[Federal Register Volume 68, Number 97 (Tuesday, May 20, 2003)]
[Notices]
[Pages 27609-27610]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-12610]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47843; File No. SR-PCX-2002-54]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change and Amendment No. 1 Thereto by the Pacific Exchange, Inc. 
Relating to a One Tick Step Up Requirement for Auto-Ex in Certain 
Option Issues

May 13, 2003.

I. Introduction

    On August 27, 2002, the Pacific Exchange, Inc. (``PCX'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') pursuant to section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'')\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to adopt a one-tick step up 
requirement for market makers who are participating on the Exchange's 
Automatic Execution System (``Auto-Ex''). On March 19, 2003, the 
Exchange submitted Amendment No. 1 to the proposed rule change. The 
proposed rule change, as amended, was published in the Federal Register 
on April 9, 2003.\3\ The Commission received no comments regarding the 
proposal. This order approves the proposed rule change, as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act No. 47615 (April 2, 2003), 68 FR 
17420.
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II. Description

    The Exchange is proposing to adopt 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 with respect to their use of Auto-Ex. These 
obligations are set forth in PCX Rule 6.87(e)(1)-(7). The Exchange is 
proposing to adopt a new rule that would require Lead Market Makers 
(``LMMs'') participating on Auto-Ex to step up and execute certain 
orders at prices better than the Exchange is disseminating under 
specified conditions.
    PCX Rule 6.87(i) currently allows the Options Floor Trading 
Committee (``OFTC'') to require market makers to step up at least one 
trading increment to the national best bid or offer (``NBBO'') for 
electronic orders in selected issues.\4\ The proposed rule change would 
impose an alternative step up requirement on LMMs. Under the proposal, 
if the OFTC has not exercised its authority to require step up to the 
NBBO, the Exchange will set the Auto-Ex System to require LMMs to step 
up and execute trades in selected issues at the NBBO if the LMM is 
quoting a price within one tick of the NBBO as disseminated by another 
exchange. If the LMM is quoting 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.
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    \4\ Further, pursuant to PCX Rule 6.87(i), the OFTC may 
designate that an order will default for manual representation in 
the trading crowd if the order would be executed at a price that is 
more than one trading increment away from the PCX market price.
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    Proposed PCX Rule 6.87(e)(8) only will apply 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. 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 has represented that it 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.

III. Discussion

    After careful consideration, the Commission finds that the proposed 
rule change is consistent with the Act and the rules and regulations 
thereunder applicable to a national securities exchange. In particular 
the Commission finds that the proposed rule change is consistent with 
section 6(b)(5) of the Act,\5\ which requires among other things, that 
the Exchange's rules be 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

[[Page 27610]]

public interest.\6\ The Commission believes that requiring LMMs to step 
up one tick to match the NBBO in the most highly traded options series 
should increase the ability of investors to gain access to the best 
bids and offers available in those options series.
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    \5\ 15 U.S.C. 78f(b)(5).
    \6\ 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).
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IV. Conclusion

    For all of the aforementioned reasons, 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.
    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\7\ that the proposed rule change (SR-PCX-2002-54), as amended, is 
approved.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \7\ 15 U.S.C. 78s(b)(2).
    \8\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-12610 Filed 5-19-03; 8:45 am]
BILLING CODE 8010-01-P