[Federal Register Volume 64, Number 175 (Friday, September 10, 1999)]
[Notices]
[Pages 49263-49265]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-23613]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-41824; File No. SR-PCX-99-24]
Self-Regulatory Organizations; Notice of Filing of Amendment No.
2 and Order Granting Partial Accelerated Approval to a Proposed Rule
Change by the Pacific Exchange, Inc. Relating to Automated Opening
Rotations
September 1, 1999.
I. Introduction
On July 13, 1999, the Pacific Exchange, Inc. (``PCX'' or
``Exchange'') filed with 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 related to automated opening
rotations (``AOR''s). On August 4, 1999, the PCX filed with the
Commission Amendment No. 1 to the proposal.\3\ Notice of the proposed
rule change appeared in the Federal Register on August 30, 1999.\4\ On
September 1, 1999, the PCX filed Amendment No. 2 to the proposal.\5\
The Commission is publishing this notice to solicit comments on
Amendment No. 2. In addition, for the reasons discussed below, the
Commission has determined to grant accelerated approval of PCX's
request in Amendment No. 2 to implement automated opening rotations for
16 issues on a thirty day pilot basis.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ In Amendment No. 1, the Exchange further clarifies the
operation of automated openings, provides rule text related to the
new procedures, and justifies its request for accelerated approval.
See letter from Michael D. Pierson, Director, Regulatory Policy,
PCX, to Michael A. Walinskas, Associate Director, Division of Market
Regulation (``Division''), SEC, dated August 3, 1999 (``Amendment
No. 1'').
\4\ See Securities Exchange Act Release No. 41774 (August 20,
1999), 64 FR 47210.
\5\ In Amendment No. 2, the Exchange provides additional details
about the operation of automated openings and proposes limited use
of such openings for certain issues on a pilot basis. See letter
from Michael D. Pierson, Director, Regulatory Policy, PCX, to
Richard Strasser, Assistant Director, Division, SEC, dated September
1, 1999 (``Amendment No. 2'').
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II. Description of the Proposal
A. Introduction
The Exchange is proposing to adopt a new procedure to facilitate
trading of option contracts during the opening rotation.\6\ Opening
rotations are held promptly following the opening of the underlying
security on the principal market where it is traded.\7\ Opening
rotations are conducted by an Order Book Official (``OBO''), who is an
Exchange employee.\8\ The PCX rules on opening rotations apply to both
index and equity options contracts.\9\
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\6\ The Exchange intends to continue to employ the current
(manual) procedures for closing rotations.
\7\ See PCX Rule 6.64, Comment .01(a).
\8\ See PCX Rules 6.51 and 6.64.
\9\ See PCX Rule 7.10.
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In its initial filing, as amended by Amendment No. 1, the PCX
proposed a new process that would allow the Exchange to conduct AORs.
The Exchange proposed a procedure to allow the OBO to establish
electronically a single price opening for executing eligible market and
marketable limit orders in the POETS system. In the event of an
imbalance, any remaining orders in the system that are eligible to be
executed will be assigned to market makers participating on the Auto-Ex
System. The new process involves three basic steps: first, the markets
are established; second, the opening rotation is automatically
processed for the majority of series; and finally, any series with
manual orders or compilation is opened manually, i.e., pursuant to the
current procedures for opening rotations.
More specifically, under the new AOR process, opening rotations on
the PCX will occur in the following manner: Prior to the opening, the
OBO will determine whether there are any orders in the trading crowd to
be executed at the opening. Once the underlying security has opened,
the OBO will request from the trading crowd bids and offers in the
specific option issue. The trading crowd may determine that the posted
bids and offers are accurate, or alternatively, may request by public
outcry that certain quotes be modified.\10\ Once the bid and asking
price in each series has been ascertained, the OBO and AOR system will
identify all series that are eligible for the AOR and that can be
opened immediately, and will also identify all series that are not
eligible for the AOR. Those that are not eligible for the AOR must be
opened manually.\11\
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\10\ Prior to an automated opening, the members of the trading
crowd must establish a bid and offer for each series in a given
issue. This occurs basically as follows: The OBO will first display
a bid price and an offering price for a particular series. (These
prices will have been established either by the Auto-Quote feature
of POETS or by a manual process, i.e., a member or members of the
trading crowd will vocalize bids and offers that a Market Quote
Terminal Operator will enter into the system and display on the
overhead screen.) The OBO will then ask the crowd if the displayed
prices are ``all right'' (or other words to that effect). There will
then be a short window period when the displayed prices may be
adjusted. While the trading crowd is establishing the market, any
member may vocalize a bid or offer that improves the market, and the
OBO will be required to update the market accordingly. See Amendment
No. 1.
\11\ For a more detailed description of the current and proposed
processes, see Securities Exchange Act Release No. 41774 (August 20,
1999), 64 FR 47210 (August 30, 1990).
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B. Amendment No. 2
In Amendment No. 2, the PCX requests that the Commission grant
accelerated approval of a thirty day pilot program (``Pilot'') that
would allow the Exchange to use automated openings for 16 issues during
the pilot period. The 16 issues are Microsoft Corp. (MSQ), Compaq
Computer Corp. (CPQ), Sun Microsystems, Inc. (SUQ), Applied Materials
(AMAT), 3Com Corp. (THQ), Advanced Micro Devices (AMD), Tellabs, Inc.
(TLAB), Schering-Plough Corp. (SGP), McKesson HBOC, Inc. (MCK), ALZA
Corp. (AZA), R&B Falcon Corp. (FLC), First Union Corp. (FTU), NIKE,
Inc. (Class B) (NKE), Newbridge Networks Corp. (NN), Data General
[[Page 49264]]
Corp. (DGN), and Baker Hughes Inc. (BHI). These issues, previously
traded only on the PCX, now will be approved for trading on other
options exchanges.
Amendment No. 2 also further details how the proposed automated
openings would work during the Pilot period and beyond. First, the
Exchange clarifies when manual openings will be held. Generally, a
series will not be eligible for an AOR if one or more members of the
trading crowd has reasonably requested a manual opening rotation in
that series. The Exchange anticipates that such requests will fall into
two general categories. The first category involves mergers and
takeovers. The second category would cover system problems or system
limitations. For example, the POETS system may be unable to generate an
accurate market because it is unable to take into account the fact that
a takeover will occur on the following day, and as such, the system is
unable to factor in the correct model. In these situations, the series
will be opened manually.
As for the provision allowing manual openings when imbalance
thresholds are exceeded, the Exchange proposes to implement this
provision in the following manner. Initially, each option issue will
have a minimum imbalance threshold of 20 contracts. However, a Lead
Market Maker in an issue may increase the imbalance threshold in that
issue to a number greater than 20, but not exceeding 999 contracts (due
to system constraints). The decision to change the imbalance threshold
will be made pursuant to proposed Rule 6.64(b)(2)(D). Language in
subsection D was previously in subsection C. The modified rule text
follows. Proposed text is italicized.
(C) Series for which one or more members of the trading crowd has
reasonably requested that a manual opening rotation be conducted. Two
Floor Officials may deny member requests for manual opening rotations
in the absence of reasonable justification for doing so.
(D) Series in which the ``imbalance threshold'' has been exceeded.
Prior to the opening, the OBO, in conjunction with the Lead Market
Maker in the issue, will set for each option issue a number of
contracts that constitutes an imbalance threshold, i.e., a specific
number of option contracts to buy in excess of the number of contracts
to sell or a specific number of contracts to sell in excess of the
number of contracts to buy. The POETS system will not automatically
open any series with an imbalance exceeding the threshold for that
issue.
Second, the Exchange amends the proposed rule text to explicitly
provide for the manual accommodation of non-bookable orders when
automated openings occur. The text of additional subsection, PCX Rule
6.64(b)(4), follows. New text is italicized.
(4) Manual Accommodations of Non-Bookable Orders. If a non-bookable
order is represented in the trading crowd and disclosed to the Order
Book Official prior to the opening rotation, and if the order is either
a market order or a limit order with a limit price equal to the opening
price of the particular series, then that order will be entitled to an
execution immediately following the opening of that series as follows:
(A) If the order is a market order or limit order for a public
customer, the order will be filled in its entire size by the Market
Makers in the trading crowd (assuming that any contingency accompanying
the order is satisfied).
(B) If the order is a limit order for a broker-dealer, the order
will be entitled to be filled up to a number of contracts equal to a
pro rata share of the number of contracts that the Auto-Ex system
assigns to the Market Makers pursuant to subsection (3), above. If a
broker is holding more than one order to trade at the same limit price,
then that broker is limited to no more than one pro rata share of the
number of contracts that the Auto-Ex System assigns to the Market
Makers.
III. Discussion
The Commission finds that the proposed rule change relating to the
establishment of a Pilot for a 30-day period is consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to a national securities exchange.\12\ Specifically, the
Commission believes the Pilot is consistent with the Section 6(b)(5)
\13\ requirements that the rules of an exchange be designed to promote
just and equitable principles of trade, to remove impediments to and
perfect the mechanisms of a free and open market and a national market
system, and not be designed to permit unfair discrimination between
customers, issuers, brokers or dealers. The proposed rule change
represents an effort to facilitate the execution of orders at the
opening by providing market-makers with a means of establishing
electronically a single opening price. By facilitating an expedited
opening of options series included in the Pilot, AOR should remove an
impediment to and help perfect the mechanism of a free and open market
consistent with the Exchange's responsibilities under Section 6 of the
Act.\14\ Moreover, by integrating features into AOR, such as the
crossing of customer orders, and by providing procedures for handling
non-bookable orders in the opening process, the Commission believes
that the proposal should promote fair participation in AOR by all
market participants.
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\12\ In approving Amendment No. 2, the Commission has considered
its impact on efficiency, competition, and capital formation. 15
U.S.C. 78c(f).
\13\ 15 U.S.C. 78f(b)(5).
\14\ 15 U.S.C. 78f.
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The Commission finds good cause for approving the Pilot prior to
the thirtieth day after the date of publication of notice thereof in
the Federal Register. The Commission notes that the Pilot will only be
for a limited duration and for a limited number of issues. Thus, the
Commission believes that accelerated approval of the Pilot will enable
the Commission and the Exchange to gain experience with AOR before the
Commission considers permanent approval of the Pilot.\15\
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\15\ The Commission notes the issues selected for the Pilot are
newly introduced for trading on more than one exchange. ROS, an
electronic opening system for the Chicago Board Options Exchange,
Inc., has already received Commission approval. The Commission
expects the PCX to report back on if and how the existence of
automatic opening systems at multiple exchanges for newly multiply
listed options affects the efficiency of trading and competition
among exchanges.
Approval of the 30-day Pilot period should not be interpreted as
suggesting that the Commission is predisposed to approving the
proposal on a permanent basis or that the Commission is predisposed
to extending the Pilot to all issues.
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning Amendment No. 2, including whether Amendment No. 2
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 20549-0609. 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. Copies of such filing will also be available for
inspection and copying at the principal office of the PCX. All
[[Page 49265]]
submissions should refer to File No. SR-PCX-99-24 and should be
submitted by October 1, 1999.
V. Conclusion
It is therefore ordered, pursuant to section 19(b)(2) of the
Act,\16\ that the Pilot program proposed in Amendment No. 2 to SR-PCX-
99-24 be and hereby is approved on an accelerated basis to expire
October 1, 1999.\17\
\16\ 15 U.S.C. 78s(b)(2).
\17\ In approving Amendment No. 2, the Commission has considered
its impact on efficiency, competition, and capital formation. 15
U.S.C. 78c(f).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\18\
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\18\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-23613 Filed 9-9-99; 8:45 am]
BILLING CODE 8010-01-M