[Federal Register Volume 59, Number 188 (Thursday, September 29, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-24040]


[[Page Unknown]]

[Federal Register: September 29, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34702; File No. SR-PSE-94-18]

 

Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Pacific Stock Exchange, Inc., Relating to the Expansion 
of the Exchange's Auto-Ex System Capacity to 20 Contracts

September 22, 1994.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on June 20, 
1994, the Pacific Stock Exchange, Inc. (``PSE'' or ``Exchange'') filed 
with the Securities and Exchange Commission (``SEC'' or ``Commission'') 
the proposed rule change as described in Items I, II and III below, 
which Items have been prepared by the self-regulatory organization. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The PSE proposes to amend PSE Rule 6.87, ``Automatic Execution 
System,'' to allow the Options Floor Trading Committee (``OFTC'') to be 
authorized to increase, on an issue-by-issue basis, the size of the 
equity option orders that may be eligible to be executive through the 
Exchange's Automatic Execution System (``Auto-Ex'') up to a maximum of 
20 contracts.
    The text of the proposed rule change is available at the Office of 
the Secretary, PSE and at the Commission.

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 self-regulatory organization 
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 self-regulatory organization 
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

(a) Purpose
    The purpose of the proposed rule change is to enhance the 
Exchange's ability to compete for options order flow. Accordingly, the 
Exchange is proposing to increase the maximum size of equity option 
orders eligible for Auto-Ex and to provide the OFTC with the authority 
to designate such changes on an issue-by-issue basis. Under the 
proposal, the OFTC would be authorized to increase the size of orders 
eligible for an execution on Auto-Ex to a size of up to 20 contracts 
without prior approval from the Commission.\1\
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    \1\The Commission recently approved an Exchange proposal to 
allow the OFTC to increase the size of Auto-Ex-eligible orders in 
one or more classes of multiply traded equity options to the extent 
that other options exchanges permit such larger-size orders to be 
entered into their own automated execution systems. The rule 
provides that if the OFTC intends to increase the Auto-Ex size 
eligibility pursuant to the rule, the Exchange will notify the 
Commission pursuant to Section 19(b)(3)(A) under the Act. See 
Securities Exchange Act Release No. 34131 (May 27, 1994), 59 FR 
29316 (June 6, 1994).
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    The Commission approved the Pacific Options Exchange Trading System 
(``POETS'') and its Auto-Ex feature as a pilot program in January 
1990.\2\ On July 30, 1993, the Commission approved the POETS pilot 
program on a permanent basis.\3\ The Auto-Ex system permits eligible 
market or marketable limit orders sent from member firms to be executed 
automatically at the displayed bid or offering price. Participating 
market makers are designated as the contra side to each Auto-Ex 
order.\4\ Participating market makers are assigned by Auto-Ex on a 
rotating basis, with the first market maker selected at random from the 
list of signed-on market makers. Auto-Ex preserves public Limit Order 
Book (``Book'') priority in all options. If Auto-Ex determines that the 
Book price is at or better than the market quote, the Auto-Ex order is 
executed against the Book. Automatic executions through Auto-Ex are 
currently available for public customer orders of 10 contracts or less 
in all series of options traded on the PSE's options floor.
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    \2\See Securities Exchange Act Release No. 27633 (January 18, 
1990), 55 FR 2466 (order approving File No. SR-PSE-89-26).
    \3\See Securities Exchange Act Release No. 32703 (July 30, 
1993), 58 FR 42117 (August 6, 1993) (``POETS Approval Order''). 
Pursuant to the POETS Approval Order, the PSE was approved to 
designate equity option orders of 10 contracts or less as eligible 
for automatic execution through the Auto-Ex feature of POETS. With 
regard to index options, the Commission previously approved a 
request by the Exchange to permit customer orders of up to 20 
contracts on the Wilshire Small Cap Index to be executed through 
Auto-Ex. See Securities Exchange Act Release No. 31397 (November 3, 
1992), 57 FR 53368, 53372 (November 9, 1992).
    \4\The Commission recently approved an Exchange proposal setting 
forth certain standards for market makers participating on Auto-Ex. 
The standards include restrictions on the number of Auto-Ex trading 
posts at which market makers may participate and mandatory log-on 
requirements to assure that market makers do not withdraw from the 
system during volatile market conditions. See Securities Exchange 
Act Release No. 32908 (September 15, 1993), 58 FR 49076 (September 
21, 1993), (``Market Maker Participation Order'').
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    The proposal would permit the OFTC to change the order size 
parameter for Auto-Ex to a maximum size of 20 contracts pursuant to an 
OFTC determination made on an issue-by-issue basis.\5\ The PSE believes 
that any implementation of the proposal by the OFTC will not impose any 
significant additional burdens on the operation and capacity of the 
POETS system in general or on the Auto-Ex system in particular. In that 
regard, the Exchange has submitted a separate capacity statement to the 
Commission setting forth the basis for this contention.\6\ The Exchange 
also represents that the OFTC will determine that adequate market 
making capacity exists prior to increasing Auto-Ex order size 
eligibility. The OFTC will make such a determination notwithstanding 
the fact that floor officials may require market makers who are members 
of a trading crowd to which a particular option class is assigned to 
log onto Auto-Ex in the event that there is inadequate participation in 
that options class.
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    \5\The Commission approved a similar provision in the POETS 
Approval Order, supra note 3.
    \6\See Letter from Michael D. Pierson, Senior Attorney, PSE, to 
Richard L. Zack, Branch Chief, Options Regulation, Commission, dated 
December 20, 1993 (File No. SR-PSE-93-26).
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(b) Statutory Basis

    The PSE believes that the proposal is consistent with Section 6(b) 
of the Act, in general, and with Section 6(b)(5), in particular, in 
that it is designed to facilitate transactions in securities and to 
promote just and equitable principles of trade.

(B) Self-Regulatory Organization's Statement on Burden on Competition

    The PSE 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.

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 reason for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (a) by order approve such proposed 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. 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 at 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 offices of the above-mentioned 
self-regulatory organization. All submissions should refer to the file 
number in the caption above and should be submitted by October 20, 
1994.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\7\
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    \7\17 CFR 200.30-3(a)(12) (1993).
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[FR Doc. 94-24040 Filed 9-28-94; 8:45 am]
BILLING CODE 8010-01-M