[Federal Register Volume 59, Number 30 (Monday, February 14, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-3322]


[[Page Unknown]]

[Federal Register: February 14, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33586; File No. SR-PSE-93-03]

 

Self-Regulatory Organizations; Pacific Stock Exchange, Inc.; 
Order Approving Proposed Rule Change and Notice of Filing and Order 
Granting Accelerated Approval of Amendment No. 1 to the Proposed Rule 
Change Relating to Waiver of Maximum Bid/Ask Differentials in 
Individual Equity Options

February 7, 1994
    On February 9, 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 two Floor Officials to 
waive, on a case-by-case basis, the required maximum bid/ask 
differentials for options when the bid/ask differential in the security 
underlying an options contract is greater than one-half of a point. 
Notice of the proposed rule change appeared in the Federal Register on 
December 23, 1993.\3\ No comments were received on the proposed rule 
change. On February 7, 1994, the Exchange submitted Amendment No. 1 to 
the proposed rule change.\4\ This order approves the proposal.
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    \1\15 U.S.C. 78s(b)(1) (1982).
    \2\17 CFR 240.19b-4 (1993).
    \3\See Securities Exchange Act Release No. 33351 (December 16, 
1993), 58 FR 68185 (December 23, 1993).
    \4\In Amendment No. 1, the Exchange proposes to: (1) Move the 
last sentence from Rule 6.37(b)(1) to Rule 6.36(b)(3); and (2) 
delete the references to in-the-money options series from the 
language originally proposed to be added to Rule 6.37(b)(3). Letter 
from Michael Pierson, Senior Attorney, Market Regulation, PSE, to 
Brad Ritter, Attorney, Office of Derivatives Regulation, Division of 
Market Regulation, Commission, dated February 7, 1994 (``Amendment 
No. 1'').
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    The Exchange proposes to amend its rule establishing the maximum 
bid/ask differentials that may be created in making a market in options 
contracts. Rule 6.37(b)(1) currently provides, for example, that a 
Market Maker may bid and/or offer so as to create differences of no 
more than one-quarter of a point between the bid and the offer when the 
bid is less than $2. The current rule also provides, however, that the 
Exchange's Options Floor Trading Committee (``Committee'')\5\ may 
establish maximum spreads other than those specified. Additionally, 
Rule 6.37(b)(1) also currently provides that in the event the bid/ask 
differential in the underlying security is greater than the bid/ask 
differential contained in the rule, the permissible price differential 
for any in-the-money option series may be identical to those in the 
underlying security market.
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    \5\The Committee is comprised of the Exchange's 14 Floor 
Officials: (1) Seven Floor brokers, and (2) seven Market Makers or 
Lead Market Makers. Telephone conversation between Michael Pierson, 
Senior Attorney, Market Regulation, PSE, and Brad Ritter, Attorney, 
Office of Derivatives Regulation, Division of Market Regulation, 
Commission, on February 2, 1994.
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    Under the proposal, the last sentence from Rule 6.37(b)(1), which 
provides an exemption from the maximum specified bid/ask differentials 
for in-the-money options series in certain circumstances, would be 
moved to Rule 6.37(b)(3).\6\ Additionally, new language is proposed to 
be added to Rule 6.37(b)(3) which would allow two Floor Officials to 
waive the requirements of Rule 6.37(b)(1) for at-the-money and out-of-
the-money options series, on a case-by-case basis, when the bid/ask 
differential for the underlying security is greater than one-half of a 
point. In such instances, the spreads for at-the-money and out-of-the-
money options series may be, at most, one-half as wide as the bid/ask 
differential in the underlying security in the primary market. The 
proposed rule also provides that exemptions granted pursuant to the 
rule are subject to Committee review.
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    \6\See Amendment No. 1, supra note 4.
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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).\7\ In particular, the 
Commission believes that the proposed rule change is designed to 
facilitate transactions in securities, to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, and to promote just and equitable principles of trade. 
Specifically, by incorporating objective standards into the rule and 
providing Floor Officials with the discretion to grant exemptions when 
those standards are met, the proposal will give Market Makers more 
flexibility to apply to alter the maximum bid/ask differential when 
quoting options where the market in the underlying security is illiquid 
and therefore has wider spreads. The Commission notes that under the 
current rule, Market Makers may already obtain approval to alter the 
spreads specified in the rule for any options series. Such approval, 
however, must be obtained from the Committee at either a regular or 
special meeting of the Committee.\8\ The proposal would alleviate any 
potential delay in granting Market Makers requests to adjust their 
spreads by permitting such relief to be granted by two Floor Officials 
rather than the full Committee.
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    \7\15 U.S.C. 78f(b)(5) (1982).
    \8\Telephone conversation between Michael Pierson, Senior 
Attorney, Market Regulation, PSE, and Brad Ritter, Attorney, Office 
of Derivatives Regulation, Division of Market Regulation, 
Commission, on February 2, 1994.
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    Although the Commission recognizes that the proposal could result 
in more requests by Market Makers to obtain permission to increase 
maximum spreads because such requests could be granted by two Floor 
Officials as opposed to the full Committee, the Commission believes 
that the rule ensures that exemptions can only be granted in limited 
circumstances. First, an exemption can only be granted for at-the-money 
and out-of-the-money options series where the spread in the underlying 
security is greater than one-half of a point. Second, even with the 
exemption for the bid/ask differentials for at-the-money and out-of-
the-money options series, the maximum spread for those series can be at 
most, one-half as wide as the spread in the underlying security. 
Finally, any exemption granted by the Floor Officials will be subject 
to Committee review. This review authority will allow the full 
Committee to monitor the use of the exemptions and to detect any 
situations where, for example, exemptions have been improperly granted 
by certain Floor Officials, and to take appropriate steps to prevent 
subsequent abuses of the rule.
    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 thereof in the Federal Register. Amendment No. 1 
merely clarifies that the intent of the proposed rule change is to 
provide objective standards for allowing Floor Officials to grant 
exemptions from Rule 6.37(b)(1) for at-the-money and out-of-the-money 
options series, not to change the current rule with respect to the 
exemption for in-the-money options series. Moreover, the Commission 
notes that this proposal was published for the full 21-day comment 
period and no comments were received by the Commission. Therefore, the 
Commission believes it is consistent with sections 6(b)(5)\9\ and 
19(b)(2)\10\ of the Act to approve Amendment No. 1 to the proposal on 
an accelerated basis.
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    \9\15 U.S.C. 78f(b)(5) (1988).
    \10\15 U.S.C. 78f(b)(5) (1988).
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    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, 
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 PSE. All written submissions should refer to 
File No. SR-PSE-93-03 and should be submitted by March 7, 1994.
    It is therefore ordered, Pursuant to section 19(b)(2) of the 
Act,\11\ that the proposed rule change (SR-PSE-93-03) is approved.

    \11\15 U.S.C. 78s(b)(2) (1982).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-3322 Filed 2-11-94; 8:45 am]
BILLING CODE 8010-01-M