[Federal Register Volume 63, Number 190 (Thursday, October 1, 1998)]
[Notices]
[Pages 52784-52786]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-26277]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40482; File No. SR-PCX-98-47]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by the Pacific 
Exchange, Inc. Relating to a Supplemental Specialist Post Fee

September 25, 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 September 17, 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 and II below, which Items have been prepared by PCX.\3\ The 
Commission is publishing this notice and order to solicit comments on 
the proposed rule change from interested persons and to approve the 
proposal, as amended.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ On September 23, 1998, the Exchange filed Amendment No. 1 to 
the proposed rule filing, the substance of which is incorporated 
into the notice. See letter from Michael Pierson, Senior Attorney, 
Regulatory Policy, PCX, to Richard Strasser, Assistant Director, 
Division of Market Regulation (``Division''), Commission, dated 
September 22, 1998.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    PCX is proposing to adopt a Supplemental Specialist Post Fee that 
will apply when the Equity Floor Trading Committee permits a specialist 
firm to consolidate its specialist posts on the Equity Floors of the 
Exchange. The text of the proposed rule change is available at the 
Office of the Secretary, PCX and at the Commission.

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

    In its filing with the Commission, PCX 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 III below. PCX 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

1. Purpose
    Unlike other stock exchanges, PCX maintains a ``specialist post'' 
structure--rather than a ``specialist unit'' structure--on its Equity 
Floors. A ``specialist post'' structure requires each registered 
specialist to be assigned to a specific post where certain designated 
stocks are traded. If a specialist firm is operating ten specialist 
posts, for example, the firm would be required to maintain a specialist 
at each of the ten posts. By contrast, under a ``specialist unit'' 
structure, stocks are allocated to the specialist unit, rather than to 
a particular post or particular specialist. If 500 stocks are traded at 
a specialist unit, for example, it would be generally within the 
specialist firm's discretion to determine the number of specialists 
necessary to operate that unit.\4\
---------------------------------------------------------------------------

    \4\ On the PCX Options Floor, Lead Market Makers (``LMMs''), who 
are like specialists in several respects, are permitted to run their 
operations in a manner consistent with a unit structure. For 
example, if an LMM has been allocated 100 option issues for trading 
at an LMM Post on the Options Floor, it is within the discretion of 
the LMM to determine the number of registered Market Makers 
necessary to operate that post. There are no rules specifying the 
number of Market Makers that an LMM must maintain at a given post 
(other than the requirement that the LMM must be present at the 
trading post throughout the trading day). If an LMM maintains 
inadequate staffing, the Exchange may take corrective action through 
the evaluation and reallocation processes. See generally PCX Rule 
6.82 and Options Floor Procedure Advice B-13.

---------------------------------------------------------------------------

[[Page 52785]]

    Although the Exchange intends to modify its rules to adopt a 
``specialist unit'' structure for equity securities in the near future, 
the Exchange anticipates that it will take a significant amount of time 
to implement the necessary rule and structural changes. In the 
meantime, a number of PCX specialist firms have expressed an interest 
in achieving greater flexibility to reduce costs for their specialist 
operations. These firms desire to reduce the number of specialists they 
employ on PCX by collapsing one or more of their posts into their other 
posts. For example, a firm that operates ten posts, which requires the 
use of ten specialists, might propose to collapse two of its posts into 
the others, so that it would need only eight posts an eight specialists 
to make markets in its specialty stocks.
    PCX's fee structure currently applies on a per post basis. Thus, if 
ten posts are consolidated into eight posts, fees previously paid for 
ten posts would only have to be paid for eight posts. The Exchange is 
now proposing to create a new fee that will apply to specialist firms 
that consolidate their posts. Under the proposal, if a firm 
consolidates its posts and this results in a reduction in the total 
number of specialist posts that the firm operates, the firm will be 
required to pay fixed specialist fees based on the number of posts that 
it operated prior to the consolidation. For example, assume that a 
specialist firm is operating ten posts with 50 stocks traded at each 
post. The Equity Floor Trading Committee (``EFTC'') may permit the firm 
to reduce the number of posts that it operates from ten to nine, with 
50 stocks being reallocated to the remaining posts. Under the proposal, 
if the EFTC approves the firm's request, \5\ the firm would be subject 
to the Supplemental Specialist Post Fee of $6,750 per month as a 
condition of each post consolidation. This fee is equivalent to the 
fixed specialist fees that would otherwise apply to each post before it 
collapsed.\6\ The fee will not apply in situations where all of the 
stocks from a specialist firm's post are transferred to a post or posts 
of another specialist firm.\7\
---------------------------------------------------------------------------

    \5\ The Exchange has recently adopted supplemental guidelines 
for the EFTC to consider in connection with member firm requests to 
consolidate their posts. See Securities Exchange Act Release No. 
40449 (September 17, 1998), (File No. SR-PCX-98-46).
    \6\ These fees include; the specialists facility fee ($300 per 
month per post); the specialist systems fee ($1,550 per month per 
post); the market data fee ($400 per month per post); the post 
cashiering fee ($2,150 per month per post); and the post clearing 
fee ($2,350) per month per post)--for a total fee of $6,750 per 
month. These fees will not include: General Membership Dues ($250 
per month per membership); and Floor Privilege Fee ($165 per month 
for each registered floor member and registered clerk).
    \7\ See Amendment No. 1.
---------------------------------------------------------------------------

    The purpose of the proposal in two-fold; First, it is intended to 
provide a way to afford relief to specialist firms, so that they can 
reduce redundancy made necessary by the specialist post structure, and 
thereby reduce their own operating costs. Second, it is intended to 
assure that the consolidation of posts on the Exchange Floors is 
revenue neutral for Exchange purposes. The Exchange needs to assure 
that it continues to collect sufficient fees for the specialist posts 
on its Equity Trading Floor so that it can continue funding its 
operations, including its regulatory program and oversight of 
specialist operations.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
Section (6)(b) \8\ of the Act, in general, and furthers the objective 
of Section (6)(b)(4),\9\ in particular, because it provides for the 
equitable allocation of reasonable dues, fees and other charges among 
its members and issuers and other persons using its facilities. In most 
cases, a consolidation of posts will result in a specialist firm 
retaining most, if not all, of its specialty stocks, albeit operated by 
fewer specialists. It is reasonable to apply the same amount in fees 
imposed on the firm as if the posts were not collapsed because the 
proportion of allocated stocks will remain the same or close in 
number.\10\
---------------------------------------------------------------------------

    \8\ 15 U.S.C. 78f.
    \9\ 15 U.S.C. 78f(b)(4).
    \10\ It is possible that the EFTC might, in some situations, 
require a reduction in the number of stocks traded at a given post 
as a precondition of a post consolidation. If the reduction is more 
than minor, however, a firm, as its own business decision, can 
choose not to consolidate its posts because of this precondition.
---------------------------------------------------------------------------

    The Exchange also believes the proposal is consistent with Section 
6(b)(5) of the Act,\11\ 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.
---------------------------------------------------------------------------

    \11\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

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. 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, N.W., 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 also will be 
available for inspection and copying at the principal office of PCX. 
All submissions should refer to File No. SR-PCX-98-47 and should be 
submitted by October 22, 1998.

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

    The Commission finds that PCX's proposal to establish a 
Supplemental Specialist Post Fee is consistent with the requirements of 
the Act and the rules and regulations thereunder applicable to a 
national securities exchange. Specifically, the Commission finds that 
the proposal is consistent with Section 6(b)(4) and 6(b)(5) of the 
Act.\12\
---------------------------------------------------------------------------

    \12\ 15 U.S.C. 78f(b)(4) and (b)(5).
---------------------------------------------------------------------------

    Section 6(b)(4) requires that the rules of an exchange provide for 
the equitable allocation of reasonable dues, fees, and other charges 
among its members and issuers and other persons using its facilities. 
Section 6(b)(5) requires that the rules of an exchange be designed to

[[Page 52786]]

prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, to protect investors and the public 
interest and not be designed to permit unfair discrimination between 
customers, issuers, brokers or dealers. The Commission believes that 
the proposal is consistent with these provisions of the Act because the 
new fee will apply in a non-discriminatory fashion to all firms that 
choose to consolidate their posts on the Exchange. Moreover, the 
proposal is designed to help reduce non-exchange related costs involved 
with maintaining a post without causing the Exchange to sacrifice 
needed revenues used to provide exchange services and to carry out its 
regulatory functions.
    PCX has requested that the Commission approve the proposal on an 
accelerated basis. The Commission finds good cause for approving the 
proposed rule change prior to the thirtieth day after the date of 
publication of notice thereof in the Federal Register. The Commission 
believes that the proposal is reasonable given the exigent 
circumstances of the recent specialist post consolidations and the 
possibility of more consolidations on the floor of PCX. Currently, 
there are eighty-two specialist posts operating on PCX's Equity Floors. 
PCX has received six member firm applications to collapse eight of 
those posts.\13\ In addition, the Exchange anticipates further 
specialist post consolidations. In the absence of the proposal, the 
Exchange would sacrifice a substantial amount of its revenue in a short 
time, which could compromise its ability to perform its regulatory 
duties.
---------------------------------------------------------------------------

    \13\ Telephone conversation between Michael Pierson, Senior 
Attorney, Regulatory Policy, PCX, and Richard Strasser, Assistant 
Director, Division, Commission, on September 23, 1998.
---------------------------------------------------------------------------

    PCX has represented that it intends to modify its rules to adopt a 
``specialist unit'' structure, as opposed to the ``specialist post'' 
structure it now operates. Such a structure could address the revenue 
issues raised by post consolidations by permitting exchange members to 
reallocate specialists without reducing the fees they pay to the 
Exchange to maintain the same level of service. As a result, the 
Commission views the Supplemental Specialist Post Fee as a temporary 
remedy to assist the Exchange in maintaining essential revenues while 
moving from a ``specialist post'' structure to a ``specialist unit'' 
structure.
    It is therefore ordered, pursuant to Section 19(b)(2) \14\ of the 
Act that the proposed rule change (SR-PCX-98-47) is hereby approved on 
an accelerated basis.

    \14\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
---------------------------------------------------------------------------

    \15\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Jonathan G. Katz,
Secretary.
[FR Doc. 98-26277 Filed 9-30-98; 8:45 am]
BILLING CODE 8010-01-M