[Federal Register Volume 69, Number 56 (Tuesday, March 23, 2004)]
[Notices]
[Pages 13611-13613]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-6406]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49418; File No. SR-PCX-2004-18]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Pacific Exchange, Inc. 
Relating to Bid-Ask Differentials

March 15, 2004.
    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 March 11, 2004, the Pacific Exchange, Inc. (``PCX'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``SEC'' or 
``Commission'') the proposed rule change as described in Items I and II 
below, which Items have been prepared by the PCX. The PCX filed the 
proposal pursuant to Section 19(b)(3)(A) under the Act,\3\ and Rule 
19b-4(f)(6) thereunder,\4\ which renders the proposal effective upon 
filing with the Commission.\5\ 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.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6).
    \5\ The PCX has asked the Commission to waive the 30-day 
operative delay. See Rule 19b-4(f)(6)(iii), 17 CFR 240.19b-
4(f)(6)(iii).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The PCX proposes to amend PCX Rule 6.37, ``Obligations of Market 
Makers,'' to permit the Options Floor Trading Committee (``OFTC'') to 
establish, with respect to options trading with a bid price of less 
than $2, bid-ask differentials that are no more than $0.50 wide 
(``double-width'') when the primary market for the underlying security: 
(1) Reports a trade outside of its disseminated quote (including any 
Liquidity Quote); or (2) disseminates an inverted quote. The double-
width relief must terminate automatically when the condition that 
necessitated the double-width relief is no longer present. The text of 
the proposed rule change appears below. Additions are italicized.\6\
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    \6\ The PCX indicated that the proposed rule should be paragraph 
(F) of PCX Rule 6.37(b)(1). See e-mail message from Steven B. 
Matlin, Senior Attorney, Regulatory Policy, PCX, to Yvonne 
Fraticelli, Special Counsel, Division of Market Regulation, 
Commission, dated March 12, 2004.
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Obligations of Market Makers

    Rule 6.37(a)--No change.
    Rule 6.37(b)(1)(A)--(E)--No change.
    (F) The OFTC may, with respect to options trading with a bid price 
less than $2, establish bid-ask differentials that are no more than 
$0.50 wide (``double-width'') when the primary market for the 
underlying security: (a) Reports a trade outside of its disseminated 
quote (including any Liquidity Quote); or (b) disseminates an inverted 
quote. The imposition of double-width relief must automatically 
terminate when the condition that necessitated the double-width relief 
i.e., condition (a) or (b)) is no longer present. Market makers that 
have not automated this process may not avail themselves of the relief 
provided herein (i.e. they may not manually adjust prices.)

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 IV below. The PCX has prepared

[[Page 13612]]

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
    PCX Rule 6.37 sets forth the obligation of market makers and 
establishes bid-ask differentials. The PCX proposes to amend PCX Rule 
6.37 to codify two instances when the bid-ask differential for options 
trading with a bid price of less than $2 may be wider than the $0.25 
interval expressly required for such options in PCX Rule 6.37(b)(1)(A). 
Specifically, with respect to options trading with a bid price of less 
than $2, the proposal would authorize the OFTC to establish bid-ask 
differentials that are no more than $0.50 wide when the primary market 
for the underlying security: (1) Reports a trade outside of its 
disseminated quote (including any Liquidity Quote); or (2) disseminates 
an inverted quote.\7\ The proposed quote width relief will apply to 
options on stocks and options on exchange-traded funds (``ETFs'').
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    \7\ The proposed rule is based on Chicago Board Options 
Exchange, Inc. (``CBOE'') Rule 8.7(b)(iv). See Securities Exchange 
Act Release No. 48990 (December 23, 2003), 68 FR 75673 (December 31, 
2003) (File No. SR-CBOE-2003-25) (order approving CBOE Rule 
8.7(b)(iv)) (``CBOE Approval Order'').
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    The proposed quote width relief will apply only to options that 
trade with a bid price of less than $2. Thus, options trading at a 
price of $2 (bid) or higher will not be eligible for the proposed quote 
width relief. The PCX notes that options trading at less than $2 are 
subject to a $0.25 bid-ask differential, which generally means that 
market makers have only $0.125 of pricing latitude on either side of 
the theoretical value to widen their quotes to take into account any 
pricing discrepancy in the underlying security.
    Under the proposal, PCX market makers will not be permitted to 
widen their quotes when the New York Stock Exchange, Inc. (``NYSE'') 
prints a trade at or within its Liquidity Quote. Because the NYSE 
disseminates Liquidity Quotes, which are quotes of substantial size 
outside of the regular disseminated quote, the PCX notes that PCX 
market makers should not be surprised if the NYSE prints a trade 
outside of its regular quote but at or within its Liquidity Quote. For 
this reason, the PCX does not propose to allow the OFTC to authorize 
PCX market makers to widen their quotes when the NYSE prints a trade at 
or within the Liquidity Quote. However, if the NYSE prints a trade 
outside of the Liquidity Quote, a PCX market maker would be able to 
widen its quotes.
    A PCX market maker will be eligible for the proposed relief only if 
the market maker has an automated quotation system that returns the 
market maker's quotes to normal width upon the termination of the 
triggering event. Double-width relief will not be available to market 
makers who must rely on manual input to restore quote values to normal 
width. Automation of this process ensures that double-width relief will 
take effect only when permissible and, more importantly, will last only 
as long as the condition that necessitated it occurs.\8\ Thus, there 
will be no sustained dissemination of stale double-wide quotes when one 
of the triggering events is not present.
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    \8\ Thus, to be eligible for the proposed double-wide relief, a 
market maker must automate this process in his or her own 
proprietary trading software. Market makers who do not automate this 
process will not be eligible for the proposed relief. At this time, 
the PCX will not be making the necessary software changes to the 
POETS system to automate this process.
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2. Statutory Basis
    The PCX believes that the proposal is consistent with Section 6(b) 
of the Act,\9\ in general, and Section 6(b)(5) of the Act,\10\ in 
particular, in that it is designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, and to remove impediments to and perfect the mechanism of a 
free and open market and a national market system.
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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 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

    The PCX neither solicited nor received written comments on the 
proposed rule change.

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

     The PCX has filed the proposed rule change pursuant to Section 
19(b)(3)(A) of the Act \11\ and subparagraph (f)(6) of Rule 19b-4 
thereunder.\12\ Because the foregoing proposed rule change: (1) Does 
not significantly affect the protection of investors or the public 
interest; (2) does not impose any significant burden on competition; 
and (3) does not become operative for 30 days from the date of filing, 
or such shorter time as the Commission may designate if consistent with 
the protection of investors and the public interest, the proposed rule 
change has become effective pursuant to section 19(b)(3)(A) of the Act 
and Rule 19b-4(f)(6) thereunder. As required under Rule 19b-
4(f)(6)(iii), the PCX provided the Commission with written notice of 
its intent to file the proposed rule change at least five business days 
prior to filing the proposal with the Commission or such shorter period 
as designated by the Commission.
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    \11\ 15 U.S.C. 78s(b)(3)(A).
    \12\ 17 CFR 240.19b-4(f)(6).
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    A proposed rule change filed under Rule 19b-4(f)(6) normally does 
not become operative prior to 30 days after the date of filing. 
However, Rule 19b-4(f)(6)(iii) permits the Commission to designate a 
shorter time if such action is consistent with the protection of 
investors and the public interest. The PCX has requested that the 
Commission waive the 30-day operative delay specified in Rule 19b-
4(f)(6) because the PCX's proposal provides quote width relief similar 
to that provided under the rules of the CBOE. Accordingly, the PCX 
believes that its proposal does not raise new regulatory issues, 
significantly affect the protection of investors or the public 
interest, or impose any significant burden on competition.
    The Commission believes that waiving the 30-day operative delay is 
consistent with the protection of investors and the public interest 
because the proposed rule change is substantially similar to a rule 
adopted previously by the CBOE.\13\ The CBOE's proposed rule was 
published for comment and the Commission received no comments regarding 
the CBOE's proposal. The Commission believes that the PCX's proposal 
raises no new issues or regulatory concerns that the Commission did not 
consider in

[[Page 13613]]

approving the CBOE's proposal. For this reason, the Commission believes 
that waiving the 30-day operative delay is consistent with the 
protection of investors and the public interest, and the Commission 
designates the proposal to be operative upon filing with the 
Commission.
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    \13\ See CBOE Rule 8.7(b)(iv) and CBOE Approval Order, supra 
note 7. For purposes only of waiving the 30-day operative delay, 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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    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.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether it 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. Comments may also be 
submitted electronically at the following e-mail address: [email protected]. All comment letters should refer to File No. SR-PCX-
2004-18. The file number should be included on the subject line if e-
mail is used. To help the Commission process and review your comments 
more efficiently, comments should be sent in hardcopy or by e-mail but 
not by both methods. 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 at 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-2004-18 and should be 
submitted by April 13, 2004.
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    \14\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 04-6406 Filed 3-22-04; 8:45 am]
BILLING CODE 8010-01-P