[Federal Register Volume 63, Number 46 (Tuesday, March 10, 1998)]
[Notices]
[Pages 11700-11702]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-6018]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39707; File No. SR-PCX-97-48]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Pacific Exchange, Inc. Relating to Market Maker 
Participation in the Pacific Exchange's Automatic Execution System for 
Options (``Auto-Ex'')

March 3, 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 December 18, 1997,\3\ 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 the 
Exchange. 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.
    \3\ On February 27, 1998, the Pacific Exchange, Inc. submitted 
an amendment clarifying certain procedures and terms referred to in 
the proposed rule change. See letter from Michael D. Pierson, Senior 
Attorney, Regulatory Policy, Pacific Exchange, Inc., to Mignon 
McLemore, Attorney, Office of Market Supervision, Division of Market 
Regulation, SEC, dated February 26, 1998 (``Amendment No. 1'').
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange is proposing to amend its rules relating to Market 
Maker participation in the Exchange's automatic execution system for 
options (``Auto-Ex''). The text of proposed rule change is available 
for review at the Exchange's principal offices and in the Commission's 
Public Reference Room.

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 Exchange 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 Exchange 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

    On September 15, 1993, the Commission approved an Exchange proposal 
to codify its Market Maker eligibility standards for participation in 
the Auto-Ex feature of the Pacific Options Exchange Trading System 
(``POETS'').\4\ Under that rule change, Market Makers are only eligible 
for Auto-Ex at one trading post that is within that market Maker's 
primary appointment zone.\5\ The rule further provides that 
participants who sign onto the system are required to remain on the 
system for the duration of the trading day, but that exemptions from 
this requirement may be granted by two Floor Officials under certain

[[Page 11701]]

circumstances. Moreover, a Market Maker who logs onto the system during 
an Expiration Week is required to remain on the system for the entire 
week. Finally, if there is inadequate Auto-Ex participation in one or 
more issues, two Floor Officials may require Market Makers who are 
members of the trading crowd to log onto Auto-Ex, while present in the 
crowd, absent reasonable justification or excuse for non-participation. 
For purposes of that provision, a Market Maker is considered to be a 
``member of a trading crowd'' if that Market Maker (a) holds an 
appointment at the trading post where the subject issue is located or 
(b) regularly effects transactions in person for his or her Market 
Maker account at that trading post.
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    \4\ See Securities Exchange Act Release No. 32908 (September 15, 
1993), 58 FR 49076 (September 21, 1993) (order approving File No. 
SR-PSE-91-38). Previously, the Commission had approved some of these 
provisions when it approved the implementation of the POETS pilot 
program. See Securities Exchange Act Release No. 27633 (January 18, 
1990) (order approving SR-PSE-89-26) (``POETS Approval Order''). See 
also, Securities Exchange Act Release No. 27423 (November 6, 1989), 
54 FR 47434 (November 14, 1989) (``POETS'' notice).
    \5\ Market Maker primary appointment zone requirements are set 
forth in PCX Rule 6.35.
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    The Exchange is now proposing to modify and expand these rules as 
follows:
    First, the Exchange is proposing to add to Rule 6.87, a provision 
on joint accounts, stating that participants in a joint account may log 
onto Auto-Ex in a trading crowd outside of their primary appointment 
zones, but only if they are substituting for another participant in the 
same joint account, where trading of Auto-Ex as such station would have 
been appropriate for the substituted party, and they have obtained the 
approval of two Floor Officials.
    Second, the Exchange is proposing to clarify this rule by stating 
that Market Makers who have not been assigned a primary appointment 
zone may not participate on the Auto-Ex system, and further, that all 
Auto-Ex transactions will count toward a Market Maker's in person and 
primary appointment zone requirements.
    Third, the Exchange is proposing to modify this rule by specifying 
that, unless exempted by two Floor Officials, Market Makers may log 
onto Auto-Ex only in person and may continue on the system only so long 
as they are present in that trading crowd. Moreover, absent an 
exemption from the foregoing limitation, Market Makers may not remain 
on Auto-Ex, and must log off Auto-Ex, where they have left the trading 
crowd, unless the departure is for a brief interval. The rule states 
that under normal circumstances, a brief interval is deemed to be 15 
minutes.
    A Market Maker who fails to comply with the log-off requirement 
will be subject to the following fines under the Exchange's Minor Rule 
Plan: \6\ if the number of failures is between one and two during a 
twelve-month period, the fine is $100 per violation; for between three 
and five failures in a twelve-month period, the fine is $250 per 
violation; and for six or more failures in a twelve-month period, the 
fine is $500 per violation.\7\ The Exchange is also proposing to add 
violations of the log-off requirement to the Exchange's Summary 
Sanction Procedure \8\ under which two Floor Officials may summarily 
fine a Member for a designated rule violation if certain procedures are 
followed.
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    \6\ See generally, PCX Rule 10.13.
    \7\ Cf. CBOE Rule 8.16(a)(iii) (similar fine schedule).
    \8\ See PCX Rule 10.14.
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    Fourth, the Exchange is eliminating the provision that states that 
a Market Maker who logs onto Auto-Ex during Expiration Week is required 
to remain on the system for the duration of that Expiration Week. When 
the Auto-Ex rule was first adopted, there was some concern that there 
might be inadequate Market Maker participation on Auto-Ex during 
Expiration Week. However, the Exchange now believes, based on several 
years' experience, that there is no lack of Market Maker participation 
on the Options Floor that justifies a need for the Expiration Week 
requirement.
    Fifth, the Exchange is proposing to make the Auto-Ex participation 
mandatory in two limited situations. Under subsection (d)(4), a Market 
Maker who has logged onto Auto-Ex at any time during a trading day must 
participate on the Auto-Ex system in that option issue whenever present 
in that trading crowd during that trading day. Under subsection (d)(5), 
Market Makers may not log off the Auto-Ex wheel during the first ten 
minutes of a ``fast market'' that has been declared pursuant to Rule 
6.28 in an issue traded ``on that wheel'',\9\ in the absence of an 
exemption from two Floor Officials.
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    \9\ The term ``on that wheel'' denotes the function of the Auto-
Ex system that allows Market Makers to be assigned option contracts 
on a rotating basis, except that the first trade of the day is 
assigned to a Market Maker at random. Thus, for example, if five 
Market Makers log on to the Auto-Ex system at the beginning of the 
trading day, then the first customer order entered that day will be 
assigned to one of the five Market Makers at random. Thereafter, on 
that trading day, incoming orders will be assigned to the five 
Market Makers in order, on a rotating basis. See supra note 3 at p. 
1.
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    Sixth, the Exchange is proposing to add a provision to Rule 6.87 
specifically prohibiting Market Makers from ``directed trading'' of 
option contracts resulting from recent executions over Auto-Ex.\10\ The 
rule states that Market Makers who receive an execution through Auto-Ex 
may not re-direct the option contracts from that trade to another 
Market Maker without first giving the other Members in the trading 
crowd an opportunity to participate.
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    \10\ ``Directed trading'' is a violation of Rule 6.73 (``Manner 
of Bidding and Offering''), which provides in part: ``All bids and 
offers shall be general ones and shall not be specified for 
acceptance by particular members.''
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    Finally, the Exchange is proposing to codify a provision on price 
adjustments in the rule that was previously included in the Exchange's 
filing to implement POETS and approved by the Commission in 1990.\11\ 
It states that due to instantaneous execution, an incorrect quote 
appearing on the screen may result in an Auto-Ex trade at an incorrect 
price, and that an Auto-Ex trade executed at an erroneous quote should 
be treated as a trade reported at an erroneous price. It also states 
that the price of the Auto-Ex trade should be adjusted to reflect 
accurately the market quote at the time of execution, and that this 
will result in public customers and Market Makers receiving correct 
fills at prevailing market quotes through Auto-Ex. It further states 
that the determination as to whether an Auto-Ex trade was executed at 
an erroneous price is to be made by two Floor Officials, and that in 
making their determination, the Floor Officials should consider such 
factors as: (1) The length of time the allegedly incorrect quote was 
displayed; (2) whether any non-Auto-Ex trades were effected at the same 
price as the Auto-Ex transaction; and (3) whether any members of the 
trading crowd were aware of orders actively being represented in the 
trading crowd that appear to have been ``printed through'' by the Auto-
Ex trade.
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    \11\ See supra note 4, POETS Approval Order and POETS Notice at 
Exhibit No. 4.
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    The Exchange believes the proposed rule change is consistent with 
Section 6(b) \12\ of the Act, in general, and furthers the objectives 
of Section 6(b)(5),\13\ 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.
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    \12\ 15 U.S.C. 78f(b).
    \13\ 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.

[[Page 11702]]

III. Date 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 
change is consistent with the Act. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 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 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-97-48 and should be submitted by March TCRA1, 
1998.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 98-6018 Filed 3-9-98; 8:45 am]
BILLING CODE 8010-01-M