[Federal Register Volume 63, Number 236 (Wednesday, December 9, 1998)]
[Notices]
[Pages 67971-67972]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-32666]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40734; File No. SR-PCX-98-55]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 by the Pacific Exchange, Inc. Relating to 
Crossed Markets Adjustments

December 1, 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 November 5, 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 
Exchange. On November 30, 1998, the PCX submitted to the Commission an 
amendment to the proposed rule change.\3\ The Commission is publishing 
this notice to solicit comments on the proposed rule change from 
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The proposed rule change was originally filed pursuant to 
Section 19(b)(3)(A)(ii) of the Act. The amendment converted the 
proposed rule change to a filing pursuant to Section 19(b)(2) of the 
Act. Letter from Michael D. Pierson, Senior Attorney, Regulatory 
Policy, PCX to Kelly McCormick, Attorney, Division of Market 
Regulation, SEC, dated November 27, 1998 (``Amendment No. 1'').
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The PCX is proposing to clarify its rules on the automatic 
execution of option orders when the PCX market and the market of a 
competing exchange are crossed or locked (i.e., the bid disseminated 
through the facilities of one exchange is higher than or equal to the 
offer disseminated through the facilities of another exchange). The 
change is intended to make consistent the Exchange's rules on the 
handling of electronic orders in such circumstances. The text of the 
proposed rule change follows. Additions to the proposed rule are in 
italics; deletions are in [brackets].
Text of the Proposed Rule Change
para. 5231 Automatic Execution System

    Rule 6.87(a)-(c)--No Change.
    (d) Auto-Ex NBBO. The Options Floor Trading C[c]ommittee (``OFTC'') 
may designate electronic orders in an option issue to receive automatic 
executions at prices reflecting the national best bid or offer 
(``NBBO''), provided that the OFTC may designate, for an option issue, 
that an order will default for manual representation in the trading 
crowd if[: (1)] the order would be executed at a price that is more 
than one trading increment away from the PCX market price[; or (2) the 
NBBO is crossed or locked].
    (e) Crossed or Locked Markets. The OFTC may designate, for an 
option issue, that an order will default for manual representation in 
the trading crowd if the NBBO is crossed or locked.

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 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 IV below. The Exchange 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
    On September 8, 1998, the Commission approved a PCX rule change 
regarding the automatic execution of option orders.\4\ The rule change 
provides 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

[[Page 67972]]

(``NBBO'').\5\ It further provides that the OFTC may 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 would exit the 
automatic execution system of the Exchange and default for Floor Broker 
representation in the trading crowd.\6\
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    \4\ Exchange Act Release No. 40412 (September 8, 1998), 63 FR 
49626 (September 16, 1998) (SR-PCX-98-27).
    \5\ Id.
    \6\ Id.
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    After the Commission approved File No. SR-PCX-98-27, the PCX has 
become aware that PCX Rule 6.87(d), the rule that the proposal changed, 
could imply that the OFTC can designate an option issue for Floor 
Broker representation in crossed and locked markets only if the issue 
is eligible to receive automatic execution at the NBBO. The Exchange, 
however, intended to allow the OFTC to designate any issue for Floor 
Broker representation in crossed and locked markets. Accordingly, the 
Exchange is now proposing to modify Rule 6.87 to clarify that the OFTC 
may designate, for any option issue, that if the NBBO is crossed or 
locked, then customer orders will default for Floor Broker 
representation in the trading crowd regardless of whether the 
Exchange's Auto-Ex system is set to execute orders at prices reflecting 
the NBBO.
    The Exchange is planning to implement a systems change to cover the 
potential for Floor Broker representation of option orders during 
crossed or locked markets. However, before effecting that change, the 
Exchange has determined to file this proposal to clarify the Exchange's 
procedure on the handling of option orders when the NBBO is crossed or 
locked. Accordingly, upon approval of this proposal, the Exchange will 
be in a position to effect the appropriate systems changes as quickly 
as possible.
    As with PCX-98-27, the Exchange believes that its proposal, if 
implemented, will serve to protect public customers from receiving 
inferior prices on their orders in situations where the NBBO is crossed 
or locked. For example, if the PCX's market is 5 bid, 5\1/4\ asked, and 
Exchange B's market is 4 bid, 4\1/4\ asked, the NBBO will be 5 bid, 
4\1/4\ asked. If the 5 bid is based on a public customer order for 10 
contracts, and that order is automatically executed, the customer would 
be deprived of an opportunity to cancel the order at 5 and buy 10 
contracts at Exchange B at 4\1/4\. This could occur regardless of 
whether the PCX Auto-Ex is using the NBBO or PCX quotes. Moreover, 
during the time that the market is crossed, it is not immediately clear 
whether the crossed markets arise from errors resulting from 
communication or system problems, keystroke errors, quotation 
dissemination delays, or are in fact true markets. The default 
mechanism will give Floor Brokers in the trading crowd an opportunity 
to ascertain whether the markets are erroneous and to assure that 
customers receive the best possible price.
    While these situations occur very infrequently, the Exchange 
believes that investors should be protected through the use of human 
intervention. During these times (if so designated by the OFTC for a 
particular option issue), public customer orders will be manually 
represented in the trading crowd by Floor Brokers and handled in a 
manner that is consistent with the Floor Brokers' best execution 
obligations.\7\
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    \7\ See PCX Rule 6.46 (``Responsibilities of Floor Brokers'').
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2. Basis
    The proposal is consistent with Section 6(b)(5) \8\ of the Act 
because it is designed to facilitate transactions in securities.
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    \8\ 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 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 the 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 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 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-98-55 and should be submitted by December 30, 
1998.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-32666 Filed 12-8-98; 8:45 am]
BILLING CODE 8010-01-M