[Federal Register Volume 67, Number 240 (Friday, December 13, 2002)]
[Notices]
[Pages 76771-76773]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-31401]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46947; File No. SR-PCX-2002-55]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 Thereto by the Pacific Exchange, Inc. 
Regarding Market Maker Quoting Obligations

December 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 August 7, 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, II, and III below, which 
items have been prepared by the Exchange. On November 8, 2002, the 
Exchange submitted Amendment No. 1 to the proposed rule change.\3\ The 
Commission is publishing this notice to solicit comments on the 
proposed rule change, as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Steven B. Matlin, Senior Counsel, PCX, to 
Nancy J. Sanow, Assistant Director, Division of Market Regulation 
(``Division''), Commission, dated November 7, 2002 (``Amendment No. 
1''). In Amendment No. 1, the Exchange amended the proposed rule 
change by: (i) Changing the quotation minimum from 20 contracts to 
10 contracts; (ii) adding an exception for market makers where a 
transaction occurs as a result of being assigned contracts by the 
order book official; (iii) making technical corrections to the rule 
text; and (iv) offering a basis for requesting accelerated 
effectiveness for the proposal.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to adopt PCX rules 6.37(a)(5) and 6.37(c)(4), 
and amend commentary .05 to PCX rule 6.37 to require options market 
makers to vocalize a legal-width, two-sided market for a minimum of 10 
contracts whenever a floor broker enters a trading crowd and calls for 
a market in an option series that is one of the 120 most actively 
traded equity options.\4\
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    \4\ Subject to the conditions set forth in proposed PCX rule 
6.37(b)(5)(A)-(D).
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    The text of the proposed rule change appears below. New text is in 
italics.
* * * * *

Text of the Proposed Rule Change

Pacific Exchange, Inc.; Rules of the Board of Governors

]4935 Obligations of Market Makers
    Rule 6.37(a)--No change.
    (b) Appointment as a Primary Market Maker.--No change.
    (1)-(4)--No change.
    (5) Whenever a Floor Broker enters a trading crowd and calls for a 
market in a particular option series, each Market Maker present at the 
trading post will be obligated to vocalize a two-sided, legal-width 
market (pursuant to rule 6.37(b)(1)) for a minimum of 10 contracts. 
This obligation only applies to:
    (A) Market Makers who have executed a transaction in the issue, but 
not those who have been assigned contracts by the Order Book Official 
pursuant to Commentary .05, on the day of the Floor Broker's call for a 
market or on the previous business day;
    (B) Option issues that are ranked in the 120 most actively traded 
equity options based on the total number of contracts traded nationally 
as reported by the Options Clearing Corporation. For each current 
month, the Exchange's determination of whether an equity option ranks 
in the top 120 most active issues will be based on volume statistics 
for the one month of trading activity that occurred two months prior to 
the current month;
    (C) Non-broker-dealer orders; and
    (D) Series not designated as LEAPS (pursuant to rule 6.4).
    (c) In Classes of Option Contracts Other Than Those to Which 
Appointed.--No change.
    (1)-(3)--No change.
    (4) Whenever a Floor Broker enters a trading crowd and calls for a 
market in a particular option series, each Market Maker present at the 
trading post will be obligated to vocalize a two-sided, legal-width 
market (pursuant to rule 6.37(b)(1)) for a minimum of 10 contracts. 
This obligation only applies to:
    (A) Market Makers who have executed a transaction in the issue, but 
not those who have been assigned contracts by the Order Book Official 
pursuant to Commentary .05, on the day of the Floor Broker's call for a 
market or on the previous business day;
    (B) Option issues that are ranked in the 120 most actively traded 
equity options based on the total number of contracts traded nationally 
for a specified month based on volume as reported by the Options 
Clearing Corporation. For each current month, the Exchange's 
determination of whether an equity option ranks in the top 120 most 
active issues will be based on volume statistics for the one month of 
trading activity that occurred two months prior to the current month;
    (C) Non-broker-dealer orders; and

[[Page 76772]]

    (D) Series not designated as LEAPS (pursuant to rule 6.4).
    (d)-(f)--No Change.

Commentary .01-.04--No Change.

    Commentary .05--Whenever a Floor Broker enters a trading crowd and 
calls for a market in any class and series at that post, each Market 
Maker present at the post where the option is traded is obligated, at a 
minimum, to make a market for one contract except as provided for in 
rule 6.37(b)(5) and rule 6.37(c)(4), at the established price. In 
addition, the Options Floor Trading Committee may determine that Market 
Makers in trading crowds shall increase the depth of their markets as 
set forth in Options Floor Procedure Advice B-12. In the event a Floor 
Broker is unable to satisfy his order from bids and offers given in the 
crowd, the Order Book Official may assign one contract to every Market 
Maker present within the primary zone to assist the Floor Broker in 
satisfying his order. If a Market Maker at the post either bids lower 
or offers higher than the established market, such Market Maker shall 
be obligated to trade one contract at the price quoted by the Market 
Maker.
* * * * *

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

    In its filing with the Commission, PCX included statements 
concerning the purpose of, and basis for, the proposed rule change, as 
amended, 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 proposes to modify PCX rule 6.37 to provide that, 
subject to certain conditions, whenever a floor broker enters a trading 
crowd and calls for a market, certain market makers present at the 
trading post will be obligated to vocalize a two-sided, legal-width 
market for a minimum of 10 contracts. This obligation would apply to: 
(a) Market makers who have executed a transaction in the issue, but not 
those who have been assigned contracts by the Order Book Official 
pursuant to PCX rule 6.37, commentary .05, on either the day of the 
floor broker's call for a market or on the previous business day;\5\ 
(b) option issues that are ranked in the top 120 most actively traded 
equity options; (c) non-broker dealer orders; and (d) series not 
designated as LEAPS.\6\ The proposed rule change would apply to market 
makers regardless of whether the issue is included in their primary 
appointment zones.
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    \5\ See Amendment No. 1.
    \6\ See PCX rule 6.4.
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    The Exchange would determine whether an equity option ranks in the 
top 120 most active, nationally-traded issues, based on volume 
statistics reported by the Options Clearing Corporation.\7\ The list of 
designated issues will be based on volume statistics for trading 
activity that occurred two months prior to the current month. For 
example, February's list of top 120 issues will be based on December's 
volume, March's list of top 120 issues will be based on January's 
volume, and so forth. Thereafter, the Exchange will continue to 
designate the top 120 issues based on a two-month lag time. The 
Exchange intends to notify its Members of the issues that are 
designated to be in the top 120 via a regulatory bulletin that will be 
published at the beginning of each month.
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    \7\ The Exchange notes that it intends to use the same procedure 
for designating the top 120 activity traded issues that it currently 
uses in designating such issues for purposes of its ``shortfall 
fee.'' See Securities Exchange Act Release No. 45351 (January 29, 
2002), 67 FR 5631 (February 6, 2002) (SR-PCX-2001-51).
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    The Exchange represents that the proposed rule change is intended 
to enhance the quoting obligations of Exchange market makers. 
Currently, when floor brokers enter a trading crowd and request a 
market, market makers are only required to make a market for one 
contract.\8\ The Exchange believes that the proposed rule change will 
also provide greater depth and liquidity to the marketplace, and will 
therefore benefit the public.
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    \8\ See PCX rule 6.37, commentary .05.
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2. Statutory Basis
    The Exchange believes that the proposed rule change, as amended, 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, 
to prevent fraudulent and manipulative acts and practices, and to 
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

    PCX does not believe that the proposed rule change, as amended, 
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

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

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 Exchange consents, the Commission will:
    (A) By order approve such proposed rule change, as amended; 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, as amended, is consistent with the Act. Specifically, the 
Commission solicits comments on whether the proposal would have a 
detrimental effect on competition and liquidity on the Exchange. The 
Commission notes that the proposal to increase the quote size 
obligations for Top 120 options would apply to all market makers that 
have executed a trade on the same or previous day that a floor broker 
requests a market in a particular Top 120 option. The Commission 
understands that PCX market makers have continuous market making 
obligations in those options for which they have a primary 
appointment.\11\ In addition, the Commission understands that PCX 
market makers are permitted to make markets in option issues that are 
outside of their primary appointment.\12\ Accordingly, the Commission 
questions whether the proposal to increase market makers' quote size 
obligations would discourage some market makers from executing 
transactions in option issues

[[Page 76773]]

that are outside of their primary appointment.
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    \11\ See PCX rule 6.37(b). See also PCX rule 6.35.
    \12\ See PCX rule 6.37(c).
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    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-2002-55 and should be 
submitted by January 3, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 02-31401 Filed 12-12-02; 8:45 am]
BILLING CODE 8010-01-P