[Federal Register Volume 62, Number 232 (Wednesday, December 3, 1997)]
[Notices]
[Pages 64035-64037]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-31615]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39358; File No. SR-PCX-97-43]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Pacific Exchange, Inc. Relating to an Extension of the 
Exchange's Specialist Evaluation Pilot Program

November 25, 1997.
    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 November 
17, 1997,\1\ the Pacific Exchange, Inc. (``PCX'' 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.
---------------------------------------------------------------------------

    \1\ See letter from Jeffrey S. Norris, Manager, Regulatory 
Development, PCX, to Heather Seidel, Attorney, Market Regulation, 
Commission, dated November 24, 1997 (``Amendment No. 1''). The 
substance of Amendment No. 1 is incorporated into the notice.
---------------------------------------------------------------------------

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

    PCX is proposing to extend its pilot program regarding the 
evaluation of its equity specialists until January 1, 1999. In 
addition, the Exchange is proposing to implement certain changes to the 
pilot program.

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

    In its filing with the Commission, the self-regulatory organization 
included statements concerning the purpose of and basis for the 
proposed rule change and discussed any comments it received on the 
proposed rule change. The text of these statements may be examined at 
the places specified in Item IV below. The self-regulatory organization 
has prepared summaries, set forth in Sections A, B, and C below, of the 
most significant aspects of such statements.

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

1. Purpose
    On June 3, 1997, the Commission approved a six-month extension of 
the pilot program for the evaluation of equity specialists.\2\ The 
reason for the extension was to allow the PCX more time to evaluate the 
impact of the SEC's new order handling rules on the performance 
criteria and to determine an appropriate overall passing score and 
individual passing scores for each criterion. The Exchange now is 
proposing to extend the pilot program until January 1, 1999. The PCX 
has established an overall passing score and individual passing scores 
for each criterion and has determined when specialists that do not 
attain the minimum passing scores should meet with the Equity 
Allocation Committee (``EAC''). The Exchange is also proposing to 
replace the ``Bettering the Quote'' criterion with Price Improvement 
and to lower the weighting of the Specialist Evaluation Questionnaire 
from 15% to 10% so that Price Improvement can be given a weight of 10%. 
Since the Bettering the Quote criterion is now measured against the 
NBBO instead of the primary market, the PCX believes it is no longer

[[Page 64036]]

a viable criterion. Previously, the ``Bettering the Quote'' criterion 
was measured against the primary market, which provided opportunities 
for the specialist to better the primary market quote. However, since 
the NBBO by definition is the best market, it does not provide the same 
opportunities for specialists to better the quote, especially when the 
PCX is the NBBO. The PCX believes that Price Improvement is a 
meaningful criterion that should be given a 10% weighting, which should 
be accomplished by lowering the Specialist Evaluation Questionnaire 
weighting to 10%. This will allow the Exchange to achieve its goal of 
providing its specialists with a more objective rating system. The 
description of the Price Improvement criterion as well as the overall 
passing score and individual passing scores are as follows:
---------------------------------------------------------------------------

    \2\See Securities Exchange Act Release No. 38712 (June 3, 1997), 
62 FR 17941 (July 8, 1997).
---------------------------------------------------------------------------

    a. Price improvement. ``Price Improvement'' measures the number of 
trades involving market and marketable limit orders that improve the 
NBBO if the NBBO quote spread at the time the original order is 
received  is greater than or equal to two trading differentials, but 
less than or equal to eight trading differentials for that security. 
The execution price for stopped market or marketable limit orders will 
be compared with the guaranteed price (which is the NBBO at the time 
the order was received).
    Orders completely or partially executed will be considered for 
price improvement. All one-sided market or marketable limit orders \3\ 
with an NBBO quote spread greater than \1/8\ point are eligible for 
price improvement. Only agency orders entered or received by an 
exchange are eligible for price improvement. Orders with time-in-force 
designations such as good until canceled (GTC), good through day of 
entry (DAY), immediate or cancel (IOC), and good until executed will be 
eligible for price improvement. In addition, stocks, rights, warrants, 
preferred stock, when issued, and when distributed equity securities 
will be eligible for price improvement.
---------------------------------------------------------------------------

    \3\ The regional exchanges have agreed to the following 
definition for marketable limit orders: A marketable limit order to 
buy is priced at or above the NBBO offer, a marketable limit order 
to sell is priced at or below the NBBO bid.
---------------------------------------------------------------------------

    The following types of orders will not be considered under the 
category of price improvement: all preopening market and limit orders, 
limit order executions out of the limit book (i.e., booked orders), 
electronically entered limit orders whose price falls in between the 
NBBO, non-regular-way trades (i.e., cash, next day and seller's 
option), negotiated trades or trades identified as crosses, bonds, 
orders designated as possible duplicates (POSS DUPE) or try to stop 
(TTS), canceled orders, odd-lot market and odd-lot limit orders, orders 
designated as all or none (AON), all tick sensitive executions (i.e., 
buy minus, sell plus, sell short, etc.), market quotations under 200 
shares, and principal and program trade account types.\4\
---------------------------------------------------------------------------

    \4\ Preopening market and limit orders were excluded because all 
such orders are entered prior to there being a market that is 
trading, so there is no market to improve upon.
---------------------------------------------------------------------------

    Specialists will be measured on the percentage of trades that are 
price improved. The following table gives the parameters and 
corresponding point values:

------------------------------------------------------------------------
              Percent of eligible trades improved                 Points
------------------------------------------------------------------------
40 +...........................................................       10
36-39.99.......................................................        9
32-35.99.......................................................        8
28-31.99.......................................................        7
24-27.99.......................................................        6
20-23.99.......................................................        5
  Limit order executions out of the limit book (i.e., booked orders)    
 were not included because they are filled as the market moves toward   
 them, not when they are outside of the NBBO. Electronically entered    
 limit orders whose price falls in between the NBBO were excluded       
 because these are not executable at the time they are entered, unless  
 the specialist chooses to fill them. Non-regular-way trades (i.e.,     
 cash, next day and seller's option) and negotiated trades are not      
 included because they are negotiated and the price does not necessarily
 depend upon the NBBO. Trades identified as crosses were excluded       
 because specialists do not participate in crosses, by definition. Bonds
 and orders designated as possible duplicates (POSS DUPE) were not      
 included because they are entered manually. Canceled orders were       
 excluded because orders cannot be improved upon if they are not allowed
 to be executed. Odd-lot market and odd-lot limit orders were not       
 included because they are executed automatically in the background, and
 the specialist never has the opportunity to improve upon them. Orders  
 designated as all or none (AON) and all tick sensitive executions      
 (i.e., buy minus, sell plus, sell short, etc.) were excluded because   
 they are conditional orders. Market quotations under 200 shares were   
 not included because they are usually computer generated and the       
 specialists generally have no opportunity to improve them. Principal   
 orders were excluded because they cannot be sent via PCOAST. Program   
 trades were not included because they involve a large portfolio of     
 stocks and derivative index products, which are not generally routed to
 a regional exchange for execution.                                     
16-19.99.......................................................        4
12-15.99.......................................................        3
8-11.99........................................................        2
4-7.99.........................................................        1
Below 4........................................................        0
------------------------------------------------------------------------

    b. Overall Passing Score. The PCX has established an overall 
passing score of 60 as the minimum standard that each specialist must 
attain each quarter. A specialist will have to obtain better than a 
passing score in each individual criterion (see minimum passing scores 
shown below) to obtain a minimum passing score of 60. Any specialist 
who falls below the minimum passing score will have to appear before 
the EAC and will be subject to the following restrictions: no new 
allocations and no trading in alternate specialist stocks for the 
quarter following the quarter that the specialist was evaluated. Such 
specialists will have the right to request the lifting of one or more 
of the restrictions based upon mitigating circumstances. Any specialist 
who does not attain a passing score in any three out of four quarters 
will also be subject to other restrictions imposed by the EAC, 
including reallocation of one or more stocks. The EAC will evaluate the 
effectiveness of the overall passing score and will adjust it 
accordingly.
    c. Individual Criterion Passing Scores. The PCX has established 
individual passing scores for each individual criterion based upon 
third quarter 1997 evaluation results. The third quarter of 1997 was 
the first evaluation period that the Trading Between the Quote, Book 
Display Time, and Quote Performance calculations were based upon the 
NBBO instead of the primary market. In addition, the evaluation results 
in the third quarter were based upon one-sixteenth trading increments 
instead of one-eighth increments. As a result of the NBBO changes and 
the change to sixteenths, individual passing scores in the affected 
criteria were lower than in previous quarters. Previous quarter scores 
were not used to determine individual criterion passing scores because 
of the aforementioned changes. The EAC will evaluate the effectiveness 
of the individual passing scores and will adjust them accordingly. The 
individual passing scores for each criterion are as follows:

------------------------------------------------------------------------
                                                                 Passing
                      Evaulation criterion                        score 
------------------------------------------------------------------------
Turnaround Time................................................     12.0
Holding Orders Without Action..................................      7.5
Trading Between the Quote......................................      5.0
Executions in Size Greater Than NBBO...........................      2.0
Specialist Evaluation Questionnaire Survey.....................      5.0

[[Page 64037]]

                                                                        
Book Display Time..............................................     10.5
Equal or Better Quote Performance..............................      1.0
Post 1 P.M. Parameters.........................................      3.0
Price Improvement..............................................      4.0
------------------------------------------------------------------------

    Any specialist who does not attain a minimum passing score in a 
particular criterion for two or more consecutive quarters or more will 
be subject to the following:
    1. If a specialist does not attain an overall passing score in any 
particular individual criterion for 2 consecutive quarters, the 
specialist will have to appear before the EAC. The EAC will meet with 
the specialist with the intent of helping the specialist to improve the 
score.
    2. If a specialist does not attain an overall passing score in any 
particular individual criterion for 3 out of 4 consecutive quarters, 
the specialist will either not be permitted to trade any alternate 
specialist stocks or not be able to apply for any new stocks for one 
quarter. The Equity Allocation Committee will decide which restriction 
will apply.
    3. If a specialist does not attain an overall passing score in any 
particular individual criterion for 4 out of 5 consecutive quarters, 5 
out of 6 quarters, etc., the specialist will be subject to both the 
alternate specialist and no new stock restrictions for one quarter. The 
EAC may also, at its discretion, impose other restrictions, including 
reallocating one or more of the specialist stocks
    The EAC will have the discretion not to impose any of these 
restrictions if there are mitigating circumstances.
    The PCX intends to file a rule change to PCX 5.37 to reflect all of 
the aforementioned changes to its Specialist Evaluation Pilot Program.
    The Commission has requested that the Exchange file a report 
regarding the Exchange's experience with the Pilot, for the period from 
April 1, 1997 to September 30, 1997, and this report has been filed 
under separate cover.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\5\ in general, and Section 6(b)(5) in 
particular, in that it is designed to promote just and equitable 
principles of trade and to protect investors and the public.
---------------------------------------------------------------------------

    \5\ 15 U.S.C. 78f(b).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any inappropriate burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or 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 Room. 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-PCX-97-43 and 
should be submitted by December 24, 1997.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-31615 Filed 12-2-97; 8:45 am]
BILLING CODE 8010-01-M