[Federal Register Volume 60, Number 203 (Friday, October 20, 1995)]
[Notices]
[Pages 54273-54274]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-26000]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36370; File No. SR-PSE-95-11]


Self-Regulatory Organizations; Pacific Stock Exchange, Inc.; 
Order Approving Proposed Rule Change Relating to the Number of Trading 
Posts That May Be Included as Part of Each Market Maker's Primary 
Appointment Zone

October 13, 1995.

I. Introduction

    On April 7, 1995, the Pacific Stock Exchange, Inc. (``PSE'' or 
``Exchange'') submitted to the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposal to increase the number of trading posts that may be included 
as part of each market maker's primary appointment zone. The proposed 
rule change was published for comment in the Federal Register on June 
16, 1995.\3\ No comments were received on the proposed rule change.

    \1\ 15 U.S.C. 78s(b)(1) (1988).
    \2\ 17 CFR 240.19b-4 (1994).
    \3\ See Securities Exchange Act Release No. 35836 (June 9, 
1995), 60 FR 31751.
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II. Description of the Proposal

    PSE Rule 6.35 currently requires each options market maker to 
select and maintain a primary appointment zone consisting of one or two 
trading posts.\4\ Pursuant to Rule 6.35, Commentary .03, at least 75% 
of the trading activity of each market maker (measured in terms of 
contract volume per quarter) must be in classes of option contracts to 
which such market maker's primary appointment zone extends. In 
addition, under the short sale rule applicable to stocks traded in the 
Nasdaq market, the options market maker exemption to that rule is 
limited to stocks underlying options in which a market maker holds an 
appointment.\5\

    \4\ PSE Rule 6.35 requires multiple posts to be contiguous, 
except under special circumstances.
    \5\ The NASD short sale rule prohibits broker-dealers from 
effecting short sales for themselves or their customers at or below 
the ``bid'' when the current ``inside'' or best price is below the 
previous inside bid. See NASD Rules of Fair Practice, Art. III, 
Sec. 48. The PSE's market maker exemption to the short sale rule 
allows options market makers to hedge options positions in their 
primary appointment zone by buying or selling (including selling 
short) shares of underlying stocks or underlying component stocks 
contained in stock indexes. Such an ``exempt hedge transaction'' is 
defined by the Exchange as a short sale effected to hedge, and which 
in fact serves to hedge, an existing offsetting options position or 
an offsetting options position that was created in one or more 
transactions contemporaneous with the short sale. See PSE Rule 4.19.
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    The Exchange proposal seeks to amend Rule 6.35 in two respects. 
First, the maximum number of trading posts that could be included as 
part of each primary appointment zone would be increased from two to 
six. Second, the Options Appointment Committee could allow a market 
maker to exceed the six trading post maximum if special circumstances 
were to exist.\6\

    \6\ See Discussion below
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III. Discussion

    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) of the Act \7\ that the 
rules of an exchange be designed to promote just and equitable 
principles of trade, to prevent fraudulent and manipulative acts, and, 
in general, to protect investors and the public.

    \7\ 15 U.S.C. 78f(b)(5) (1988).
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    The Commission believes that increasing from two to six the maximum 
number of contiguous trading posts that may comprise an options market 
maker's primary appointment zone is a reasonable measure designed by 
the Exchange to help ensure adequate market maker participation in each 
class of options traded on the Exchange. The Exchange has stated that 
the effect of increasing the trading post maximum will be to increase 
the maximum number of issues a market maker could have within his or 
her primary appointment zone. Accordingly, out of a total of 366 
options issues at PSE, the change potentially could result in increases 
from 58 to 98 in appointed issues, representing an increase from 16% to 
27% of the total number of issues traded on the Exchange.\8\

    \8\ See Facsimile from Michael D. Pierson, Senior Attorney, 
Market Regulation, PSE, to Francois Mazur, Attorney, Office of 
Market Supervision, Division of Market Regulation, Commission, dated 
September 12, 1995. In comparison, out of a total of 644 classes of 
options at the CBOE, there are a maximum of 241 classes of options 
in which a CBOE market maker may hold an appointment, representing 
37% of the total number of options classes traded at the CBOE. 
Securities Exchange Act Release No. 35629 (April 19, 1995), 60 FR 
20542.
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    The Commission believes that the PSE's proposal will benefit the 
market and investors by increasing the potential number of options 
classes to which the obligations of a market maker will apply.\9\ 
Although the Commission 

[[Page 54274]]
recognizes that the proposal could result in increasing a market 
maker's appointed options classes, the PSE is under an obligation to 
ensure that adequate market making capabilities and obligations will 
continue to exist in such classes. In this regard, the Commission 
expects the PSE to assess whether market makers have adequate capital 
to fulfill their continual market making obligations under PSE Rule 
6.37 in all their appointed classes. Further, the in-person and general 
trading requirements applicable to market makers under PSE Rule 6.37 
\10\ should continue to ensure that market making is adequate in all 
appointed classes.\11\

    \9\ For example, PSE Rule 6.37 requires generally that a market 
maker's transactions constitute a course of dealing reasonably 
calculated to contribute to the maintenance of a fair and orderly 
market. Specific requirements include engaging in dealings for the 
market maker's own account when there exists, or it is reasonably 
anticipated that there will exist, a lack of price continuity, a 
temporary disparity between the supply of and demand for a 
particular option contract, or a temporary distortion of the price 
relationship between option contracts of the same class. Other 
requirements include maintaining certain minimum bid/ask 
differentials, and providing for maximum allowable bid and offer 
changes. The Commission notes that increasing the number of trading 
posts that may comprise a market maker's primary appointment zone 
does not in any way lessen a market maker's obligation to make a 
market.
    PSE Rule 6.35 will continue to require that a market maker's 
primary appointment zone consist of contiguous posts, unless special 
circumstances exist and the Options Appointment Committee appoints 
non-contiguous posts.
    \10\ PSE Rule 6.37, Commentary .07 generally requires that at 
least 60% of a market maker's transactions be executed by the market 
maker in-person, while present on the options trading floor, and 
provides sanctions for failing to meet this requirement. Moreover, 
PSE Rule 6.32, Commentary .02 allows market makers to elect to 
receive market maker treatment for off-floor opening transactions if 
the market maker, in addition to satisfying all of the other 
existing obligations imposed on market makers, executes at least 80% 
of his or her total transactions for any calendar quarter in-person 
and not through the use of orders. See Securities Exchange Act 
Releases No. 34338 (July 8, 1994), 59 FR 35965.
    \11\ The Commission notes that any further changes to this rule 
may warrant the development of additional standards to ensure 
adequate market making performance.
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    The Commission also believes that there may be circumstances in 
which it would be appropriate for the Options Appointment Committee to 
allow a market maker to exceed the six trading post maximum. Before 
allowing a market maker to exceed the six trading post maximum, 
however, the Commission expects the Options Appointment Committee to 
make a specific finding that special circumstances exist. In 
determining the existence of special circumstances, the Options 
Appointment Committee should identify the need to expand the trading 
post maximum, and consider, among other things, whether there continues 
to exist sufficient liquidity in that market maker's existing 
appointments, and whether that market maker will continue to have 
adequate capital to fulfill his or her market making obligations. 
Moreover, the Commission expects that any expansion in the trading post 
maximum would be temporary as market needs warrant.\12\

    \12\ The Commission understands that the Options Floor Trading 
Committee will examine the appropriateness of any further changes to 
this rule in the near future. Telephone Conversation between 
Michael, D. Pierson, Senior Attorney, Market Regulation, PSE, and 
Francois Mazur, Attorney, Office of Market Supervision, Division of 
Market Regulation, Commission, on October 12, 1995.
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\13\ that the proposed rule change (SR-PSE-95-11) is approved.

    \13\ 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.\14\

    \14\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-26000 Filed 10-19-95; 8:45 am]
BILLING CODE 8010-01-M