
subsequently filed Amendments Nos. 1 and 2 to the proposed rule change
on December 21, 1993, Amendment No. 3 on March 28, 1994, and Amendment
No. 4 on May 25, 1994.\5\ This order approves the proposal, as amended.
---------------------------------------------------------------------------
\1\15 U.S.C. 78s(b)(1) (1982).
\2\17 CFR 240.19b-4 (1993).
\3\Under Auto-Ex, eligible small public customer market or
marketable limit orders are routed through the system and
automatically executed at the prevailing market quote. Currently,
Auto-Ex applies to orders of 10 contracts or less.
\4\See Securities Exchange Act Release No. 33340 (December 15,
1993), 58 FR 67887 (December 22, 1993).
\5\Amendment Nos. 1, 2, and 3, contained various changes to the
proposed rule change as originally filed; however, these changes
were withdrawn and superseded by Amendment No. 4 to the proposed
rule change. See Letter from Michael Pierson, Senior Attorney, PSE,
to Brad Ritter, Attorney, Office of Derivatives and Equity
Oversight, Division of Market Regulation, Commission, dated May 25,
1994 (``Amendment No. 4''). In Amendment No. 4, the PSE also
proposes to adopt Rule 6.87(c) which would provide that firms
entering orders for execution on Auto-Ex may not divide them up in
order to make their parts eligible for entry into Auto-Ex.
---------------------------------------------------------------------------
The PSE proposal adds Commentary .01 to PSE Rule 6.87(a) relating
to the operation of Auto-Ex in equity options. Interpretation .01 would
permit the OFTC to increase, in one or more classes of multiply-traded
equity options, the size of orders eligible for entry into Auto-Ex to
the extent that other options exchanges permit such larger-size orders
in multiply-traded equity options of the same class or classes to be
entered into their own automated execution systems.\6\ The proposal
further provides that any such increase in the order eligibility size
will be conditioned on PSE's filing the specific terms of the increase
for immediate effectiveness under section 19(b)(3)(A) of the Act. The
proposal requires that the PSE include in any such filing,
representations that Auto-Ex has the capacity to accommodate the
increase in the order eligibility size. Such representations shall
cover systems capacity as well as the market-making capacity of market-
makers participating in Auto-Ex.\7\ Any proposed increase that is
initiated by the PSE and not made in response to matching an increase
effectuated by another market would have to be filed with the
Commission for review under section 19(b) of the Act.
---------------------------------------------------------------------------
\6\Any proposed increase that is initiated by the PSE and not
made in response to matching an increase effectuated by another
market would have to be filed pursuant to sections 19(b)(1) or
19(b)(2) of the Act.
\7\The PSE represents that it has more than adequate market-
making capacity to handle any reasonably expected increase in
orders. Telephone conversation between Michael Pierson, Senior
Attorney, Market Regulation, PSE, and Brad Ritter, Attorney, Office
of Derivatives Regulation, Division of Market Regulation, SEC, on
March 15, 1994.
---------------------------------------------------------------------------
Finally, the proposal would add Rule 6.87(c) which would prohibit
the splitting of orders for purposes of making the parts eligible for
entry into Auto-Ex. The Exchange believes this is necessary in order to
comply with the purpose behind the Auto-Ex system which is to allow for
the execution of small customer orders. Additionally, when large orders
are split and then routed through Auto-Ex, market makers do not have
the opportunity to adjust their markets to reflect the order flow.
Finally, the PSE believes that this provision is consistent with the
rule adopted by the Chicago Board Options Exchange (``CBOE'') regarding
orders routed through its Retail Automatic Execution System
(``RAES'').\8\
---------------------------------------------------------------------------
\8\See CBOE Rule 6.8(a)(i).
---------------------------------------------------------------------------
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 and 11A.\9\ Specifically, the
Commission notes that the proposed rule change is substantively
identical to a proposal recently approved by the Commission relating to
RAES at the CBOE.\10\ The Commission believes that the rationale
supporting approval of the CBOE proposal applies equally to the PSE's
proposed rule change. In particular, the Commission continues to
believe that the development and implementation of the Auto-Ex system
provides for more efficient handling and reporting of orders in PSE
equity options through the use of new data processing and
communications techniques, thereby improving order processing and
turnaround time.
---------------------------------------------------------------------------
\9\15 U.S.C. 78f and 78k-1 (1988).
\10\See Securities Exchange Act Release No. 32956 (September 24,
1993), 58 FR 51893 (October 5, 1993).
---------------------------------------------------------------------------
Further, the Commission believes that providing the PSE with an
efficient method by which to increase Auto-Ex order size eligibility to
match another market's increase is consistent with sections 6(b)(5) and
11A(a)(1)(C) of the Act in that it facilitates transactions in
securities and promotes fair competition among options markets by
enhancing the benefits available to investors of a multiple trading
environment. The Commission also believes that the proposal adequately
protects investors and the public interest by conditioning the increase
in order size eligibility on the PSE's filing with the Commission,
under section 19(b)(3)(A) of the Act, of the specific terms of the
increase. The Commission believes that requiring the PSE to provide it
with such a filing will provide sufficient opportunity for the
Commission to determine whether the PSE has adequate system and market
maker capacity to accommodate the proposed increase and request
appropriate modification of the increase if necessary. Finally, the
Commission notes that the PSE has represented that Auto-Ex currently
has adequate system and market-maker capacity to accommodate any
reasonably anticipated increase in order size eligibility.\11\
---------------------------------------------------------------------------
\11\See supra note 7.
---------------------------------------------------------------------------
Amendment No. 4 provides that orders may not be split for purposes
of making the parts eligible for entry into Auto-Ex. The Commission
agrees with the Exchange that this is necessary in order to assure
compliance with the purpose of Auto-Ex, which is to allow for a more
efficient method of executing small market and limit orders.\12\
Additionally, the rule change proposed in Amendment No. 4 is consistent
with CBOE Rule 6.8(a)(i), which the Commission previously approved.\13\
---------------------------------------------------------------------------
\12\See Securities Exchange Act Release No. 32703 (July 30,
1993), 58 FR 42117, (August 6, 1993).
\13\See Securities Exchange Act Release No. 28411 (September 6,
1990), 55 FR 37784 (September 13, 1990).
---------------------------------------------------------------------------
The Commission finds good cause for approving Amendment No. 4 to
the proposed rule change prior to the thirtieth day after the date of
publication of notice of filing thereof in the Federal Register.\14\
For the reasons stated above, the Commission believes it is consistent
with section 6(b)(5) of the Act to approve Amendment No. 4 to the PSE's
proposal on an accelerated basis.
---------------------------------------------------------------------------
\14\As noted previously, Amendment No. 3 withdraws and
supersedes Amendment Nos. 1, 2, and 3. See Amendment No. 4, supra
note 5.
---------------------------------------------------------------------------
Interested persons are invited to submit written data, views, and
arguments concerning Amendment No. 4 to the proposed rule change.
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 in the Commission's Public
Reference Section, 450 Fifth Street NW., Washington, DC. 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-PSE-93-26 and should be submitted by June 27, 1994.
It is therefore ordered, pursuant to section 19(b)(2) of the
Act,\15\ that the proposed rule change (SR-PSE-93-26) is approved, as
amended.
\15\15 U.S.C. 78s(b)(2) (1988).
---------------------------------------------------------------------------
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\16\
---------------------------------------------------------------------------
\16\17 CFR 200.30-3(a)(12) (1993).
---------------------------------------------------------------------------
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-13607 Filed 6-3-94; 8:45 am]
BILLING CODE 8010-01-M