[Federal Register Volume 63, Number 77 (Wednesday, April 22, 1998)]
[Notices]
[Pages 19994-19996]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-10607]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39875; File No. SR-PCX-98-02]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Pacific Exchange, Inc. Relating to LMM Book Pilot Program 
Expansion to Allow Book Staffing by Employees of the LMM

April 15, 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 the self-
regulatory organization. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested 
persons.\3\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ On April 13, 1998, the PCX submitted a letter, in response 
to Commission staff questions, providing a brief explanation of its 
proposed method for admitting employees to participate in the LMM 
Program and concerning its proposed surveillance of the LMM Program 
employees and operations. See Letter from Michael D. Pierson, Senior 
Attorney, Regulatory Policy, PCX, to Marie D'Aguanno Ito, Special 
Counsel, Division of Market Regulation, Commission, dated April 13, 
1998.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    PCX is proposing to expand its Lead Market Maker (``LMM'') Book 
Pilot Program by allowing qualified LMMs to manage their own employees 
in operating the options public limit order book under 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.

[[Page 19995]]

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

    On October 11, 1997, the Commission approved an Exchange proposal 
to adopt a one-year pilot program under which a limited number of LMMs 
would be able to assume operational responsibility for the options 
public limit order book (``Book'') in certain option issues.\4\ On 
September 22, 1997, the Commission approved an Exchange proposal to 
extend the program for one year, so that it is currently set to expire 
on October 12, 1998.\5\
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    \4\ See Exchange Act Release No. 37810 (October 11, 1996), 61 FR 
54481 (October 18, 1996) (approving File No. SR-PSE-96-09).
    \5\ See Exchange Act Release No. 39106 (September 22, 1997), 62 
FR 51172 (September 30, 1997).
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    Under the pilot program, approved LMMs manage the Book function, 
take responsibility for trading disputes and errors, set rates for Book 
execution, and pay the Exchange a fee for systems and services.\6\ Only 
multiple-listed option issues are currently eligible to be traded under 
the pilot program.\7\ Initially, the program was limited by allowing no 
more than three LMMs to participate in the program and no more than 40 
option symbols to be used. But on April 1, 1997, the Commission 
approved an Exchange proposal to expand the program so that up to nine 
LMMs may participate and up to 150 option symbols may be used.\8\
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    \6\ See Exchange Act Release No. 37874 (October 28, 1996), 61 FR 
56597 (November 1, 1996) (approving SR-PSE-96-38, establishing a 
staffing charge for LMMs who participate in the pilot program).
    \7\ See Exchange Act Release No. 38273 (February 12, 1997), 62 
FR 7489 (February 19, 1997).
    \8\ See Exchange Act Release No. 38462 (April 1, 1997), 62 FR 
16886 (April 8, 1997).
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    The Exchange is now proposing to further expand the program by 
allowing LMMs to manage their own employees in operating the Book. 
Currently, the Exchange permits LMMs who are participating in the pilot 
program to use Exchange personnel to assist the LMM in performing the 
OBO function, and, in return, the Exchange charges the LMM a staffing 
charge for such use of Exchange personnel.\9\ LMMs who manage their own 
employees would continue to set their own rates for Book executions, 
but would no longer be required to pay the Exchange a staffing charge 
(except under unusual circumstances).
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    \9\ See Exchange Act Release No. 37874, supra.
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    Under the pilot program, Exchange staff currently assist LMMs in 
performing Order Book Official (``OBO'') functions, pursuant to Rules 
6.51 through 6.59.\10\ These functions include the OMO's duty to assist 
in the maintenance of a fair, orderly and competitive market.\11\ LMMs 
running the Book will continue to be required to report to an Options 
Floor Official any unusual activity, transactions or price changes or 
other unusual market conditions or circumstances that are detrimental 
to the maintenance of a fair, orderly and competitive market.\12\ LMMs 
who operate the Book will also continue to be required to disclose to 
members, upon request, the price and number of contracts that are bid 
below or that are offered above the Book information displayed, 
pursuant to Rule 6.55.\13\
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    \10\ See PCX Rule 6.82(h)(1)(a).
    \11\ See PCX Rule 6.53.
    \12\ See PCX Rule 6.54.
    \13\ See PCX Rule 6.57.
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    In the event of unusual market circumstances, the Exchange will 
make Exchange staff available to assist the LMMs in performing their 
OBO functions on a temporary basis, and will charge such LMMs a 
reasonable fee for such services. In this regard, the Exchange intends 
to file with the Commission a proposal to establish those temporary 
staffing charges.
    The Exchange believes that allowing LMMs to hire their own 
employees to operate the Book will have no negative impact on the 
Exchange's oversight and regulation of activities on the Options 
Trading Floor. LMMs who operate the Book will continue to be subject to 
higher capital requirements than other LMMs or Market Makers.\14\ The 
Exchange will continue to employ Exchange staff to monitor the 
operations of all LMMs. Exchange staff will also continue to prepare 
all Unusual Activity Reports that are forwarded to the Surveillance 
Department for review. Finally, Floor Officials will continue to 
monitor the activities of LMMs, including those activities that are 
brought to the attention of Floor Officials by members of the trading 
crowd, who serve a self-policing function.
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    \14\ See PCX Rule 6.82, Commentary .05 (requiring that LMMs who 
run the Book to maintain ``minimum net capital,'' as provided in SEC 
Rule 15c3-1, and also to maintain a cash or liquid asset position of 
at least $500,000, plus $25,000 for each issue over 5 issues for 
which they perform the function of an OBO).
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    The Exchange believes that the proposed change will make the 
Exchange LMM Program more competitive because it will provide LMMs with 
the same flexibility currently held by options specialists at other 
exchanges, and DPMs at the Chicago Board Options Exchange.
    The Exchange believes the proposed rule change is consistent with 
Section 6(b) \15\ of the Act, in general, and furthers the objectives 
of Section 6(b)(5),\16\ 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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    \15\ 15 U.S.C. 78f(b).
    \16\ 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.

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 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, including whether the proposed 
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

[[Page 19996]]

available for inspection and copying in the Commission's public 
Reference Room, 450 Fifth Street, NW., Washington, DC 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-98-02 and should be submitted by May 13, 1998.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-10607 Filed 4-21-98; 8:45 am]
BILLING CODE 8010-01-M