[Federal Register Volume 65, Number 221 (Wednesday, November 15, 2000)]
[Notices]
[Pages 69111-69112]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-29183]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43518; File No. SR-PCX-00-32]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of a Proposed Rule Change by the Pacific 
Exchange, Inc. To Increase the Maximum Size of Orders Eligible for 
Automatic Execution

November 3, 2000.
    Pursuant to Section 19(b)(1) of he Securities Exchange Act of 1934 
(``Act``) \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on August 22, 2000, 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. 
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.
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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 increase the maximum size of equity 
and index option contracts that may be designated for automatic 
execution to seventy-five 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
    The Exchange's Automatic Execution System (``Auto-Ex'') 
automatically executes public customer market and marketable limit 
orders within certain size parameters. PCX Rule 6.87(b) currently 
provides that the Options Floor Trading Committee (``OFTC'') shall 
determine the size of orders that are eligible to be executed through 
Auto-Ex. The rule further provides that although the OFTC may change 
the order size parameter on an issue-by-issue basis, the maximum order 
size for execution through Auto-Ex is fifty contracts for both equity 
and index options.\3\ The Exchange is now proposing to increase the 
maximum size of option orders that are eligible for automatic 
execution, subject to designation by the OFTC on an issue-by-issue 
basis, to seventy-five contracts.\4\
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    \3\ See Securities Exchange Act Release No. 41823 (September 1, 
1999), 64 FR 49265 (September 10, 1999) (approving PCX proposal to 
increase the maximum size of index and equity option orders that may 
be automatically executed, from twenty to fifty contracts).
    \4\ The Exchange notes that, pursuant to PCX Rule 6.86(g), if 
the OFTC determines, pursuant to PCX Rule 6.87(b), that 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 for manual (non-electronic) 
orders in that greater amount, as provided in PCX Rule 6.86(a).
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    The Exchange believes that these changes will help it to meet the 
changing needs of customers in the marketplace and give the Exchange 
better means of competing with other options exchanges for order flow, 
particularly in multiply traded issues. The Exchange also believes that 
increasing to seventy-five the number of option contracts executable 
through Auto-Ex will enable the Exchange to more effectively and 
efficiently manage increased order flow in actively traded option 
issues consistent with its obligations under the Act. In addition, the 
Exchange indicates that this increase should bring the speed and 
efficiency of automated execution to a greater number of retail orders. 
The PCX further believes that it should have flexibility to complete 
for order flow with other exchanges without being limited to responding 
to increases in automatic execution eligibility levels initiated by 
those other exchanges.\5\
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    \5\ See PCX Rule 6.87(c) (permitting the PCX to match the 
maximum size of orders eligible for automatic execution that are 
permitted on another options exchange in multiply traded issues).
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    The Exchange represents that it believes that the increase will not 
expose Auto-Ex to risk of failure or operational capacity is sufficient 
to accommodate the increased number of automatic executions anticipated 
to result from implementation of this proposal.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with section 6(b) \6\ of the Act, in general, and furthers the 
objectives of section 6(b)(5),\7\ in particular, in that it is designed 
to facilitate transactions in securities, to promote just and equitable 
principles of trade, to enhance competition and to protect investors 
and the public interest.
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    \6\ 15 U.S.C. 78f(b).
    \7\ 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 Proposed Rule Change and Timing for 
Commission Action

    The PCX requests that the proposed rule change be given accelerated

[[Page 69112]]

effectiveness pursuant to section 19(b)(2) \8\ of the Act.
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    \8\ 15 U.S.C. 78(b)(2).
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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 the 
PCX. All submissions should refer to File No. SR-PCX-00-32 and should 
be submitted December 6, 2000.

V. Commission's Findings and Order Granting Accelerated Approval of 
the Proposed Rule Change

    After careful review, the Commission finds 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, the requirements of section 6 of the Act.\9\ Among 
other provisions, section 6(b)(5) of the Act requires that the rules of 
an exchange be designed to foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating securities transactions; 
remove impediments to and perfect the mechanism of a free and open 
market and a national securities system; and protect investors and the 
public interest.\10\
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    \9\ The Commission has considered the proposed rule's impact on 
efficiency, competition and capital formation. 15 U.S.C. 78c(f).
    \10\ 15 U.S.C. 78f(b)(5).
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    Pursuant to section 19(b)(2) \11\ of the Act, the Commission finds 
good cause for approving the proposed rule change prior to the 30th day 
after the date of publication of notice thereof in the Federal 
Register.\12\ The Commission believes that granting accelerated 
approval will provide the PCX with flexibility to compete for order 
flow with other exchanges without being limited to responding to 
increases in automatic execution eligibility levels initiated by those 
other exchanges.\13\
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    \11\ 15 U.S.C. 78s(b)(2).
    \12\ In approving this proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
    \13\ The Commission notes that it is concurrently approving 
similar proposals filed by the American Stock Exchange, LLP 
(``Amex''), Chicago Board Options Exchange, Inc. (``CBOE''), and the 
Philadelphia Stock Exchange, Inc. (``Phlx''). See Securities 
Exchange Act Release Nos. 43516 (November 3, 2000) (SR-Amex-99-45); 
43517 (November 3, 2000) (SR-CBOE-99-51); and 41515 (November 3, 
2000) (SR-Phlx-99-32).
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    While increasing the maximum order size limit from fifty contracts 
to seventy-five contracts for Auto-Ex eligibility by itself does not 
raise concerns under the Act, the Commission believes that this 
increase raises collateral issues that the PCX will need to monitor and 
address. Increasing the maximum order size for particular option 
classes will make a larger number of option orders eligible for the 
Exchange's automatic execution system. These orders may benefit from 
greater speed of execution, but at the same time create greater risks 
for market maker participants. Market makers signed onto the Auto-Ex 
system will be exposed to the financial risks associated with larger-
sized orders being routed through the system for automatic execution at 
the displayed price. When the market for the underlying security 
changes rapidly,it may take a few moments for the related option's 
price to reflect that change. In the interim, customers may submit 
orders that try to capture the price differential between the 
underlying security and the option. The larger the orders accepted 
through Auto-Ex, the greater the risk market makers must be willing to 
accept. The Commission does not believe that, because the Exchange's 
OFTC determines to approve orders as large as seventy-five contracts as 
eligible for Auto-Ex, the OFTC or any other PCX committee or officials 
should disengage Auto-Ex more frequently by, for example, declaring a 
``fast'' market. Disengaging Auto-Ex can negatively affect investors by 
making it slower and less efficient to executive their option orders. 
It is the Commission's view that the Exchange, when increasing the 
maximum size of orders that can be sent through Auto-Ex, should not 
disadvantage all customers--the vast majority of which enter orders for 
less than seventy-five contracts--by making the Auto-Ex system less 
reliable.
    It is Therefore Ordered, pursuant to section 19(b)(2) of the 
Act,\14\ that the proposed change, as amended, (SR-PCX-00-32) is hereby 
approved on an accelerated basis.
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    \14\ 15 U.S.C. 78s(b)(2).
    \15\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-29183 Filed 11-14-00; 8:45 am]
BILLING CODE 8010-01-M