[Federal Register Volume 59, Number 146 (Monday, August 1, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-18577]


[[Page Unknown]]

[Federal Register: August 1, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34435; File No. SR-PSE-92-48]

 

Self-Regulatory Organizations; Pacific Stock Exchange, Inc.; 
Order Approving Proposed Rule Change, Relating to Requirements That 
Market Makers Fill Incoming Orders or Update Existing Markets

July 22, 1994.
    On December 22, 1992, the Pacific Stock Exchange, Inc. (``PSE'' or 
``Exchange'') submitted to the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b) of the Securities Exchange 
Act of 1934 (``Act'')\1\ and Rule 19b-4 thereunder,\2\ a proposed rule 
change to amend PSE rules to expressly require its market makers and 
lead market makers to respond to orders, represented in a trading crowd 
at the currently disseminated bid or offer, either by satisfying the 
order or by updating the existing market in the subject series.
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    \1\15 U.S.C. 78s(b)(1) (1988).
    \2\17 CFR 240.19b-4 (1993).
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    The proposed rule change was published for comment in Securities 
Exchange Act Release No. 31962 (March 8, 1993), 58 FR 13661 (March 12, 
1993). No comments were received on the proposed rule change.
    The proposal amends PSE Rule 6.37 to require PSE market makers or 
lead market makers to either execute an order, at the quote they are 
currently disseminating, in its entirety or update their quotes (by 
either raising their bids or lowering their offers) to reflect that the 
previously disseminated quote is no longer available.\3\ The amendment 
also requires that market makers and lead market makers maintain these 
updated quotes for a reasonable time period, which, unless specific 
market changes occur, is defined as two minutes.\4\ Further, the 
proposal amends PSE Rule 10.13 to make the failure to comply with the 
obligation to trade or update quotes in response to an order a 
violation of the PSE's Minor Rule Plan. As a violation of the PSE's 
Minor Rule Plan, a member could be fined $100, $200, or $500 for a 
first, second, or third violation, respectively. The Exchange 
represents that such fines would be recommended, but not required, and 
repeated or aggravated violations could entail formal disciplinary 
action.
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    \3\The Commission understands this provision to allow an 
exchange, upon receipt of a market or marketable limit order, to 
execute less than the total number of contracts contained in the 
order, but the exchange then becomes obligated to update its 
quotation if it is not willing to transact with any more of the 
order at the same price. For example, if as a result of displaying a 
more competitive offer, an exchange is sent an order to buy 50 
contracts that was originally received by another exchange, it may 
buy fewer than 50 contracts at its quoted price, but must then 
revise its quotation to reflect that the price is no longer 
available.
    \4\Commentary .09 to PSE Rule 6.37 provides that a reasonable 
period of time is presumed to be two minutes. The Commentary further 
provides, however, that the revised market can be changed before the 
two minutes are up if there is: (a) a change in the market quote in 
the underlying security or a change in the size of the market 
quoted; or (b) a quote change of \1/4\ of a point (or twice the 
minimum price differential), in another options series on the same 
underlying security, resulting from a customer order. Finally, the 
Commentary provides that two floor officials may grant exemptions 
from the trade or update requirements contained in Rule 6.37 if the 
individual situation warrants such action.
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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).\5\ Specifically, the 
Commission finds that requiring PSE market makers and lead market 
makers to execute orders or update their markets facilitates 
transactions in securities, protects investors and the public interest, 
and promotes fair competition among options markets by reducing the 
likelihood that an outdated quote from one options market will hinder 
the execution of an order on another options market by making such 
execution appear to be at an inferior price (i.e., a ``trade-
through'').
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    \5\15 U.S.C. 78f(b)(5) (1988).
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    Currently, in light of the expansion in the multiple trading of 
options, the options exchanges have either implemented or are working 
to implement systems upgrades which will prevent orders that are 
identified as potential ``trade-troughs'' from being automatically 
executed and will re-route these orders to the appropriate market maker 
or specialist at each exchange for nonautomated execution. Further, to 
attract order flow, many market makers and specialists from the 
different options exchanges have represented to their customers that 
they will execute the orders they receive at the best price available 
at any of the five options exchanges. The current proposal, therefore, 
will, consistent with Section 6(b)(5) of the Act, facilitate options 
transactions by encouraging PSE market makers to keep their markets up-
to-date. This, in turn, should reduce the likelihood that outdated 
quotes will cause orders on other exchanges, that could be 
automatically executed, to be re-routed for non-automated handling. it 
also should reduce the likelihood that outdated quotes will cause 
orders executed on other exchanges at current market prices to appear 
to be executed at inferior prices. The Commission further notes that, 
concurrently with approval of this proposal, it is approving similar 
proposals by the American Stock Exchange (``AMEX''), Chicago Board 
Options Exchange (``CBOE''), New York Stock Exchange (``NYSE'') and the 
Philadelphia Stock Exchange (``PHLX'').\6\
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    \6\See Securities Exchange Act Release No. 34431, 34432, 34433, 
and 34434, (July 22, 1994), respectively.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\7\ that the proposed rule change (SR-PSE-92-48) is approved.

    \7\15 U.S.C. 78s(b)(2) (1988).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-18577 Filed 7-29-94; 8:45 am]
BILLING CODE 8010-01-M