[Federal Register Volume 60, Number 21 (Wednesday, February 1, 1995)]
[Notices]
[Pages 6330-6332]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-2385]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35277; File No. SR-PSE-94-24]
Self-Regulatory Organizations; Order Approving a Proposed Rule
Change and Notice of Filing and Order Granting Accelerated Approval of
Amendment No. 1 to the Proposed Rule Change by the Pacific Stock
Exchange, Inc., Relating to Financial Arrangements of Options Market
Makers
January 25, 1995.
On September 9, 1994, the Pacific Stock Exchange, Inc. (``PSE'' or
``Exchange'') submitted to the Securities and Exchange Commission
(``Commission''), 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 regarding financial arrangements of market makers
and the trading restrictions that are imposed on market makers who have
financial [[Page 6331]] arrangements with other members or member
organizations. Notice of the proposal appeared in the Federal Register
on December 23, 1994.\3\ No comment letters were received on the
proposed rule change. The Exchange filed Amendment No. 1 to the
proposal on January 25, 1995.\4\ This order approves the Exchange's
proposal, as amended.
\1\15 U.S.C. Sec. 78s(b)(1) (1988).
\2\17 CFR 240.19b-4 (1992).
\3\See Securities Exchange Act Release No. 35107 (December 16,
1994), 59 FR 66395 (December 23, 1994).
\4\In Amendment No. 1, the Exchange deleted proposed Commentary
.07 from PSE Rule 6.40, regarding inadvertent violations of Rule
6.40. See Letter from Michael Pierson, Senior Attorney, Market
Regulation, PSE, to Brad Ritter, Senior Counsel, Office of Market
Supervision, Division of Market Regulation, Commission, dated
January 25, 1995 (``Amendment No. 1'').
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The Exchange is proposing several amendments to Exchange Rule 6.40
(Financial Arrangements of Market Makers). First, the Exchange is
proposing to change its definition of ``financial arrangement.''
Specifically, instead of relying on the Exchange's definition of
financial arrangement under Rule 4.18,\5\ a financial arrangement for
purposes of Rule 6.40 would exist if one member directly finances the
other member's dealings upon the Exchange and has a beneficial interest
in the other member's trading account such that the first member is
entitled to at least ten percent of the second member's trading
profits. In the alternative, a financial arrangement will be deemed to
exist under Rule 6.40(a) where two members trade for the same joint
account.
\5\Rule 4.18 requires disclosure to the Exchange of certain
financial arrangements of members. For these purposes, a financial
arrangement is defined as: (1) The direct financing of a member's
dealings upon the Exchange; or (2) any direct equity investment or
profit sharing arrangement; or (3) any consideration over the amount
of $5,000 that constitutes a gift, loan, salary, or bonus. See PSE
Rule 4.18(a).
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Second, the Exchange proposes to modify Rule 6.40(b) to provide
that two floor officials, on the basis of demonstrated need, may grant
a written exemption\6\ to the trading restrictions imposed by the
rule.\7\
\6\This amendment merely changes the word ``dispensation'' to
``exemption.''
\7\The Exchange also proposes non-substantive amendments to Rule
6.40(b) by deleting subsections (b)(2) and (b)(3) and adding to
subsection (b)(1) the restriction on bidding, offering, and/or
trading in the same option series at the same time.
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Finally, the Exchange proposes to add several commentaries to Rule
6.40. Proposed Commentary .03 merely provides that for purposes of Rule
6.40(a), the term ``member'' includes members and member organizations.
Proposed Commentary .04 states the purpose of Rule 6.40 and further
provides that any market makers who are not technically covered by the
terms of Rule 6.40, but who unfairly dominate the market in any class
of options, will be considered to be in violation of their obligation
to contribute to the maintenance of fair and orderly markets and to act
in accordance with just and equitable principles of trade.
Proposed Commentary .05 codifies the Exchange's existing policy
that two or more Lead Market Makers (``LMMs'') who are trading on
behalf of the same member organization may not bid, offer, and/or trade
in the same option series at the same time. Commentary .05 further
provides that two or more LMMs who do not have financial arrangements
with each other are permitted to bid, offer and/or trade in the same
option series at the same time.\8\
\8\See generally PSE Rule 6.82 (Lead Market Maker System Pilot
Program).
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Proposed Commentary .06 provides that exemptions to the trading
restrictions in Rule 6.40(b) may ordinarily be granted by two floor
officials for the purpose of providing liquidity in a trading crowd or
where the individual situation otherwise warrant such action.
Commentary .06 further provides that an exemption granted pursuant to
Rule 6.40(b) generally will not extend beyond the trading day on which
it is issued. Moreover, Commentary .06 provides that the Exchange's
Options Floor Trading Committee (``Committee'') will review, on a
regular basis, the exemptions granted pursuant to Rule 6.40(b).\9\
\9\This requirement is presently set forth in Rule 6.40(c). To
avoid repetition, the Exchange also proposes to delete Rule 6.40(c)
and renumber rule 6.40(d).
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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).\10\ Specifically, the
Commission finds, as it did in originally approving Rule 6.40,\11\ that
full disclosure of financial arrangements among PSE market makers,
members, and member organizations helps the Exchange to better identify
and deter potential trading abuses among affiliated PSE members and
member organizations. In addition, with such disclosure, the Exchange's
ability to monitor the financial condition of its members and member
organizations is enhanced. The Commission believes that the proposed
amendments to Rule 6.40 do not detract from these benefits in any
material manner and thus, are consistent with the Act.
\10\15 U.S.C. Sec. 78f(b)(5) (1988).
\11\See Securities Exchange Act Release No. 32775 (August 20,
1993), 58 FR 45368 (August 27, 1993).
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The Commission believes that it is appropriate for the Exchange to
amend the definition of ``financial arrangement'' to focus more on the
nature of the financial interest that a member may have in a market
maker's trading account. The Commission believes that the amended
definition will help the Exchange to achieve a balance whereby it can
still restrict the types of activity for which the rule was intended
without unnecessarily removing liquidity from its trading crowds.
Commentary .04 furthers this by clarifying the purpose of the rule and
providing that unfair domination by market makers subject to financial
arrangements that technically are not covered by the amended definition
will be considered a violation of just and equitable principles of
trade.\12\ The Commission believes that Commentary .06 is also
consistent with this goal by providing that exemptions to the trading
restrictions in Rule 6.40(b) may ordinarily be granted for purposes of
providing liquidity in a trading crowd.
\12\The Commission also notes that as with other PSE rules, in
considering appropriate sanctions for violations of Rule 6.40, the
Exchange can consider mitigating factors, such as whether a
violation was inadvertent. See Amendment No. 1, supra note 4.
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On balance, the Commission believes that the trading restrictions
in Rule 6.40 should continue to help to preclude collusive trading
activity and increase public confidence in the markets while the
proposed amendments to Rule 6.40 will allow PSE market makers to
continue to respond to trading conditions in all options classes on the
Exchange floor without adversely affecting the liquidity of the
Exchange's options markets.
The Commission finds good cause for approving Amendment No. 1 to
the proposed rule change prior to the thirtieth day after the date of
publication of notice of filing thereof in the Federal Register. As
discussed above, the Commission believes that Proposed Commentary .07
was merely a restatement of the general proposition that in considering
appropriate sanctions for violation of Exchange rules, the Exchange
(and appropriate committees) may consider mitigating factors, such as
whether a violation was inadvertent. As a result, the Commission
believes that deleting this language from Rule 6.40 does not raise any
new regulatory concerns. Accordingly, the Commission believes that it
is consistent with Section 6(b)(5) of the Act to approve Amendment No.
[[Page 6332]] 1 to the proposed rule change on an accelerated basis.
Interested persons are invited to submit written data, views and
arguments concerning Amendment No. 1 to the proposed rule change.
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 submissions, all subsequent
amendments, all written statements with respect to the proposed rule
changes that are filed with the Commission, and all written
communications relating to the proposed rule changes 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 filings will also be available for inspection and
copying at the principal office of the PSE. All submissions should
refer to File No. SR-PSE-94-24 and should be submitted by February 22,
1995.
It Is Therefore Ordered, pursuant to Section 19(b)(2) of the
Act,\13\ that the proposed rule change (SR-PSE-94-24), as amended, is
approved.
\13\15 U.S.C. Sec. 78s(b)(2) (1988).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\14\
\14\17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-2385 Filed 1-31-95; 8:45 am]
BILLING CODE 8010-01-M