[Federal Register Volume 64, Number 140 (Thursday, July 22, 1999)]
[Notices]
[Pages 39548-39550]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-18657]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41611; File No. SR-PCX-99-04]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Pacific Exchange, Inc. Relating to an Increase in the 
Maximum Size of Option Orders That May Be Executed Automatically

July 9, 1999.
    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 February 10, 1999, 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, II, and III below, which Items have been prepared by the PCX. 
On February 25, 1999 the Exchange submitted Amendment No. 1 to the 
proposed rule change.\3\ On May 25, 1999 the Exchange

[[Page 39549]]

submitted Amendment No. 2 to the proposed rule change.\4\ On July 2, 
1999 the Exchange submitted Amendment No. 3 to the proposed rule 
change.\5\ 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\ Amendment No. 1 sets the maximum order size for execution 
through Auto-Ex for equity options and for index options on the PSE 
Technology Index, the Wilshire Small Cap Index, and the Morgan 
Stanley Emerging Growth Index at fifty contracts. Additionally, in 
Amendment No. 1 the PCX withdrew SR-PCX-99-05, which was filed with 
the Commission on February 22, 1999. See letter from Robert P. 
Pacileo, Staff Attorney, PCX, to Michael A. Walinskas, Deputy 
Associate Director, Division of Market Regulation, Commission, dated 
February 24, 1999.
    \4\ In Amendment No. 2 the Exchange proposed to add a subsection 
to PCX Rule 6.87 to address the unbundling of Auto-Ex orders See 
letter from Robert P. Pacileo, Staff Attorney, PCX, to Michael A. 
Walinskas, Associate Director, Division of Market Regulation, 
Commission, dated May 24, 1999.
    \5\ In Amendment No. 3 the Exchange replaced the proposal in its 
entirety to restate and clarify the purpose of the proposal, to 
address technical modifications to PCX Rule 6.87 made in a separate 
filing with the Commission (SR-PCX-99-23), and to add a proposal to 
amend PCX Rule 6.86. See letter from Robert P. Pacileo, Staff 
Attorney, PCX, to Michael A. Walinskas, Associate Director, Division 
of Market Regulation, Commission, dated July 1, 1999.
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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 modify its rules on the automatic execution 
of option orders by expanding the maximum number of contracts that may 
be designated for automatic execution on an issue-by-issue basis. 
Specifically, the Exchange proposes to change the maximum order size 
for execution of equity options orders that are eligible to be executed 
electronically on the Exchange's Automatic Execution System (``Auto-
Ex'') from twenty contracts to fifty contracts.

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 III below. The 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
    First, the Exchange proposes to amend its Rule 6.86, governing 
Trading Crowd Firm Disseminated Market Quotes. The Exchange proposes to 
add subsection 6.86(g) and to make technical changes to Rule 6.86 to 
make it consistent with proposed Rule 6.87(b).\6\
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    \6\ PCX Rule 6.87 has been renumbered and reorganized under SR-
PCS-99-23, filed with the Commission on June 14, 1999. See 
Securities Exchange Act Release No. 41582 (June 30, 1999).
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    Specifically, the Exchange proposes to add subsection 6.86(g) to 
require that, if the Options Floor Trading Committee (``OFTC'') 
determines, pursuant to Rule 6.87(b), the size of orders in an issue 
that are eligible to be executed on Auto-Ex will be greater than twenty 
contracts, then the trading crowd will be required to provide a market 
depth in that greater amount. The Exchange proposes this rule change to 
update, clarify and keep consistent PCX rules governing size of market 
orders and market depth.
    Second, the Exchange proposes to modify its rules on the automatic 
execution of Equity and Index Option orders by expanding the maximum 
number of contracts that may be designated for automatic execution, on 
an issue-by-issue basis, to fifty contracts.\7\ Currently, the PCX Rule 
6.87(b) provides that the Exchange's OFTC shall determine the size of 
orders that are eligible to be executed electronically on the 
Exchange's Auto-Ex system.\8\ The rule provides that the OFTC may 
change the order size parameter of orders that may be executed on Auto-
Ex on an issue-by-issue basis. The rule further provides that the 
maximum order size that the OFTC may designate for execution on Auto-Ex 
is twenty contracts.\9\
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    \7\ The PCX Technology Department has confirmed that Pacific 
Options Exchange Trading System (``POETS'') is capable of, and has 
the capacity to, execute trades at 50-up on an issue-by-issue basis, 
which can equate to floor-wide 50-up if done for all issues.
    \8\ The Commission approved the POETS and its Auto-Ex features 
as a pilot program in January 1990. See Securities Exchange Act 
Release No. 27633 (January 18, 1990), 55 FR 2466 (order approving 
File No. SR-PSE-89-26). On July 30, 1993, the Commission approved 
the program on a permanent basis. See Securities Exchange Act 
Release No. 32703 (July 30 ,1993), 58 FR 42117 (August 6, 1993). The 
Auto-Ex system permits eligible market or marketable limit orders 
sent from member firms to be executed automatically at the displayed 
bid or offering price. Participating market makers are designated as 
the contra side to each Auto-Ex order. Participating market makers 
are assigned by Auto-Ex on a rotating basis, with the first market 
maker selected at random from the list of signed-on market makers. 
Auto-Ex preserves Book priority in all options. Automatic executions 
through Auto-Ex are currently available for public customer orders 
of ten contracts or less (or in certain issues, for twenty contracts 
or less) in all series of options traded on the Options Floor of the 
Exchange.
    \9\ Currently, however, PCX Rule 6.87(c) provides: ``The Options 
Floor Trading Committee may increase the size of Auto-Ex-eligible 
orders in one or more classes of multiply traded equity options to 
the extent that other options exchanges permit such larger size 
orders in multiply traded equity options of the same class or 
classes to be entered into their own automated execution systems. If 
the Options Floor Trading Committee intends to increase the Auto-Ex 
order size eligibility pursuant to this subsection, the Exchange 
will notify the Securities and Exchange Commission pursuant to 
Section 19(b)(3)(A) of the Exchange Act.''
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    The Exchange proposes to distinguish between Equity and Index 
Options for matters relating to expansion of the maximum number of 
contracts that may be designated for automatic execution. The PCX 
proposes to increase the maximum size of Equity Option orders that the 
OFTC may designate for automatic execution in an issue from twenty 
contracts to fifty contracts. The PCX also proposes to allow the OFTC 
the ability to determine the size of Index Options orders that are 
eligible to be executed on Auto-Ex on an issue-by-issue basis for the 
following Index Options, with a maximum order size of fifty contracts: 
(1) the PSE Technology Index; (2) the Wilshire Small Cap Index; and (3) 
the Morgan Stanley Emerging Growth Index. The Exchange proposes these 
changes in an effort to meet the changing needs of customers in the 
market place and to give the Exchange better means of competing with 
other options exchanges for order flow, particularly in multiply traded 
issues. The Exchange also believes that the proposal will allow the 
Exchange to enhance its operational efficiency, particularly during 
times when large influxes of manual orders crate undue congestion in 
particular trading crowds.
    Third, the Exchange proposes to add subsection 6.87(k) to address 
the unbundling of Auto-Ex orders. Specifically, the Exchange proposes 
that the OFTC will determine, on an issue-by-issue basis, the manner in 
which orders entered through the Auto-Ex system will be assigned to 
individual Market Makers for execution. Each Marker Maker who is 
participating on the Auto-Ex system will be required to execute a 
maximum of ten option contracts per Auto-Ex trade, except that, the 
OFTC may permit individual Market Makers and Lead Market Makers 
(``LMM'') to be allocated a number of contracts greater than ten and no 
more than fifty, upon the request of the individual Market Maker or 
LMM.
    Fourth, the Exchange proposes that, in accordance with the 
provision on

[[Page 39550]]

LMMs' guaranteed participation in Rule 6.82(d)(2), the LMM in an issue 
will be required to either (i) participate in every other trade 
executed on Auto-Ex in that issue or (ii) participate in a percentage 
of every trade consistent with the amount of the LMM's guaranteed 
participation. The Exchange also proposes that the OFTC may require 
Market Makers or an LMM who is participating on Auto-Ex in a particular 
issue to execute a number of contracts greater than ten. However, 
before doing so, the OFTC must take into account whether doing so would 
place a Market Maker at undue risk based on that Market Maker's 
capitalization.
    Finally, the Exchange proposes that the OFTC seek to assure that 
each Market Maker participating on Auto-Ex in a particular issue will 
be assigned up to the same maximum number of option contracts per Auto-
Ex trade. The OFTC may permit exceptions to this procedure only in 
unusual situations where the OFTC finds good cause for permitting 
differences in the maximum number of contracts executed by individual 
Market Makers.
2. Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) \10\ of the Act, in general, and furthers the 
objectives of Section 6(b)(5),\11\ in particular, in that it is 
designed to facilitate transactions in securities, to protect investors 
and the public interest and to promote just and equitable principles of 
trade.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    PCX 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

    No written comments were solicited or received with respect to the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    Within 35 days of the date of 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 such 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 20549-0609. 
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. 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-99-04 and should 
be submitted by August 12, 1999.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-18657 Filed 7-22-99; 8:45 am]
BILLING CODE 8010-01-M