[Federal Register Volume 63, Number 203 (Wednesday, October 21, 1998)]
[Notices]
[Pages 56283-56284]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-28197]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40548; File No. SR-PCX-98-50]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by the Pacific 
Exchange, Inc. to Make the LMM Book Pilot Program Permanent

October 14, 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 30, 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. The 
Commission is publishing this notice and order to solicit comments on 
the proposed rule change from interested persons and to grant 
accelerated approval to the proposal.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    PCX is proposing to modify PCX Rule 6.82 to make the LMM Book Pilot 
Program permanent. Proposed new language is in italics; proposed 
deletions are in [brackets].

Text of the Proposed Rule Change

Lead Market Makers

para.5181
    Rule 6.82(a)-(h), No Change.
    Commentary:
    .01.--.02., No Change.
    [.03. The provisions of Rule 6.82(h) are subject to a pilot 
program, which is set to expire on October 12, 1998.]
    .03. [.04.], No Change.

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

    In it 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
    Background. The Commission approved the Lead Market Maker (``LMM'') 
Book Pilot Program on October 11, 1996,\3\ Under the program, a limited 
number of LMMs are able to assume operational responsibility for the 
options limit order book (``Book'') in certain options issues.\4\ The 
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. The program allows LMMs to have greater 
control over their operations by allowing them to set their own rates 
for execution services provided to customers.
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    \3\ See Exchange Act Release No. 37810 (October 11, 1996), 61 FR 
54481 (October 18, 1996).
    \4\ Id.
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    In April 1997, the Commission approved an Exchange proposal to 
expand the scope of the pilot program to allow up to nine LMMs to 
participate and up to 150 symbols to be used.\5\ In September 1997, the 
Commission approved PCX's request to extend the pilot program for one 
year.\6\ In addition, the Commission approved inclusion of non-
multiply-listed options issues in the program in February 1998; 
elimination of the cap on the number of symbols that may be used under 
the program in May 1998; and elimination of the cap of the number of 
LMMs that may participate in the program in August 1998.\7\ The program 
currently has 10 LMM participants that are collectively trading 155 
options issues (and 194 option symbols) as part of the pilot program.
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    \5\ See Exchange Act Release No. 38462 (April 1, 1997), 62 FR 
16886 (April 8, 1997).
    \6\ See Exchange Act Release No. 39106 (September 22, 1997), 62 
FR 51172 (September 30, 1997).
    \7\ See Exchange Act Release Nos. 39667 (February 13, 1998), 63 
FR 9895 (February 26, 1998); 40020 (May 21, 1998), 63 FR 29286 (May 
28, 1998); and 40328 (August 17, 1998), 63 FR 45276 (August 25, 
1998).
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    Proposal. PCX is proposing to make the LMM Book Pilot Program 
permanent. The Exchange believes the program is operating successfully 
and without any problems, and on that basis, the Exchange believes that 
making the LMM Book Pilot Program permanent is warranted. The Exchange 
submitted a report on September 28, 1998, as requested by the 
Commission in Exchange Act Release No. 37810, which related to the one 
year extension of the pilot program approved in September

[[Page 56284]]

1997.\8\ The report indicated that the Exchange had received no formal 
complaints on the operation of the pilot since the previous report. 
Moreover, the Exchange found no significant impact from the pilot on 
bid/ask spreads, depth, and continuity in the Exchange's options 
markets.
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    \8\ See n. 3 above.
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2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
Section 6(b) \9\ of the Act, in general, and furthers the objectives of 
Section 6(b)(5) of the Act, \10\ in particular, because it is designed 
to perfect the mechanism of a free and open market, to promote just and 
equitable principles of trade, to facilitate transactions in 
securities, and in general, to protect investors and the public 
interest.
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    \9\ 15 U.S.C. 78f.
    \10\ 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. 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, 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 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-98-50 and should be 
submitted by November 12, 1998.

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

    The Commission finds that PCX's proposal to make the LMM Book Pilot 
Program permanent is consistent with the requirements of the Act and 
the rules and regulations thereunder applicable to a national 
securities exchange. Specifically, the Commissions finds that the 
proposal is consistent with Section 6(b)(5) \11\ of the Act.
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    \11\ 15 U.S.C. 78f(b)(5).
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    Section 6(b)(5) requires that the rules of an exchange be designed 
to 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 it is designed to give LMMs greater control over their 
operations on the Exchange floor while maintaining sufficient 
safeguards to permit proper Exchange oversight of the LMMs managing the 
Book function.\12\
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    \12\ See n. 3 above (order approving pilot and noting that, 
among other safeguards, the Exchange's Options Allocation Committee 
will evaluate LMMs at least semiannually.)
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    The Commission notes that the LLM Book Pilot Program has been in 
operation two years without significant problems and may have resulted 
in cost savings to customers in Book execution charges while improving 
the Exchange's competitiveness.
    The Commission finds good cause for approving the proposed rule 
change prior to the thirtieth day after the date of publication. The 
Commission notes when the LMM Book Pilot Program was initially 
proposed, notice was published in the Federal Register for the full 21-
day comment period without any comments being received by the 
Commission.\13\ Moreover, amendments to the LMM Book Pilot Program did 
not generate public comment.\14\ Finally, the Commission believes it is 
important to ensure that the proposal runs without interruption. As a 
result, it is approved permanently.
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    \13\ See, n. 3 above.
    \14\ Id.
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    It is therefore ordered, pursuant to Section 19(b)(2) \15\ of the 
Act that the proposed rule change (SR-PCX-98-50) is hereby approved on 
an accelerated basis.

    \15\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200:30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-28197 Filed 10-20-98; 8:45 am]
Billing Code 8010-01-M