[Federal Register Volume 67, Number 56 (Friday, March 22, 2002)]
[Notices]
[Pages 13393-13394]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-6903]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45578; File No. SR-PCX-2001-50]


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

March 15, 2002.

I. Introduction

    On December 13, 2001, the Pacific Exchange, Inc. (``PCX'' or 
``Exchange'')

[[Page 13394]]

submitted to the Securities and Exchange Commission (``Commission'' or 
``SEC''), pursuant to Section 19(b)(1) of the Securities Exchange Act 
of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule 
change relating to collective actions of market makers. The Federal 
Register published the proposed rule change for comment on February 12, 
2002.\3\ The Commission received no comments on the proposed rule 
change. This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 45392 (February 5, 
2002), 67 FR 6567.
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II. Description of Proposal

    The Exchange has submitted 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, subject to three exceptions set forth in proposed 
PCX Rule 6.37(f), which are described below.
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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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    Subsection (1) to proposed PCX Rule 6.37(f) would permit the Lead 
Market Maker (``LMM'') to receive input from the members of the trading 
crowd on the variables of the formula the LMM uses to generate 
automatically updated market quotations in each option issue, but the 
members of the crowd would not be required to provide feedback. 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 
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.
    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 the autoquote variables to the members of the trading 
crowd.

III. Discussion

    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.\6\ 
Specifically, the Commission believes that the proposed rule change is 
consistent with the Section 6(b)(8) \7\ requirement that the rules of 
an exchange not impose any burden on competition not necessary or 
appropriate in furtherance of the Act.
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    \6\ In approving the proposal, the Commission has considered its 
impact on efficiency, competition, and capital formation. 15 U.S.C. 
78c(f).
    \7\ 15 U.S.C. 78f(b)(8).
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    The Commission believes that the proposed rule change should deter 
collective action on the part of Exchange members by clearly 
establishing in the Exchange's rules that options market makers are 
prohibited from determining by agreement the spreads or option prices 
at which they will trade an issue, subject to certain specified 
exceptions that the Commission herein approves.\8\ For instance, the 
proposal would permit LMMs to receive input from members of the crowd 
in setting the parameters of the formula used to automatically update 
options quotations. At this time, the Commission believes it is 
reasonable for the Exchange's rules to permit members of the crowd to 
be given a voice in setting autoquote parameters because, pursuant to 
the Exchange's rules, they will be obligated to execute orders at the 
resultant quote.
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    \8\ The Commission expects the Exchange to monitor the 
collective actions that are undertaken pursuant to the rule change 
approved herein for any undesirable or inappropriate anticompetitive 
effects. The Commission's examination staff will monitor the 
Exchange's efforts in this regard.
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    In addition, the proposed rule change would permit the LMM and 
members of the crowd to make a collective response to a request to fill 
a large order, provided that a collective response is requested. The 
Commission believes that this exception recognizes the desire of the 
marketplace to provide a single price to a request to fill a large 
order that a single member would not be able to fill. The Commission 
believes that any anticompetitive effect of this exception is limited 
by requiring that there be a member's specific request for a single 
price and that the order be sufficiently large. In addition, the 
Commission notes that notwithstanding this exception, a single crowd 
participant may voice a bid or offer independently from, and 
differently from, the LMM and other members of a trading crowd.
    Finally, the Commission finds that the proposed rule change is 
designed to effectively limit the circumstances in which collective 
action is permissible.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\9\ that the proposed rule change (SR-PCX-2001-50) is approved.
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    \9\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-6903 Filed 3-21-02; 8:45 am]
BILLING CODE 8010-01-P