[Federal Register Volume 63, Number 247 (Thursday, December 24, 1998)]
[Notices]
[Pages 71322-71325]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-34126]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40805; File No. SR-PCX-98-53]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by the Pacific 
Exchange, Inc. Relating to Options Floor Trading Halts and Suspensions

December 17, 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 October 6, 1998,\3\ the Pacific Exchange, Inc. (``PCX'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I and II below, which Items have been prepared by the PCX. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons. For the reasons discussed 
below, the Commission is granting accelerated approval of the proposed 
rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ On December 4, 1998, the PCX submitted Amendment No. 1 to 
the proposed rule change. Amendment No. 1 clarifies certain defined 
terms in the rule language and makes additional non-substantive 
textual changes. See letter from Robert Pacileo, Jr., Staff 
Attorney, PCX, to Mignon McLemore, Attorney, Division of Market 
Regulation, Commission, dated December 3, 1998.
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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 amend its Rule 6.65 on Options Floor 
Trading Halts and Suspensions to include guidelines to assist Floor 
Officials in their decisions regarding trading halts in equity options. 
The text of the proposed rule change is set forth below. Proposed new 
language is in italics.

para. 5079  Trading Halts and Suspensions

    Rule 6.65(a)-(b)--No Change.
    (c) Options Floor Trading Halt Guidelines. Trading halts are, by 
definition, unusual market conditions. Accordingly, all of the precise 
circumstances at the time a trading halt cannot be anticipated. An 
evaluation of all circumstances at the time a trading halt is under 
consideration is critical. Except as provided below, to ensure 
consistent application of the Exchange's trading halt guidelines, the 
concurrence of two Floor Officials and a senior Exchange Official is 
required. Bearing in mind the need to exercise discretion in

[[Page 71323]]

response to particular circumstances as they occur, the following are 
guidelines for trading halts at the Exchange under varying 
circumstances:
    (1) No last sale and/or quotation dissemination either by the 
Exchange or by OPRA. At the outset, a time-critical review by two Floor 
Officials and a senior Exchange Official (the ``group'') will be made 
of the circumstances causing the failure of dissemination. If it is 
believed by the group that the dissemination will resume in less than 
15 minutes, trading ordinarily will continue and a message will be 
given to the news wire services announcing the dissemination 
difficulty. If it is believed by this group that the dissemination 
problem will extend beyond 15 minutes, the two Floor Officials, in 
their discretion, may impose a halt on all trading in affected 
securities. In any event, two Floor Officials may permit trading to 
continue for more than 15 minutes after a failure of dissemination only 
with the concurrence of a senior Exchange Official. Trading may resume 
upon a determination by the group that the conditions that led to the 
halt are no longer present or that the interests of a fair and orderly 
market are best served by a resumption of trading. Generally the 
Exchange will notify member firms and the news wire services of the 
resumption of trading.
    (2) Primary market halts trading in one or more securities for 
regulatory reasons. Upon notification by the primary market of a 
regulatory trading halt of an individual equity security in the primary 
market, the Exchange may impose a trading halt in the individual stock 
option overlying the security so halted. Trading will resume upon a 
determination by two Floor Officials that the conditions that led to 
the halt are no longer present or that the interests of a fair and 
orderly market are best served by a resumption of trading.
    (3) Primary market non-regulatory trading halt in one or more 
equity securities. Upon notification by the primary market of a non-
regulatory trading halt of an individual equity security in the primary 
market, any two Floor Officials, in their discretion, may impose a 
trading halt in the individual stock option overlying the security so 
halted. Trading may resume upon a determination by two Floor Officials 
that the conditions that led to the halt are no longer present or that 
the interests of a fair and orderly market are best served by a 
resumption of trading. Generally the Exchange will notify member firms 
and the news wire services of the resumption of trading.
    (4) The primary market halts trading floor-wide. If the primary 
market halts trading floor-wide, the Exchange will halt trading in all 
individual equity options overlying the securities so halted in the 
primary market and will assess the viability of markets in the 
underlying securities, as measured by transactions and by share volume. 
In the event that it is determined by two Floor Officials, with the 
concurrence of a senior Exchange Official, that sufficient markets will 
support trading other than on the primary exchange, the Exchange will 
resume trading. Generally the Exchange will notify member firms and the 
news wire services of the resumption of trading.
    (5) Primary market is open but is unable to disseminate last sale 
or quotation information. The Exchange's options trading ordinarily 
will remain open for trading unless, in the opinion of two Floor 
Officials, the absence of disseminated information will impede the 
ability of market makers to maintain fair and orderly markets in the 
option. The concurrence of a senior Exchange Official is required if 
more than one option class is affected.
    (6) Over-the-counter quote dissemination halt. Two Floor Officials, 
in their discretion, may halt trading in options overlying over-the-
counter securities affected by such a quote dissemination halt upon 
first notification of the dissemination halt. Trading may resume upon a 
determination by two Floor Officials that the conditions that led to 
the halt are no longer present or that the interests of a fair and 
orderly market are best served by a resumption of trading. Generally 
the Exchange will notify member firms and the news wire services of the 
resumption of trading.
    (7) Expiration Friday trading in individual equity options. In the 
event that any of the foregoing should occur on expiration Friday, it 
is the preference of the Exchange to allow trading to continue on that 
date. This will be a primary consideration in the assessments to be 
made by the Floor Officials and the Senior Exchange Official.
    (8) Dissemination of news after the close of trading in the primary 
market. Any two Floor Officials may halt trading in any security in the 
event of disseminated news that causes the Floor Officials to believe 
that trading in options should be halted to allow market participants 
an opportunity to consider the effect of the news on pricing of trades. 
Two Floor Officials and a senior Exchange Official will then decide 
whether and, if so, when to recommence trading. This may occur after 
the primary market of the underlying security has closed for the day, 
in which event, the decision may be to not resume trading until the 
next trading day or to have a closing rotation after appropriate 
notification to the public.
    Commentary:
    .03  For purposes of this Rule, a ``regulatory halt'' is a halt 
that is initiated by a regulatory authority in the primary market and a 
``non-regulatory halt'' is a halt initiated by floor staff or at the 
request of a Market Maker or Trading Crowd in the primary market. For 
example, regulatory halts may be initiated by Exchange Staff in the 
primary market if listing or maintenance requirements are not met; if 
there is a need for dissemination of news regarding market developments 
or material information; or at the request of the issuer. Examples of 
non-regulatory halts in the primary market would be requests by Floor 
Members due to an influx, or imbalance of orders, or by Floor Officials 
due to volatility in market conditions; or natural disasters.
* * * * *

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 II below. The self-regulatory organization 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. Circuit Breakers are coordinated cross-market trading 
halts that are intended to help avoid a systematic breakdown when a 
severe one-day market drop of historic propositions prevents the 
financial markets from operating in an orderly manner. The objective of 
trading halts (i.e.,circuit breakers) is to stop trading when there is 
a severe market decline such that liquidity and credit dry up and 
prices threaten to free fall.\4\ The Securities and futures markets 
introduced circuit breakers in order to offer investors an opportunity 
to assess

[[Page 71324]]

information and positions when the markets experienced a severe, rapid 
decline.\5\
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    \4\ See Exchange Act Release No. 39846 (April 9, 1998), 63 FR 
18477 (April 15, 1998).
    \5\ Id.
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    In 1988, the Commission approved various exchanges' circuit breaker 
proposals, along with the PCX's and the NASD's circuit breaker policy 
statements in response to the October 19, 1987 market drop. The 
Commission stated in its approval order that the circuit breaker 
proposals would provide market participants with an opportunity during 
a severe market decline to reestablish an equilibrium between buying 
and selling interests in a more orderly fashion.\6\
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    \6\ Id.
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    The current PCX Rule 6.65 provides for trading halts and 
suspensions for equity options whenever the Exchange deems such action 
appropriate in the interests of a fair and orderly market and to 
protect investors. The PCX also has a policy which sets forth 
guidelines for trading halts in equity options at the Exchange under 
varying circumstances. The proposed rule change would codify the 
Exchange's policy regarding guidelines for trading halts by describing 
several situations which may require trading halts. The situations are: 
(1) No last sale and/or quotation dissemination either by the Exchange 
or by the Options Price Reporting Authority (''OPRA''); (2) Primary 
market halts trading in one or more securities for regulatory reasons; 
(3) Primary market non-regulatory trading halt in one or more equity 
securities; (4) The Primary market halts trading floor-wide; (5) 
Primary market is open but is unable to disseminate last sale or 
quotation information; (6) Over-the-counter quote dissemination halt; 
(7) Expiration Friday trading in individual equity options; and (8) 
Dissemination of news after the close of trading in the primary market. 
The Commission approved a similar change to the Chicago Board Options 
Exchange (``CBOE'') rule and policy regarding trading halts in equity 
options.\7\
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    \7\ See CBOE Regulatory Circular RG92-40, dated July 8, 1992, or 
CBOE Regulatory Circular RG93-58, dated November 10, 1993, (CBOE 
Circular 92-40 reissued); Exchange Act Rel. No. 25906 (July 13, 
1988), 53 FR 27249 (July 919, 1988) (order approving CBOE's trading 
halt policy for individual equity options). See also CBOE Regulatory 
Circular RF95-51, dated June 14, 1995; Exchange Act Rel. No. 35789 
(May 31, 1995), 60 FR 30127 (June 7, 1995) (order approving 
amendment to CBOE's trading halt policy for individual equity 
options to reflect amendments to CBOE Rule 6.3).
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    Proposal. The Exchange is proposing to amend Rule 6.65 on Options 
Floor Trading Halts and Suspensions to include non-mandatory guidelines 
to assist Floor Officials in their decisions regarding trading halts. 
Trading halts are, by definition, unusual market conditions. 
Accordingly, all of the precise circumstances of a trading halt cannot 
be anticipated. An evaluation of all the circumstances at the time a 
trading halt is under consideration is critical. Bearing in mind the 
need to exercise discretion in response to particular circumstances as 
they occur, the PCX proposes the following guidelines for trading halts 
at the Exchange.
    First, when there is no last sale and/or quotation dissemination 
either by the Exchange or by the OPRA, the PCX proposes that, after 
review by two Floor Officials and a senior Exchange Official, if it is 
believed that the dissemination will resume in less than 15 minutes, 
trading ordinarily will continue and a message will be given to the 
news wire services announcing the dissemination difficulty. In 
addition, if it is believed by this group that the dissemination 
problem will extend beyond 15 minutes,the two Floor Officials, in their 
discretion, may impose a halt on all trading in affected securities. In 
any event, two Floor Officials may permit trading to continue for more 
than 15 minutes after a failure of dissemination only with the 
concurrence of a senior Exchange Officials. Trading may resume upon a 
determination by the group that the condition that led to the halt are 
no longer present or that the interests of a fair and orderly market 
are best served by a resumption of trading.
    Second, when the primary market halts trading in one or more 
securities for regulatory reasons, the Exchange proposes that trading 
in the individual stock option overlying a stock that has been halted 
for regulatory reasons generally will halt immediately upon the 
notification thereof by the primary market.\8\
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    \8\ As stated in proposed commentary .03, a ``regulatory halt'' 
is a halt that is initiated by a regulatory authority in the primary 
market and a ``non-regulatory halt'' is a halt initiated by floor 
staff or at the request of a Market Maker or Trading Crowd in the 
primary market. For example, regulatory halts may be initiated by 
Exchange Staff in the primary market if listing or maintenance 
requirements are not met; if there is a need for dissemination of 
news regarding market developments or material information; or at 
the request of the issuer. Examples of non-regulatory halts in the 
primary market would be requests by Floor Members due to an influx, 
or imbalance of orders, or by Floor Officials due to volatility in 
market conditions; or natural disasters.
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    Third, the Exchange proposes that, upon notification by the primary 
market of a non-regulatory trading halt of an individual equity 
security in the primary market, any two Floor Officials, in their 
discretion, may impose a trading halt in the individual stock option 
overlying the security so halted.
    Fourth, when the primary market halts trading floor-wide, the 
Exchange proposes that trading will halt in all individual equity 
options overlying the securities so halted in the primary market and 
will assess the viability of markets in the underlying securities, as 
measured by transactions and by share volume. In the event that it is 
determined by two Floor Officials, with the concurrence of a senior 
Exchange Official, that sufficient markets will support trading other 
than on the primary exchange, the Exchange will resume trading.
    Fifth, the Exchange proposes that when the primary market is open 
but is unable to disseminate last sale or quotation information, 
options trading ordinarily will remain open for trading unless, in the 
option of two Floor Officials, the absence of disseminated information 
will impede the ability of market makers to maintain fair and orderly 
markets in the option. The concurrence of a senior Exchange Official is 
required if more than one option class is affected.
    Sixth, the Exchange further proposes that, in the event of an over-
the-counter quote dissemination halt, two Floor Officials, in their 
discretion, may halt trading in options overlying over-the-counter 
securities affected by such a quote dissemination halt upon first 
notification of the dissemination halt.
    Seventh, the Exchange proposes that, in the event that any of the 
foregoing should occur on expiration Friday, it is the preference of 
the Exchange to allow trading to continue on that date. This will be a 
primary consideration in the assessment to be made by the Floor 
Officials and the senior Exchange Official.
    Eighth, the Exchange proposes that any two Floor Officials may halt 
trading in any security in the event of disseminated news after the 
close of trading in the primary market that causes the Floor Officials 
to believe that trading in options should be halted to allow market 
participants an opportunity to consider the effect of the news on 
pricing of trades. Two Floor Officials and a senior Exchange Official 
will than decide whether and, if so, when to recommence trading. This 
may occur after the primary market of the underlying security has 
closed for the day, in which event, the decision may be to not resume 
trading until the next trading day or to have a closing rotation after 
appropriate notification to the public.
    Finally, when regard to any of the aforementioned circumstances, 
the

[[Page 71325]]

Exchange proposes that trading may resume upon a determination by two 
Floor Officials that the conditions that led to the halt are no longer 
present or that the interests of a fair and orderly market are best 
served by a resumption of trading. Generally the Exchange will notify 
member firms and the news wire services of the resumption of trading.
2. Statutory Basis
    The PCX 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),\10\ in particular, in that it is designed to promote 
just and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in regulating, clearing, settling, 
processing information with respect to, and facilitating transactions 
in securities and, in general to protect investors and the public 
interest.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The PCX believes that the proposed rule change will impose no 
burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    The PCX neither solicited nor received written comments on the 
proposed rule change.

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 will also be 
available for inspection and copying at the principal office of the 
PCX. All submissions should refer to File No. SR-PCX-98-53 and should 
be submitted by January 14, 1999.

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

    The Commission finds, for the reasons set forth below, that the 
proposed rule change is consistent with the requirements of the Act and 
the rules and regulations thereunder applicable to a national 
securities exchange and, in particular, with the requirements of 
Section 6(b) \11\ of the Act. Specifically, the Commission believes the 
proposals is consistent with the Section 6(b)(5) \12\ requirements that 
the rules of an exchange be designed to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitation transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and national market system and, in general, to 
protect investors and the public.\13\
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    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(5).
    \13\ In approving this rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. The Commission believes that this rule will 
improve market efficiency by providing uniform guidelines for 
Exchange Floor Officials in the event that the circumstances 
outlined in the proposed rule occur. The Commission further believes 
that the rule will have little, if any, adverse impact on 
competition. 15 U.S.C. 78c(f).
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    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 
approval of the proposal should enhance market efficiency by providing 
additional clarity to the Exchange's existing trading halt policy for 
options on individual equity securities. Furthermore, outlining 
conditions which require an option trading halt should help lessen 
confusion for market participants, thereby facilitating the maintenance 
of a fair and orderly market. The Commission notes that the proposed 
rule change should be particularly helpful during times of high 
volatility in the market. The Commission also notes that this proposal 
is similar to a proposal filed by CBOE on October 5, 1987. After the 
notice and comment period, the Commission approved CBOE's proposal.\14\
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    \14\ See supra, note 7.
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    Given the Commission's prior approval of a similar proposal and the 
immediate need to provide uniform guidelines for Exchange Floor 
Officials in handling trading halts and suspensions, the Commission 
deems it appropriate to approve the proposed rule change on an 
accelerated basis. The Commission believes it is consistent with 
Section 6(b)(5) \15\ and Section 19(b)(2) \16\ of the Act to grant 
accelerated approval to the proposed rule change.
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    \15\ 15 U.S.C. 78f(b)(5).
    \16\ 15 U.S.C. 78s(b)(2).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (SR-PCX-98-53) is approved on an 
accelerated basis.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-34126 Filed 12-23-98; 8:45 am]
BILLING CODE 8010-01-M