[Federal Register Volume 65, Number 194 (Thursday, October 5, 2000)]
[Notices]
[Pages 59485-59486]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-25592]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43369; File No. SR-PCX-00-23]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change and Amendment Nos. 1 and 2 by the 
Pacific Exchange, Inc. Relating to the Conversion to Decimal Pricing

September 27, 2000.
    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 August 8, 2000, 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. The Exchange 
filed the proposal pursuant to Section 19(b)(3)(A) of the Act,\3\ and 
Rule 19b-4(f)(6) thereunder,\4\ which renders the proposal effective 
upon filing with the Commission.\5\ The Exchange filed amendments to 
the proposed rule change on August 25, 2000 and September 22, 2000, 
respectively.\6\ 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\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6).
    \5\ The Commission agreed to waive the 5-day pre-filing notice 
requirement. The Commission also finds good cause to waive the 30-
day pre-operative waiting period. See Rule 19b-4(f)(6)(iii). 17 CFR 
240.19b-4(f)(6)(iii).
    \6\ See Letter dated August 24, 2000, from Hassan Abedi, 
Attorney, Regulatory Policy, PCX, to Nancy Sanow, Assistant 
Director, Division of Market Regulation (``Division''), Commission 
(``Amendment No. 1''). Amendment No. 1 clarifies that the Exchange 
is prohibited from changing the minimum price variation for 
securities pricing in decimals while the Decimals Implementation 
Plan submitted to the Commission on July 24, 2000 is in effect. 
Amendment No. 1 also withdraws proposed amendments to PCX Rule 7.40, 
governing short sales, and clarifies that the minimum price 
variation for SPDRs and MidCap SPDRs trading in decimals will be 
$.01. In addition, Amendment No. 1 makes certain technical 
corrections to the proposed rule change. See also Letter dated 
September 21, 2000, from Hassan Abedi, Attorney, Regulatory Policy, 
PCX, to Nancy Sanow, Assistant Director, Division, Commission 
(``Amendment No. 2''). Amendment No. 2 conforms PCX Rule 7.66 to a 
recent proposed amendment to the Intermarket Trading System Plan 
(``ITS Plan'') relating to decimal pricing.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange proposes to amend certain PCX rules to implement the 
securities industry's Decimals Implementation Plan submitted to the 
Commission on July 24, 2000. The text of the proposed rule change is 
available at the PCX and at the Commission.

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 PCX has prepared summaries, set forth in section 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 June 8, 2000, the Commission issued an order (``Order'') \7\ 
requiring the national securities exchanges and the National 
Association of Securities Dealers, Inc. (``Participants'') to act 
jointly in planning, discussing, developing, and submitting to the 
Commission a plan that will begin phasing in the implementation of 
decimal pricing in equity securities and options on or before September 
5, 2000 (``Plan''). The Commission directed the Participants to submit 
the Plan to the Commission by July 24, 2000, and further directed each 
Participant to file the rule changes necessary to implement the phase-
in plan. In compliance with the Order, the Exchange submitted the 
proposed rule change to implement the Plan.
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    \7\ See Securities Exchange Act Release No. 42914 (June 8, 
2000), 65 FR 38010 (June 19, 2000).
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    Equity Trading Rules. The Exchange proposes to amend PCX Rule 
7.10(b) to establish a $.01 minimum price variation (``MPV'') for 
equity securities pricing in decimals, as required by the Plan,\7\ and 
to amend Commentary .01 to Rule 7.10 to clarify that the Exchange is 
prohibited from changing the MPV for securities pricing in decimals 
while Plan is in effect.\8\ The Exchange is also proposing to amend 
Rule 7.19(c)(1) to provide that a bid or offer will have price priority 
over another bid or offer only if its price exceeds the price of the 
other bid or offer by the MPV. The Exchange is proposing to add 
commentary .06 to PCX Rule 7.41(b) to clarify that for the purposes of 
the rule, the term ``closest trading differential'' means the MPV. In 
addition, the Exchange is proposing to add Commentary .01 to PCX Rule 
7.29(a) to clarify that for purposes of the rule, the term ``price 
improvement'' means an improvement in price by at least the MPV. The 
Exchange is also proposing to amend Rule 7.66 to conform the rule to 
recent amendments to the ITS Plan. Finally, the remaining proposed 
changes add a decimal reference to Rule 7.12(b), Commentary .05, Rule 
7.66(b)(8)(i)(A)(1), and Rule 7.79(e) to supplement the existing 
fractional references.
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    \7\ The Plan provides for MPVs for equities and options of no 
less than one cent. The Order requires the Participants to submit 
joint or individual studies two months after Full Implementation (as 
defined in the Plan) regarding the impact of decimal pricing on 
systems capacity, liquidity, and trading behavior, including an 
analysis of whether there should be a uniform minimum quoting 
increment. If a Participant wishes to move to quoting in an 
increment of less than one cent, the Participant should include in 
its study a full analysis of the potential impact of such trading on 
the Participant's market and the markets as a whole. Within thirty 
days after submitting the study, and absent Commission action, the 
Participants individually must submit for notice, comment, and 
Commission action, proposed rule changes under Section 19(b) of the 
Exchange Act to establish their individual choice of minimum 
increments by which equities or options are quoted on their 
respective markets.
    \8\ See Amendment No. 1, supra n.6.
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Options Trading Rules
    PCX Rule 6.37(b)(1) currently specifies the maximum bid/ask spread 
differentials that an options market maker is permitted to create in 
the course of maintaining a fair and orderly market.\9\ The Exchange is 
proposing to amend this rule to provide the bid/ask spread 
differentials in decimals. In addition, the Exchange is proposing to 
amend PCX Rule 6.37(b)(3) and Commentary .10, Rule 6.75, Commentaries 
.02-.03, Rule 6.80, Commentary .01, Rule 8.102(f), and Rule

[[Page 59486]]

6.64, Commentary .03(c)-(d) to replace fractional references with 
decimal references. The Exchange is also proposing to amend PCX Rule 
6.47(a)(2) and (b)(2), governing non-facilitation crosses, to require 
floor brokers to bid above the highest bid or below the lowest offer by 
at least the MPV before crossing orders.
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    \9\ For example, if a market maker's bid price is between $2 and 
$5, the maximum difference between that bid price and the 
corresponding offering price will be \3/8\ of $1 (i.e., $.40).
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    Finally, the PCX proposes to adopt new Rule 6.72 to explicitly 
state and give effect to the minimum price increments for options 
mandated by the Plan. Thus, to the extent an option class is pricing in 
decimals, the MPVs would be as follows: For options quoting under $3 a 
contract, the MPV would be $.05; and for options quoted at $3 a 
contract or greater, the MPV would be $.10.\10\ This rule would replace 
current Rule 6.72, which requires bids and offers above $3 to be 
expressed in eighths of the one dollar and bids and offers below $3 to 
be expressed in sixteenths of one dollar.
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    \10\ The Plan contemplates that the options exchanges may wish 
to consider a pilot program for one-cent minimum price variations 
for quoting in a limited number of options (``Penny Pilot'') at some 
point in the implementation process. The Commission expects that, 
before implementing a Penny Pilot, the options exchanges will 
carefully coordinate on such issues as the selection and number of 
options to be included in the pilot to ensure the continued orderly 
operation of the markets and clearing organizations. In particular, 
the Commission expects that the options exchanges will consult with 
the Commission regarding the impact on market-wide capacity. Before 
implementing a Penny Pilot, each options exchange should also submit 
appropriate rule filings to the Commission under Section 19(b) of 
the Exchange Act.
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2. Statutory Basis
    The PCX believes that the proposed rule change is consistent with 
the requirements of the Act and the rules and regulations thereunder 
that are applicable to national securities exchange, and, in 
particular, with the requirements of Section 6(b) of the Act.\11\ In 
particular, the PCX believes that the proposed rule change is 
consistent with Section 6(b)(5) \12\ in that it is designed to promote 
just and equitable principles of trade, to remove impediments to and to 
perfect the mechanism of a free and open market and a national market 
system, and, in general, to protect investors and the public interest.
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    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The PCX does not believe that the proposed rule change will impose 
any burden on competition 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

    The Exchange did not solicit or receive written comments on the 
proposed rule change.

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate,\13\ it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \14\ and Rule 19b-
4(f)(6) \15\ thereunder. At any time within 60 days of the filing of 
the proposed rule change, the Commission may summarily abrogate such 
rule change if it appears to the Commission that such action is 
necessary or appropriate in the public interest, for the protection of 
investors, or otherwise in furtherance of the purposes of the Act.
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    \13\ The Exchange requested the Commission to waive 5 day pre-
filing notice requirement and the 30-day operative period.
    \14\ 15 U.S.C. 78s(b)(3)(A).
    \15\ 17 CFR 240.19-4(f)(6).
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    The PCX has requested that the Commission accelerate the operative 
date. The Commission believes that it is consistent with the protection 
of investors and the public interest and therefore finds good cause to 
designate the proposal to become immediately operative upon filing. 
Acceleration of the operative date will ensure that the PCX is able to 
operate in accordance with the terms and conditions of the Plan. For 
these reasons, the Commission finds good cause to designate that the 
proposal, as amended, become operative immediately upon filing.\16\
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    \16\ For purposes only of accelerating the operative date of 
this proposal, the Commission has considered the proposed rule's 
impact on efficiency, competition, and capital formation. 15 U.S.C. 
78c(f).
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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 PCX. 
All submissions should refer to the File No. SR-PCX-00-23 and should be 
submitted by October 26, 2000.

    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. 00-25592 Filed 10-4-00; 8:45 am]
BILLING CODE 8010-01-M