[Federal Register Volume 65, Number 5 (Friday, January 7, 2000)]
[Notices]
[Pages 1214-1215]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-389]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-42301; File No. SR-PCX-99-25]
Self Regulatory Organizations; Pacific Exchange, Inc.; Order
Approving Proposed Rule Change To Allow Lead Market Makers To Perform
Certain Floor Broker Functions
December 30, 1999.
I. Introduction
On July 13, 1999, the Pacific Exchange, Inc. (``PCX'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'' or ``SEC''), 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 allow PCX Lead Market Makers
(``LMM''s) to perform certain Floor Broker Functions. Notice of the
proposed rule change was published in the Federal Register on September
21, 1999.\3\ No comments were received on the proposal. This order
approves the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 41868 (September 13,
1999), 64 FR 51173.
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II. Description of the Proposal
The proposed rule change modifies the Exchange's current rules \4\
to allow an LMM to perform certain Floor Broker functions in addition
to Order Book Official (``OBO'') and Market Maker functions. Under the
proposed changes, an LMM acting as a Floor Broker will be required to
use due diligence and perform all other obligations of Floor Brokers
pursuant to PCX Rules 6.43 through 6.48. An LMM will be permitted, but
will not be obligated, to accept non-discretionary orders that are not
eligible to be placed in the Public Order Book, and will be permitted
to represent such orders as a Floor Broker. An LMM will not be
permitted to represent discretionary orders, whether as a Floor Broker
or otherwise, and all orders in the LMM's possession that are eligible
to be booked will be required to be booked.
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\4\ See PCX Rule 6.82, ``Lead Market Makers,'' and PCX Rule
6.83, ``Limitations on Dealings of Lead Market Makers.''
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III. Discussion
For the reasons discussed below, the Commission finds that the
proposed rule change is consistent with the Act and the rules and
regulations under the Act applicable to a national securities exchange.
In particular, the Commission believes that the proposed rule change is
consistent with the Section 6(b)(5) \5\ requirements that the rules of
an exchange be designed to promote just and equitable principles of
trade, prevent fraudulent and manipulative acts and practices, and
protect investors and the public interest.\6\ The Commission also finds
that the proposal may serve to remove impediments to and perfect the
mechanism of a free and open market by enabling Exchange LMMs to better
serve customers.
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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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The LMM system at the PCX was first approved, on an eighteen-month
pilot basis, in 1990.\7\ After granting a number of extensions to the
pilot,\8\ the Commission approved the program on a permanent basis on
September 22, 1997.\9\ The LMM program was created originally to
enhance the ability of the Exchange to compete in a multiple trading
environment, and was designed primarily for new option issues and
option issues with comparatively low volume. Subsequently, all equity
and index options traded on the PCX were made eligible for the LMM
program.\10\
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\7\ See Securities Exchange Act Release No. 27631 (January 17,
1990), 55 FR 2462 (January 24, 1990).
\8\ See Securities Exchange Act Release Nos. 31063 (August 21,
1992), 57 FR 39255 (August 28, 1992); 31635 (December 22, 1992), 57
FR 62414 (December 30, 1992); 33854 (April 1, 1994), 59 FR 16873
(April 8, 1994); 34710 (September 23, 1994), 59 FR 50306 (October 3,
1994); 36293 (September 28, 1995), 60 FR 52243 (October 5, 1995);
and 37767 (September 30, 1996), 61 FR 52483 (October 7, 1996).
\9\ See Securities Exchange Act Release No. 39111 (September 22,
1997), 62 FR 51710 (October 2, 1997).
\10\ See Securities Exchange Act Release No. 37780 (October 3,
1996), 61 FR 53247 (October 10, 1996).
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Exchange members appointed as LMMs assume responsibilities and
acquire rights in their appointed options classes that extend beyond
the obligations and rights of Market Makers who trade in the same
options issue. In addition to performing the regular obligations of a
Market Maker, an LMM must assume certain additional obligations that
are designed to strengthen the LMM's market making activities.
Pursuant to PCX Rule 6.82, ``Lead Market Maker,'' each LMM is
responsible for, among other things: assuring that disseminated market
quotations are accurate; honoring guaranteed markets; determining the
formula for generating automatically updated market quotations; being
present at the designated trading post throughout each trading day;
effecting, with respect to trading as a Market
[[Page 1215]]
Maker, trades that have a high degree of correlation with the overall
pattern of trading of each series in the option issues involved;
participating in the automatic execution system; actively promoting the
Exchange as a marketplace; and responding to competition by offering
competitive markets and competitively priced services. Subject to
certain exceptions, LMMs receive a guaranteed 50% participation in
transactions occurring on their disseminated bids and offers in their
appointed issues.
Since its inception, the LMM position at the PCX has been designed
to incorporate some of the functions performed by Designated Primary
Market Makers (``DPM''s) at the Chicago Board Options Exchange
(``CBOE''). Under the original LMM system at PCX, however, an LMM--
unlike a DPM--was not authorized to manage the public limit order book
(``the Book'') or perform certain Floor Broker functions.\11\
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\11\ These functions were accorded to DPMs at the CBOE from the
beginning of the DPM program at that exchange. See Securities
Exchange Act Release No. 24934 (September 22, 1987), 52 FR 36122
(September 25, 1987) (first approving the CBOE DPM program and
depicting the DPM as a position ``akin to a specialist'').
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The PCX has in recent years sought to broaden the privileges of its
LMMs to make its LMM system more competitive with similar systems at
other options exchanges. In October 1996, the Commission approved a PCX
pilot program that allowed a number of LMMs to perform the functions of
the PCX OBO (i.e., manage the Book) in certain designated options
issues.\12\ Participating LMMs were required to resolve trading
disputes and errors, set rates for Book execution, and disclose Book
information to members upon request. The pilot was subsequently
extended and expanded to allow all LMMs to participate as OBOs.\13\ In
October 1998 this facet of the LMM system was permanently approved by
the Commission.\14\
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\12\ See Securities Exchange Act Release No. 37810 (October 11,
1996), 61 FR 54481 (October 18, 1996).
\13\ See Securities Exchange Act Release Nos. 38462 (April 1,
1997), 62 FR 16886 (April 8, 1997); 39106 (September 22, 1997), 62
FR 51172 (September 30, 1997); 39667 (February 13, 1998), 63 FR 9895
(February 26, 1998); 40020 (May 21, 1998), 63 FR 29286 (May 28,
1998); and 40328 (August 17, 1998), 63 FR 45276 (August 25, 1998).
\14\ See Securities Exchange Act Release No. 40548 (October 14,
1998), 63 FR 56283 (October 21, 1998). Until recently, the Exchange
required participating LMMs to use Exchange personnel to assist the
LMM in performing the OBO function, for which the Exchange charged
the LMM a staffing fee. In July 1999, the Commission approved a rule
change allowing qualified LMMs to manage their own employees in
operating the Book. See Securities Exchange Act Release No. 41595
(July 2, 1999), 64 FR 38064 (July 14, 1999).
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The PCX now seeks to further revise PCX Rule 6.82 to permit its
LMMs to act as Floor Brokers, in addition to performing OBO and Market
Maker functions. Floor Brokers are registered with the Exchange and are
permitted to accept and execute options orders received on behalf of
members while on the Exchange floor.
The PCX has proposed this rule change for competitive reasons.
Specifically, the PCX believes that the proposed changes will afford
its LMMs additional flexibility so that they can better compete with
DPMs and specialists on other national securities exchanges.\15\ the
PCX also believes that the proposed changes will allow its LMMs to
provide customers with a greater level of service and enable the LMMs
to offer more competitive rates for the execution of customer orders.
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\15\ The proposed rule change will generally allow LMMs on the
PCX to perform the same functions that DPMs on the CBOE may perform.
See CBOE Rule 8.80(c).
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Under the proposal, an LMM will be permitted, but will not be
obligated, to accept non-discretionary orders that are not eligible to
be placed in the Book,\16\ and will be permitted to represent such
orders as a Floor Broker. In handling an order as a Floor Broker, an
LMM will be obligated to use due diligence to execute the order at the
best available price, in accordance with the rules of the Exchange,\17\
and will be further subject to all other obligations of Floor Brokers
specified in PCX Rules 6.43 through 6.48.
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\16\ The eligibility of orders to be placed in the Book is
determined by reference to PCX Rule 6.52(a), which governs the types
of orders that OBOs may accept. Such orders, as indicated in the
Rule, ``shall include limit orders . . . and such other orders as
may be designated by the Options Floor Trading Committee.''
According to the PCX, the Committee has not designated any
additional types of orders that may be accepted by OBOs. Orders not
eligible for the Book include, for example, contingency orders,
spread orders, straddle orders, and combination orders. Telephone
conversation between Robert P. Pacileo, Attorney, PCX, and Ira L.
Brandriss, Attorney, Division of Market Regulation, Commission, on
August 6, 1999.
\17\ The PCX represented that it will provide detailed guidance
concerning these responsibilities in a Regulatory Bulletin that will
be disseminated to members upon the approval of this proposed rule
change. The bulletin will specify, among other things, that in
executing transactions for his own account as a Market Maker, an LMM
(a) must accord priority to orders he represents as Floor Broker
over his activity as Market Maker, and (b) must not initiate a
transaction for his own account that would result in putting into
effect any stop or stop limit order which may be in the Book or
which he represents as Floor Broker, except with the approval of a
Floor Official and a guarantee that the stop or stop limit order
will be executed at the same price as the electing transaction.
Telephone conversation between Robert P. Pacileo, Attorney, PCX, and
Ira L. Brandriss, Attorney, Division of Market Regulation,
Commission, on November 19, 1999.
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At the same time, the proposal places restrictions on the types of
orders that an LMM may represent as a Floor Broker, consistent with
applicable rules of competing exchange.\18\ An LMM will not be
permitted to represent discretionary orders, whether as a Floor Broker
or otherwise. In addition, all orders in the LMM's possession that are
eligible to be booked will be required to be booked.
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\18\ See CBOE Rule 8.80(c)(8).
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The Commission finds that the proposed rule change is an
appropriate expansion of the functions performed by LMMs. The proposal
implements a system that has been in place other exchanges, and is
likely to enhance trading at the PCX. It provides a further incentive
for Market Makers to become LMMs, and thus may add depth and liquidity
to PCX-listed issues. The ability of LMMs to serve as Floor Brokers
should also afford LMMs greater flexibility in responding to varying
market conditions, and enable them to improve service to PCX customers
by offering competitive service rates. Finally, by placing LMMs on a
similar footing as DPMs and specialists at other options exchanges, the
proposal should encourage further competition among the exchange
markets.
IV. Conclusion
It is Therefore Ordered, pursuant to Section 19(b)(2) \19\ of the
Act, that the proposed rule change (SR-PCX-99-25) is hereby approved.
\19\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\20\
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\20\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-389 Filed 1-6-00; 8:45 am]
BILLING CODE 8010-01-M
