[Federal Register Volume 64, Number 22 (Wednesday, February 3, 1999)]
[Notices]
[Pages 5335-5336]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-2533]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40980; File No. SR-PCX-98-55]
Self-Regulatory Organizations; Pacific Exchange, Inc.; Order
Approving Proposed Rule Change and Amendment No. 1 Relating to Crossed
Market Adjustments
January 26, 1999.
I. Introduction
On November 5, 1998, the Pacific Exchange, Inc. (``PCX'' or
``Exchange'') submitted to the Securities and Exchange Commission
(``SEC'' or ``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 to clarify its rules on the
automatic execution of options orders. Amendment No. 1 was submitted to
the Commission on November 30, 1998.\3\ The proposed rule change was
published for comment in the Federal Register on December 9, 1998.\4\
The Commission did not receive any comments on the proposal. This order
approves the proposal, as amended.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ The proposed rule change was originally filed pursuant to
Section 19(b)(3)(A)(ii) of the Act. The amendment converted the
proposed rule change to a filing pursuant to Section 19(b)(2) of the
Act. Letter from Michael D. Pierson, Senior Attorney, Regulatory
Policy, PCX to Kelly McCormick, Attorney, Division of Market
Regulation, SEC, dated November 27, 1998 (``Amendment No. 1'').
\4\ Securities Exchange Act Release No. 40734 (December 1,
1998), 63 FR 67971 (December 9, 1998).
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II. Description of the Proposal
The Exchange proposes to clarify its rules on the automatic
execution of orders when the PCX market and the market of a competition
exchange are crossed or locked (i.e., the bid disseminated through the
facilities of one exchange is higher than or equal to the offer
disseminated through the facilities of another exchange. The Exchange
believes the proposal will make consistent the handling of electronic
orders in such circumstances.
On September 8, 1998, the Commission approved a PCX proposal to
amend PCX Rule 6.87(d) regarding the automatic execution of options
orders.\5\ The rule change provided that the Exchange's Options Floor
Trading Committee (``OFTC'') may designate electronic orders in an
option issue to receive automatic executions at prices reflecting the
National Best Bid or Offer (``NBBO''). The rule change further provided
that the OFTC may designate a customer order to exit the automatic
execution system and receive floor broker representation in the trading
crowd if the NBBO is crossed (e.g. 6\1/8\ bid, 6 asked) or locked (e.g.
6 bid, 6 asked).
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\5\ Securities Exchange Act Release No. 40412 (September 8,
1998), 63 FR 49626 (September 16, 1998) (File No. SR-PCX-98-27).
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After the Commission approved the amendment to PCX Rule 6.87(d),
the Exchange became aware that the rule implied that the OFTC could
designate an option issue for floor broker representation in crossed or
locked markets only if the issue was eligible to receive automatic
execution at the NBBO. The Exchange's intention was to allow OFTC the
discretion to designate orders in an option issue for floor broker
representation if the NBBO is crossed or
[[Page 5336]]
locked, regardless of whether the orders are eligible for automatic
execution at the NBBO. Accordingly, the Exchange is now proposing to
amend PCX Rule 6.87 to clarify that the OFTC may designate customer
orders, for any option issue, to default to floor broker representation
in the trading crowd if the NBBO is crossed or locked, regardless of
whether the Exchange's Auto-Ex system is set to execute orders at
prices reflecting the NBBO.
The Exchange stated that the proposal should prevent customer
orders from being executed at inferior prices. The Exchange illustrated
this potential problem as follows. If the PCX market is 5 bid, 5\1/4\
asked, and exchange B's market is 4 bid, 4\1/4\ asked, the NBBO would
be 5 bid, 4\1/4\ asked. If the 5 bid is based on a public order for 10
contracts, and the order is automatically executed, the customer would
be deprived of an opportunity to cancel the order at 5 and buy 10
contracts at exchange B at 4\1/4\. This result would occur regardless
of whether the PCX Auto-Ex system is using the NBBO or PCX quotes.
The Exchange also explained that in many cases crossed or locked
markets occur because of communications or systems problems, or due to
keystroke errors, or quotation dissemination delays. The Exchange
stated that it believes that the proposal allow floor brokers to
determine if the locked or crossed market is actually a true market.
The Exchange stated that it plans to implement a systems change to
accommodate the potential for floor broker representation of options
orders during crossed or locked markets after this proposal is
approved.
III. Discussion
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.\6\ In
particular, the Commission finds that the proposed rule change is
consistent with the requirements of Section 6(b)(5) of the Act.\7\
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\6\ In reviewing this proposal, the Commission has considered
the proposed rule's impact on efficiency, competition, and capital
formation. 15 U.S.C. 78c(f).
\7\ 15 U.S.C. 78f(b)(5).
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Section 6(b)(5) of the Act \8\ requires, among other things, that
the rules of an exchange be designed to facilitate transactions in
securities and, in general, to protect investors and the public
interest. The proposed rule change should protect customer orders from
being executed at inferior prices. Currently if the NBBO is crossed or
locked, a customer's order could potentially be executed at an inferior
price. If an order is placed for an option issue that is not eligible
for automatic execution at the NBBO, the order would be automatically
executed at a price that may be inferior to a price listed on another
market. The proposed amendment to PCX Rule 6.87 would prevent this
situation from occurring. The customer order would default to the PCX
floor brokers who would then handle that order consistent with their
best execution obligations.
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\8\ Id.
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The proposed rule change provides floor brokers with the
opportunity to determine if the crossed or locked markets are true
markets. As explained by the Exchange, a locked or crossed market may
be caused by external factors unrelated to the option issue. The
default provision will allow floor brokers to ascertain whether the
crossed or locked market is in fact a true market, before assessing
what the best execution would be for a particular customer's order.
Accordingly, the Commission believes the proposed rule change will
facilitate transactions when markets are crossed or locked and will
protect investors and the public interest consistent with the
requirements of Section 6(b)(5) of the Act.\9\
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\9\Id.
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IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\10\ that the proposed rule change (SR-PCX-98-55) is approved.
\10\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\11\
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\11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-2533 Filed 2-2-99; 8:45 am]
BILLING CODE 8010-01-M