[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