[Federal Register Volume 67, Number 62 (Monday, April 1, 2002)]
[Notices]
[Pages 15445-15446]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-7779]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45641; File No. SR-PCX-2001-48]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval to a Proposed Rule Change and Amendment 
No. 1 Thereto by the Pacific Exchange, Inc. To Increase to Two Hundred 
Fifty Contracts the Maximum Permissible Number of Equity and Index 
Option Contracts Executable Through Auto-Ex

March 25, 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 November 27, 2001, 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 and II below, which Items have been prepared by the PCX. The 
PCX filed Amendment No. 1 on December 5, 2001.\3\ The Commission is 
publishing this notice to solicit comments on the proposed rule change, 
as amended, from interested persons and is approving the proposal on an 
accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Mia S. Shiver, Senior Attorney, Regulatory 
Policy, PCX, to Nancy J. Sanow, Assistant Director, Division of 
Market Regulation, Commission, dated December 4, 2001 (``Amendment 
No. 1''). In Amendment No. 1, the PCX revised the rule text of the 
proposed rule change to reflect current PCX Rule 6.87.
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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 increase to 250 contracts the maximum size 
of equity and index option contracts that may be designated for 
automatic execution.
    Below is the text of the proposed rule change, as amended. Proposed 
new language is italicized; proposed deletions are in brackets.
* * * * *

Automatic Execution System

    Rule 6.87(a)-(b)(4)--No change.
    (b)(5) The [Options Floor Trading Committee (``OFTC'')] OFTC shall 
determine the size of orders that are eligible to be executed on Auto-
Ex. Although the order size parameter may be changed on an issue-by-
issue basis by the OFTC, the maximum order size for execution through 
Auto-Ex is as follows:
    (A) Equity Options: the maximum order size for execution through 
Auto-Ex for equity options is [one hundred (100)] 250 contracts;
    (B) Index Options: the maximum order size for execution through 
Auto-Ex is [one hundred (100)] 250 contracts. [for:
    (i) The PSE Technology Index;
    (ii) the Wilshire Small Cap Index; and
    (iii) the Morgan Stanley Emerging Growth Index.]
    (6)--No change.
    (c)-(p)--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 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. The Exchange represents that 
Auto-Ex has proven to be a credible system offering prompt and 
efficient automatic trade executions at the disseminated, quoted 
prices. PCX Rule 6.87(b) currently provides that the Exchange's Options 
Floor Trading Committee (``OFTC'') shall determine, on an issue-by-
issue basis, the size of orders that are eligible to be executed 
through Auto-Ex. The maximum order size for execution through Auto-Ex 
is currently 100 contracts for both equity and index options.\4\ 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 250 contracts.
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    \4\ See Securities Exchange Act Release No. 43887 (January 25, 
2001), 66 FR 8831 (February 2, 2001) (approving PCX proposal to 
increase the maximum size of index and equity option orders that may 
be automatically executed through Auto-Ex to 100 contracts).
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    The Exchange believes that increasing the number of option 
contracts executable through Auto-Ex to 250 contracts 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. The Exchange believes that this increase 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. In addition, the 
Exchange represents that this increase should bring the speed and 
efficiency of automated execution to a greater number of retail orders. 
The Exchange represents that it further believes that its systems 
capacity is sufficient to accommodate the increased number of automatic 
executions anticipated to result from implementation of the proposed 
rule change.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with section 6(b) \5\ of the Act, in general, and furthers the 
objectives of section 6(b)(5) of the Act,\6\ 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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    \5\ 15 U.S.C. 78f(b).
    \6\ 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. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, is consistent with the Act. Persons making written

[[Page 15446]]

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-2001-48 and should be submitted by April 22, 2002.

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

    After careful review, the Commission finds that the proposed rule 
change, as amended, 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. 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 interest.\7\
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    \7\ 15 U.S.C. 78f(b)(5).
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    While increasing the maximum order size limit from 100 contracts to 
250 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 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 Auto-
Ex. These orders may benefit from greater speed of execution, but at 
the same time create greater risks for market maker participants. 
Market makers signed on to Auto-Ex 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 
PCX's OFTC determines to approve orders as large as 250 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 an 
``unusual market condition.'' \8\ Disengaging Auto-Ex can negatively 
affect investors by making it slower and less efficient to execute 
their orders. It is the Commission's view that the PCX, when increasing 
the maximum size of orders that can be sent through Auto-Ex, should not 
disadvantage all customers--the vast majority of whom enter orders for 
less than 250 contracts--by making their automatic execution systems 
less reliable.
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    \8\ The PCX has filed a proposed rule change (File No. SR-PCX-
2001-13) with the Commission that would specify the Exchange's 
procedures governing the disengagement of Auto-Ex for ``unusal 
market conditions,'' and would require documentation of the reasons 
for any action to disengage Auto-Ex to operate in a manner other 
than the usual manner. The proposed rule change was filed pursuant 
to the 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) (File No. 3-10282) and is 
pending with the Commission.
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    In addition, pursuant to section 19(b)(2) \9\ 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.\10\ The Commission believes that granting 
accelerated approval will provide the PCX with flexibility to compete 
for order flow with other exchanges immediately.\11\
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    \9\ 15 U.S.C. 78s(b)(2).
    \10\ In approving this proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
    \11\ See Securities Exchange Act Release No. 45628 (March 22, 
2002) (order approving an increase to 250 contracts the maximum 
permissible number of equity and index option contracts executable 
through AUTO-EX); see also Securities Exchange Act Release No. 45629 
(March 22, 2002) (order approving an increase to 250 contracts in 
the maximum guarantee size for AUTO-X orders in options overlying 
the QQQs).
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V. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change, as amended, is consistent with the Act and the rules and 
regulations thereunder applicable to a national securities exchange, 
and, in particular, with section 6(b)(5) of the Act.\12\
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    \12\ 15 U.S.C. 78f(b)(5).
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    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\13\ that the proposed rule change (SR-PCX-2001-48), as amended, is 
hereby approved on an accelerated basis.
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    \13\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, pursuant 
to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-7779 Filed 3-29-02; 8:45 am]
BILLING CODE 8010-01-P