[Federal Register Volume 67, Number 162 (Wednesday, August 21, 2002)]
[Notices]
[Pages 54250-54251]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-21320]



[[Page 54250]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46360; File No. SR-PCX-2002-49]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Pacific Exchange, Inc. 
Amending PCX Rule 6.82(d)(2) in Order to Change the Percentage of 
Guaranteed Participation Afforded to Lead Market Makers

August 15, 2002.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4\2\ thereunder, notice is hereby given that 
on July 25, 2002, the Pacific Exchange, Inc. (``PCX'' or ``Exchange'') 
filed with the Securities and Exchange Commission (the ``Commission'') 
the proposed rule change as described in Items I, II, and III 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.
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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 Exchange proposes to amend PCX Rule 6.82(d)(2) in order to 
change the percentage of guaranteed participation afforded to Lead 
Market Makers (``LMMs'').
    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

    Rule 6.82(a)-(c)-No change.
    (d) Rights of Lead Market Makers:
    (1)--No change.
    (2) Guaranteed Participation. [Except as provided in subsections 
(A) and (B), below,] LMMs shall be allocated [50%] 40% participation 
(or such lesser percentage as the Options Allocation Committee may 
establish as a condition in allocating an issue to an LLM) in 
transactions occurring at their disseminated bids and/or offers in 
their allocated issue(s). LMM participation may be greater than [50%] 
40% as a result of successful competition by means of ``public 
outcry.'' LMMs at their own discretion may direct some or all of their 
participation to competing public orders in the crowd. Public orders 
placed in the book shall take priority pursuant to Exchange rules. 
Oversight and enforcement shall be the responsibility of the OBO.
    [(A) Multiply-traded Issues. If the average daily trading volume in 
a multiply-traded issue reaches 3,000 contracts at the Exchange during 
any three-calendar-month period (measured on a ``rolling'' three-
calendar-month basis), and if:]
    [(i) in the case of an issue traded by two options exchanges, the 
Exchange's monthly share of the total multi-exchange customer trading 
volume in the issue drops from above 70% to below 70%; or]
    [(ii) in the case of an issue traded by three or more options 
exchanges, the Exchange's monthly share of the total multi-exchange 
customer trading volume in the issue drops from above 45% to below 45%; 
the Options Allocation Committee will evaluate the LMM's performance in 
that issue and, based on that evaluation, may reduce the LMM's 
guaranteed participation in that issue from 50% to 40%.]
    [(B) Non multiply-traded Issues. If the average daily trading 
volume in a non-multiply-traded issue reaches 3,000 contracts at the 
Exchange during any three-calendar-month period (measured on a 
``rolling'' three-calendar-month basis), the Options Allocation 
Committee will evaluate the LMM's performance in that issue and, based 
on that evaluation, may reduce the LMM's guaranteed participation in 
that issue from 50% to 25%.]
    [(C) Return to Previous Levels of Guaranteed Participation. If the 
Options Allocation Committee has reduced an LMM's guaranteed 
participation in an issue pursuant to subsections (A) or (B) above, and 
average daily trading volume in the issue falls below 3,000 contracts 
at the Exchange during any three-calendar-month period (measured on a 
``rolling'' three-calendar-month basis), the Options Allocation 
Committee will evaluate the LMM's performance in that issue and, based 
on that evaluation, may raise the LMM's guaranteed participation in 
that issue from 40% to 50% (in a multiply-traded issue) or from 25% to 
50% (in a non-multiply-traded issue).]

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 Exchange 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 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
    Currently, Exchange rules provide that LMMs may be allocated a 
maximum guaranteed participation of 50% in transactions occurring at 
their disseminated bid or offer.\3\ The Exchange has assessed 
guaranteed participation levels of other exchanges \4\ in relation to 
its own rules \5\ and determined that, in establishing a fair and 
orderly market, it is appropriate to decrease the LMM guaranteed from 
50% to 40%. The Exchange also believes it is desirable to continue to 
grant the Options Allocation Committee (``OAC'') the discretion to 
allocate less than 40% guaranteed participation on a case-by-case basis 
as a condition of allocating an issue to an LMM.\6\
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    \3\ See PCX Rule 6.82(d)(2). The Rules of the PCX require that 
transactions of LMMs and Market Makers (``MMs'') constitute a course 
of dealing that is reasonably calculated to contribute to the 
maintenance of a fair and orderly market. In furtherance of that 
goal, the Exchange has always required LMMs and MMs to make markets 
in options transactions and provide liquidity to the Exchange. LMMs 
have additional responsibilities that include, inter alia, the 
obligation to (1) assure that the disseminated market quotations are 
accurate; (2) determine formulas for generating automatically 
updated quotations and disclosing the elements of the formula to the 
members of the trading crowd; (3) be present at the trading post 
throughout every business day; (4) participate at all times in the 
automated execution system for each assigned option issue; (5) 
promote the exchange as a marketplace by assisting in meeting and 
educating market participants; and (6) maintain sufficient cash or 
liquid asset position.
    \4\ Each of the other four options exchanges provides a tiered 
structure that guarantees specialists no more than 40% participation 
where there is more than one member on parity with the specialist's 
best bid or offer. See Chicago Board Options Exchange, Inc. Rule 
8.87; Philadelphia Stock Exchange, Inc. Rule 1014(g); American Stock 
Exchange LLC Rule 950(d), Commentary .05; International Stock 
Exchange, Inc. Rule 713, Supplementary Material .01.
    \5\ See, e.g., PCX Rule 6.47(b) (limiting LMM guaranteed 
participation in facilitation trades to 40%).
    \6\ See Securities Exchange Act Release No. 45937 (May 15, 
2002), 67 FR 36283 (May 23, 2002)(approving SR-PCX 2002-13 to allow 
the OAC to establish, as a condition in allocating an issue to an 
LMM, a lesser guaranteed percentage).
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    The proposed rule also eliminates PCX Rules 6.82(d)(2)(A)-(C), 
which relate to guaranteed participation for LMMs with respect to 
multiply-traded and non multiply-traded issues. According to the 
Exchange, these rules were designed to measure LMM performance and 
allow the OAC to take

[[Page 54251]]

market share into consideration when determining to reduce an LMM's 
guaranteed participation percentage in a particular issue. However, the 
Exchange believes that the process articulated in the rule is overly 
complicated and no longer serves its intended use, especially in light 
of this proposed rule to decrease guaranteed participation levels from 
50% to 40%.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with section 6(b) of the Act,\7\ in general, and furthers the 
objectives of section 6(b)(5),\8\ in particular, in that it is designed 
to promote just and equitable principles of trade, prevent fraudulent 
and manipulative acts and practices, and protect investors and the 
public interest.
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    \7\ 15 U.S.C. 78f(b).
    \8\ 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 Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received from Members, Participants, or Others

    Written comments on the proposed rule change were neither solicited 
nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    The foregoing rule change has become effective pursuant to section 
19(b)(3)(A) of the Act \9\ and subparagraph (f)(6) of Rule 19b-4\10\ 
thereunder because the Exchange has designated the proposed rule change 
as one that does not: (i) Significantly affect the protection of 
investors or the public interest; (ii) impose any significant burden on 
competition; (iii) become operative for 30 days from the date on which 
it was filed, or such shorter time as the Commission may designate; and 
the Exchange has given the Commission written notice of its intention 
to file the proposed rule change at least five business days prior to 
filing. At any time within 60 days of the filing of such proposed rule 
change, the Commission may summarily abrogate such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.
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    \9\ 15 U.S.C. 78s(b)(3)(A).
    \10\ 17 CFR 240.19b-4(f)(6).
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    The Exchange has requested that the Commission waive the 30-day 
operative delay. The Commission believes that waiving the 30-day 
operative delay is consistent with the protection of investors and the 
public interest. Acceleration of the operative date will permit the 
Exchange to promptly decrease the LMM guaranteed from 50% to 40%, 
affording Market Makers a greater opportunity to interact with orders 
and thereby enhancing competition on the Exchange. For these Commission 
designates the proposal to be become operative immediately.\11\
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    \11\ For purposes only of accelerating the operative date of 
this proposal, the Commission has considered the proposed rule's 
impact on efficiency, competition, and capital formation. 15 
U.S.C.78c(f).
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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 Section. Copies of such filing will also 
be available for inspection and copying at the principal office of the 
Exchange. All submissions should refer to File No. SR-PCX-2002-49 and 
should be submitted by September 11, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-21320 Filed 8-20-02; 8:45 am]
BILLING CODE 8010-01-P