[Federal Register Volume 61, Number 168 (Wednesday, August 28, 1996)]
[Notices]
[Pages 44376-44379]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-21891]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37590; File No. SR-PSE-96-28]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Pacific Stock Exchange Incorporated Relating to Its Rule 
on the Evaluation of Its Equity Specialists

August 21, 1996.
    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 August 
18, 1996, the Pacific Stock Exchange Incorporated (``PSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``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 Exchange is proposing to adopt a pilot program amending its 
rule on the evaluation of its equity specialists.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its fling 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

1. Purpose
    The Exchange is proposing to adopt a pilot program amending its 
rule relating to specialists evaluations for a nine month period from 
October 1, 1996 to June 30, 1997. Currently, PSE Rule 5.37(a) provides 
that the Equity Allocation Committee (``EAC'') shall evaluate all 
registered specialists on a quarterly basis and that each registered 
specialist shall receive an overall evaluation rating based on the 
following three measures of performance: (1) Specialist Evaluation 
Questionnaire Survey (``Questionnaire''); (2) SCOREX Limit Order 
Acceptance Performance; and (3) National Market System Quote 
Performance.
    The Exchange is proposed to modify PSE Rule 5.37(a) by adding three 
new measures of performance and eliminating one measure of performance. 
The new measures are: (1) Executions; (2) Book Display Time; and (3) 
Post 1-P.M. Parameters. The Exchange is also proposing to: add more 
questions to the Questionnaire and to expand the National Market System 
Quote Performance measure (for the nine month pilot, this criterion 
will be referred to as ``Quote Performance'') \1\ to include a 
performance measure for bettering the quote. In addition, the Exchange 
is proposing to eliminate SCOREX Limit Order Acceptance Performance as 
a measure of specialist performance. The Exchange's new rule for the 
evaluation of specialists will therefore consist of five separate 
measures of performance, as specified below:
---------------------------------------------------------------------------

    \1\ See infra text accompanying note 4.
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    a. Executions. This category, on which 50% of each specialist 
evaluation is based, consists of four subcategories: (a) Turnaround 
Time; (b) Holding Orders Without Action; (c) Trading Between the Quote; 
and (d) Executions in Size Greater Than BBO.
    ``Turnaround Time'' calculates the average number of seconds for 
all eligible orders up to 1,099 shares based upon the number of seconds 
between the receipt of a market or marketable limit order in P/COAST 
and the execution, partial execution, stopping, or cancellation of the 
order. An order that is moved from the auto-ex screen to the manual 
screen will accumulate time until it is executed, partially executed, 
stopped, or canceled. This measurement begins after the stock opens for 
the day on the primary market. Only those orders received by P/COAST 
after the

[[Page 44377]]

stock opens will be counted. If there is a trading halt or period when 
the P/COAST system is experiencing problems, Turnaround Time will not 
be included for those blocks of time. A specialist will be awarded 
points based on the average number of seconds between the receipt of 
eligible market or marketable limit orders and any of the actions 
specified above being taken upon such orders. This category will count 
for 15% of the overall score. The parameter ranges and corresponding 
points for Turnaround Time are listed below:

------------------------------------------------------------------------
               Number of seconds parameter range                  Points
------------------------------------------------------------------------
1-8............................................................       10
9-10...........................................................        9
11-12..........................................................        8
13-14..........................................................        7
15-16..........................................................        6
17-18..........................................................        5
19-20..........................................................        4
21-22..........................................................        3
23-24..........................................................        2
25-26..........................................................        1
27+............................................................        0
------------------------------------------------------------------------

    ``Holding Orders Without Action'' measures the number of market and 
marketable limit orders up to 10,099 shares that are held without 
action for greater than 25 seconds. As in the Turnaround Time 
calculation, a cancellation, a stop, an execution, or partial execution 
stops the clock. This measurement begins after the stock opens for the 
day on the primary market. Only those orders received by P/COAST after 
the stock opens will be counted. If there is a trading halt or period 
when the P/COAST system is experiencing problems, those blocks of time 
will be excluded from the Holding Orders Without Action calculation. 
The specialist will be awarded points based on the percentage of orders 
that are held under the established time period.\2\ This category will 
count for 15% of the overall score. The parameter ranges and 
corresponding points for Holding Orders Without Action are listed 
below:
---------------------------------------------------------------------------

    \2\ I.e., a specialist will receive fewer points the larger the 
percentage of orders that he (she) holds for greater than 25 
seconds.

------------------------------------------------------------------------
               Percent of orders parameter range                  Points
------------------------------------------------------------------------
1-3............................................................       10
4-6............................................................        9
7-9............................................................        8
10-12..........................................................        7
13-15..........................................................        6
16-18..........................................................        5
19-21..........................................................        4
22-24..........................................................        3
25-27..........................................................        2
28-30..........................................................        1
31+............................................................        0
------------------------------------------------------------------------

    ``Trading Between the Quote'' measures the number of market and 
marketable limit orders that are executed between the best primary 
market bid and offer. For this criterion to count toward the overall 
evaluation score, ten orders or more must have been executed during the 
quarter the specialist is being evaluated. If less than ten orders are 
executed, this criterion will not be counted and the rest of the 
evaluation criteria will be given more weight.
    When a market or marketable limit order is executed, the execution 
price is compared to the primary bid and offer. The specialist will be 
awarded points based on the percentage of orders the specialist 
receives that are executed between the primary bid and offer. If the 
execution price falls between the primary bid and the primary offer, 
the trade is counted as one that traded between the quote at the time 
of execution. Each time a trade is executed, the primary market quote 
will be noted. If the spread of that quote is two or more trading 
fractions apart, that trade will count as one eligible for the 
comparison of the execution price to the quote. If there is a trading 
halt or period when the P/COAST system is experiencing problems, those 
blocks of time will not be included in the Trading Between the Quote 
calculation.
    This category will count for 10% of the overall score. The 
parameter ranges and corresponding points for Trading Between the Quote 
are listed below:

------------------------------------------------------------------------
               Percent of orders parameter range                  Points
------------------------------------------------------------------------
51+............................................................       10
46-50..........................................................        9
41-45..........................................................        8
36-40..........................................................        7
31-35..........................................................        6
26-30..........................................................        5
21-25..........................................................        4
16-20..........................................................        3
11-15..........................................................        2
5-10...........................................................        1
0-4............................................................        0
------------------------------------------------------------------------

    ``Executions in Size Greater Than BBO'' measures the number of 
market and marketable limit orders which exceed the best bid and offer 
(``BBO'') size. When a market or marketable limit order is executed, 
the order must meet two tests to be counted: first, the original order 
size must be greater than the BBO size; and second, the execution size 
must be greater than the BBO size. If the execution size is greater 
than the bid size (for a sell order) or offer size (for a buy order), 
the trade is counted as one that was executed in size greater than the 
BBO. If there is a trading halt or period when the P/COAST system is 
experiencing problems, those blocks of time will not be included in the 
Executions in Size Greater Than BBO calculation. For this criterion to 
count toward the overall evaluation score, ten orders or more must have 
been executed during the quarter the specialist is being evaluated. If 
less than ten orders are executed, this criterion will not be counted 
and the rest of the evaluation criteria will be given more weight.
    The specialist will be awarded points based on the percentage of 
orders that are executed that exceed the BBO size. This category will 
count for 10% of the overall score. The parameter ranges and 
corresponding points for Executions In Size Greater than BBO are listed 
below:

------------------------------------------------------------------------
               Percent of orders parameter range                  Points
------------------------------------------------------------------------
98-100.........................................................       10
95-97.999......................................................        9
92-94.999......................................................        8
89-91.999......................................................        7
86-88.999......................................................        6
83-85.999......................................................        5
80-82.999......................................................        4
77-79.999......................................................        3
74-76.999......................................................        2
71-73.999......................................................        1
0-70.999.......................................................        0
------------------------------------------------------------------------

    b. Specialist Evaluation Questionnaire Survey. The Questionnaire is 
filled out by equity floor brokers on a quarterly basis. The 
Questionnaire responses will count for 15% of the overall score. Each 
question in the Questionnaire has a possible rating of 1 to 10. Each 
question will be weighted equally and will count for 1.875% of the 
overall evaluation score.
    The Questionnaire currently solicits from floor brokers ratings in 
the following categories: the quality of markets maintained by the 
specialist; the specialist's effectiveness in his (her) handling of 
orders; communication; and the specialist's handling of clerical and 
administrative matters. The Questionnaire will be expanded to solicit 
from floor brokers ratings on the specialist's: handling of manual 
orders for a size greater than that provided for in the BBO; failure 
trade on displayed quotes; representation of the broker's orders in his 
(her) quotes; and facilitation of crosses.
    The new questions proposed to be added to the Questionnaire are the 
following: Does the specialist handle manual orders from floor brokers 
for greater than the BBO size? Does the specialist fail to trade on his 
(her) displayed quotes?; Does the specialist adequately represent 
brokers' orders in the quotes?; and Does the specialist allow for each 
facilitation of crosses?
    c. Book Display Time. This criterion calculates the percentage of 
the book shares at the best price in the book that

[[Page 44378]]

are displayed in the specialist's quote, by symbol, and the duration of 
time that each percentage is in effect. This criterion rates the P/
COAST book displayed 100% of the time. The sizes of all open buy limit 
orders at the best price for the symbol in the specialist's book will 
be totaled and compared to the bid size quote. The sizes of all open 
sell limit orders at the best price for the symbol in the book will be 
totaled and compared to the offer size quote. This will be done for 
each symbol traded by the specialist, and only for those orders priced 
within the primary quote. Limit orders in the book which are priced 
beyond the primary quote will not be included; they will not be 
executed until they reach the price in the primary quote, so the 
specialist should not be required to cover them in his (her) quote 
sizes.
    The specialist will be awarded points on the basis of the 
percentage of the book that the specialist displays. This category will 
count for 15% of the overall score. The parameter ranges and 
corresponding points for Book Display Time are listed below:

------------------------------------------------------------------------
                Percent of book parameter range                   Points
------------------------------------------------------------------------
80+............................................................       10
75-79..........................................................        9
70-74..........................................................        8
65-69..........................................................        7
60-64..........................................................        6
55-59..........................................................        5
50-54..........................................................        4
45-49..........................................................        3
40-44..........................................................        2
35-39..........................................................        1
0-34...........................................................        0
------------------------------------------------------------------------

    d. Post-1 P.M. Parameters. This criterion measures the specialist's 
quote performance in the post-1 p.m. (Pacific Time) auction market 
(``Extended Trading Session'').\3\ The Post-1 P.M. Parameters criterion 
has the following features:
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    \3\ The PSE's Extended Trading Session is an auction market 
trading session that runs from 1:00-1:50 p.m. (Pacific Time).
---------------------------------------------------------------------------

    1. Specialists' activity is recorded in post-1 p.m. files, where 
there is one record for each quote and trade per post and symbol as 
they occur during the extended trading session.
    2. Specialists are not subject to the post-1 p.m. quote-spread 
parameters until after 1:10 p.m. This allows the specialists time to do 
any primary market runoff business that is necessary.
    3. The specialist's quote prices in effect ten minutes past the 
beginning of the Extended Trading Session must be within the defined 
number of trading fractions of the primary closing quote.
    A. If the primary exchange is the NYSE, and the primary bid price 
at closing on that day for the stock is under $1.00, the trading 
fraction is \1/16\; if the price is at or over $1.00, it is \1/8\.
    B. If the primary exchange is the Amex, and the primary bid price 
at closing on that day for the stock is under $10.00, the trading 
fraction is \1/16\; if the price is at or over $10.00, it is \1/8\.
    4. The specialist's quote sizes in effect ten minutes past the 
beginning of the Extended Trading Session must be 500 shares or more if 
the primary bid price is less than $50.00, or 200 shares if the primary 
bid price is $50.00 or more.
    5. The specialist's quote-spread parameters must apply to a minimum 
of 25% of the stocks traded at the post to receive full credit on the 
evaluation (i.e., 10 points).
    6. If the specialist executes any trades after ten minutes of the 
Extended Trading Session and they are priced within the allowable 
trading fraction of the primary closing quote price, the quantity of 
the trade is deducted from the required quote size.
    7. If the specialist changes his (her) quote at any time on the 
same day for that symbol while the required quote size is not zero, his 
(her) quote price must be within the allowable trading fraction from 
the primary closing bid price and his (her) quote size must be at least 
the remaining quote size required (as adjusted for trades, as explained 
in item 6). If either the price or size on either side of the quote for 
that symbol does not comply, the symbol is not counted as adhering to 
the parameters for that day.
    8. If, at the end of the Extended Trading Session, the required 
quote size is still not zero (after adjusted for trades) for bid and/or 
ask, but the specialist has complied with the quote price and size 
guidelines on both bid and ask, the symbol is counted as one that 
adhered to the parameters.
    This category will count for 10% of the overall score. The 
parameter ranges and corresponding points for Post-1 P.M. Parameters 
are listed below:

------------------------------------------------------------------------
                Percent of book parameter range                   Points
------------------------------------------------------------------------
 25+...........................................................       10
22-24.999......................................................        9
19-21.999......................................................        8
16-18.999......................................................        7
13-15.999......................................................        6
10-12.999......................................................        5
7-9.999........................................................        4
4-6.999........................................................        3
0-3.999........................................................        0
------------------------------------------------------------------------

    e. Quote Performance. This category, on which 10% of each 
specialist evaluation is based, consists of two subcategories: (a) 
Equal or Better Quote Performance; and (b) Better Quote Performance.
    ``Equal or Better Quote Performance'' calculates for each issue 
traded, the percentage of time in which a specialist's bid or offer is 
equal to or better than the primary market quote with a 500-share 
market size or the primary market size, whichever is less, with a 200-
share minimum. This category will count for 5% of the overall score. 
The parameter ranges and corresponding points for Equal or Better Quote 
Performance are listed below:

------------------------------------------------------------------------
                Percent of time parameter range                   Points
------------------------------------------------------------------------
40+............................................................       10
36-39..........................................................        9
32-35..........................................................        8
28-31..........................................................        7
24-27..........................................................        6
20-23..........................................................        5
16-19..........................................................        4
12-15..........................................................        3
8-11...........................................................        2
4-7............................................................        1
0-3............................................................        0
------------------------------------------------------------------------

    ``Better Quote Performance'' calculates for each issue traded, the 
percentage of time in which a specialist's bid or offer, is better than 
the primary quote with a 500-share market size or the primary market 
size, whichever is less, with a 200-share minimum. This category will 
count for 5% of the overall score. The parameter ranges and 
corresponding points for Better Quote Performance are listed below:

------------------------------------------------------------------------
                Percent of time parameter range                   Points
------------------------------------------------------------------------
4+.............................................................       10
3--3.999.......................................................        9
2--2.999.......................................................        8
1--1.999.......................................................        7
0--0.999.......................................................        0
------------------------------------------------------------------------

    The Exchange notes that the pilot program only modifies the 
performance criteria of PSE Rule 5.37(a). Consequently, during the 
pilot the EAC will evaluate the performance of specialists in 
accordance with the standards and procedures found in PSE Rule 5.37. 
During the nine month pilot, the Exchange will re-program its computer 
program so that the following three criteria are based upon the 
national best bid and offer instead of the primary market bid and 
offer: Trading Between the Quote, Book Display Time, and Quote 
Performance.\4\ Also, during the pilot, the Exchange will establish an 
overall passing score for the performance evaluation as well as 
individual passing scores for each criterion. The exchange will file a 
proposed rule change with the Commission pursuant to Rule 19b-4 of

[[Page 44379]]

the Act that will include these changes by May 1, 1997.
---------------------------------------------------------------------------

    \4\ See supra note 1.
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2. Statutory Basis
    The proposed rule change is consistent with Section 6(b)(5) of the 
Act \5\ in that it is designed to prevent fraudulent and manipulative 
acts and practices and to perfect the mechanism of a free and open 
market.
---------------------------------------------------------------------------

    \5\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange 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 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 reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve the 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, N.W., Washington, D.C. 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, N.W., 
Washington, D.C. 20549. Copies of such filing will also be available 
for inspection and copying at the principal office of the Exchange. All 
submissions should refer to File No. SR-PSE-96-28 and should be 
submitted by September 18, 1996.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-21891 Filed 8-27-96; 8:45 am]
BILLING CODE 8010-01-M