[Federal Register Volume 63, Number 36 (Tuesday, February 24, 1998)]
[Notices]
[Pages 9276-9278]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-4572]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39649; File No. SR-PCX-98-04]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Pacific Exchange, Inc. Relating to the Identification of 
Broker-Dealer Orders on the Options Floor

February 11, 1998.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'')\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on January 23, 1998, the Pacific Exchange, Inc. (``PCX'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by PCX. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    PCX is proposing to amend its rules on the identification of 
broker-dealer orders by requiring that, if an order is for an account 
in which a broker-dealer has an interest, the broker-dealer status of 
the order must be disclosed to the trading crowd prior to execution,

[[Page 9277]]

regardless of whether the order is to be executed at the trading 
crowd's disseminated bid or offering price. The text of the proposed 
rule change is attached as Exhibit A.

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

    In its filing with the Commission, PCX 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. PCX 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

Purpose
    On July 21, 1994, the Commission approved an Exchange proposal to 
adopt new Rule 6.66(c), which currently states: ``Prior to executing an 
order in which a broker-dealer has an interest, a member must indicate 
by public outcry that such order is for a broker-dealer if the order is 
to be executed at the trading crowd's disseminated bid or offering 
price. This rule applies regardless of whether such broker-dealer is an 
Exchange member.'' \3\ The Exchange is now proposing to expand the 
scope of Rule 6.66(c) by striking the words ``if the order is to be 
executed at the trading crowd's disseminated bid or offering price'' 
from the text of Rule 6.66(c). Accordingly, under the amended rule, 
prior to executing an order in which a broker-dealer has an interest, a 
Floor Broker would be required to indicate by public outcry that the 
order is for a broker-dealer.
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    \3\ See Exchange Act Release No. 34426 (July 21, 1994), 59 FR 
38497 (July 28, 1994) (Order approving SR-PSE-92-14).
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    The proposal is intended to facilitate transactions in option 
contracts by making the members in the trading crowd and the Order Book 
Official staff aware of the nature of orders being represented on the 
Floor, thereby assuring that broker-dealer orders will not be 
represented inadvertently as public customer orders. In that regard, 
the Exchange notes that only non-broker-dealer orders are entitled to 
be place in the public limit order book and to be given priority over 
broker-dealer orders under certain circumstances.\4\ The Exchange 
further notes that only non-broker-dealers are entitled to receive a 
guaranteed minimum of 20 contracts at the disseminated bid or offering 
price.\5\
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    \4\ See PCX Rules 6.52(a) and 6.75.
    \5\ See PCX Rule 6.86(a).
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    The Exchange believes the proposal will make the existing rule less 
complicated and easier to follow by removing the distinction between 
broker-dealer orders to be executed at the bid or offering price, and 
those that are not. In that regard, the Exchange notes that there is no 
such distinction applicable to Market Maker orders, the identification 
of which is governed by Rule 6.66(b), which requires Floor Brokers to 
verbally identify Market Maker orders as such prior to their 
execution.\6\ Thus, removing the subject distinction from Rule 6.66(c) 
will make the Exchange's option order disclosure rules uniform, 
consistent, and easier to follow.
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    \6\ Rule 6.66(b) states: ``A Floor Broker holding an order for 
the amount of a Market Maker shall verbally identify the order as 
such prior to consummating a transaction, and shall, after effecting 
the trade, supply the name of the Market Maker concerned, by public 
outcry , upon the request of any member or member in the trading 
crowd.''
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    The Exchange is also proposing to amend Rules 6.2 and 6.77 by 
adding certain violations of Rule 6.66(c) (as amended) to the list of 
those violations that may give rise to a circumstance in which two 
Floor Officials may nullify a transaction or adjust its terms.\7\ 
Specifically, such action could be taken if a Floor Broker failed to 
identify a broker-dealer order for 20 contracts or less. The reason for 
the limitation on the number of contract is that under Rule 6.86, only 
non-broker-dealer orders are eligible for a guaranteed execution of 20 
contracts as the displayed price. If a Floor Broker does not disclose 
that an order for 20 contracts or less is for a broker-dealer (under 
the proposed rule), the numbers in the trading crowd may incorrectly 
assume that the order is for a public customer and provide an execution 
at the displayed price, without having an opportunity to update their 
quotes.\8\ The Exchange believes that adding this provision is simply a 
logical extension of Rule 6.2, Commentary .05(v), which permits two 
Floor Officials to nullify, or adjust the terms of, any order executed 
in violation of Rule 6.86, which states that only non-broker-dealer 
orders are eligible for a guarantee of up to 20 option contracts at the 
disseminated market price.
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    \7\ Specifically, as Exhibit A indicates, the PCX proposes to 
move Commentary .05 from Rule 6.2 to Rule 6.77 and renumber it as 
Commentary .01. The existing subparagraphs will then be relettered 
and a new subparagraph, (f), added to address violations of Rule 
6.66(c) as amended.
    \8\ See PCX Rule 6.37(d) and Rule 6.37, Commentary .05 (Market 
Makers are required to make a market for, at a minimum, one contract 
for broker-dealer orders; they must also lower their bids or raise 
their offers if they do not satisfy an order in its entirety).
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Basis
    The Exchange believes that the proposal is consistent with Section 
6(b) of the Act, in general, and Section 6(b)(5) of the Act, in 
particular, in that it is designed to facilitate transactions in 
securities, to promote just and equitable principles of trade, and to 
protect investors and the public interest.

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 Receive From Members, Participants, or Others

    Written comments on the proposed rule change were neither solicited 
nor received.

III. Data of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    Within 35 days of the date of 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 such 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, including whether the proposed rule 
is consistent with the Act. 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

[[Page 9278]]

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 in the Commission's Public 
Reference Room, 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 PCX. All submissions should refer to File No. 
SR-PCX-98-04 and should be submitted by March 17, 1998.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.

Exhibit A--Text of the Proposed Rule Change \10\
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    \10\ New text is italicized; deletions are bracketed.
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para. 4733  Admission to and Conduct on the Options Trading Floor

    Rule 6.2(a)-(c)--No change.
    Commentary:
    .01-.04--No change.
    [.05] [Moved to Rule 6.77, Com. .01.]
* * * * *

para. 5085  Order Identification

    Rule 6.66(a)-(b)--No change.
    (c) Broker-Dealer Orders. Prior to executing an order in which a 
broker-dealer has an interest, a member must indicate by public 
outcry that such order is for a broker-dealer. [if the order is to 
be executed at the trading crowd's disseminated bid or offering 
price.] This rule applies regardless of whether such broker-dealer 
is an Exchange member.
* * * * *

para. 5151  Contract Made on Acceptance of Bid or Offer

    Rule 6.77--No change.
    Commentary:
    .01  Two Options Floor Officials may nullify a transaction or 
adjust its terms if they determine the transaction to have been in 
violation of any of the following:
    (a)  [I]  Rule 6.73 (Manner of Bidding and Offering).[;]
    (b)  [ii]  Rule 6.75 (Priority of Bids and Offers).[;]
    (c)  [iii]  Rule 6.56 (Transactions outside the Order Book 
Official's Last Quoted Range).[;]
    (d)  [iv]  Rule 6.76 (Priority on Split Price Transaction).[;]
    (e)  [v]  Rule 6.86 (Trading Crowd Firm Dissemination Market 
Quotes).
    (f)  Rule 6.66(c) (Failure to identify a broker-dealer order for 
20 contracts or less).
[FR Doc. 98-4572 Filed 2-23-98; 8:45 am]
BILLING CODE 8010-01-M