[Federal Register Volume 63, Number 164 (Tuesday, August 25, 1998)]
[Notices]
[Pages 45276-45277]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-22703]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40328; File No. SR-PCX-98-17]


Self-Regulatory Organization's; Pacific Exchange, Inc.; Order 
Approving Proposed Rule Change Relating to Expansion of the LMM Book 
Pilot Program

August 17, 1998.

I. Introduction

    On April 16, 1998, the Pacific Exchange, Inc. (``PCX'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') the proposed rule change pursuant to 
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ 
and Rule 19b-4 thereunder,\2\ to remove the current cap on the number 
of LMMs who may participate in the program.\3\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4 (1991).
    \3\ The Exchange had initially submitted the filing prior to 
April 16, 1998, but that submission did not include a signature 
page. By letter dated April 14, 1998, the Exchange filed Amendment 
No. 1 to the filing, which contained signatures for the filing. 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 14, 1998. On May 1, 1998, PCX 
submitted Amendment No. 2 to the filing, seeking to withdraw the 
portion of the filing that proposed removing the limit on the number 
of option issues that may be included in the LMM program. The PCX 
represented in the Amendment that such proposal would be submitted 
in a separate filing. See Letter from Michael D. Pierson, Senior 
Attorney, Regulatory Policy, to Marie D'Aguanno Ito, Special 
Counsel, Division of Market Regulation, Commission, dated April 30, 
1998.
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    Notice of the proposed change was published in the Federal 
Register.\4\ The Commission received no comment letters in response to 
the notice of the proposed rule change.
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    \4\ Exchange Act Release No. 39995 (May 15, 1998) 63 FR 28432 
(May 22, 1998).
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II. Description of the Proposal

    PCX has proposed to remove the current cap on the number of LMMs 
who may participate in the program.
    On October 11, 1996, 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.\5\ 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.\6\
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    \5\ See Exchange Act Release No. 37810 (October 11, 1996) 61 FR 
54481 (October 18, 1996) (approving File No. SR-PSE-96-09).
    \6\ 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.\7\ 
Currently, both multiply-listed and non-multiply-listed option issues 
are eligible to be traded under the pilot program.\8\ 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.\9\
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    \7\ 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); see 
also File No. SR-PCX-98-03 (proposal to modify the LMM Book Pilot 
staffing charge).
    \8\ See Exchange Act Release No. 38273 (February 12, 1997) 62 FR 
7489 (February 19, 1997) (approving File No. SR-PSE-96-45); see also 
Exchange Act Release No. 39667 (February 13, 1998) 63 FR 9895 
(February 26, 1998) (order approving proposal to allow non-multiply-
listed option issues to be traded under the program).
    \9\ 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 expand the LMM Book Pilot Program 
to eliminate the cap on the number of LMMs that may participate in the 
program. The Exchange notes that the program has been in operation for 
approximately eighteen months and that no significant problems have 
occurred. The program has been viable and effective, and has resulted 
in significant cost savings to customers in Book execution charges. The 
Exchange believes that it has adequate systems and operation capacity 
to expand the scope of the program beyond its current limits.
    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.

[[Page 45277]]

III. Discussion

    The Commission believes the proposed rule change is consistent with 
the provisions of Section 6(b)(5) \10\ of the Act, which provides, 
among other things, that the rules of an exchange are designed to 
facilitate transactions in securities, to promote just and equitable 
principles of trade, and to protect investors and the public interest. 
The Commission notes that the LMM Book Pilot Program has been in 
operation for almost two years, without significant problems. According 
to the Exchange, the Program has been effective, has resulted in cost 
savings to customers in Book execution charges, and has provided the 
Exchange greater competitive ability. In seeking to remove the cap on 
the number of LMM participants in the program, the Exchange has 
represented that it has both the systems and operational capacity, and 
the ability, to handle such an expansion. Moreover, the Exchange 
believes that such expansion is necessary to handle increased order 
flow and to provide the flexibility that the Exchange needs in its 
efforts to facilitate transactions. Further, the Exchange believes that 
such an expansion would provide it with an enhanced competitive 
ability, particularly in comparison with other exchanges that trade 
options. The Commission agrees that the elimination of the current cap 
on LMM participants in the program should provide PCX with the 
flexibility and competitive ability that the Exchange is seeking, while 
enhancing its ability to facilitate transactions and to lower customer 
costs. The Commission notes that the program has operated without 
serious concerns or disruptions to date, and that the Exchange has 
represented that it will continue its efforts to oversee and surveil 
the operations of the program and the LMM participants. For these 
reasons, the Commission believes that the proposed elimination of the 
cap on the current number of LMM participants in the Book Pilot Program 
would be consistent with Section 6(b)(5) of the Exchange Act.
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    \10\ 15 U.S.C. 78f(b)(5).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\11\ that the proposed rule change (SR-PCX-98-17) is approved.
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    \11\ 15 U.S.C. 78s(b)(2).
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    For the Commisson, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-22703 Filed 8-24-98; 8:45 am]
BILLING CODE 8010-01-M