[Federal Register Volume 67, Number 29 (Tuesday, February 12, 2002)]
[Notices]
[Pages 6567-6569]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-3296]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45392; File No. SR-PCX-2001-50]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Pacific Exchange, Inc. Relating to Rules on Collective 
Actions of Market Makers

February 5, 2002.
    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 December 13, 2001, 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 PCX. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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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 PCX is proposing to adopt rules pertaining to collective 
actions of options market makers that may be made in determining 
spreads or prices in particular option series. The text of the proposed 
rule change is set forth below. Additions are in italics; deletions are 
in brackets.
para.4935 Obligations of Market Makers
    Rule 6.37(a)-(c)--No change.
    (d)--[Reserved] \3\
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    \3\ Proposed Rule 6.37(d) is pending SEC approval. See File No. 
SR-PCX-99-13.
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    (e) Prohibited Practices and Procedures.
    (1) Any practice or procedure whereby Market Makers trading any 
particular option issue determine by agreement the spreads or option 
prices at which they will trade that issue is prohibited.
    (2) [Reserved]
    (f) Notwithstanding the prohibitions set forth in Subsection (e), 
the LMM and members of the trading crowd are permitted to act 
collectively as set forth below:
    (1) The LMM may receive input from the members of the trading crowd 
on any one or more of the following variables of the formula the LMM 
uses to generate automatically updated market quotations in each option 
issue: (A) Options pricing calculation model; (B) volatility; (C) 
interest rates; and (D) dividends (both declared and anticipated). 
However, members of the trading crowd are not required to provide input 
to the LMM on any of these variables. Notwithstanding any input that 
the members of the trading crowd may have provided with regard to these 
variables, it is within the LMM's sole discretion to make the final 
independent decision regarding the variables to be used in operating 
the automated quotation system. LMMs using Exchange-approved 
proprietary automated quotation updating systems are not required to 
disclose proprietary information concerning the variables used by those 
systems; provided, however, that LMMs may disclose the variables 
themselves pursuant to Rule 6.82(c)(8).
    (2) The obligation of Market Makers to make competitive markets 
does not preclude the LMM and members of the trading crowd from making 
a collective response to a request for a market, provided the member 
representing the order requests such a response in order to fill a 
large order. For purposes of this rule, a large order is an order for a 
number of contracts that is greater than the eligible order size for 
automatic execution pursuant to Rule 6.87.
    (3) In conjunction with their obligations as a responsible broker 
or dealer pursuant to Rule 6.86 and SEC Rule 11Ac1-1, the LMM and 
Market Makers in the trading crowd may collectively agree to the best 
bid, best offer and aggregate quotation size required to be 
communicated to the Exchange pursuant to Rule 6.86(c).
Lead Market Makers
    Rule 6.82(a)-(b)--No change.
    (c) Obligations of Lead Market Makers:
    Each LMM must meet the following obligations:
    (1)-(7)--No change
    (8) LMMs are responsible for establishing the variables in the 
formula used to generate automatically updated quotations in each 
option issue or series. The LMM may disclose to the members of the 
trading crowd the following variables of the formula used to generate 
automatically updated market quotations in each option issue: (A) 
Options pricing calculation model; (B) volatility; (C) interest rate; 
and (D) dividends (both declared and anticipated).
    [(8)-(13)]- (9)-(14)--No change.

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 sections A, 
B, and C below, of the most significant aspects of such statements.

[[Page 6568]]

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

1. Purpose
    The Exchange is submitting the proposed rule change pursuant to 
subparagraph IV.B.j of the Commission's September 11, 2000 Order,\4\ 
which requires in part that certain options exchanges, including the 
PCX, adopt new, or amend existing, rules to make express any practice 
or procedure whereby market makers trading any particular option class 
determine by agreement the spreads or option prices at which they will 
trade any option class. The Exchange is proposing to amend PCX Rule 
6.37 (``Obligation of Market Makers'') by adding a new subsection (e) 
to be entitled, ``Prohibited Practices and Procedures.'' Proposed 
subsection (e)(1) would state that any practice or procedure whereby 
market makers trading any particular option issue determine by 
agreement the spreads or option prices at which they will trade that 
issue is prohibited.
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    \4\ See Order Instituting Public Administrative Proceedings 
Pursuant to section 19(h)(1) of the Securities Exchange Act of 1934, 
Making Findings and Imposing Remedial Sanctions. Securities Exchange 
Act Release No. 43268 (September 11, 2000).
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    The Exchange is also proposing to adopt new PCX Rule 6.37(f), which 
would provide that notwithstanding the prohibitions set forth in 
Subsection (e), the Lead Market Maker (``LMM'') and members of the 
trading crowd are permitted to act collectively as set forth in 
subsection (1) through (3) of proposed PCX Rule 6.37(f).
    Subsection (1) to proposed PCX Rule 6.37(f) would permit the LMM to 
receive input from the members of the trading crowd on any one or more 
of the following variables of the formula the LMM uses to generate 
automatically updated market quotations in each option issue: (A) 
Options pricing calculation model; (B) volatility; (C) interest rates; 
and (D) dividends (both declared and anticipated). However, members of 
the trading crowd would not be required to provide input to the LMM on 
any of these variables. In addition, it would be within the LMM's sole 
discretion to make the final independent decision regarding the 
variables to be used in operating the automated quotation system. 
Finally, subsection (1) would further state that LMMs using Exchange-
approved proprietary automated quotation updating systems are not 
required to disclose proprietary information concerning the variables 
used by those systems; provided, however, that LMMs would be permitted 
to disclose the variables themselves pursuant to proposed PCX Rule 
6.82(c)(8). The Exchange believes such input into autoquote variables 
helps to assure the quality of the Exchange's markets. An LMM may have 
a variable set erroneously or may have failed to update a variable in 
response to new information. The Exchange believes that the proposed 
rule change would allow such errors to be rectified promptly.
    Subsection (2) of proposed PCX Rule 6.37(f) would state that the 
obligation of market makers to make competitive markets would not 
preclude the LMM and members of the trading crowd from making a 
collective response to a request for a market, provided the member 
representing the order requests such a response in order to fill a 
large order. A large order would be defined as an order for a number of 
contracts that is greater than the eligible order size for automatic 
execution pursuant to PCX Rule 6.87.
    Subsection (3) of proposed PCX Rule 6.37(f) would state that in 
conjunction with their obligations as a responsible broker or dealer 
pursuant to PCX Rule 6.86 and SEC Rule 11Ac1-1,\5\ the LMM and market 
makers in the trading crowd may collectively agree to the best bid, 
best offer and aggregate quotation size required to be communicated to 
the Exchange pursuant to PCX Rule 6.86(c).
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    \5\ 17 CFR 240.11Ac1-1.
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    The Exchange is also proposing a similar change to PCX Rule 6.82 
(``Obligations of Lead Market Makers'') by adding new subsection 
(c)(8), which would provide that LMMs are responsible for establishing 
the variables in the formula used to generate automatically updated 
quotations in each option issue or series. It would also permit the LMM 
to disclose to the members of the trading crowd the following variables 
of the formula used to generate automatically updated market quotations 
in each option issue: (A) Options pricing calculation model; (B) 
volatility; (C) interest rate; and (D) dividends (both declared and 
anticipated).
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with section 6(b) of the Act \6\ in general and furthers the objectives 
of Section 6(b) \7\ in particular in that it is designed to promote 
just and equitable principles of trade, remove impediments to a free 
and open market and a national market system, and 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

    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

    No written comments were solicited or received with respect to the 
proposed rule change.

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 PCX 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 filings will also be 
available for inspection and copying at the principal office of the 
PCX. All submissions should refer to File No. SR-PCX-2001-50 and should 
be submitted by March 5, 2002.


[[Page 6569]]


    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-3296 Filed 2-11-02; 8:45 am]
BILLING CODE 8010-01-P