[Federal Register Volume 67, Number 113 (Wednesday, June 12, 2002)]
[Notices]
[Pages 40362-40365]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-14717]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46029; File No. SR-PCX-2002-30]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval to Proposed Rule Change by the Pacific 
Exchange, Inc. Relating to the Firm Quote Size for Disseminated Market 
Quotes for Customer Orders Entered on the Exchange

June 4, 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 May 30, 2002, the Pacific Exchange, Inc. (``PCX'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I and II

[[Page 40363]]

below, which Items have been prepared by the Exchange. 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 PCX is proposing to amend its rules relating to the firm quote 
size applicable to disseminated market quotes for customer orders 
entered on the Exchange. Specifically, the Exchange proposes to make a 
systems change to allow the true size of customer orders in the limit 
order book to be disseminated through the Options Price Reporting 
Authority (``OPRA'') as the PCX firm quote size whenever such orders 
represent the best bid or offer on the Exchange.
    The text of the proposed rule change appears below. New text is in 
italics; deletions are in brackets.
* * * * *
PACIFIC EXCHANGE, INC.
RULES OF THE BOARD OF GOVERNORS
Text of the Proposed Rule Change:
] 5221  Firm Quotes
    Rule 6.86(a)-(b)--No change.
    (c) Obligations of Responsible Brokers or Dealers
    (1) Customer Orders. Except as provided in subsection (d), below, 
each Responsible Broker or Dealer is obligated to execute any customer 
order in a listed option series in an amount up to the quotation size 
established by rule and periodically published by the Exchange. The 
minimum quotation size established by rule and published by the 
Exchange for customer orders will be one contract [20 contracts] for 
each option series.
    (A) Dissemination of the Size of Orders in the Limit Order Book. If 
one or more orders in the limit order book represent the best bid or 
offer on the Exchange, then the Exchange will disseminate via OPRA the 
aggregate size of such order or orders as the firm quote size for which 
the Responsible Broker or Dealer will be firm. In such circumstances:
    (i) If one or more additional limit orders at the same price to buy 
or sell the same series of option contracts are entered into the limit 
order book for representation on the Exchange, then the firm quote size 
then being disseminated in that series will be automatically increased 
to reflect the adjusted size of such orders in the limit order book at 
that price; and
    (ii) If the number of contacts in the limit order book at the same 
price to buy or sell the same series of option contracts has been 
reduced because of an execution or cancellation of one or more orders 
in the limit order book, then the firm quote size then being 
disseminated in that series will be automatically decreased to reflect 
the adjusted size of such orders in the limit order book at that price.
* * * * *

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 Exchange 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 currently complies with Rule 11Ac1-1 under the Act \3\ 
(``Quote Rule''), by having established by rule and periodically 
publishing the quotation size for which each Responsible Broker or 
Dealer on the Exchange is obligated to execute an order to buy or sell 
an option series that is a reported security at its published bid or 
offer. Specifically, the minimum quotation size established by rule and 
periodically published by the Exchange for ``customer'' orders is 
currently twenty contracts for each option series. In addition, the 
minimum quotation size established by rule and periodically published 
by the Exchange for ``broker-dealer orders'' is currently one contract 
for each option series.
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    \3\ 17 CFR 240.11Ac1-1. See generally Securities Exchange Act 
Release No. 44145 (April 2, 2001), 66 FR 18662 (April 10, 2001) 
(order approving rule changes relating to the application of the 
Quote Rule to options trading).
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    The Exchange proposes to amend its PCX Rule 6.86(c)(1), which 
relates to the obligations of Responsible Brokers or Dealers \4\ with 
respect to customer orders. PCX Rule 6.86(c)(1) currently provides:
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    \4\ PCX Rule 6.86(a)(2) provides, in part, that ``the term 
`Responsible Broker or Dealer' means that with respect to any bid or 
offer for any listed option made available by the Exchange to 
quotation vendors, the Lead Market Maker (``LLM'') and any 
registered Market Makers constituting the trading crowd in such 
option series will collectively be the Responsible Broker or Dealer 
to the extent of the aggregate quotation size specified.''
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    ``Except as provided in subsection (d), * * * each Responsible 
Broker or Dealer is obligated to execute any customer order in a listed 
option series in an amount up to the quotation size established by rule 
and periodically published by the Exchange. The minimum quotation size 
established by rule and published by the Exchange for customer orders 
will be 20 contracts for each option series.''

The Exchange proposes to amend the second sentence of this rule, so 
that it would state: ``The minimum quotation size established by rule 
and published by the Exchange for customer orders will be one contract 
for each option series.''
    The Exchange notes that its LMMs are currently obligated to 
``[h]onor guaranteed markets, including markets required by PCX Rule 
6.86, Firm Quotes, and any better markets pledged during the allocation 
process.'' \5\ Since all LMMs on the PCX have pledged during the 
allocation process to make markets for at least twenty contracts (and 
in some cases more than twenty contracts), LMMs would continue to be 
required to disseminate, at a minimum, firm quotes for at least twenty 
contracts (in issues currently allocated to such LMMs), unless such 
pledges are rescinded.\6\ Accordingly, LMM quotes generally would be 
for at least twenty contracts or such other minimum number that the LMM 
has pledged to honor during the allocation process. The effect of the 
proposed rule change, however, is that if the Exchange is disseminating 
a quote on behalf of a customer order, and that order is for less than 
twenty contracts, the Exchange would no longer disseminate twenty 
contracts on behalf of that customer order, and instead, would 
disseminate the order's true size. Consequently, in such circumstances, 
the Responsible Broker or Dealer will no longer be required buy or sell 
option contracts at the price established by a customer order for less 
than twenty contracts.\7\
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    \5\ See PCX Rule 6.82(c)(2).
    \6\ The Exchange also notes that with respect to option issues 
to be allocated in the future, LMMs may commit to making minimum 
size markets in an amount other than twenty contracts, but these 
pledges will apply only if the Options Allocations Committee accepts 
them.
    \7\ For example, assume the LMM is disseminating a market of 2 
bid, 2.20 asked, in a particular option series for which the 
guaranteed size is twenty contracts. Then assume that an incoming 
customer order to buy one contract for 2.10 is entered on the 
Exchange, making the new best bid and offer on the Exchange 2.10 
bid, 2.20 asked. Under the current rule, the Exchange disseminates 
twenty contracts as the size of the 2.10 bid. If a market order to 
sell twenty contracts is then entered in that series, the 
Responsible Broker or Dealer (generally, the LMMs) is obligated to 
buy the balance of 19 contracts at a price of 2.10. The risk from 
these types of situations discourages LMMs from increasing their 
guaranteed sizes (whether for Auto-Ex or Firm Quote Rule purposes) 
because the greater their guaranteed sizes, the greater the 
potential liability. Under the proposed rule change, the Exchange 
will disseminate the true size of the customer order for one 
contract and the Responsible Broker or Dealer will no longer be 
obligated to ``fill in'' the difference between one contract and the 
guaranteed size.

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[[Page 40364]]

    The Exchange is also proposing to adopt new subsection (A) to Rule 
6.86(c)(1), relating to the dissemination of the size of orders in the 
Exchange's limit order book. Currently, if the best bid or offer on the 
Exchange is represented by one or more orders in the limit order book, 
and the aggregate size of such order or orders is less than the minimum 
customer firm quote size (i.e., twenty contracts), then the Exchange 
disseminates the minimum customer firm quote size via OPRA as its firm 
quote. Under the proposal, if one or more orders in the limit order 
book represent the best bid or offer on the Exchange, then the Exchange 
would disseminate via OPRA the aggregate size of such order or orders 
as the firm quote size for which the Responsible Broker or Dealer would 
be firm.\8\
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    \8\ The Exchange notes that pursuant to PCX Rule 6.75(a)-(b), 
orders in the limit order book have priority over all other bids or 
offers at the same price then being represented at the trading post. 
Accordingly, such orders in the limit order book must be filled in 
their entirety before other bids or offers at the same price are 
filled.
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    In that regard, the Exchange proposes to increase or decrease the 
firm quote size in such circumstances as follows: First, if one or more 
additional limit orders at the same price to buy or sell the same 
series of option contracts are entered into the limit order book for 
representation on the Exchange, then the firm quote size then being 
disseminated in that series would be automatically increased to reflect 
the adjusted size of such orders in the limit order book at that price. 
Second, if the number of contacts in the limit order book at the same 
price to buy or sell the same series of option contracts has been 
reduced because of an execution or cancellation of one or more orders 
in the limit order book, then the firm quote size then being 
disseminated in that series would be automatically decreased to reflect 
the adjusted size of such orders in the limit order book at that price.
    The Exchange believes that the proposed rule change would encourage 
deeper and more liquid markets on the Exchange. Specifically, the 
proposed rule change would reduce the risk that LMMs and Market Makers 
would be obligated to buy or sell option contracts at prices 
established by other investors, and, therefore, they would face less 
liability when increasing their guaranteed Auto-Ex or firm quote sizes.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with section 6(b) of the Act,\9\ in general, and furthers the 
objectives of section 6(b)(5) of the Act,\10\ in particular, in that it 
is designed to promote just and equitable principles of trade, remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, and, in general, protect investors and the public interest.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The PCX does not believe that the proposed rule change would 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 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 the filing will also be 
available for inspection and copying at the principal offices of the 
Exchange. All submissions should refer to File No. SR-PCX-2002-30 and 
should be submitted by July 3, 2002.

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

    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.\11\ In 
particular, the Commission believes the proposed rule change is 
consistent with the section 6(b)(5) of the Act \12\ requirement that 
the rules of an exchange be designed to facilitate transactions in 
securities, promote just and equitable principles of trade, remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, and, in general, to protect investors and the 
public interest.
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    \11\ In approving this proposal, 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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    The Commission notes that the proposal to change the firm quote 
size for customer orders from twenty contracts to one contract for each 
option series is consistent with Rule 11Ac1-1(d) under the Act.\13\ The 
Commission also believes that the Exchange's proposal to disseminate 
the actual size of customer limit orders whenever such orders are the 
best bid or offer on the Exchange should help to increase transparency 
by providing more accurate quotation information, which is consistent 
with section 11A of the Act.\14\ Finally, the Commission understands 
that the proposed rule change is a step towards implementing the 
Exchange's plan to disseminate quotations with actual size on a floor-
wide basis in the near future, which should further increase 
transparency and enhance the quality of PCX's quotation information 
that is disseminated to the public.
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    \13\ 17 CFR 240.11Ac1-1(d).
    \14\ 15 U.S.C. 78k-1. The Commission notes that in Section 
11A(a)(1)(C)(iii) of the Act, Congress found that it is in the 
public interest and appropriate for the protection of investors and 
the maintenance of fair and orderly markets to assure the 
availability of information with respect to quotations for 
securities. 15 U.S.C. 78k-1(a)(1)(C)(iii).
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    The Commission finds good cause, consistent with section 19(b)(2) 
of the Act,\15\ to approve the proposed rule

[[Page 40365]]

change prior to the thirtieth day after the date of publication of the 
notice of filing thereof in the Federal Register. The Commission notes 
that the PCX has represented that it is technologically capable of 
implementing the proposal immediately upon approval from the 
Commission. The Commission believes that accelerated approval of this 
proposal should permit the PCX to immediately begin to disseminate 
quotes with actual size when customer limit orders represent the best 
price on the Exchange, which should reflect more accurate trading 
interest. Accordingly, the Commission finds that there is good cause, 
consistent with section 19(b)(2) of the Act,\16\ to approve the 
proposal on an accelerated basis.
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    \15\ 15 U.S.C. 78s(b)(2).
    \16\ Id.
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    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\17\ that the proposed rule change (SR-PCX-2002-30) is approved on 
an accelerated basis.
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    \17\ Id.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-14717 Filed 6-11-02; 8:45 am]
BILLING CODE 8010-01-P