[Federal Register Volume 68, Number 68 (Wednesday, April 9, 2003)]
[Notices]
[Pages 17420-17422]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-8608]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47615; File No. SR-PCX-2002-54]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Pacific Exchange, Inc. Relating to a One Tick Step Up 
Requirement for Auto-Ex in Certain Option Issues

April 2, 2003.
    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 27, 2002, the Pacific Exchange, Inc. (``PCX'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') the proposed rule change as described in 
items I, II and III below, which items have been prepared by the self-
regulatory organization. On March 19, 2003, the Exchange submitted 
Amendment No. 1 to the proposed rule change. 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 is proposing to amend its rules by adopting a one tick 
step up requirement for Market Makers who are participating on the 
Exchange's Automatic Execution System (``Auto-Ex'') in certain option 
issues. The text of the proposed rule change is below. Additions are in 
italics.
* * * * *

[[Page 17421]]

5231 Automatic Execution System

    Rule 6.87(a)-(d)--No change.
    (e) Market Maker Requirements and Eligibility. Any Exchange Member 
who is registered as a Market Maker and who has obtained written 
authorization from a clearing member is eligible to participate on the 
Auto-Ex system, subject to the following conditions and requirements:
    (1)-(7)--No change.
    (8) Auto-Ex Tick Better Requirement in Certain Issues.
    (A) Except as provided in subsection (B), below, Lead Market Makers 
who are participating on Auto-Ex must assure that Exchange staff (i.e., 
the Order Book Official or Control Room staff) have set the Auto-Ex 
System either:
    (i) to execute incoming electronic orders at prices that are one 
trading increment better than the Exchange's disseminated bid or 
offering price when another options exchange is disseminating the 
national best bid or offer at a price that is one trading increment 
better than the price being disseminated by the Exchange. The order 
will default for manual representation in the trading crowd when 
another options exchange is disseminating a price that is more than one 
trading increment better than the price being disseminated by the 
Exchange, or
    (ii) to execute incoming electronic orders at the NBBO pursuant to 
Rule 6.87(i).
    (B) Applicability. The requirements of subsection (A), above, will 
apply only to non-broker-dealer orders for ten contracts or less in 
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 three calendar months of trading 
activity beginning four months prior to the current month. In addition, 
the requirements of Subsection (A), above, will only apply to orders in 
option series that are not designated as LEAPS pursuant to Rule 6.4(e).
* * * * *

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
    The Exchange is proposing to adopt new PCX rule 6.87(e)(8) relating 
to the Exchange's Auto-Ex System for options trading. Currently, 
Options Market Makers who are logged on to Auto-Ex are obligated to 
meet certain requirements as set forth in PCX rule 6.87(e)(1)-(7). The 
Exchange is proposing to adopt a new rule requiring Lead Market Makers 
(``LMMs'') on Auto-Ex to ``step up'' and execute certain orders at 
better prices than the Exchange is disseminating, if another options 
exchange is disseminating that better price.
    Current PCX rule 6.87(i) allows Auto-Ex to be set to execute 
inbound electronic orders at prices reflecting the national best bid or 
offer (``NBBO'') in selected issues, subject to the approval of the 
Options Floor Trading Committee (``OFTC''). Under the proposal, LMMs 
who are participating on Auto-Ex must assure that Exchange staff (i.e., 
the Order Book Official or Control Room staff) sets the Auto-Ex System 
in either of two ways for the selected issues as defined in PCX Rule 
6.87(e)(8)(B). First, when another options exchange is disseminating a 
price at the NBBO and that price is one trading increment better than 
the price being disseminated by the Exchange, the Exchange staff may 
set the Auto-Ex system may to execute incoming electronic orders at 
prices that are one trading increment better than the Exchange's 
disseminated bid or offering price. Where the Exchange is disseminating 
a price that is more than one trading increment inferior to the price 
being disseminated by another options exchange, the order will default 
for manual representation in the trading crowd.
    Alternatively, an LMM may have the Exchange staff set the Auto-Ex 
system to execute incoming electronic orders at the NBBO pursuant to 
PCX rule 6.87(i). Pursuant to PCX rule 6.87(i), any order that is not 
executed at the NBBO will be manually presented in the trading crowd if 
it is more than one trading increment away from the PCX market price.
    Proposed PCX rule 6.87(e)(8) will apply only to non-broker-dealer 
orders for ten contracts or less in 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. In addition, the rule 
will only apply to orders in option series that are not designated as 
LEAPS pursuant to PCX rule 6.4(e).
    The Exchange's determination of whether an equity option ranks in 
the top 120 most active, nationally-traded issues will be based on 
volume statistics 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 three calendar months of trading activity beginning 
four months prior to the current month. 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.
2. Basis
    The Exchange believes that the proposal is consistent with section 
6(b)(5) \3\ of the Act in that it designed to promote just and 
equitable principles of trade, to remove impediments and to 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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    \3\ 15 U.S.C. 78s(b)(2).
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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

    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

    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

[[Page 17422]]

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 self-
regulatory organization consents, the Commission will:
    (A) By order approve such proposed rule change, 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 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 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-2002-54 and should 
be submitted by April 30, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\4\
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    \4\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-8608 Filed 4-8-03; 8:45 am]
BILLING CODE 8010-01-P