[Federal Register Volume 63, Number 179 (Wednesday, September 16, 1998)]
[Notices]
[Page 49626]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-24818]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40412; File No. SR-PCX-98-27]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change by the Pacific Exchange, Inc. Relating to the Automatic 
Execution of Option Orders

September 8, 1998.

I. Introduction

    On June 12, 1998, the Pacific Exchange, Inc. (``PCX'' or 
``Exchange'') submitted to the Securities and Exchange Commission 
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend PCX Rule 6.87 governing 
the operations of the Exchange's Automatic Execution System. On July 
14, 1998, the PCX filed with the Commission Amendment No. 1 to the 
proposed rule change.\3\ The proposed rule change, as amended, was 
published for comment in the Federal Register on August 3, 1998.\4\ The 
Commission received no comments regarding the proposal. This order 
approves the proposal as amended.
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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, Senior Attorney, 
Regulatory Policy, Exchange, to Ken Rosen, Attorney, Division of 
Market Regulation, Commission, dated July 13, 1998 (``Amendment No. 
1'').
    \4\ Securities Exchange Act Release No. 40263 (July 24, 1998) 63 
FR 41312.
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II. Description of the Proposal

    Presently, orders entered via the Exchange's Member Firm Interface 
(``MFI'') are delivered to one of three destinations: (a) to the 
Exchange's Automatic Execution System for options trading (``Auto-
Ex''), where they are automatically executed at the disseminated bid or 
offering price; (b) to Auto-Book, which maintains non-marketable limit 
orders based on limit price and time receipt; or (c) to a Member Firm's 
default destination, a particular firm booth or remote entry site, if 
the order fails to meet the eligibility criteria necessary for using 
either Auto-Ex or Auto-Book or if the Member Firm requests such default 
for its orders.\5\
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    \5\ See Securities Exchange Act Release No. 27633 (January 18, 
1990) 55 FR 2466 (January 24, 1990); Securities Exchange Act Release 
No. 39970 (May 7, 1998) 63 FR 26662 (May 13, 1998).
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    The Exchange now proposes to adopt new PCX Rule 6.87(d),\6\ which 
would provide that the Exchange's Options Floor Trading Committee 
(``OFTC'') may designate electronic orders in an option issue to 
receive automatic executions at prices reflecting the National Best Bid 
or Offer (``NBBO'').
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    \6\ PCX Rules 6.87 governs the operation of Auto-Ex. Currently, 
only non-broker/dealer customer orders for up to ten option 
contracts (or 20 option contracts, depending on the option issue) 
are eligible to be executed on Auto-Ex. See PCX Rule 6.87. Moreover, 
Auto-Ex is designed to prevent executions at prices inferior to 
prices being concurrently disseminated in other marketplaces in 
multiply-traded issues. When Auto-Ex prevents an automatic execution 
from occurring because it would trade through a better price on 
another market, the order will default either to a member firm booth 
or to a hand-held terminal in the trading crowd (depending on the 
member firm's instruction). See Letter from Michael D. Pierson, 
Senior Attorney, Regulatory Policy, Exchange, to Kenneth Rosen, 
Attorney, Division, Commission, dated August 27, 1998. Thereafter, 
the order could be represented manually.
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    The proposal would allow the OFTC to designate, for an option 
issue, that an order will default for manual representation by a floor 
broker in the trading crowd if the order would be executed at a price 
that is more than one trading increment away from the PCX market 
price\7\ The proposal also would permit the OFTC to designate, for an 
option issue, that if the NBBO is crossed (e.g., 6\1/8\ bid, 6 asked) 
or locked (e.g., 6 bid, 6 asked), then customer orders to buy or sell 
the series would default for manual representation in the trading 
crowd. Under the proposal, however, the Exchange would maintain the 
flexibility to require automatic executions on the Exchange when the 
NBBO is locked or crossed. Such action may be appropriate, for example, 
when there is a large influx of electronic orders and a fair and 
orderly market would be better served by a reduction in the number of 
orders. In such situations, public customers would receive very 
favorable prices on their orders.
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    \7\ The Commission recently approved a similar proposal by the 
Chicago Board Options Exchange. See Securities Exchange Act Release 
No. 40096 (June 16, 1998) 63 FR 34209 (June 23, 1998).
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III. Discussion

    After careful review, the Commission finds that the proposal rule 
change is consistent with the requirements of the Act. In particular, 
the Commission believes the proposal is consistent with Section 3(f) 
\8\ and Section 6(b)(5) \9\ of the Act. Section 6(b)(5) requires, among 
other things, that the rules of an exchange be designed to promote just 
and equitable principles of trade and to protect investors and the 
public interest.
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    \8\ In approving this rule, the Commission has considered the 
proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \9\ 15 U.S.C. 78f(b)(5).
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    By automating the execution of eligible retail orders for equity 
options, the proposal should help to ensure that investors receive 
prompt, automatic execution of Auto-Ex options orders at the best 
available prices, even if those prices are being quoted in a market 
other than the Exchange. This proposal should minimize the delay 
inherent in manually handling orders in this circumstance, and thereby 
reduce the risk to investors that, as a result of an adverse move in 
the market while their orders are being manually handled, they may 
receive an inferior execution or none at all.
    Moreover, the proposal is consistent with Section 3(f) of the Act 
because it should help to promote competition for dually listed options 
among options exchanges by helping to ensure that investors receive an 
automatic execution at the NBBO regardless of whether that quote 
originated on the PCX or on another exchange.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\10\ that the proposed rule change (SR-PCX-27), as amended, is 
hereby approved.

    \10\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 98-24818 Filed 9-15-98; 8:45 am]
BILLING CODE 8010-01-M