[Federal Register Volume 63, Number 50 (Monday, March 16, 1998)]
[Notices]
[Pages 12852-12854]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-6660]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39735; File No. SR-PCX-97-39]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by the Pacific 
Exchange, Inc. Relating to Trading Differentials for Option Contracts

March 9, 1998.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act'' or ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice 
is hereby given that on October 21, 1997, the Pacific Exchange, Inc. 
(``PCX'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change as described in 
Items I and II below, which Items have been prepared by the self-
regulatory organization. On December 10, 1997, the Exchange submitted 
to the Commission an amendment to the proposed rule change.\3\ The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons and to grant accelerated 
approval to the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Letter from Michael D. Pierson, PCX, to Christine 
Richardson, Division of Market Regulation, Commission (December 10, 
1997) (``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 proposes to amend its rules to allow the Exchange to 
establish, upon the filing of a rule change proposal pursuant to 
Section 19(b)(3)(A) of the Exchange Act, the trading differentials for 
option contracts traded on the Exchange. The Exchange also proposes to 
amend its rules to clarify that the Exchange shall file a rule change 
proposal with the Commission pursuant to Section 19(b)(3)(A) of the 
Exchange Act when it determines to change the trading differentials for 
equity securities.\4\ The text of the proposed rule change is available 
at the Office of the Secretary, PCX and at the Commission.
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    \4\ The Exchange already has the authority to determine the 
trading differentials for equity securities traded on the Exchange. 
See Exchange Act Release No. 38780 (June 26, 1997), 62 FR 36087 
(July 3, 1997) (order approving SR-PCX-97-15). The approval order 
for SR-PCX-97-15 stated that, when the Exchange determined to change 
a trading differential for an equity security, the Exchange would 
file with the Commission a rule change proposal pursuant to Section 
19(b)(3)(A) of the Exchange Act (effective upon filing).
    The Exchange is now proposing to add Commentary .01 to Rule 
5.3(b) to clarify that, when it determines to change a trading 
differential for an equity security, it shall file with the 
Commission a rule change proposal pursuant to Section 19(b)(3)(A) of 
the Exchange Act. See Amendment No. 1, supra note 3. This new 
language will conform the Exchange's Rule 5.3(b) to what is required 
by the order that gives the Exchange its authority to change the 
trading differentials for equity securities.
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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, 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    PCX Rule 6.72 currently provides that bids and offers in option 
contracts shall be expressed in eighths of $1, unless a different 
fraction of $1 is approved by the Exchange's Options Floor Trading 
Committee for an option contract of a particular series. Commentary .01 
to Rule 6.72 currently provides that the Options Floor Trading 
Committee has determined that bids and offers for all option series 
trading below $3 shall be expressed in sixteenths of a dollar.
    The Exchange is now proposing to amend Rule 6.72 to provide that 
the Exchange shall determine the trading differentials for option 
contracts traded on the Exchange. The Exchange is proposing this rule 
change in order to provide itself with greater flexibility, so that it 
can change the trading differentials for option contracts traded on the 
Exchange on an expedited basis. Amendment No. 1 amends Commentary .01 
to Rule 6.72 to clarify that when the Exchange determines to change the 
trading increments for option contracts, the Exchange will designate 
such change as a stated policy, practice, or interpretation with 
respect to the administration of Rule 6.72 within the meaning of 
subparagraph (3)(A) of subsection 19(b) of the Exchange Act and will 
file a rule change for immediate effectiveness upon filing with the 
Commission. The Exchange notes that the proposed rule change is

[[Page 12853]]

substantively similar to a recently approved PCX rule change proposal 
governing equity securities traded on the Exchange.\5\
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    \5\See Exchange Act Release No. 38780 (June 26, 1997), 62 FR 
36087 (July 3, 1997) (order approving File No. SR-PCX-97-15, 
modifying PCX Rule 5.3(b) to provide that ``The Exchange shall 
determine the trading differentials for equity securities traded on 
the Exchange''); see also Exchange Act Release No. 38575 (May 6, 
1997), 62 FR 26606 (May 14, 1997) (order granting temporary 
accelerated approval, for a ninety-day period, of rule change 
relating to trading differentials for equity securities) (File No. 
SR-PCX-97-16).
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    The Exchange recognizes that there has been a movement within the 
securities industry to reduce the minimum trading and quotation 
increments for equity securities imposed by the various self-regulatory 
organizations (``SROs''). The NYSE, The Nasdaq Stock Market 
(``Nasdaq''), and the Amex have recently reduced their minimum 
increments.\6\ Furthermore, several third market makers have begun 
quoting equity securities in increments smaller than the primary 
markets. As derivative securities, the prices of options are determined 
in reference to the prices of the underlying securities. Consequently, 
the Exchange believes that the proposed rule change will give it the 
flexibility it needs to change the minimum trading and quotation 
increments for option contracts traded on the Exchange.
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    \6\ See, e.g., Exchange Act Release No. 38744 (June 18, 1997), 
62 FR 34334 (June 25, 1997) (granting temporary accelerated approval 
to a NYSE proposal to replace eighths with sixteenths as the minimum 
trading increment for NYSE-listed equity securities); Exchange Act 
Release No. 38571 (May 5, 1997), 62 FR 25682 (May 9, 1997) 
(approving an Amex proposal to reduce the minimum trading increment 
from \1/8\ to \1/16\ for Amex-listed equity securities); Exchange 
Act Release No. 38678 (May 27, 1997), 62 FR 30363 (June 6, 1997) 
(approving a proposed rule change by Nasdaq to reduce the minimum 
quotation increment from \1/8\ to \1/16\ for Nasdaq-listed equity 
securities).
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    In addition to adding the Section 19(b)(3)(A) filing requirement to 
the text of the proposed rule change for option contracts trading 
differentials, Amendment No. 1 to the filing also adds the same 
requirement to Rule 5.3(b) concerning a change in trading differentials 
for equity securities. Amendment No. 1 adds Commentary .01 to Rule 
5.3(b) to clarify that, when the Exchange determines to change the 
trading increments for equity securities, it will designate such change 
as a stated policy, practice, or interpretation with respect to the 
administration of Rule 5.3(b) within the meaning of subparagraph (3)(A) 
of subsection 19(b) of the Exchange Act and will file a rule change for 
immediate effectiveness upon filing with the Commission.
2. Statutory Basis
    The Exchange represents that the proposed rule change is consistent 
with Section 6(b) of the Act \7\ in general and furthers the objectives 
of Section 6(b)(5) \8\ in particular in that it is designed to 
facilitate transactions in securities, to remove impediments to and 
perfect the mechanism of a free and open market, and to promote just 
and equitable principles of trade.
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    \7\ 15 U.S.C. 78f(b).
    \8\ 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

    No written comments were either solicited or received.

III. Commission's Findings and Order Granting Accelerated Approval 
of Proposed Rule Change

    The Commission has determined to approve the proposed rule change 
on an accelerated basis, thereby permitting the Exchange to establish a 
procedure whereby it may determine the trading differentials for option 
contracts traded on the Exchange, as well as to permit the Exchange to 
clarify in its rules the necessary procedure to be followed by the 
Exchange when it determines to change the trading differentials for 
equity securities. The Commission finds that the proposed rule change 
is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities exchange. In 
particular, the Commission finds that the proposal comports with the 
requirements of Section 6 and Section 11A of the Act.\9\ Specifically, 
the Commission believes that permitting the Exchange to establish 
trading differentials for option contracts upon the filing of a 
proposal under Section 19(b)(3)(A) will help to facilitate securities 
transactions, to remove impediments to and perfect the mechanism of a 
free and open market, to foster competition and coordination with 
persons engaged in regulating securities, and to promote just and 
equitable principles of trade. The Commission believes that permitting 
the Exchange to establish trading differentials for option contracts 
upon the filing of a proposal under Section 19(b)(3)(A) will provide 
greater flexibility to the Exchange and thereby enhance the quality of 
the market for the affected PCX-listed options. Allowing the PCX to 
quote in finer increments will facilitate quote competition. This 
should help produce more accurate pricing of options and should result 
in tighter quotations. Furthermore, if the quoted markets are improved 
by reducing the minimum increment, the change could result in added 
benefits to the market such as reduced transaction costs.
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    \9\ See 15 U.S.C. 78f(b) and 78k-1. In approving this rule 
change, the Commission notes that it has considered the proposal's 
impact on efficiency, competition, and capital formation, consistent 
with Section 3 of the Act. Id. at 78c(f).
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    The Commission finds good cause for approving the proposed rule 
change, as amended, prior to the thirtieth day after the date of 
publication of the notice thereof in the Federal Register. As noted 
above, the Commission previously has approved a similar set of 
procedures applicable to PCX equity securities.
    The Commission also notes that substantively similar rule proposals 
submitted by the Chicago Board Options Exchange (``CBOE'') and American 
Stock Exchange (``Amex'')\10\ are being approved contemporaneously with 
the approval of this PCX filing. Notice of the CBOE and Amex proposals 
was published in the Federal Register and no comments were 
received.\11\ Accordingly, the Commission believes that it is 
consistent with Sections 6(b)(5) and 19(b)(2) of the Act to approve the 
proposed rule change on an accelerated basis.
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    \10\ See File Nos. SR-CBOE-97-49 and SR-Amex-97-41.
    \11\ See Exchange Act Release No. 39348 (November 21, 1997), 62 
FR 63577 (December 1, 1997) (notice for File No. SR-CBOE-97-49); 
Exchange Act Release No. 39347 (November 21, 1997), 62 FR 63576 
(December 1, 1997) (notice for File No. SR-Amex-97-41).
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    The Commission also finds good cause for approving Amendment No. 1 
to the proposed rule change prior to the thirtieth day after the date 
of publication of the notice thereof in the Federal Register. 
Specifically, the Commission believes that, by adding the Section 
19(b)(3)(A) filing requirement to the text of Rule 6.72, the Exchange 
clarifies the necessary procedure to be followed upon a determination 
to change the trading differentials for option contracts. The 
Commission further believes that the clarifying language being added to 
the PCX's Rule 5.3(b), concerning the Exchange's authority to establish 
trading differentials for equity securities, conforms the rule to what 
is required by

[[Page 12854]]

the original approval order.\12\ The Commission recognizes that this 
proposed additional language does not raise any new regulatory issues 
because the Exchange merely is seeking to clarify the process that it 
is already required to follow upon a determination to change trading 
differentials for equity securities. Accordingly, the Commission 
believes that it is consistent with Sections 6(b)(5) and 19(b)(2) of 
the Act to approve Amendment No. 1 to the proposed rule change on an 
accelerated basis.
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    \12\ See Exchange Act Release No. 38780 (June 26, 1997), 62 FR 
36087 (July 3, 1997) (order approving SR-PCX-97-15).
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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, 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-97-39 and 
should be submitted by April 6, 1998.

V. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change, as amended, is consistent with the requirements of the Act 
and the rules and regulations thereunder.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\13\ that the proposed rule change, as amended, (SR-PCX-97-39) is 
approved on an accelerated basis.

    \13\ 15 U.S.C. 78s(b)(2).
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    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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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-6660 Filed 3-13-98; 8:45 am]
BILLING CODE 8010-01-M