[Federal Register Volume 69, Number 204 (Friday, October 22, 2004)]
[Notices]
[Pages 62105-62107]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-2793]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50538; File No. SR-PCX-2004-89]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Pacific Exchange, Inc., To 
Allow Market Maker Quotation Spreads in PCX Plus of up to $5

October 14, 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 September 27, 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 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 PCX is proposing to amend PCX Rule 6.37 to allow quotation 
spreads for options that trade on the Exchange's electronic trading 
platform, PCX Plus, to be $5 regardless of the price of the bid. The 
text of the proposed rule change appears below. Additions are 
underlined.
* * * * *

Rule 6

Options Trading

Obligations of Market Makers

    RULE 6.37. (a)-No Change.
    (b) No Change.
    (1) Bidding and/or offering so as to create differences of no more 
than:
    (A) .25 between the bid and the offer for each option contract for 
which the bid is less than $2,
    (B) no more than .40 where the bid is $2 or more but does not 
exceed $5,
    (C) no more than .50 where the bid is more than $5 but does not 
exceed $10,
    (D) no more than .80 where the bid is more than $10 but does not 
exceed $20, and
    (E) no more than $1 when the last bid is $20.10 or more, provided 
that the Exchange may establish differences other than the above for 
one or more series or classes of options.
    (F) The two Trading Officials or the Exchange 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).
    (G) Options, designated by the Exchange, that trade on PCX Plus may 
be quoted electronically with a difference not to exceed $5 between the 
bid and offer regardless of the price of the bid. The $5 quote width 
shall only apply to classes trading on PCX Plus and only following the 
opening rotation in each security (i.e., the widths specified in 
paragraph (b)(1)(A)-(F) above shall apply during opening rotation). 
Quotes given in open outcry in PCX Plus issues may not be quoted with 
$5 widths and instead must comply with the legal width requirements 
specified in paragraph (b)(1)(A)-(F) above.
    (2)-(5)--No Change.
    (c)-(h)--No Change.
    Commentary .01-.09--No Change.\3\
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    \3\ In a telephone call, the PCX agreed to a minor change 
clarifying that the Exchange is not proposing to amend Commentaries 
.01 through .09 of PCX Rule 6.37. Telephone conversation between 
Steven B. Matlin, Senior Attorney, Regulatory Policy, PCX, and 
Yvonne Fraticelli, Special Counsel, Office of Market Supervision, 
Division of Market Regulation, Commission, on October 13, 2004.
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* * * * *

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 self-regulatory organization 
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 self-regulatory organization 
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 purpose of the proposed rule change is to substantially relax 
the quotation spread requirements on options designated by the Exchange 
that trade on the Exchange's electronic trading platform, PCX Plus. 
Currently, the PCX's rules contain maximum quotation spread 
requirements that vary from $.25 to $1, depending on the price of the 
option. Each PCX market maker independently is subject to these 
requirements. According to the PCX, while the primary purpose of the 
spread requirements is to help maintain narrow spreads, the spread 
requirements also result in individual market makers sometimes quoting 
at prices that they believe are unnecessarily narrow, potentially 
exposing them to greater risk if markets move quickly. The PCX believes 
that, due to the market making system in PCX Plus, the quotation spread 
requirements may not be necessary to ensure tight and competitive 
quotations on the PCX.
    In this regard, the PCX states that the market structure in PCX 
Plus creates strong incentives for competing market makers and other 
market participants to disseminate competitive prices. In PCX Plus, 
each market maker quotes independently and customers and professional 
traders can enter limit orders on the PCX's book. The PCX automatically 
collects this trading interest, calculates the PCX best bid and offer 
(``BBO''), and disseminates the BBO to the investing public. 
Furthermore, the PCX allocates trading interest on PCX Plus based upon 
the price and size of the interest. Under the PCX's trading algorithm, 
the PCX allocates volume to trading interest at the best price. The 
larger the size of a person's quote or order at the best price, the 
more trading interest that person

[[Page 62106]]

receives. The PCX believes that this provides strong incentives for 
market makers and other market participants to enter quotes and orders 
that improve the price and depth of the market. The PCX believes that 
in this model, market forces provide sufficient discipline to maintain 
narrow and competitive quotation spreads.
    Accordingly, the PCX proposes to expand the allowable spreads for 
options designated by the Exchange that trade on the Exchange's 
electronic trading platform, PCX Plus. The $5 quote width shall only 
apply to options trading on PCX Plus and only following the opening 
rotation in each security.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\4\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act,\5\ in particular, because 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 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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    \4\ 15 U.S.C. 78f(b).
    \5\ 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 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

    The proposed rule change has been designated by the PCX as a ``non-
controversial'' rule change pursuant to Section 19(b)(3)(A) of the Act 
\6\ and subparagraph (f)(6) of Rule 19b-4 thereunder.\7\ Consequently, 
because the foregoing 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 on which it was filed, or such 
shorter time as the Commission may designate if consistent with the 
protection of investors and the public interest, and the Exchange 
provided the Commission with written notice of its intent to file the 
proposed rule change at least five days prior to the filing date, it 
has become effective pursuant to Section 19(b)(3)(A) of the Act \8\ and 
Rule 19b-4(f)(6) thereunder.\9\ 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 other 
exchanges.\10\ 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. In addition, the PCX believes that its request is 
consistent with the protection of investors and the public interest and 
that good cause exists, including the PCX's need to maintain 
competition and efficiency.
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    \6\ 15 U.S.C. 78s(b)(3)(A).
    \7\ 17 CFR 240.19b-4(f)(6).
    \8\ 15 U.S.C. 78s(b)(3)(A).
    \9\ 17 CFR 240.19b-4(f)(6).
    \10\ The proposed rule change is based on International 
Securities Exchange, Inc. (``ISE'') Rule 803(b)(4) and Chicago Board 
Options Exchange, Inc. (``CBOE'') Rule 8.7(b)(iv)(A). See Securities 
Exchange Act Release Nos. 50015 (July 14, 2004), 69 FR 43872 (July 
22, 2004) (order approving File No. SR-ISE-2003-22); and 50079 (July 
26, 2004), 29 FR 45858 (July 30, 2004) (order approving File No. SR-
CBOE-2004-44).
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    The Commission believes that waiving the 30-day operative delay is 
consistent with the protection of investors and the public 
interest.\11\ Specifically, the Commission believes that allowing the 
PCX to implement $5 quotation spread parameters like those adopted by 
the ISE and the CBOE will help the PCX to compete with those 
exchanges.\12\ The Commission believes that the PCX's proposal raises 
no new issues or regulatory concerns that the Commission did not 
consider in approving the ISE and CBOE proposals. For these reasons, 
the Commission designates that the proposal become operative 
immediately.
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    \11\ For purposes only of waiving the operative delay for this 
proposal, the Commission has considered the proposed rule's impact 
on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
    \12\ See note 9, supra.
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate the rule change if it 
appears to the Commission that the action is necessary or appropriate 
in the public interest, for the protection of investors, or would 
otherwise further 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 the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number SR-PCX-2004-89 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609.
    All submissions should refer to File Number SR-PCX-2004-89. This 
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, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). 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, 450 Fifth 
Street, NW., Washington, DC 20549. Copies of this filing also will be 
available for inspection and copying at the principal office of the 
PCX. All comments received will be posted without change; the 
Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make

[[Page 62107]]

available publicly. All submissions should refer to File Number SR-PCX-
2004-89 and should be submitted on or before November 12, 2004.

    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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Margaret H. McFarland,
Deputy Secretary.
 [FR Doc. E4-2793 Filed 10-21-04; 8:45 am]
BILLING CODE 8010-01-P