[Federal Register Volume 59, Number 5 (Friday, January 7, 1994)]
[Notices]
[Pages 1043-1045]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-394]
[[Page Unknown]]
[Federal Register: January 7, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33407; File No. SR-PSE-93-17]
Self-Regulatory Organizations; Order Approving Proposed Rule
Change by the Pacific Stock Exchange, Inc., Relating to Permanent
Approval of the Options Trading Crowd Performance Evaluation Pilot
Program
December 30, 1993.
On July 28, 1993, the Pacific Stock Exchange, Inc. (``PSE'' or
``Exchange'') submitted to 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 seeking permanent approval of the
Options Trading Crowd Performance Evaluation pilot program provided in
Options Floor Procedure Advice (``OFPA'') B-13, ``Subject: Evaluation
of Options Trading Crowd Performance.''\3\
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\1\15 U.S.C. 78s(b)(1) (1988).
\2\17 CFR 240.19b-4 (1993).
\3\On April 22, 1988, the Commission approved the PSE's Options
Trading Crowd Performance Evaluation program on a two-year pilot
basis. See Securities Exchange Act Release No. 25611 (April 22,
1988), 53 FR 15325 (order approving SR-PSE-87-28). Subsequently, the
Commission approved proposals which extended the pilot program
through October 1, 1993. See Securities Exchange Act Release Nos.
29930 (November 12, 1991), 56 FR 58598 (order approving File No. SR-
PSE-91-30) and 31613 (December 17, 1992), 57 FR 61464 (order
approving File No. SR-PSE-92-34). Most recently, the Commission
approved an extension of the pilot program through January 1, 1994.
See Securities Exchange Act Release No. 33094 (October 22, 1993), 58
FR 58365 (notice of filing and order granting partial accelerated
approval of File No. SR-PSE-93-17).
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The proposed rule change was published in Securities Exchange Act
Release No. 33094 (October 22, 1993), 58 FR 58365. No comments were
received on the proposed rule change.
Currently, under the pilot program, the Options Allocation
Committee (``Committee'') conducts quarterly evaluations of options
trading crowds to determine whether they have fulfilled performance
standards relating to quality of markets, competition among market
makers, observance of ethical standards, and administrative
requirements.\4\ In making its evaluations, the Committee may consider
any relevant information, including (1) the results of a trading crowd
evaluation questionnaire which the Committee distributes each quarter
to floor brokers and floor brokerage firms;\5\ (2) trading data; (3)
reports filed with the Exchange (e.g., Order Book Official Unusual
Activity Reports); and (4) the regulatory history of the members in the
crowd.
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\4\Prior to June 1992, the Options Listing Committee conducted
the quarterly evaluations. In June 1992, the Commission approved a
proposal allowing the Options Allocation Committee to assume the
evaluation function. See Securities Exchange Act Release No. 30843
(June 19, 1992), 57 FR 28889 (order approving File No. SR-PSE-92-
07).
\5\The PSE has stated that the questionnaire is distributed to
90% of the Exchange's floor brokers, and that 80% of those who
receive the questionnaire complete it. Telephone conversation
between Michael D. Pierson, Senior Attorney, Market Regulation, PSE,
to Yvonne Fraticelli, Staff Attorney, Options Branch, Division,
Commission, on October 7, 1993.
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Trading crowds rated in the bottom 10% of the aggregate results of
overall evaluation scores are presumed under OFPA B-13(b) to have
failed to meet minimum performance standards. Under OFPA B-13 the
Committee may call an informal meeting or conduct a formal hearing with
a trading crowd that has failed to meet minimum performance standards.
Prior to the close of the informal meeting, the Committee must inform
the crowd of possible consequences if the unsatisfactory performance
continues.
At a formal hearing under OFPA B-13(e), rights of confrontation and
rights to counsel apply. Based on the information adduced at the formal
hearing, the Committee has the authority to take action against a
trading crowd or individual market makers in the crowd. Specifically,
under OFPA B-13(a), the Committee may restrict the allocation of new
options classes and reallocate existing options classes. The remedial
actions provided in paragraph (a) may not be taken without a formal
hearing and may be reviewed by the PSE's Board of Governors pursuant to
PSE Rule XX, section 11(d), ``Procedure Following Applications for
Hearing or Review,'' of the Rules of the Board of Governors, upon
submission of a timely application for review. The Exchange's Board of
Governors may also review any Committee decision under OFPA B-13 on its
own initiative.
The PSE has evaluated the Options Trading Crowd Evaluation Program
and concluded that the program has provided an accurate and useful
means of evaluating trading crowd and LMM performance. In this regard,
the Exchange notes that the questionnaires are completed by options
floor brokers, who are uniquely qualified to evaluate the trading
crowds and LMMs. Based upon the increases in the survey ratings over
the third and fourth quarters of 1992 and the first quarter of 1993,
the Exchange believes that the program has improved the performances of
the Exchange's market makers and LMMs.\6\ The PSE notes that the
general evaluation results are disseminated to the trading floor on a
quarterly basis and that the Committee reviews the detailed survey
responses and comments and considers them in allocating options to
trading crowds and LMMs.
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\6\The Committee has not distributed the evaluation
questionnaires since the first quarter of 1993. However, the
Committee plans to distribute questionnaires covering the last two
quarters of 1993 early in 1994. Telephone conversations between
Michael Pierson, Senior Attorney, Market Regulation, PSE, and Yvonne
Fraticelli, Staff Attorney, Options Branch, Division, Commission, on
December 15 and 16, 1993.
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During the last quarter of 1992 and the first three quarters of
1993, the Committee held seven informal meetings with trading crowds
and five informal meetings with LMMs.\7\The Exchange has held one
formal hearing since the inception of the pilot program, regarding the
performance of Post X-17. As a result of the hearing, the Exchange's
Options Listing Committee reallocated three options and removed six
options to another post. The members of Post X-17 appealed the decision
to the Exchange's Board of Governors and thereafter to the Commission.
On December 26, 1989, the Commission denied Post X-17's request for a
stay of the Options Listing Committee's reallocation of three
options.\8\ On December 29, 1992, the Commission ruled that the PSE's
reallocation of the options was not reviewable by the Commission under
section 19(d)(2) of the Act because the reallocation was not imposed as
a disciplinary sanction and because no limitation or prohibition to
access occurred within the meaning of section 19(d) of the Act.\9\
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\7\Telephone conversations between Michael Pierson, Senior
Attorney, Market Regulation, PSE, and Yvonne Fraticelli, Staff
Attorney, Options Branch, Division, Commission, on December 15 and
16, 1993.
\8\See Securities Exchange Act Release No. 27568 (December 26,
1989) (Order Denying Stay, File No. 3-7285).
\9\See Securities Exchange Act Release No.31666 (December 29,
1992), File No. 3-7285.
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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, and, in
particular, the requirements of section 6(b)(5)\10\ in that it is
designed to remove impediments to and protect the mechanism of a free
and open market and to protect investors and the public interest. The
Commission believes that the trading crowd evaluation program is
designed to help the Exchange to maintain the quality and integrity of
its markets by setting minimum standards of market maker performance
and providing a means to identify market makers and trading crowds
which fail to meet performance standards. By allowing the Exchange to
assess the quality of its trading crowds and market makers, and to take
appropriate remedial measures where necessary, the Commission believes
that the trading crowd evaluation program helps the Exchange to provide
a more competitive, efficient and fair market.
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\10\15 U.S.C. 78f(b) (1982).
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Specifically, the Commission believes that the evaluation program
furthers the PSE's ability to ensure liquid and continuous markets for
options by permitting the Exchange to enforce more effectively the
affirmative and negative obligations imposed on PSE market makers. In
particular, the trading crowd evaluation questionnaire enables the PSE
to determine whether market makers are making continuous, two-sided
markets in all option series for each option class located at a trading
station and whether deep and liquid markets are provided as a result of
competition among market makers. The Commission believes that the more
stringent, formalized market maker standards should further enhance the
integrity of the PSE's markets and contribute to investor confidence
and protection. In addition, the Commission believes that the
Committee's consideration of the trading crowd survey results in
allocating options to trading crowds and LMMs should provide an
incentive for improved market maker performance.
The Commission also notes that the evaluation program provides
procedural rights in connection with remedial actions taken under the
program. Specifically, the Committee may restrict the allocation of new
options and reallocate existing options under paragraph (a) of OFPA B-
13 only after a formal hearing. At a formal hearing, the OFPA provides
for a right to counsel and a record of the proceedings. In addition,
the Committee's decision is reviewable by the Exchange's Board of
Governors upon the submission of a timely application for review and
the Exchange's Board of Governors may review any Committee decision on
its own initiative. The Board review panel or the Chairman of the Board
may grant or deny a stay of the Committee's action. By requiring that
the Committee implement the remedial measures provided in paragraph (a)
only after a formal hearing, and by providing a right to appeal the
Committee's decision to the Exchange's Board of Governors, the
Commission believes that the evaluation program contains processes
designed to safeguard the procedural rights of individuals affected by
remedial actions.
Finally, the Commission notes that the PSE's trading crowd
evaluation program is similar to a program adopted previously by the
Chicago Board Options Exchange (``CBOE'').\11\
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\11\See Securities Exchange Act Release No. 28012 (May 14,
1990), 55 FR 20879 (order approving File No. SR-CBOE-90-04) and CBOE
Rule 8.60, ``Evaluation of Trading Crowd Performance.''
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It is therefore ordered, pursuant to section 19(b)(2) of the
Act,\12\ that the proposed rule change is approved.
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\12\15 U.S.C. 78s(b)(2) (1982).
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) (1992).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-394 Filed 1-6-94; 8:45 am]
BILLING CODE 8010-01-M
