[Federal Register Volume 59, Number 210 (Tuesday, November 1, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-26965]


[[Page Unknown]]

[Federal Register: November 1, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34891; File No. SR-PSE-94-19]

 

Self-Regulatory Organizations; Order Approving Proposed Rule 
Change by the Pacific Stock Exchange, Inc., Relating to the Expansion 
of the Exchange's Firm Quote Rule to 20 Contracts

October 25, 1994.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ on June 20, 1994, the 
Pacific Stock Exchange, Inc. (``PSE'' or ``Exchange'') submitted to the 
Securities and Exchange Commission (``SEC'' or ``Commission'') a 
proposed rule change to amend PSE Rule 6.86, ``Trading Crowd Firm 
Disseminated Market Quotes,'' to increase from 10 to 20 contracts the 
minimum size of all non-broker/dealer customer option orders that are 
guaranteed for execution at the bid/offer displayed as the disseminated 
market quote at the time the order is announced or displayed at the 
option's trading post.
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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 proposal was published for comment in the Federal Register in 
Securities Exchange Act Release No. 34571 (August 22, 1994), 59 FR 
44446 (August 29, 1994). No comments were received on the proposal.
    Currently, PSE Rule 6.86 requires each trading crowd on the PSE to 
provide a depth of 10 option contracts for all non-broker/dealer 
customer orders at the bid/offer displayed as the disseminated market 
quote at the time the order is announced or displayed at the option's 
trading post. The PSE proposes to amend PSE Rule 6.86 to increase the 
minimum size guarantee for non-broker/dealer options orders from 10 to 
20 contracts. In addition, the PSE proposes to make conforming 
amendments to PSE Rule 6.86(d) and to Commentaries .01, .02, and 
.03.\3\
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    \3\Currently, PSE Rule 6.86(d) provides that the order book 
official shall allocate among the market makers present at the 
trading post the balance of contracts necessary to provide an 
execution on 10 contracts if the response of members at a trading 
post is insufficient to provide a depth of 10 contracts. The 
Exchange proposes to amend paragraph (d) to replace the term ``ten'' 
with ``twenty.'' In addition, the PSE proposes to replace the term 
``ten'' with ``twenty'' in Commentaries .01, .02, and .03. 
Commentary .01 states that if the bid or offer being displayed as a 
disseminated market quote is on behalf of an order represented by a 
floor broker or the order book official, and is for less than 10 
contracts, the trading crowd is obligated to buy or sell the balance 
of the contracts necessary to provide a depth of 10 contracts at the 
disseminated bid or offering price. Commentary .02 provides that a 
floor broker's failure to remove a bid or offer from the screen 
after the bid or offer has been filled or cancelled may result in 
the floor broker being held responsible for providing a depth of 10 
contracts upon being present or returning to the trading crowd, and/
or being subject to disciplinary action by the Exchange. Commentary 
.02 also provides that a market maker or floor broker who has caused 
a bid or offer to be disseminated, but who leaves the trading post 
without removing the bid or offer, may be held responsible for 
providing a depth of 10 contracts upon returning to the trading 
crowd, and/or being subject to disciplinary action by the Exchange. 
Commentary .03 states that market maker orders for less than 10 
contracts that are represented at a trading post by a floor broker 
shall not be disseminated.
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    The PSE states that the proposal is a response to competitive 
market conditions and is designed to enhance the PSE's competitive 
position in the securities industry. The Exchange believes that the 
proposal will result in improved market quality and market maker 
performance. In addition, the PSE believes that the proposal will 
ensure greater depth of markets at the Exchange and will result in 
better executions of customers orders to buy or sell 20 contracts or 
less. According to the PSE, the proposal will also encourage Exchange 
market makers to be more competitive in making markets, and thereby 
will facilitate transactions in securities and improve the quality of 
the PSE's options markets. Moreover, the Exchange believes that by 
attracting greater customer order flow to the Exchange, the proposed 
rule change should enhance market depth and liquidity and result in 
tighter options pricing spreads.
    Based on the combined capital of the members of each trading crowd, 
the PSE believes that its market maker system can provide sufficient 
liquidity to meet the needs resulting from this rule change. The 
Exchange does not believe that the proposal will require its market 
makers to assume undue risks. The PSE is able currently to provide a 
guarantee for customer orders of 10 contracts or less in all options 
series, including long-term options (``LEAPs''), and the Exchange 
believes that it has the capacity to expand that guarantee to 20 
contracts in all series, including LEAPs. Previously, the Exchange has 
evaluated the operation of current PSE Rule 6.86 and has concluded that 
the program has resulted in better executions for customer orders and 
an improvement in the quality of the PSE's options markets and market 
maker performance.\4\
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    \4\See Securities Exchange Act Release No. 31824 (February 4, 
1993), 58 FR 8078 (February 11, 1993) (order approving File No. SR-
PSE-92-40) (``10-Up Approval Order'').
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    Finally, the Exchange believes that it has adequate systems 
capacity that would be necessary if the Commission approves the 
proposed rule change, and, further, that the proposal will have no 
negative impact on the Exchange's Pacific Options Exchange Trading 
System (``POETS'').
    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.
    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, Section 6(b)(5), in that it is designed to facilitate 
transactions in securities and to protect investors and the public 
interest.\5\
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    \5\15 U.S.C. 78f(b)(5) (1988).
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    The Commission believes that the proposal is designed to improve 
the quality of the PSE's options markets and the performance of PSE 
options market makers. Specifically, under the proposal, public 
customers will be assured order execution to a minimum depth of 20 
contracts at the best disseminated bid or offer, which, in turn, may 
result in better executions of small customer orders by providing 
greater depth to the PSE's options markets. In addition, the proposal 
should encourage PSE market makers to become more competitive in making 
larger sized markets, thereby facilitating transactions in securities 
and contributing to a more free, open, and liquid market. The proposal 
may also attract greater customer order flow to the Exchange, which 
would further enhance market depth and liquidity and result in tighter 
options pricing spreads.
    In its order granting permanent approval to the PSE's 10-up pilot 
program, the Commission noted that the Exchange had submitted a report 
concerning the operation and effectiveness of the 10-up program.\6\ In 
its report, the Exchange stated that the 10-up rule had resulted in 
faster executions of public customer orders and had improved the 
quality of the Exchange's options market and market maker performance. 
The report also noted that the 10-up rule places greater obligations on 
market makers since they must either keep their markets updated or run 
the risk of having to fill a customer order based on a stale quote that 
may not be competitive under current market conditions. The Commission 
believes that the proposal to increase the 10-up guarantee to 20 
contracts may continue to improve the performance of the PSE's market 
makers and produce better executions of small public customer orders.
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    \6\See 10-Up Approval Order, supra note 4.
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    In addition, the Commission believes that the proposal is designed 
to enhance fair competition among brokers and dealers and among 
exchange markets. Presently, the American Stock Exchange, Inc. 
(``Amex''), the Chicago Board Options Exchange, Inc. (``CBOE''), the 
New York Stock Exchange, Inc. (``NYSE''), and the Philadelphia Stock 
Exchange, Inc. (``PHLX''), all impose some form of 10-up requirement on 
their markets.\7\ The Commission believes, as it has stated in the 
past, that the PSE is entitled to respond competitively to the actions 
of the other options exchanges in order to encourage brokerage firms 
and their customers to trade in PSE options and, where those options 
are multiple traded, to choose to route their orders to the PSE.\8\ 
Accordingly, the Commission finds that the proposal is consistent with 
Sections 11A(a)(1)(C) (ii) and (iv) of the Act because it will promote 
``fair competition among brokers and dealers'' and ``the practicability 
of brokers executing investors' orders in the best market.''\9\
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    \7\See Amex Rule 958A, ``Specialist Options Transactions,'' CBOE 
Rule 8.51, ``Trading Crowd Firm Disseminated Market Quotes,'' NYSE 
Rule 758A, ``Specialist Options Transactions,'' and PHLX Rule 1033, 
``Bids and Offers--Premium.''
    \8\See Securities Exchange Act Release No. 28021 (May 16, 1990), 
55 FR 21131 (May 22, 1990) (order approving File No. SR-PSE-89-16).
    \9\15 U.S.C. 78k-1 (1984).
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    Moreover, although the Commission carefully scrutinizes 
discriminatory order execution practices, the Commission believes that 
limiting the 20 contract minimum to public customers furthers the 
purposes of the Act by helping to ensure that market makers' volume 
guarantees will not be exhausted by competitors to the detriment of 
public customers.\10\
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    \10\See Securities Exchange Act Release No. 34400 (July 19, 
1994), 59 FR 38011 (July 26, 1994) (order approving File No. SR-
PHLX-91-45).
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    The PSE has stated that its market maker system has sufficient 
liquidity to meet the 20-contract guarantee, and that the proposal will 
not require PSE market makers to assume undue risks. In this regard, 
the Commission notes that market makers' clearing firms guarantee their 
trades, and that the clearing firms are subject to Rule 15c3-1 under 
the Act. In addition, under PSE Rule 6.82(c)(8), Lead Market Makers 
(``LMMs'') must maintain cash or assets in the amount of $100,000 or an 
amount sufficient to assume a position of 20 trading units of each 
security in which the LMM holds an appointment. Finally, under PSE Rule 
6.86(d), an Order Book Official will allocate among market makers at 
the trading post the balance of contracts necessary to provide an 
execution on 20 contracts if there is insufficient response by members 
present at the trading post. In light of this, the Commission believes 
that the PSE floor should be able to adequately handle the 20-up 
requirement and that it will not place undue burdens or capital risks 
on the PSE's options market makers.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\11\ that the proposed rule change (SR-PSE-94-19) is approved.

    \11\15 U.S.C. 78s(b)(2) (1984).
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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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Jonathan G. Katz,
Secretary.
[FR Doc. 94-26965 Filed 10-31-94; 8:45 am]
BILLING CODE 8010-01-M