[Federal Register Volume 64, Number 167 (Monday, August 30, 1999)]
[Notices]
[Pages 47210-47214]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-22427]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41774; File No. SR-PCX-99-24]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Pacific Exchange, Inc. Relating to Automated Opening 
Rotations

August 20, 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 July 13, 1999, the Pacific Exchange Inc. (``PCX'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II, and III below, which 
Items have been prepared by the Exchange. On August 4, 1999, the 
Exchange filed with the Commission Amendment No. 1 to the proposed rule 
change.\3\ The Commission is publishing this notice to solicit comments 
on the proposed rule change, as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, the Exchange further clarifies the 
operation of automated openings, provides rule text related to the 
new procedures, and justifies its request for accelerated approval. 
See letter from Michael D. Pierson, Director, Regulatory Policy, 
PCX, to Michael A. Walinskas, Associate Director, Commission, dated 
August 3, 1999 (``Amendment No. 1'').
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange is proposing to adopt a new procedure for handling 
customer orders and executing option transactions during the opening 
rotation. This rule change is intended to automate the current 
procedures for opening rotations, except for those situations in which 
the opening rotation will continue to be conducted manually. The test 
of the proposed rule change follows. New text is italicized.

para.5073--Trading Rotations

    Rule 6.64(a)--No additional change.
    (b) Automated Opening Rotation. The Exchange may employ automated 
opening rotations in designated series of options. All option series 
that are eligible for participation in the Automatic Opening Rotation 
will be opened automatically. Conversely, if an option series is not 
opened automatically pursuant to this Rule, then that series must be 
opened manually pursuant to applicable Exchange Rules. Automated 
Opening Rotations, when held, will be based upon the following 
procedures.
    (1) Establishing a Market for the Opening Rotation: Prior to the 
opening rotation in a particular option series, the Order Book Official 
will determine whether there are any manual orders being represented in 
the trading crowd to be executed during the opening rotation. In doing 
so, the Order Book Official will call for bids and offers from the 
trading crowd once the underlying security has opened. The trading 
crowd may determine that the bids and offers then being displayed on 
the overhead screens are accurate, or alternatively, may modify those 
bids and offers by public outcry.
    (2) Designating Series that are Not Eligible for the Automated 
Opening Rotation. The Order Book Official must identify, prior to the 
opening, all option series that are not eligible for the automated 
opening rotation. These series include:
    (A) Series for which there are no market or marketable limit orders 
in the POETS system.
    (B) Series for which there are one or more manual orders being 
represented in the trading crowd that are likely to be executed during 
the opening rotation, as determined by an Order Book Official.
    (C) Series for which one or more members of the trading crowd has 
reasonably requested that a manual opening rotation be conducted. Two 
Floor Officials may deny member requests for manual opening rotations 
in the absence of reasonable justification for doing so. Prior to the 
opening, the OBO, in conjunction with the members of the trading crowd, 
will set for each option issue a number of contracts that constitutes 
an imbalance threshold, i.e., a specific number of option contracts to 
buy in excess of the number of contracts to sell or a specific number 
of contracts to sell in excess of the number of contracts to buy. The 
POETS system will not automatically open any series with an imbalance 
exceeding the threshold for that issue.
    (3) Automated Opening Rotations. Series Eligible for the Automated 
Opening Rotation will be opened automatically based on the following 
principles and procedures:
    (A) The POETS system will determine a single price at which a 
particular option series will be opened, as provided in Commentary .03, 
below.
    (B) Orders in the system will maintain priority over Market Maker 
bids and offers. Orders in the system will be matched up with one 
another, if possible, before they are executed against the accounts of 
Market Makers participating on the Automatic Execution System.
    (C) If there is an imbalance in the number of contacts to buy or 
sell at the opening, then the imbalance will be cleaned up by the 
Market Makers who are participating on the Automatic Execution System. 
Accordingly, each Market Maker will be assigned a number of option 
contracts for execution until the imbalance has been exhausted. The 
maximum number of option contracts that may be assigned to a Market 
Maker is established pursuant to Rule 6.87. When the Auto-Ex System 
assigns the imbalance of contracts to Market Makers, the assignments 
will be made in the same manner in which option contracts are allocated 
to Market Makers who are participating on the Auto-Ex System pursuant 
to Rule 6.87. The maximum number of contracts assigned will be the same 
as the number assigned under the Auto-Ex procedures established 
pursuant to Rule 6.87.

[[Page 47211]]

Commentary:
    .01-.02--No Change.
    .03--Determining the Opening Price of a Single Price Opening. The 
appropriate price to be used in a single price opening on the Exchange 
is determined in the following manner: Once the trading crowd has 
established the bid and offering prices in a particular series, the 
Order Book Official will identify the number of contracts available to 
sell at the previously-established bid price and the number of 
contracts available to buy at the previously-established offering 
price.
    (a) If the number of contracts available to sell at the bid price 
is greater than the number available to buy at the offering price, then 
the opening price will be the bid price.
    (b) If the number of contracts available to buy at the offering 
price is greater than the number available to sell at the bid price, 
then the opening price will be the offering price.
    (c) If eligible market and marketable limit orders can be 
completely satisfied by trading against other orders in the Limit Order 
Book, then the market may open between the established bid and ask 
prices, with no Market Maker participation. For example, if the market 
is 2-2\1/4\, with an order in the Limit Order Book to sell 20 contracts 
at 2\1/8\, and there is a market order to buy 5 contracts, the single 
price open, will occur with 5 contracts trading at 2-\1/8\. The opening 
price will always be on or between the established bid and offer.
    (d) If there is no trading increment available at the half-way 
point between the bid and offering prices e.g., as in the case of a 
market of bid, 2\1/16\ asked), then the opening price will be 
established at the price closest to the last sale price of option 
contracts in that series.

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

    In its filing with the Commission, the Exchange 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 place 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
    Introduction. The Exchange is proposing to adopt a new procedure to 
facilitate trading of option contracts during the opening rotation.\4\ 
Opening rotations are held promptly following the opening of the 
underlying security on the principal market where it is traded.\5\ 
Opening rotations are conducted by an Order Book Official (``OBO''), 
who is an Exchange employee.\6\ The PCX rules on opening rotations 
apply to both index and equity option contracts.\7\
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    \4\ The Exchange intends to continue to employ the current 
(manual) procedures for closing rotations.
    \5\ See PCX Rule 6.64, Comment. .01(a).
    \6\ See PCX Rules 6.51 and 6.64.
    \7\ See PCX Rule 7.10.
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    Curent Procedures for Opening Rotations. Prior to the opening, 
firms and floor brokers may enter customer orders into the Limit Order 
Book (``Book'') for handling by the OBO to facilitate a single price 
opening. It is the responsibility of the floor broker to make the OBO 
aware of orders that may be expected to trade on the opening.\8\
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    \8\ See OFPA A-1.
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    In conducting the opening rotation, the OBO first asks the trading 
crowd whether the quotes generated by Auto-Quote \9\ are consistent 
with the trading crowd's markets. At that time, the market makers have 
an opportunity to adjust the Auto-Quote parameters, including the 
volatility settings. If one or more members of the trading crowd 
determines to improve a market, they may do so. Alternatively, the 
trading crowd or LMM may establish a market without the use of the 
Auto-Quote function, and in that case, the OBO will request bids and 
offers from members of the trading crowd and enter the quotes manually.
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    \9\ The Auto-Quote feature of POETS allows market quotes to be 
generated systematically, using programmed theoretical models and 
variable criteria that are entered through the Auto-Quote function 
by Book staff. See Securities Exchange Act Release No. 27633 
(January 18, 1990), 55 FF 2466 (January 24, 1990).
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    Once the best bid and ask prices have been established, each option 
series,\10\ is opened as follows: First, if there are no orders in the 
Book and no orders being manually represented in the trading crowd of 
which the OBO is aware, the series is flagged ``open,'' free trading is 
commenced in that series and the Auto-Ex System \11\ is flagged on in 
that series. Second, if there are one or more market or marketable 
limit orders in the Book, or one or more orders being manually 
represented in the trading crowd and designed for trading at the 
opening rotation, the OBO will call for a market and attempt to 
determine from floor brokers the sizes and prices of those orders.\12\ 
The OBO will then ask the floor brokers in the crowd what customers 
orders they are holding to be executed at the opening and, when 
possible, match all customers orders at the appropriate price.\13\ If 
imbalances occur, the OBO asks the market makers if they can clean up 
the imbalance at the established price and, if not, establish

[[Page 47212]]

where the orders can be filled.\14\ Market makers who respond with bids 
or offers are entitled to participate based on existing rules on 
priority of bids and offers.\15\
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    \10\ The term ``series'' means all option contracts of the same 
class (puts or calls) having the same expiration date and exercise 
price, and the same unit of trading. In general, when a new issue is 
first listed and traded on the Exchange, there will be 24 series 
available for trading. These include series that are in-, at- and 
out-of-the money, for both puts and calls, and for each of four 
expiration months. As the price of the underlying stock moves and 
new series are added, the number of series outstanding at any given 
time can be greater than 100. For example, on July 1, 1999, the 
number of series outstanding in options on America Online, Inc. was 
104.
    \11\ 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 20 contracts or less in most option issues 
traded on the Exchange (however, the maximum size of orders eligible 
for Auto-Ex is ten contracts in a small number of issues).
    \12\ See OFPA C-1. If the OBO believes that the response to the 
request for markets is insufficient either as to price or size, the 
OBO may request markets from each market maker who did not respond 
and/or may call for supplemental market makers. See OFPA C-1.
    \13\ See OFPA C-1. The appropriate price that is used in a 
single price opening is determined in the following manner: Once the 
bid and offering prices in a particular series have been determined, 
the OBO will identify the number of contracts available to sell at 
the bid price and the number of contracts available to buy at the 
offering price. If the number available to sell at the bid price is 
greater than the number available to buy at the offering price, then 
the opening price will be the bid price, and vice versa. If the 
number of contracts to sell is equal to the number to buy, then the 
opening price will be established halfway between the bid and 
offering price. However, if there is no trading increment available 
at the half-way point between the bid and offering prices (e.g., as 
in the case of a market 2 bid, 2\1/16\ asked), then the opening 
price will be established at the price closest to the last sale 
price of option contracts of that series.
    If market and marketable limit orders can be completely 
satisfied by trading against other orders in the Book, then the 
market may open between the established bid and ask prices, with no 
market maker participation. For example, if the market is 2-2\1/4\, 
with an order in the Book to sell 20 contracts at 2\1/8\, and a 
market order to buy 5 contracts, the single price opening will occur 
with 5 contracts trading at 2\1/8\ (public customer to public 
customer). The market quote at the opening will then be 2-2\1/8\.
    \14\ See OFPA C-1. During the opening rotation, OBOs are 
permitted to match market orders at the opening price, but floor 
brokers who present these orders to the OBO must remain on the 
trading floor during the rotation (or must designate another floor 
broker to represent those market orders in his or her place). See 
OFPA A-1.
    \15\ See PCX Rules 6.73 and 6.75.
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    While conducting the opening rotation, the OBO will attempt to 
match all public customer orders at a single price.\16\ If there is an 
imbalance of public customer orders in the Book, the OBO will seek 
market maker and firm participation to establish the opening price.\17\ 
The OBO may give market orders that are entitled to participate at the 
opening \18\ priority over limit orders at the same opening price on 
the Book.
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    \16\ See PCX Rule 6.75(c)(2).
    \17\ See PCX Rule 6.75(c)(2).
    \18\ The OFTC is required to establish a cut-off-time for orders 
entitled to participate in the opening. See PCX Rule 6.75(c)(1).
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    Generally, each option issue traded at a given trading post is to 
be opened in the same order in which opening transactions are reported 
in the underlying securities.\19\ In opening a particular option issue, 
the OBO will ordinarily first open one or more series of a given class 
having the nearest expiration, and then proceed to series of options 
having the next most distant expiration, and so forth, until all series 
in that issue have been opened.\20\ Unless the Options Floor Trading 
Committee (``OFTC'') provides otherwise, the OBO will determine whether 
to open puts first or calls first, but may alternate the opening of put 
series and call series, or may open all series of one type (puts or 
calls) before opening series of the other type, depending upon market 
conditions.\21\
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    \19\ See PCX Rule 6.64, Comment. .01(a).
    \20\ See PCX Rule 6.64, Comment. .01(a).
    \21\ See PCX Rule 6.64, Comment. .01(a).
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    New Automated Opening Rotation (``AOR'') Process. The Exchange is 
proposing to adopt a new procedure that will allow the OBO to establish 
electronically a single price opening for executing eligible market and 
marketable limit orders in the POETS system. In the event of an 
imbalance, any remaining orders in the system that are eligible to be 
executed will be assigned to market makers participating on the Auto-Ex 
System. The new process involves three basic steps: first, the markets 
are established; second, the opening rotation is automatically 
processed for the majority of series; and finally, any series was 
manual orders or complication is opened manually i.e., pursuant to the 
current procedures for opening rotations as described above.\22\
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    \22\ See Current Procedures for Opening Rotations, supra.
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    More specifically, under the new AOR process, opening rotations on 
the PCX will occur in the following manner: Prior to the opening, the 
OBO will determine whether there are any orders in the trading crowd to 
be executed at the opening.\23\ Once the underlying security has 
opened, the OBO will request from the trading crowd bids and offers in 
the specific option issue. The trading crowd may determine that the 
posted bids and offers are accurate, or alternatively, may request by 
public outcry that certain quotes be modified.\24\
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    \23\ These may include, for example, orders that cannot be 
represented in POETS, such as contingency orders, broker/dealer 
orders, orders designated ``not held,'' orders for spreads or 
straddlers, combination orders, all-or-none orders, as well as any 
order the floor broker determines to represent manually. As noted 
above, it is the floor brokers' obligation to notify the OBO of such 
orders prior to the opening. See note 8, supra.
    \24\ Prior to an automated opening, the members of the trading 
crowd must establish a bid and offer for each series in a given 
issue. This occurs basically as follows: The OBO will first display 
a bid price and an offering price for a particular series. (These 
prices will have been established either by the Auto-Quote feature 
of POETS or by manual process, i.e., a member or members of the 
trading crowd will vocalize bids and offers that a Market Quote 
Terminal Operator will enter into the system and display on the 
overhead screen.) The OBO will then ask the crowd if the displayed 
prices are ``all right'' (or other words to that effect). There will 
then be a short window period when the displayed prices may be 
adjusted. While the trading crowd is establishing the market, any 
member may vocalize a bid or offer that improves the market, and the 
OBO will be required to update the market accordingly. See Amendment 
No. 1.
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    Once the bid and asking price in each series has been ascertained, 
the OBO and AOR system will identify all series that are eligible for 
the AOR and that can be opened immediately, and will also identify all 
series that are not eligible for the AOR. Those that are not eligible 
for the AOR must be opened manually. Procedures for automatic and 
manual opening are discussed below.
1. Automatic Opening
    The Exchange intends to use the AOR in all issues traded on the 
PCX. The Exchange also expects that particular series will only be 
designated for manual openings (i.e., ``de-selected'' from the 
automated procedure) in unusual circumstances. The Exchange does not 
anticipate any situations where all series of a given issue will be 
opened manually when the AOR is operational. The Exchange also does not 
anticipate that any particular series will be de-selected and opened 
manually on a routine or regular basis.\25\
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    \25\ See Amendment No. 1.
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    To prepare for an automated opening, the AOR will first exclude 
series for which there are no market or marketable limit orders in the 
system,\26\ as well as all series deemed ineligible for AOR. The series 
eligible for AOR will be promptly opened in accordance with the 
following principles and procedures. First, the system will determine a 
single price at which the series will be opened.\27\ Second, orders in 
the system will maintain priority over market maker bids and offers, so 
orders in the system will be matched up with one another, if possible, 
before executing against the accounts of market makers. Third, if there 
is an imbalance in the number of contracts to buy or sell at the 
opening,\28\ then the imbalance will be ``cleaned up'' by the market 
makers who are participating on the Auto-Ex system, i.e., the system 
will assign a set number of contracts (generally 20) to each 
participating market marker until the imbalance has been exhausted.
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    \26\ There can be single price opening unless there are orders 
eligible for trading being represented.
    \27\ The formula that the Exchange intends to use for 
establishing a single price opening in automated openings is set 
forth above. See note 13, supra.
    \28\ For example, if there are market or marketable limit orders 
collectively representing interest to buy 500 contracts and to sell 
100 contracts at a single price, the imbalance will be 400 
contracts. As discussed below, an imbalance in an amount greater 
than a previously-established threshold level will render the series 
ineligible for the AOR.
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    Currently, under the manual process, the imbalance will be cleaned 
up based on auction market principles: Any member can bid or offer for 
some (or all) of the imbalance at the established price. If there are 
no bids or offers for the imbalance, the OBO will allocate the 
imbalance to the members of the trading crowd. Under the proposal, 
however, the imbalance will be allocated to the members of the trading 
crowd using the Exchange's existing Auto-Ex system. When the Auto-Ex 
System assigns the imbalance of contracts to market makers, the 
assignments will be made in the same manner in which option contracts 
are allocated to market makers who are participating on the Auto-Ex 
System pursuant to PCX Rule 6.87. The maximum number of contracts 
assigned will be the same as the number assigned under the Auto-Ex 
procedures established pursuant to PCX Rule 6.87.\29\
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    \29\ See Amendment No. 1.
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    The number of contracts allocated to each market will depend on the 
Auto-Ex size guarantee established for that particular issue. If that 
number is 20 (which currently applies to most issues currently traded 
on the PCX), then based on the example, two market

[[Page 47213]]

markers will each receive automatic executions of 20 contracts against 
their trading accounts at the opening price. Under the proposal, 
whatever the opening price, the system will guarantee that all 
contracts constituting an imbalance will be cleaned by the Auto-Ex 
System.\30\
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    \30\ Id.
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    Under the proposal, orders may participate in the automated opening 
rotation regardless of size. An order will not be prohibited from 
participating in the automated opening rotation on the ground that the 
order is ineligible from being executed over the Auto-Ex System due to 
its size.\31\
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    \31\ Id.
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2. Manual Opening
    As noted above, all series that are not eligible for AOR will have 
been identified before any series are opened automatically. The OBO can 
designate a series as ineligible for AOR by deliberately not entering a 
quote into the system for that series. Series not eligible for the AOR 
include series for which: (a) there are orders requiring special 
handling; \32\ (b) there is an imbalance of contracts exceeding an 
established threshold; or (c) the trading crowd and OBO determine that 
the series should be opened manually.
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    \32\ The following types of orders are ineligible to participate 
in the automated opening rotation: (1) broker/dealer orders; (2) 
contingency orders; (3) spreads; (4) straddles; (5) not held orders; 
and (6) combination orders. These types of orders are defined in PCX 
Rule 6.62. If any of these types of orders are being represented in 
the trading crowd and are likely to participate in the opening based 
on price, a manual opening rotation will be held in that series. See 
Amendment No. 1.
    Market orders and plain limit orders (i.e., limit orders with no 
contingencies) are eligible to participate in the automated opening 
rotation. See PCX Rule 6.75(c)(1); OFPA A-1 (eligibility of market 
orders); and Amendment No. 1.
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a. Manual Orders Requiring Special Handling
    A series will be deemed ineligible for AOR if a broker in the crowd 
is holding an order that is likely to be executed during the opening. 
In general, manual orders to buy at relatively low prices or to sell at 
relatively high prices generally will not likely participate in the 
opening.\33\
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    \33\ If there is an order in the crowd that is ineligible to 
participate in the automated opening rotation due to its type, and, 
based on its price, that order is likely to participate in the 
opening (e.g., there is a broker/dealer order to buy puts at 5\1/4\ 
and the established market is 4\7/8\-5), the opening rotation will 
be conducted manually for that series. On the other hand, if the 
market were 5\1/2\-5\7/8\, the 5\1/4\ bid would not likely 
participate in the opening, so it will not be required that a manual 
process be held. (A manual opening is required under proposed PCX 
Rule 6.64(b)(2)(B) for a series if there are one or more manual 
orders in the trading crowd ``that are likely to be executed during 
the opening rotation, as determined by the Order Book Official.'') 
However, in the second example above, the broker/dealer order to buy 
puts at 5\1/4\ will be eligible to be executed in free trading 
immediately following the opening of that series. See Amendment No. 
1.
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b. Imbalance of Contracts Exceeding Established Thresholds
    The Exchange will establish, for each option issue, a number of 
contracts that constitutes an imbalance threshold. This number will 
attempt to reflect the relative liquidity in the trading crowd and size 
of the trading crowd.\34\ The AOR will calculate imbalance on a series-
by series basis and flag those series for which the imbalance threshold 
has been exceeded. The threshold level will vary by issue and by 
trading crowd. For example, assume the established market is 5-5\1/4\ 
and there are orders for 100 contracts to buy at 5\1/4\ and orders for 
500 contracts to sell at 5. Since the imbalance is 400 contracts, the 
threshold will be exceeded unless the established level is greater than 
400. If the established level is greater than 400, the opening will 
occur under AOR. If the threshold is exceeded there will be a manual 
opening.
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    \34\ The Exchange anticipates that the number of contracts 
constituting an imbalance threshold will be established by the OBO 
in consultation with the trading crowd. The Options Floor Trading 
Committee will monitor and supervise the general process of 
designating imbalance thresholds on the trading floor. The Exchange 
believes that it is necessary to provide a reasonable amount of 
flexibility in the process of establishing particular thresholds, 
and further that there is little risk of abuse in providing 
flexibility because if low thresholds are established by a trading 
crowd, the result will merely be that certain series will have to be 
opened manually. Although the Exchange does not anticipate that 
there will be any problems in this area, the Exchange will study the 
process during the first six months of use of the new system, and if 
rule changes appear necessary, the Exchange will file a rule filing 
with the Commission to effect the changes necessary. See Amendment 
No. 1.
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c. Crowd's Request for Manual Opening
    A member or members of a trading crowd may request a particular 
series to be opened manually, and the OBO will honor reasonable 
requests. These requests may typically be made in a series with a large 
amount of open interest or for other reasons.\35\ Although the Exchange 
does not anticipate problems resulting from such requests, in the event 
of a dispute the matter would be resolved by floor officials.\36\
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    \35\ The Exchange represents that it does not anticipate that 
this provision will be used with any regularity, but instead, should 
be used under extraordinary circumstances. For example, there may be 
a series that has a very large amount of open interest, and the 
underlying stock is involved in a takeover or merger. The crowd may 
prefer to have a particular series opened manually because the 
proposed takeover price is equal to the strike price of that series. 
In this exceptional case, the use of the open outcry system would be 
preferable to the use of the auto-ex system because the allocation 
of contracts would more likely be consistent with the trading 
strategies of the members of the trading crow. See Amendment No. 1.
    \36\ See PCX Constitution, art. IV, sec. 8. On the PCX, floor 
officials are members of the OFTC who are responsible for the 
general supervision of the dealings of members on the Options Floor.
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    Obligations and Eligibility of Market Makers. Market makers may 
participate in the AOR if they are otherwise eligible to participate on 
the Auto-Ex system during the trading day pursuant to PCX Rule 6.87. 
Generally, to participate on Auto-Ex, a market maker must be present in 
the trading crowd and that trading crowd must be included within that 
market maker's primary appointment zone. If there is inadequate 
participation in a particular option issue, two floor officials may 
require market makers who are members of the trading crowd, as defined 
in subsection (6) of PCX Rule 6.87, to log on to Auto-Ex, while present 
in the trading crowd, absent reasonable justification or excuse for 
non-participation. The Exchange proposes that these rules will apply to 
market maker participation in the AOR with respect to contracts 
allocated to market makers during the opening rotation process.
    Surveillance of Market Maker Procedures. The market makers 
participating on AOR will be required to price the contracts fairly, in 
a manner consistent with their obligations under PCX Rule 6.37. In 
conjunction with the implementation of the AOR system, the Exchange 
will publish a regulatory bulletin to remind market makers of their 
obligation to set Auto-Quote fairly. The Exchange believes that a 
number of factors, including scrutiny by customers and firms 
representing customer orders, will ensure that market makers adjust the 
Auto-Quote values consistent with their obligation. Moreover, market 
makers are required to vocalize their changes to Auto-Quote, which 
allows OBO's to oversee the markets and alerts market makers who may 
want to improve the markets. In addition, if an OBO notices any unusual 
activity in the setting of Auto-Quote values, the OBO must fill out an 
OBO Unusual Activity Report which will be investigated by the Exchange. 
Finally, the Exchange's Auto-Quote has an audit trail log that details 
every quote change resulting from the use of Auto-Quote. This audit 
trail report can be studied in the event of any concerns with the way 
the Auto-Quote values were established for AOR.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
Section

[[Page 47214]]

6(b) \37\ of the Act, in general, and furthers the objectives of 
Section 6(b)(5),\38\ in particular, in that it is designed to 
facilitate transactions in securities, to promote just and equitable 
principles of trade, to protect investors and the public interest, to 
remove impediments to and to perfect the mechanism of a free and open 
market and a national market system. Specifically, the proposal is 
designed to facilitate the execution of orders at the opening by 
providing a means of establishing a single price opening. This will 
expedite the opening of option issues on the Exchange, which will serve 
all market participants. It will eliminate problems associated with 
later openings, including the elimination of backlogs of unexecuted 
orders that can result when opening rotations are conducted entirely 
manually.
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    \37\ 15 U.S.C. 78f(b).
    \38\ 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 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 
Exchange. All submissions should refer to File No. SR-PCX-99-24 and 
should be submitted by [insert date 21 days from date of publication].

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\39\
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    \39\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-22427 Filed 8-27-99; 8:45 am]
BILLING CODE 8010-01-M