[Federal Register Volume 70, Number 135 (Friday, July 15, 2005)]
[Notices]
[Pages 41069-41071]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-3769]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52008; File No. SR-PCX-2005-78]


Self-Regulatory Organizations; Pacific Exchange, Inc.; Notice of 
Filing and Immediate Effectiveness of a Proposed Rule Change Amending 
Obvious Error Rule for Equity Options

July 11, 2005.
    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 July 1, 2005, 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 PCX. The Exchange

[[Page 41070]]

filed the proposed rule change as a ``non-controversial'' rule change 
under Rule 19b-4(f)(6) under the Act,\3\ which renders the proposal 
effective upon filing with the Commission. 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\ 17 CFR 240.19b-4(f)(6).
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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 its obvious error rule for equity 
options. Below is the text of the proposed rule change. Proposed 
additions are in italics and proposed deletions are in [brackets].
* * * * *
Pacific Exchange, Incorporated
* * * * *
Rule 6.87(a)-6.87(g) Commentary .03--No Change
    Rule 6.87(g) Commentary .04--Buyers of options with a zero bid [and 
$.05 offer (i.e., a Theoretical Price of $.05)] may request that their 
execution be busted if at least [the two] one strike[s] below (for 
calls) or above (for puts) in the same options class [were] was quoted 
with a zero bid [and $.05 offer] at the time of the execution. Such 
buyers must follow the procedures of Rule 6.87(g)(3) above.
* * * * *

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 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, Proposed Rule Change

1. Purpose
    The Exchange proposes to revise its obvious error rule with respect 
to equity options (PCX Rule 6.87(g)) (``Obvious Error Rule'') to adjust 
the terms that relate to nullification of no bid series as set forth in 
PCX Rule 6.87(g) Commentary .04.
    Under the current Obvious Error Rule, transactions in options 
series quoted no bid at a nickel (i.e., $0.05 offer) will be nullified 
provided at least two strike prices below (for calls) or above (for 
puts) in the same options class was quoted no bid at a nickel at the 
time of execution. A ``no bid'' option refers to an option where the 
bid price is $0.00.\4\ Series of options quoted no bid are usually deep 
out-of-the-money series that are perceived as having little if any 
chance of expiring in-the-money.\5\ For this reason, relatively few 
transactions occur in these series, and those that do are usually the 
result of a momentary pricing error. In some cases, the pricing error 
is substantial enough such that other provisions in the Obvious Error 
Rule become applicable. In many cases PCX Rule 6.87(g) Commentary .04 
is the only provision that would apply to the pricing error.
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    \4\ When the bid price is $0.00, the offer price is typically 
$0.05. In this instance, the option typically is referred to as ``no 
bid at a nickel.''
    \5\ For example, on July 11th with the underlying stock trading 
at $21, the July 40 calls likely will be quoted no bid at a nickel.
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    The proposed rule change would amend the conditions set forth in 
PCX Rule 6.87(g) Commentary .04 that provide that the option series 
must be quoted at no bid at a nickel and instead only require that the 
option series be quoted at no bid. In addition, the proposed rule would 
allow a transaction to be nullified if a series is quoted at no bid one 
strike price below (for calls) or above (for puts) instead of two 
strikes below (for calls) or above (for puts) as set forth in the 
current rule. The reason for these changes is that options that are 
priced at no bid, regardless of the offer, are usually deep out-of-the-
money series that are perceived as having little if any chance of 
expiring in-the-money. This is especially the case when the series 
below (for calls) or above (for puts) in the same option class 
similarly is quoted no bid. In this regard, the offer price is 
irrelevant. Therefore, transactions in series that are quoted no bid at 
a dime, for example, are just as likely to be the result of an obvious 
error as are transactions in series that are quoted no bid at a nickel 
when the series below (for calls) or above (for puts) in the same 
option class similarly is quoted at no bid.
2. Statutory Basis
    The PCX believes that the proposed rule change is consistent with 
Section 6(b) of the Act \6\ in general, and furthers the objectives of 
Section 6(b)(5) of the Act \7\ 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 facilitating transactions in 
securities, and to remove impediments to and perfect the mechanism of a 
free and open market and national market system.
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    \6\ 15 U.S.C. 78f(b).
    \7\ 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 inappropriate burden on competition 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

    Because the proposed rule change: (i) Does not significantly affect 
the protection of investors or the public interest; (ii) does not 
impose any significant burden on competition; and (iii) by its terms, 
does not become operative for 30 days after the date of filing, the 
proposed rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act \8\ and subparagraph (f)(6) of Rule 19b-4 
thereunder.\9\ As required under Rule 19b-4(f)(6)(iii),\10\ the 
Exchange provided the Commission with written notice of its intent to 
file the proposed rule change, along with a brief description and text 
of the proposed rule change, at least five business days prior to the 
date of the filing of the proposed rule change.
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    \8\ 15 U.S.C. 78s(b)(3)(A).
    \9\ 17 CFR 240.19b-4(f)(6).
    \10\ 17 CFR 240.19b-4(f)(6)(iii).
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    At any time within 60 days of the filing of the 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 the 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 the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

[[Page 41071]]

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-2005-78 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-9309.
    All submissions should refer to File Number SR-PCX-2005-78. 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, 100 F Street, 
NE., Washington, DC 20549. Copies of such 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 available publicly. All 
submissions should refer to File Number SR-PCX-2005-78 and should be 
submitted on or before August 5, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. E5-3769 Filed 7-14-05; 8:45 am]
BILLING CODE 8010-01-P