[Federal Register Volume 63, Number 190 (Thursday, October 1, 1998)]
[Notices]
[Pages 52784-52786]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-26277]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40482; File No. SR-PCX-98-47]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval of Proposed Rule Change by the Pacific
Exchange, Inc. Relating to a Supplemental Specialist Post Fee
September 25, 1998.
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 17, 1998, the Pacific Exchange, Inc. (``PCX'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'' or ``SEC'') the proposed rule change as described in
Items I and II below, which Items have been prepared by PCX.\3\ The
Commission is publishing this notice and order to solicit comments on
the proposed rule change from interested persons and to approve the
proposal, as amended.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ On September 23, 1998, the Exchange filed Amendment No. 1 to
the proposed rule filing, the substance of which is incorporated
into the notice. See letter from Michael Pierson, Senior Attorney,
Regulatory Policy, PCX, to Richard Strasser, Assistant Director,
Division of Market Regulation (``Division''), Commission, dated
September 22, 1998.
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
PCX is proposing to adopt a Supplemental Specialist Post Fee that
will apply when the Equity Floor Trading Committee permits a specialist
firm to consolidate its specialist posts on the Equity Floors of the
Exchange. The text of the proposed rule change is available at the
Office of the Secretary, PCX and at the Commission.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, 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 III below. 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, the Proposed Rule Change
1. Purpose
Unlike other stock exchanges, PCX maintains a ``specialist post''
structure--rather than a ``specialist unit'' structure--on its Equity
Floors. A ``specialist post'' structure requires each registered
specialist to be assigned to a specific post where certain designated
stocks are traded. If a specialist firm is operating ten specialist
posts, for example, the firm would be required to maintain a specialist
at each of the ten posts. By contrast, under a ``specialist unit''
structure, stocks are allocated to the specialist unit, rather than to
a particular post or particular specialist. If 500 stocks are traded at
a specialist unit, for example, it would be generally within the
specialist firm's discretion to determine the number of specialists
necessary to operate that unit.\4\
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\4\ On the PCX Options Floor, Lead Market Makers (``LMMs''), who
are like specialists in several respects, are permitted to run their
operations in a manner consistent with a unit structure. For
example, if an LMM has been allocated 100 option issues for trading
at an LMM Post on the Options Floor, it is within the discretion of
the LMM to determine the number of registered Market Makers
necessary to operate that post. There are no rules specifying the
number of Market Makers that an LMM must maintain at a given post
(other than the requirement that the LMM must be present at the
trading post throughout the trading day). If an LMM maintains
inadequate staffing, the Exchange may take corrective action through
the evaluation and reallocation processes. See generally PCX Rule
6.82 and Options Floor Procedure Advice B-13.
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[[Page 52785]]
Although the Exchange intends to modify its rules to adopt a
``specialist unit'' structure for equity securities in the near future,
the Exchange anticipates that it will take a significant amount of time
to implement the necessary rule and structural changes. In the
meantime, a number of PCX specialist firms have expressed an interest
in achieving greater flexibility to reduce costs for their specialist
operations. These firms desire to reduce the number of specialists they
employ on PCX by collapsing one or more of their posts into their other
posts. For example, a firm that operates ten posts, which requires the
use of ten specialists, might propose to collapse two of its posts into
the others, so that it would need only eight posts an eight specialists
to make markets in its specialty stocks.
PCX's fee structure currently applies on a per post basis. Thus, if
ten posts are consolidated into eight posts, fees previously paid for
ten posts would only have to be paid for eight posts. The Exchange is
now proposing to create a new fee that will apply to specialist firms
that consolidate their posts. Under the proposal, if a firm
consolidates its posts and this results in a reduction in the total
number of specialist posts that the firm operates, the firm will be
required to pay fixed specialist fees based on the number of posts that
it operated prior to the consolidation. For example, assume that a
specialist firm is operating ten posts with 50 stocks traded at each
post. The Equity Floor Trading Committee (``EFTC'') may permit the firm
to reduce the number of posts that it operates from ten to nine, with
50 stocks being reallocated to the remaining posts. Under the proposal,
if the EFTC approves the firm's request, \5\ the firm would be subject
to the Supplemental Specialist Post Fee of $6,750 per month as a
condition of each post consolidation. This fee is equivalent to the
fixed specialist fees that would otherwise apply to each post before it
collapsed.\6\ The fee will not apply in situations where all of the
stocks from a specialist firm's post are transferred to a post or posts
of another specialist firm.\7\
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\5\ The Exchange has recently adopted supplemental guidelines
for the EFTC to consider in connection with member firm requests to
consolidate their posts. See Securities Exchange Act Release No.
40449 (September 17, 1998), (File No. SR-PCX-98-46).
\6\ These fees include; the specialists facility fee ($300 per
month per post); the specialist systems fee ($1,550 per month per
post); the market data fee ($400 per month per post); the post
cashiering fee ($2,150 per month per post); and the post clearing
fee ($2,350) per month per post)--for a total fee of $6,750 per
month. These fees will not include: General Membership Dues ($250
per month per membership); and Floor Privilege Fee ($165 per month
for each registered floor member and registered clerk).
\7\ See Amendment No. 1.
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The purpose of the proposal in two-fold; First, it is intended to
provide a way to afford relief to specialist firms, so that they can
reduce redundancy made necessary by the specialist post structure, and
thereby reduce their own operating costs. Second, it is intended to
assure that the consolidation of posts on the Exchange Floors is
revenue neutral for Exchange purposes. The Exchange needs to assure
that it continues to collect sufficient fees for the specialist posts
on its Equity Trading Floor so that it can continue funding its
operations, including its regulatory program and oversight of
specialist operations.
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
Section (6)(b) \8\ of the Act, in general, and furthers the objective
of Section (6)(b)(4),\9\ in particular, because it provides for the
equitable allocation of reasonable dues, fees and other charges among
its members and issuers and other persons using its facilities. In most
cases, a consolidation of posts will result in a specialist firm
retaining most, if not all, of its specialty stocks, albeit operated by
fewer specialists. It is reasonable to apply the same amount in fees
imposed on the firm as if the posts were not collapsed because the
proportion of allocated stocks will remain the same or close in
number.\10\
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\8\ 15 U.S.C. 78f.
\9\ 15 U.S.C. 78f(b)(4).
\10\ It is possible that the EFTC might, in some situations,
require a reduction in the number of stocks traded at a given post
as a precondition of a post consolidation. If the reduction is more
than minor, however, a firm, as its own business decision, can
choose not to consolidate its posts because of this precondition.
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The Exchange also believes the proposal is consistent with Section
6(b)(5) of the Act,\11\ in particular, in that it is designed to
facilitate transactions in securities, to promote just and equitable
principles of trade, and to protect investors and the public interest.
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\11\ 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. 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. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.
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 also will be
available for inspection and copying at the principal office of PCX.
All submissions should refer to File No. SR-PCX-98-47 and should be
submitted by October 22, 1998.
IV. Commission's Findings and Order Granting Accelerated Approval
of Proposed Rule Change
The Commission finds that PCX's proposal to establish a
Supplemental Specialist Post Fee is consistent with the requirements of
the Act and the rules and regulations thereunder applicable to a
national securities exchange. Specifically, the Commission finds that
the proposal is consistent with Section 6(b)(4) and 6(b)(5) of the
Act.\12\
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\12\ 15 U.S.C. 78f(b)(4) and (b)(5).
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Section 6(b)(4) requires that the rules of an exchange provide for
the equitable allocation of reasonable dues, fees, and other charges
among its members and issuers and other persons using its facilities.
Section 6(b)(5) requires that the rules of an exchange be designed to
[[Page 52786]]
prevent fraudulent and manipulative acts and practices, to promote just
and equitable principles of trade, to protect investors and the public
interest and not be designed to permit unfair discrimination between
customers, issuers, brokers or dealers. The Commission believes that
the proposal is consistent with these provisions of the Act because the
new fee will apply in a non-discriminatory fashion to all firms that
choose to consolidate their posts on the Exchange. Moreover, the
proposal is designed to help reduce non-exchange related costs involved
with maintaining a post without causing the Exchange to sacrifice
needed revenues used to provide exchange services and to carry out its
regulatory functions.
PCX has requested that the Commission approve the proposal on an
accelerated basis. The Commission finds good cause for approving the
proposed rule change prior to the thirtieth day after the date of
publication of notice thereof in the Federal Register. The Commission
believes that the proposal is reasonable given the exigent
circumstances of the recent specialist post consolidations and the
possibility of more consolidations on the floor of PCX. Currently,
there are eighty-two specialist posts operating on PCX's Equity Floors.
PCX has received six member firm applications to collapse eight of
those posts.\13\ In addition, the Exchange anticipates further
specialist post consolidations. In the absence of the proposal, the
Exchange would sacrifice a substantial amount of its revenue in a short
time, which could compromise its ability to perform its regulatory
duties.
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\13\ Telephone conversation between Michael Pierson, Senior
Attorney, Regulatory Policy, PCX, and Richard Strasser, Assistant
Director, Division, Commission, on September 23, 1998.
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PCX has represented that it intends to modify its rules to adopt a
``specialist unit'' structure, as opposed to the ``specialist post''
structure it now operates. Such a structure could address the revenue
issues raised by post consolidations by permitting exchange members to
reallocate specialists without reducing the fees they pay to the
Exchange to maintain the same level of service. As a result, the
Commission views the Supplemental Specialist Post Fee as a temporary
remedy to assist the Exchange in maintaining essential revenues while
moving from a ``specialist post'' structure to a ``specialist unit''
structure.
It is therefore ordered, pursuant to Section 19(b)(2) \14\ of the
Act that the proposed rule change (SR-PCX-98-47) is hereby approved on
an accelerated basis.
\14\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\15\
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\15\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 98-26277 Filed 9-30-98; 8:45 am]
BILLING CODE 8010-01-M
