[Federal Register Volume 66, Number 23 (Friday, February 2, 2001)]
[Notices]
[Pages 8831-8832]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-2814]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43887; File Nos. SR-PCX-00-18 and SR-Amex-00-57]


Self-Regulatory Organizations; Pacific Exchange, Inc. and 
American Stock Exchange LLC; Order Approving Proposed Rule Changes 
Relating to Increasing to One Hundred Contracts the Maximum Size for 
Option Orders That May Be Executed Automatically

January 25, 2001.

I. Introduction

    On June 30, 2000, the Pacific Exchange, Inc. (``PCX'') filed with 
the Securities and Exchange Commission (``Commission''), pursuant to 
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ 
and Rule 19b-4 thereunder,\2\ a proposal to increase the maximum size 
of equity and index option contracts that may be designated for 
automatic execution to one hundred contracts. On November 15, 2000, the 
PCX rule proposal was published for public comment in the Federal 
Register.\3\ On November 28, 2000, the American Stock Exchange LLC 
(``Amex'') also filed a similar proposed rule change to increase to one 
hundred the maximum permissible number of equity and index option 
contracts in an order executable through its automatic execution 
system. On December 13, 2000, the Amex rule proposal was published for 
comment in the Federal Register.\4\ The Commission received no comments 
on either the PCX or the Amex proposal. This order approves the PCX and 
the Amex proposed rule changes.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 43519 (November 3, 
2000), 65 FR 69112.
    \4\ See Securities Exchange Act Release No. 43660 (December 4, 
2000), 65 FR 77942.
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II. Description of the Proposed Rule Changes

A. PCX Proposal

    The PCX'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 
parameters on an issue-by-issue basis, the maximum order size for 
execution through Auto-Ex is seventy-five contracts for both equity and 
index options.\5\ The PCX 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 one hundred 
contracts.\6\
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    \5\ See Securities Exchange Act Release No. 43518 (November 3, 
2000), 65 FR 69111 (November 15, 2000) (approving PCX proposal to 
increase the maximum size of index and equity option orders that may 
be automatically executed from fifty to seventy-five contracts).
    \6\ The PCX 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 PCX believes that these changes will help it meet the changing 
needs of customers in the marketplace and give the PCX better means of 
competing with other options exchanges for order flow, particularly in 
multiply traded issues. The PCX also believes that increasing to one 
hundred the number of option contracts executable through Auto-Ex will 
enable the PCX to more effectively and efficiently manage increased 
order flow in actively traded options issues consistent with its 
obligations under the Act. In addition, the PCX indicates that this 
increase should bring the speed an deficiency of automated execution to 
a greater number of retail orders. The PCX further believes that it 
should have 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.\7\
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    \7\ 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 PCX represents that it believes that the increase will not 
expose Auto-Ex to risk of failure or operational breakdown. The PCX 
further represents that it believes that its systems capacity is 
sufficient to accommodate the increased number of automatic executions 
anticipated to result from implementation of this proposal.

B. Amex Proposal

    The Amex's Automatic Execution System (``AUTO-EX'') automatically 
executes public customer market and marketable limit orders in options 
at the best bid or offer displayed at the time the order is entered 
into the Amex Order File (``AOF''). Generally, public customer market 
and marketable limit orders for up to seventy-five options contracts 
may be automatically executed through the Amex's AUTO-EX system.\8\ 
Recently, AOF, which handles limit orders routed to the specialist's 
book as well as those orders routed to AUTO-EX, was increased to allow 
for the entry of orders of up to 250 options contracts.\9\ Because 
AUTO-EX is only allowed to execute equity option orders and index 
orders of up to seventy-five contracts, any market and marketable limit 
orders for between seventy-five and 250 option contracts are generally

[[Page 8832]]

routed by the AOF to the specialist's book.
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    \8\ See Securities Exchange Act Release No. 43516 (November 3, 
2000), 65 FR 69079 (November 15, 2000). The Amex codified its rules 
under Amex Rule 933, Commentary .02, regarding the maximum option 
order size eligibility for its AUTO-EX system. While the maximum 
permissible number of contracts in an index option order executable 
through AUTO-EX is generally seventy-five contracts, there are three 
exceptions: the Institutional, Japan and S&P MidCap 400 Indices 
allow ninety-nine contract orders. The Exchange proposes to increase 
the applicable parameter from ninety-nine to one hundred contracts 
for the Institutional, Japan and S&P MidCap 400 Indices to eliminate 
any potential for confusion over the permissible parameters 
applicable to AUTO-EX eligible orders for both equity and index 
options.
    \9\ See Securities Exchange Act Release No. 42128 (November 10, 
1999), 64 FR 63836 (November 22, 1999).
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    The Amex proposes to amend Commentary .02 under Amex Rule 933 to 
increase the maximum AUTO-EX order size eligibility for equity and 
index option contracts orders from seventy-five to one hundred 
contracts. The proposed increase in permissible order size will be 
implemented on a case-by-case basis for an individual option class or 
for all option classes when two floor governors or senior floor 
officials deem such as increase appropriate. Currently, the Amex posts 
applicable quote size parameters on its web page. Generally, these 
parameters provide that displayed quotes are for twenty contracts for 
equity options and for thirty contracts for index options and are set 
on a class-by-class basis. However, pursuant to Amex Rule 958A, the 
order size for AUTO-EX will remain at ten contracts for equity and 
index options, or such larger size currently in effect and as indicated 
on the Amex's web page.\10\
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    \10\ Amex Rule 958A, referred to as the ``Firm Quote Rule,'' 
requires Exchange specialists to sell/buy at least ten contracts at 
the offer/bid which is displayed when a buy/sell order reaches the 
trading post where the option class is located for trading.
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    The Amex represents that it has sufficient systems capacity to 
accommodate implementation of the proposed increase in permissible 
order size and that AUTO-EX has been extremely successful in enhancing 
execution and operational efficiencies during emergency situations and 
during other non-emergency situations for certain options classes. The 
Amex believes that permitting automatic executions of orders for up to 
one hundred contracts will enhance its overall operational efficiency 
and give the Amex better means of competing with other options 
exchanges for order flow.

III. Discussion

    After careful review, the Commission finds that the PCX and the 
Amex proposed rule changes are 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.\11\ 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 market system; 
and protect investors and the public.\12\
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    \11\ The Commission has considered the proposed rule's impact on 
efficiency, competition and capital formation. 15 U.S.C. 78c(f).
    \12\ 15 U.S.C. 78f(b)(5).
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    While increasing the maximum order size limit from seventy-five to 
one hundred contracts for automatic execution eligibility by itself 
does not raise concerns under the Act, the Commission believes that 
this increase raises collateral issues that the PCX and the Amex, 
respectively, will need to monitor and address. Increasing the maximum 
order size for particular options classes will make a larger number of 
option orders eligible for the PCX and the Amex's automatic execution 
systems. 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 PCX's Auto-Ex and the Amex's AUTO-EX 
systems 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 each automatic execution system, the greater the risk market 
makers must be willing to accept. The Commission does not believe that, 
because the PCX's OFTC determines to approve orders as large as one 
hundred 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. Similarly, the Commission does 
not believe that, because Amex floor governors and senior floor 
officials determine to approve orders as large as one hundred contracts 
as eligible for AUTO-EX, those officials or any other Amex officials or 
Amex committee should disengage AUTO-EX more frequently, for example, 
by declaring a ``fast'' market. Disengaging the PCX's or the Amex's 
automatic execution system can negatively affect investors by making it 
slower and less efficient to execute their option orders. It is the 
Commission's view that the PCX and the Amex, when increasing the 
maximum size of orders that can be sent through their respective 
automatic execution systems, should not disadvantage all customers--the 
vast majority of whom enter orders for less than one hundred 
contracts--by making their automatic execution systems less reliable.

IV. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule changes are consistent with the Act and the rules and regulations 
thereunder applicable to a national securities exchange, and, in 
particular, with Section 6(b)(5).\13\
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    \13\ Id.
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    It Is Therefore Ordered, pursuant to Section 19(b)(2) of the 
Act,\14\ and the proposed rule changes (SR-PCX-00-18 and SR-Amex-00-57) 
are approved.
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    \14\ 14 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-2814 Filed 2-1-01; 8:45 am]
BILLING CODE 8010-01-M