[Federal Register Volume 65, Number 65 (Tuesday, April 4, 2000)]
[Notices]
[Pages 17689-17690]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-8195]


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SECURITIES AND EXCHANGE COMMISSION

(Release No. 34-42583; File No. SR-PCX-99-35)


Self-Regulatory Organizations; Order Approving a Proposed Rule 
Change by the Pacific Exchange, Inc. To Increase Lead Market Maker 
Concentration Levels From 10% of 15% of the Issues Traded on the 
Exchange's Options Floor

March 28, 2000.

I. Introduction

    On September 15, 1999, the Pacific Exchange, Inc. (``PCX'' or 
``Exchange''), filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') a proposed rule change pursuant to Section 
19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 
19b-4 thereunder \2\ to amend PCX Rule 6.82(e)(3) to increase the 
percentage of issues that the PCX's Options Allocation Committee 
(``Committee'') may allocate to a Lead Market Maker (``LMM'') from 10% 
of the number of issues traded on the PCX's options floor to 15% of the 
number of issues traded on the PCX's options floor.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    Notice of the proposed rule change was published for comment in the 
Federal Register on November 1, 1999.\3\ No comments were received 
regarding the proposal. This order approves the proposed rule change.

II. Description of the Proposal

    Currently, PCX Rule 6.82(e)(3) states that in the absence of 
extraordinary circumstances, as determined by the Committee, no LMM may 
be allocated more than 10% of the number of issues traded on the PCX's 
options floor. The Exchange proposes to amend PCX Rule 6.82(e)(3) to 
increase the percentage of issues that the Committee may allocate

[[Page 17690]]

to an LMM from 10% of the number of issues traded on the PCX's options 
floor to 15% of the number of issues traded on the PCX's options floor.
    The Exchange proposes to amend PCX Rule 6.82(e)(3) for several 
reasons. First, the Exchange anticipates that the Continued Listing 
Fee, which the PCX implemented in September 1999, will reduce the total 
number of issues traded on the PCX's options floor.\4\ The Exchange 
believes that the Continued Listing Fee will result in the delisting of 
a significant number of options issues, thus lowering the total number 
of issues that an LMM may hold.\5\
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    \3\ See Securities Exchange Act Release No. 42051 (October 22, 
1999), 64 FR 58876.
    \4\ See Securities Exchange Act Release No. 42050 (October 21, 
1999), 64 FR 58117 (notice of filing and immediate effectiveness of 
File No. SR-PCX-99-32.) The Continued Listing Fee applies to options 
market makers and LMM's who wish to continue trading options issues 
that fail to produce revenue of more than $500 per month through 
transaction, comparison, and data entry fees. If no LMM or trading 
crowd is willing to pay the Continued Listing Fee for an option that 
is subject to the fee, the PCX will delist the option.
    \5\ Since the implementation of the Continued Listing Fee, 158 
isues have been delisted. Telephone conversation between Robert 
Pacileo, Staff Attorney, Regulatory Policy, PCX, and Yvonne 
Fraticelli, Special Counsel, Division of Market Regulation 
``Division''), Commission, on March 23, 2000.
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    Second, the Exchange believes that it is necessary for competitive 
reasons to permit the allocation of additional issues to LLMs. The 
Exchange believes that the proposal will place the PCX's LMMs on a more 
equal footing with specialists on the American Stock Exchange 
(``Amex'') and Designated Primary Market Makers (``DPMs'') on the 
Chicago Board Options Exchange (``CBOE'') with respect to the number of 
issues that may be allocated to them.\6\ The Exchange believes that the 
current 10% cap is unnecessarily low and that an increase in 
concentration levels is consistent with rules and guidelines of other 
options exchanges.
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    \6\ See e.g., CBOE Regulatory Circular RG99-135, discussed in 
Section III, infra.
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III. Discussion

    The Commission finds that the proposed rule change is consistent 
with the Act and the rules and regulations thereunder applicable to a 
national securities exchange and, in particular, with Section 6(b)(5) 
of the Act, in that the proposal is designed to promote just and 
equitable principals of trade, to remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and 
to protect investors and the public interest.\7\ Specifically, the 
Commission believes that the proposal will allow the PCX to revise PCX 
Rule 6.82(e)(3) to provide a limit on options allocations that is 
comparable to the policies of other options exchanges, thereby helping 
the PCX to compete more effectively with other options exchanges.\8\
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    \7\ 15 U.S.C. 78f(b)(5).
    \8\ In approving the proposal, the Commission has considered the 
rule's impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
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    For example, the Commission notes that under the CBOE's policy, the 
CBOE's Modified Trading System Appointments Committee will review a 
DPM's concentration level if an event or proposal would cause a DPM to 
meet any two of the following three criteria: (1) The number of classes 
allocated to a DPM (and any affiliated DPMs) is 25% or more of the 
total number of classes traded on the CBOE (excluding DJX, NDX, OEX, 
and SPX); (2) the volume in the classes allocated to a DPM (and any 
affiliated DPMs) is 25% or more of the total volume of the CBOE 
(excluding DJX, NDX, OEX, and SPX); or (3) the number of DPM 
appointments held by a DPM (and any affiliated DPMs) is 25% or more of 
the total number of DPMs effective on the CBOE.\9\ Similarly, the Amex 
has no rule limiting the number of options products that may be 
allocated to a specialist unit, although the Amex considers several 
factors, including capitalization and the number of persons in a 
specialist unit, in making allocation decisions. In addition, the Amex 
will review a proposal merger of specialist units if the proposed 
merger would result in the concentration in the unit of 25% or more of 
the trading volume on the Amex or 25% or more of the number of products 
traded on the Amex.\10\
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    \9\ See CBOE Regulatory Circular RG99-135.
    \10\ Conversation between Claire P. McGrath, Vice President and 
Special Counsel, Derivative Securities, Amex, and Yvonne Fraticelli, 
Special Counsel, Division, Commission, on March 20, 2000.
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    By increasing the number of issues that may be allocated to an LLM 
from 10% of the issues traded on the PCX's options floor to 15% of the 
issues traded on the PCX's options floor, the proposal will help to 
make PCX Rule 6.82(e)(3) more comparable to the policies of the CBOE 
and the Amex. Although the proposal increases the percentage of issues 
that may be allocated to an LMM, the Commission does not believe that 
the proposal will result in an undue concentration of issues in an LMM. 
In this regard, the Commission believes that the proposal to limit the 
number of issues that may be allocated to an LMM to 15% of the number 
of issues traded on the PCX should address concerns regarding potential 
adverse effects on the maintenance of a fair and orderly market that 
could arise from an LMM's insolvency or similar event. In addition, the 
Commission notes that the PCX's proposal rule is more restrictive than 
the allocation policies of the CBOE and Amex, which do not impose a 
specified mandatory limit on the number of options that may be 
allocated to specialists or DPMs.

IV. Conclusion

    For the reasons discussed above, the Commission finds that the 
proposed rule change is consistent with the Act (specifically, Section 
6(b)(5) of the Act) and the rules and regulations thereunder applicable 
to a national securities exchange.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\11\ that the proposed rule change (SR-PCX-99-35) is approved.
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    \11\ 15 U.S.C. 78s(b)(2).
    \12\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-8195 Filed 4-3-00; 8:45 am]
BILLING CODE 8010-01-M