[Federal Register Volume 63, Number 46 (Tuesday, March 10, 1998)]
[Notices]
[Pages 11700-11702]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-6018]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-39707; File No. SR-PCX-97-48]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Pacific Exchange, Inc. Relating to Market Maker
Participation in the Pacific Exchange's Automatic Execution System for
Options (``Auto-Ex'')
March 3, 1998.
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 December 18, 1997,\3\ the Pacific Exchange, Inc. (``PCX'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'' or ``SEC'') the proposed rule change as described in
Items I, II and III below, which Items have been prepared by the
Exchange. 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. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ On February 27, 1998, the Pacific Exchange, Inc. submitted
an amendment clarifying certain procedures and terms referred to in
the proposed rule change. See letter from Michael D. Pierson, Senior
Attorney, Regulatory Policy, Pacific Exchange, Inc., to Mignon
McLemore, Attorney, Office of Market Supervision, Division of Market
Regulation, SEC, dated February 26, 1998 (``Amendment No. 1'').
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange is proposing to amend its rules relating to Market
Maker participation in the Exchange's automatic execution system for
options (``Auto-Ex''). The text of proposed rule change is available
for review at the Exchange's principal offices and in the Commission's
Public Reference Room.
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 Exchange 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 Exchange 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
On September 15, 1993, the Commission approved an Exchange proposal
to codify its Market Maker eligibility standards for participation in
the Auto-Ex feature of the Pacific Options Exchange Trading System
(``POETS'').\4\ Under that rule change, Market Makers are only eligible
for Auto-Ex at one trading post that is within that market Maker's
primary appointment zone.\5\ The rule further provides that
participants who sign onto the system are required to remain on the
system for the duration of the trading day, but that exemptions from
this requirement may be granted by two Floor Officials under certain
[[Page 11701]]
circumstances. Moreover, a Market Maker who logs onto the system during
an Expiration Week is required to remain on the system for the entire
week. Finally, if there is inadequate Auto-Ex participation in one or
more issues, two Floor Officials may require Market Makers who are
members of the trading crowd to log onto Auto-Ex, while present in the
crowd, absent reasonable justification or excuse for non-participation.
For purposes of that provision, a Market Maker is considered to be a
``member of a trading crowd'' if that Market Maker (a) holds an
appointment at the trading post where the subject issue is located or
(b) regularly effects transactions in person for his or her Market
Maker account at that trading post.
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\4\ See Securities Exchange Act Release No. 32908 (September 15,
1993), 58 FR 49076 (September 21, 1993) (order approving File No.
SR-PSE-91-38). Previously, the Commission had approved some of these
provisions when it approved the implementation of the POETS pilot
program. See Securities Exchange Act Release No. 27633 (January 18,
1990) (order approving SR-PSE-89-26) (``POETS Approval Order''). See
also, Securities Exchange Act Release No. 27423 (November 6, 1989),
54 FR 47434 (November 14, 1989) (``POETS'' notice).
\5\ Market Maker primary appointment zone requirements are set
forth in PCX Rule 6.35.
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The Exchange is now proposing to modify and expand these rules as
follows:
First, the Exchange is proposing to add to Rule 6.87, a provision
on joint accounts, stating that participants in a joint account may log
onto Auto-Ex in a trading crowd outside of their primary appointment
zones, but only if they are substituting for another participant in the
same joint account, where trading of Auto-Ex as such station would have
been appropriate for the substituted party, and they have obtained the
approval of two Floor Officials.
Second, the Exchange is proposing to clarify this rule by stating
that Market Makers who have not been assigned a primary appointment
zone may not participate on the Auto-Ex system, and further, that all
Auto-Ex transactions will count toward a Market Maker's in person and
primary appointment zone requirements.
Third, the Exchange is proposing to modify this rule by specifying
that, unless exempted by two Floor Officials, Market Makers may log
onto Auto-Ex only in person and may continue on the system only so long
as they are present in that trading crowd. Moreover, absent an
exemption from the foregoing limitation, Market Makers may not remain
on Auto-Ex, and must log off Auto-Ex, where they have left the trading
crowd, unless the departure is for a brief interval. The rule states
that under normal circumstances, a brief interval is deemed to be 15
minutes.
A Market Maker who fails to comply with the log-off requirement
will be subject to the following fines under the Exchange's Minor Rule
Plan: \6\ if the number of failures is between one and two during a
twelve-month period, the fine is $100 per violation; for between three
and five failures in a twelve-month period, the fine is $250 per
violation; and for six or more failures in a twelve-month period, the
fine is $500 per violation.\7\ The Exchange is also proposing to add
violations of the log-off requirement to the Exchange's Summary
Sanction Procedure \8\ under which two Floor Officials may summarily
fine a Member for a designated rule violation if certain procedures are
followed.
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\6\ See generally, PCX Rule 10.13.
\7\ Cf. CBOE Rule 8.16(a)(iii) (similar fine schedule).
\8\ See PCX Rule 10.14.
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Fourth, the Exchange is eliminating the provision that states that
a Market Maker who logs onto Auto-Ex during Expiration Week is required
to remain on the system for the duration of that Expiration Week. When
the Auto-Ex rule was first adopted, there was some concern that there
might be inadequate Market Maker participation on Auto-Ex during
Expiration Week. However, the Exchange now believes, based on several
years' experience, that there is no lack of Market Maker participation
on the Options Floor that justifies a need for the Expiration Week
requirement.
Fifth, the Exchange is proposing to make the Auto-Ex participation
mandatory in two limited situations. Under subsection (d)(4), a Market
Maker who has logged onto Auto-Ex at any time during a trading day must
participate on the Auto-Ex system in that option issue whenever present
in that trading crowd during that trading day. Under subsection (d)(5),
Market Makers may not log off the Auto-Ex wheel during the first ten
minutes of a ``fast market'' that has been declared pursuant to Rule
6.28 in an issue traded ``on that wheel'',\9\ in the absence of an
exemption from two Floor Officials.
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\9\ The term ``on that wheel'' denotes the function of the Auto-
Ex system that allows Market Makers to be assigned option contracts
on a rotating basis, except that the first trade of the day is
assigned to a Market Maker at random. Thus, for example, if five
Market Makers log on to the Auto-Ex system at the beginning of the
trading day, then the first customer order entered that day will be
assigned to one of the five Market Makers at random. Thereafter, on
that trading day, incoming orders will be assigned to the five
Market Makers in order, on a rotating basis. See supra note 3 at p.
1.
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Sixth, the Exchange is proposing to add a provision to Rule 6.87
specifically prohibiting Market Makers from ``directed trading'' of
option contracts resulting from recent executions over Auto-Ex.\10\ The
rule states that Market Makers who receive an execution through Auto-Ex
may not re-direct the option contracts from that trade to another
Market Maker without first giving the other Members in the trading
crowd an opportunity to participate.
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\10\ ``Directed trading'' is a violation of Rule 6.73 (``Manner
of Bidding and Offering''), which provides in part: ``All bids and
offers shall be general ones and shall not be specified for
acceptance by particular members.''
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Finally, the Exchange is proposing to codify a provision on price
adjustments in the rule that was previously included in the Exchange's
filing to implement POETS and approved by the Commission in 1990.\11\
It states that due to instantaneous execution, an incorrect quote
appearing on the screen may result in an Auto-Ex trade at an incorrect
price, and that an Auto-Ex trade executed at an erroneous quote should
be treated as a trade reported at an erroneous price. It also states
that the price of the Auto-Ex trade should be adjusted to reflect
accurately the market quote at the time of execution, and that this
will result in public customers and Market Makers receiving correct
fills at prevailing market quotes through Auto-Ex. It further states
that the determination as to whether an Auto-Ex trade was executed at
an erroneous price is to be made by two Floor Officials, and that in
making their determination, the Floor Officials should consider such
factors as: (1) The length of time the allegedly incorrect quote was
displayed; (2) whether any non-Auto-Ex trades were effected at the same
price as the Auto-Ex transaction; and (3) whether any members of the
trading crowd were aware of orders actively being represented in the
trading crowd that appear to have been ``printed through'' by the Auto-
Ex trade.
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\11\ See supra note 4, POETS Approval Order and POETS Notice at
Exhibit No. 4.
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The Exchange believes the proposed rule change is consistent with
Section 6(b) \12\ of the Act, in general, and furthers the objectives
of Section 6(b)(5),\13\ in particular, in that it is designed to
facilitate transactions in securities, to promote just and equitable
principles of trade and to protect investors and the public interest.
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\12\ 15 U.S.C. 78f(b).
\13\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments on the proposed rule change were neither solicited
nor received.
[[Page 11702]]
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 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, including whether the proposed rule
change is consistent with the Act. 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 Room, 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 PCX. All submissions should
refer to File No. SR-PCX-97-48 and should be submitted by March TCRA1,
1998.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\14\
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\14\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 98-6018 Filed 3-9-98; 8:45 am]
BILLING CODE 8010-01-M