[Federal Register Volume 61, Number 196 (Tuesday, October 8, 1996)]
[Notices]
[Pages 52820-52824]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-25762]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37770; File No. SR-PSE-96-28]


Self-Regulatory Organizations; Pacific Stock Exchange 
Incorporated; Order Granting Approval to Proposed Rule Change Relating 
to Its Rule on the Evaluation of Its Equity Specialists

October 1, 1996.

I. Introduction

    On August 18, 1996, the Pacific Stock Exchange, Incorporated 
(``PSE'' or ``Exchange'') submitted to the Securities and Exchange 
Commission (``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to revise its equity specialist 
evaluation performance measures on a nine-month pilot basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    The proposed rule change was published for comment in Securities 
Exchange Act Release No. 37590 (August 21, 1996), 61 FR 44376 (August 
28, 1996). No comments were received on the proposal.

II. Description

    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 July 1, 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 proposing 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 Quote 
Performance measure (formerly the National Market System Quote 
Performance measure) \3\ 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:
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    \3\ See infra text accompanying note 6.
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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 autoex 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 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

[[Page 52821]]

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, the order will accumulate time until it is cancelled, 
stopped, executed, or partially executed. 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.\4\ This category will count for 15% of the overall score. The 
parameter ranges and corresponding points for Holding Orders Without 
Action are listed below:
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    \4\ I.e., a specialist will receive fewer points the larger the 
percentage of orders that he (she) holds for greater than 25 
seconds.

------------------------------------------------------------------------
               Number of seconds 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 
specialists; the specialists'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 to 
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 easy 
facilitation of crosses?

c. Book Display Time

    This criterion calculates the percentage of the book shares at the 
best price in the book that are displayed in the specialist's quote, by 
symbol, and

[[Page 52822]]

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'').\5\ The Post-1 P.M. Parameters criterion has the following 
features:
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    \5\ The PSE's Extended Trading Session is an auction market 
trading session that runs from 1:00-1:50 p.m. (Pacific Time).
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    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 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 of Better Quote Performance; 
and (b) Better Quote Performance.
    Equal or Better Quote Performance calculates for each issue traded, 
the percentage of time in which 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 market 
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 
------------------------------------------------------------------------
34 +..........................................................        10
3 - 3.999.....................................................         9
2 - 2.999.....................................................         8
1 - 1.999.....................................................         7
0 - 0.999.....................................................         0
------------------------------------------------------------------------

    The Exchange noted 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. 
The Exchange represented that during the nine month pilot, it will re-
program its computer program so that the following three criteria are 
based upon the national best bid and offer (``NBBO'') instead of the 
primary market bid and offer: Trading Between the Quote, Book Display 
Time, and Quote Performance.\6\ The Exchange also represented that 
during the pilot it will establish an overall passing score for the

[[Page 52823]]

performance evaluation as well as individual passing scores for each 
criterion. The Exchange further stated that it will file a proposed 
rule change with the Commission pursuant to Rule 19b-4 of the Act that 
will include these changes by May 1, 1997.\7\
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    \6\ See Securities Exchange Act Release No. 37590 (August 21, 
1996), 61 FR 44376 (August 28, 1996).
    \7\ Id.
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III. Discussion

    The Commission believes that specialists play a crucial role in 
providing stability, liquidity, and continuity to the trading of 
stocks. Among the obligations imposed upon specialists by the Exchange, 
and by the Act and the rules promulgated thereunder, is the maintenance 
of fair and order markets in their designated securities.\8\ To ensure 
that specialists fulfill these obligations, it is important that the 
Exchange conduct effective oversight of their performance. The PSE's 
specialist evaluation program is critical to this oversight.
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    \8\ Rule 11b-1, 17 CFR 240.11b-1; PSE Rules 5.29(f).
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    The PSE's proposed pilot program adds three new objective measures 
to the Exchange's specialist evaluation program and eliminates one of 
its objective performance measures. The first new objective measure, 
Executions, consists of four submeasures: Turnaround Time, Holding 
Orders Without Action, Trading Between the Quote, and Executions in 
Size Greater Than BBO. Turnaround Time and Holding Orders Without 
Action (30% of the overall program weight) apply to the timeliness of 
executions of orders received by specialists; Trading Between the Quote 
(10%) applies to the execution prices of orders directed to 
specialists; and Executions in Size Greater That BBO, applies to the 
depth of the markets provided by specialists.
    The Commission notes that these submeasures are almost identical to 
the objective measures currently used in the Boston Stock Exchange, 
Inc.'s (``BSE'') specialist performance evaluation program 
(``SPEP'').\9\ The Commission believes that the adoption of the 
Execution measure will greatly enhance the Exchange's specialist 
evaluation program in that its component submeasures should generate 
sufficiently detailed information to enable the Exchange to make 
accurate assessments of specialist performance in the areas of 
timeliness of executions, price performance, and market depth.
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    \9\ See infra notes 15-16 and accompanying text. For a detailed 
description of the BSE's SPEP, see Securities Exchange Act Release 
Nos. 31890 (February 19, 1993), 58 FR 11647 (February 26, 1993) 
(order approving incorporation of objective criteria into BSE SPEP); 
37581 (August 19, 1996), 61 FR 43797 (August 26, 1996) (order 
approving revision of program weights applicable to objective 
criteria).
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    The second proposed measure of specialist performance, Book Display 
Time, calculates for each security the percentage of shares in the 
specialist's book at the best price in the book that are displayed in 
the specialist's quote, and the duration of time that each percentage 
is in effect. The Commission also believes that the adoption of this 
measure is appropriate, in that it may encourage PSE specialists to 
display a greater percentage of the best priced limit orders in a 
security in their quotes, thereby increasing PSE market depth and the 
possibility of execution for such limit orders.\10\
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    \10\ However, the Exchange's use of the primary market quote 
instead of the NBBO in calculating this measure may reduce the 
possibility of these beneficial effects occurring during the pilot 
program. See infra notes 15-16 and accompanying text.
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    The third proposed measure of specialist performance, Post 1-P.M. 
Parameters, calculates each specialist's quote performance during the 
Exchange's Extended Trading Session. Given that the PSE is one of 
either two or three national securities exchanges conducting an auction 
market trading session between 1:00 and 1:30 p.m. (PT),\11\ and the 
only such exchange doing so between 1:30 and 1:50 p.m. (PT), the 
quality of PSE specialists' quote performance is of particular 
importance during this time. The Exchange's current evaluation program 
does not include a performance measure specifically tailored to the 
Extended Trading Session. Accordingly, Commission believes that the 
adoption of this measure is appropriate as it will provide such a 
performance measure as well as a possible incentive to PSE specialists 
to maintain or improve their quote performance during this time.
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    \11\ The Philadelphia Stock Exchange, Inc. conducts a post-4 
p.m. (ET) auction market trading session between 4:00-4:15 p.m. 
(ET), while the Chicago Stock Exchange, Incorporated conducts such a 
session between 4:00-4:30 p.m. (ET).
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    The Commission finds that the Exchange's proposal to expand its 
former National Market System Quote Performance measure (referred to as 
Quote Performance for the nine-month pilot) to include a performance 
measure for bettering the quote is, with one qualification discussed 
below,\12\ responsive to the previous request by the Division of Market 
Regulation for the inclusion of such a measure in the PSE's evaluation 
program.\13\
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    \12\ See infra notes 15-16 and accompanying text.
    \13\ Telephone Conversation between Jeff Norris, Special 
Projects and Financial Administration Manager, PSE, and Sharon 
Lawson, Senior Special Counsel, SEC, dated July 20, 1995.
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    Furthermore, the exchange is proposing to eliminate SCOREX Limit 
Order Acceptance Performance, which calculates the percentage of limit 
orders accepted by specialists, as a measure of specialist performance. 
In light of the adoption of the three new performance measures into the 
Exchange's evaluation program, one of which will measure limit order 
handling in particular (Book Display Time), the Commission believes 
that the elimination of this proposal from the PSE's evaluation program 
is appropriate.
    The Exchange is also proposing to add four new questions to its 
Questionnaire and to reduce the weight of the Questionnaire from 45% to 
15% of the overall evaluation program. The Commission believes that the 
new questions should solicit additional relevant information as to the 
market making performance of PSE specialists. Moreover, the Commission 
finds that the reduction in the weight of the Questionnaire is 
appropriate in that it will accommodate the inclusion of the proposed 
new objective criteria into the PSE's evaluation program, while still 
maintaining the combination of a subjective floor broker survey and 
objective performance criteria that, as the Commission previously 
stated, should provide an exchange with an effective and fair means of 
evaluating specialist performance.\14\
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    \14\ See, e.g. Securities Exchange Act Release No. 28843 
(February 1, 1991), 56 FR 5040 (February 7, 1991) (order permanently 
approving PSE specialist evaluation program); SEC, Division of 
Market Regulation, The October 1987 Market Break Report (``Market 
Break Report'') (February 1988), at xvii.
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    Despite the improvements to the existing specialist performance 
evaluation program being adopted herein, the Commission is concerned 
with the Exchange's use of the primary market quote, instead of the 
NBBO, in the proposed Trading Between the Quote, Book Display Time, and 
Quote Performance measures.\15\ The Commission believes that the use of 
the NBBO in this context is necessary to guage the performance of PSE 
specialists in comparison with their competitors in the national market 
system. The Exchange's proposed use of the primary market quote in 
these three measures does not allow for such comparisons to be made in 
instances where the primary market quote is not equal to the NBBO.\16\
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    \15\ See supra notes 8, 9, and 11.
    \16\ The following illustrates the difficulties arising out of 
the PSE's use of the primary market quote instead of the NBBO in 
these three measures: PSE specialists will receive credit in Trading 
Between the Quote when the primary market bid (offer) is lower 
(higher) than the NBBO and the specialist effects a trade at the 
NBBO; PSE specialists will receive credit in Book Display Time for 
displaying its limit orders priced at the primary market bid (offer) 
is lower (higher) than the NBBO; and, PSE specialists may receive 
credit in either component of the Quote Performance measure when the 
specialist's quote is equal to or better than the primary market 
quote but either inferior or equal to the NBBO.

---------------------------------------------------------------------------

[[Page 52824]]

    Although the Commission is concerned about approving a specialist 
evaluation program containing objective measures that are more 
appropriately based on the NBBO,\17\ the Commission believes that 
approval of the proposal on a pilot basis is appropriate. The Exchange 
has represented that during the operation of the pilot it will 
reprogram its computer systems so that these three measures are 
calculated using the NBBO instead of the primary market quote and will 
submit a rule change pursuant to Rule 19b-4 by May 1, 1997 to effect 
this change.\18\ Moreover, the Exchange has represented that the 
reprogramming of these measures may take up to six months. As the 
Exchange's revision of its objective performance measures already has 
been subject to significant delays,\19\ and the Commission feels that 
the proposed specialist evaluation program is a substantial improvement 
over the existing program even with the use of the primary market quote 
in these measures, the Commission believes that it is appropriate to 
approve the proposal on a pilot basis. This will allow the PSE to 
commence using the new measures immediately for the last quarter of 
1996.
---------------------------------------------------------------------------

    \17\ The use of the primary market quote rather than the NBBO 
may be appropriate in limited circumstances. For example, the 
primary market closing price may be useful as a benchmark to 
specialist performance in a post-4 p.m. action market trading 
session, and is therefore appropriate for use in the proposed Post--
1 p.m. Parameters measure.
    \18\ See Securities Exchange Act Release No. 37590, supra note 
6.
    \19\ See Letter from Sharon Lawson, Senior Special Counsel, SEC, 
to David P. Semak, Vice President--Regulation, PSE, dated January 9, 
1995 (requesting PSE to submit revised specialist evaluation program 
by October 31, 1995); Letter from David P. Semak, Vice President--
Regulation, PSE, to Sharon Lawson, Senior Special Counsel, 
Commission, dated April 6, 1995 (requesting extension to April 30, 
1996); Letter from David P. Semak, Vice President--Regulation, PSE, 
to Sharon Lawson, Senior Special Counsel, Commission, dated August 
11, 1995 (requesting extension to July 31, 1996).
---------------------------------------------------------------------------

    The Commission has previously stated that true relative performance 
standards are the preferable means to evaluate comparative performance 
of specialists on a national securities exchange.\20\ Moreover, the 
Commission has also stated that an effective evaluation program should 
subject specialists who meet minimum performance levels on the overall 
program, but need help or guidance in improving their performance in a 
particular area, to review. While PSE's specialist evaluation program 
subjects those specialists falling into the bottom 10% of all 
specialists on his or her trading floor to review by the EAC, it does 
not set a minimum performance level on the overall program. In 
addition, the Exchange has not established minimum performance 
standards for individual performance measures. However, the Commission 
notes that the PSE has represented that it will establish an overall 
passing score for the evaluation program as well as individual passing 
scores for each performance measure during the course of the pilot.
---------------------------------------------------------------------------

    \20\ By relative performance standards the Commission means 
standards that automatically subject specialists that fall below a 
predetermined threshold of performance to a special performance 
review by the appropriate exchange authority. See Securities 
Exchange Act Release No. 28843, supra note 14; Market Break Report 
at xvii and 4-28 to 4-29.
---------------------------------------------------------------------------

    Accordingly, the Commission believes that it is appropriate to 
approve this rule filing on a nine-month pilot basis, expiring July 1, 
1997. This nine-month period will enable the Exchange to determine the 
appropriateness of the newly adopted objective measures, their 
respective weights and the acceptable levels of performance; reprogram 
its systems so that Trading Between the Quote, Book Display Time and 
Quote Performance are calculated using the NBBO instead of the primary 
market quote; develop an overall passing score for the performance 
evaluation as well as individual pausing scores for each criterion; as 
well as to review the effectiveness of the overall PSE Rule 5.37 equity 
evaluation program.
    The Commission therefore requests that the PSE submit by May 15, 
1997 a proposed rule change pursuant to Rule 19b-4 to revise the pilot 
to utilize the NBBO to calculate the Trading Between the Quote, Book 
Display Time, and Quote Performance measures; a passing score for the 
overall performance evaluation as well as each criterion, and a request 
to extend the pilot beyond July 1, 1997. The Commission also requests 
that the PSE submit a report to the Commission, by May 15, 1997, 
describing its experience with the pilot. At a minimum, this report 
should contain data, for the last review period of 1996 and the first 
review period of 1997, on (1) the number of registered specialists who 
scored in the bottom 10% of all registered specialists on his or her 
trading floor in the overall program; (2) the number of specialists 
who, as a result of scoring in the bottom 10% in any one quarterly 
evaluation, appeared before the EAC, and the type of restrictions that 
were imposed on such specialists (i.e., restriction on new allocations 
or acting as an alternate specialist), or any further action that was 
taken against such specialists; (3) the number of specialists who, as a 
result of scoring in the bottom 10% in any two out of four consecutive 
quarterly evaluations, appeared before the EAC, whether any 
restrictions were imposed on such specialists, and whether formal 
proceedings were initiated against such specialists; and (4) the number 
of specialists for whom formal proceedings were initiated, the results 
of such proceedings, including a list of any stocks reallocated from a 
particular unit.
    For the reasons discussed above, the Commission finds that the 
PSE's proposal to modify its Rule 5.37 specialist evaluation program 
performance measures is consistent with the requirements of section 
6(b) and 11 of the Act \21\ and the rules and regulations thereunder 
applicable to a national securities exchange. Specifically, the 
Commission finds that the proposed rule change is consistent with the 
Section 6(b)(5) requirement that the rules of an exchange be designed 
to promote just and equitable principles of trade, to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, and, in general, to protect investors and the 
public interest.
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    \21\ 15 U.S.C. 78f (b) and 78k.
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    Further, the Commission finds that the proposal is consistent with 
Section 11(b) of the Act \22\ and Rule 11b-1 thereunder which allow 
securities exchanges to promulgate rules relating to specialists in 
order to maintain fair and orderly markets and to remove impediments to 
and perfect the mechanism of a national market system.
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    \22\ 15 U.S.C. 78k (b).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\23\ that the proposed rule change (SR-PSE-96-28) is approved on a 
pilot basis, through July 1, 1997.

    \23\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\24\
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    \24\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 96-25762 Filed 10-7-96; 8:45 am]
BILLING CODE 8010-01-M