[Federal Register Volume 61, Number 196 (Tuesday, October 8, 1996)]
[Notices]
[Pages 52820-52824]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-25762]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37770; File No. SR-PSE-96-28]
Self-Regulatory Organizations; Pacific Stock Exchange
Incorporated; Order Granting Approval to Proposed Rule Change Relating
to Its Rule on the Evaluation of Its Equity Specialists
October 1, 1996.
I. Introduction
On August 18, 1996, the Pacific Stock Exchange, Incorporated
(``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 to revise its equity specialist
evaluation performance measures on a nine-month pilot basis.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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The proposed rule change was published for comment in Securities
Exchange Act Release No. 37590 (August 21, 1996), 61 FR 44376 (August
28, 1996). No comments were received on the proposal.
II. Description
The Exchange is proposing to adopt a pilot program amending its
rule relating to specialists evaluations for a nine month period from
October 1, 1996 to July 1, 1997. Currently, PSE Rule 5.37(a) provides
that the Equity Allocation Committee (``EAC'') shall evaluate all
registered specialists on a quarterly basis and that each registered
specialist shall receive an overall evaluation rating based on the
following three measures of performance: (1) Specialist Evaluation
Questionnaire Survey (``Questionnaire''); (2) SCOREX Limit Order
Acceptance Performance; and (3) National Market System Quote
Performance.
The Exchange is proposing to modify PSE Rule 5.37(a) by adding
three new measures of performance and eliminating one measure of
performance. The new measures are: (1) Executions, (2) Book Display
Time; and (3) Post 1-P.M. Parameters. The Exchange is also proposing
to: add more questions to the Questionnaire and to expand the Quote
Performance measure (formerly the National Market System Quote
Performance measure) \3\ to include a performance measure for bettering
the quote. In addition, the Exchange is proposing to eliminate SCOREX
Limit Order Acceptance Performance as a measure of specialist
performance. The Exchange's new rule for the evaluation of specialists
will therefore consist of five separate measures of performance, as
specified below:
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\3\ See infra text accompanying note 6.
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a. Executions
This category on which 50% of each specialist evaluation is based,
consists of four subcategories: (a) Turnaround Time; (b) Holding Orders
Without Action; (c) Trading Between the Quote; and (d) Executions in
Size Greater Than BBO.
Turnaround Time calculates the average number of seconds for all
eligible orders up to 1,099 shares based upon the number of seconds
between the receipt of a market or marketable limit order in P/COAST
and the execution, partial execution, stopping, or cancellation of the
order. An order that is moved from the autoex screen to the manual
screen will accumulate time until it is executed, partially executed,
stopped, or canceled. This measurement begins after the stock opens for
the day on the primary market. Only those orders received by P/COAST
after the stock opens will be counted. If there is a trading halt or
period when the P/COAST system is experiencing problems, Turnaround
Time will not be included for those blocks of time. A specialist will
be awarded points based on the average number of seconds between the
receipt of eligible market or marketable limit orders and any of the
actions specified above being taken
[[Page 52821]]
upon such orders. This category will count for 15% of the overall
score. The parameter ranges and corresponding points for Turnaround
Time are listed below:
------------------------------------------------------------------------
Number of seconds parameter range Points
------------------------------------------------------------------------
1- 8......................................................... 10
9-10......................................................... 9
11-12......................................................... 8
13-14......................................................... 7
15-16......................................................... 6
17-18......................................................... 5
19-20......................................................... 4
21-22......................................................... 3
23-24......................................................... 2
25-26......................................................... 1
27+........................................................... 0
------------------------------------------------------------------------
Holding Orders Without Action measures the number of market and
marketable limit orders up to 10,099 shares that are held without
action for greater than 25 seconds. As in the Turnaround Time
calculation, the order will accumulate time until it is cancelled,
stopped, executed, or partially executed. This measurement begins after
the stock opens for the day on the primary market. Only those orders
received by P/COAST after the stock opens will be counted. If there is
a trading halt or period when the P/COAST system is experiencing
problems, those blocks of time will be excluded from the Holding Orders
Without Action calculation. The specialist will be awarded points based
on the percentage of orders that are held under the established time
period.\4\ This category will count for 15% of the overall score. The
parameter ranges and corresponding points for Holding Orders Without
Action are listed below:
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\4\ I.e., a specialist will receive fewer points the larger the
percentage of orders that he (she) holds for greater than 25
seconds.
------------------------------------------------------------------------
Number of seconds parameter range Points
------------------------------------------------------------------------
1- 3......................................................... 10
4- 6......................................................... 9
7- 9......................................................... 8
10-12......................................................... 7
13-15......................................................... 6
16-18......................................................... 5
19-21......................................................... 4
22-24......................................................... 3
25-27......................................................... 2
28-30......................................................... 1
31+........................................................... 0
------------------------------------------------------------------------
Trading Between the Quote measures the number of market and
marketable limit orders that are executed between the best primary
market bid and offer. For this criterion to count toward the overall
evaluation score, ten orders or more must have been executed during the
quarter the specialist is being evaluated. If less than ten orders are
executed, this criterion will not be counted and the rest of the
evaluation criteria will be given more weight.
When a market or marketable limit order is executed, the execution
price is compared to the primary bid and offer. The specialist will be
awarded points based on the percentage of orders the specialist
receives that are executed between the primary bid and offer. If the
execution price falls between the primary bid and the primary offer,
the trade is counted as one that traded between the quote at the time
of execution. Each time a trade is executed, the primary market quote
will be noted. If the spread of that quote is two or more trading
fractions apart, that trade will count as one eligible for the
comparison of the execution price to the quote. If there is a trading
halt or period when the P/COAST system is experiencing problems, those
blocks of time will not be included in the Trading Between the Quote
calculation.
This category will count for 10% of the overall score. The
parameter ranges and corresponding points for Trading Between the Quote
are listed below:
------------------------------------------------------------------------
Percent of orders parameter range Points
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51+........................................................... 10
46-50......................................................... 9
41-45......................................................... 8
36-40......................................................... 7
31-35......................................................... 6
26-30......................................................... 5
21-25......................................................... 4
16-20......................................................... 3
11-15......................................................... 2
5-10......................................................... 1
0- 4......................................................... 0
------------------------------------------------------------------------
Executions in Size Greater Than BBO measures the number of market
and marketable limit orders which exceed the best bid and offer
(``BBO'') size. When a market or marketable limit order is executed,
the order must meet two tests to be counted: first, the original order
size must be greater than the BBO size; and second, the execution size
must be greater than the BBO size. If the execution size is greater
than the bid size (for a sell order) or offer size (for a buy order),
the trade is counted as one that was executed in size greater than the
BBO. If there is a trading halt or period when the P/COAST system is
experiencing problems, those blocks of time will not be included in the
Executions in Size Greater Than BBO calculation. For this criterion to
count toward the overall evaluation score, ten orders or more must have
been executed during the quarter the specialist is being evaluated. If
less than ten orders are executed, this criterion will not be counted
and the rest of the evaluation criteria will be given more weight.
The specialist will be awarded points based on the percentage of
orders that are executed that exceed the BBO size. This category will
count for 10% of the overall score. The parameter ranges and
corresponding points for Executions In Size Greater than BBO are listed
below:
------------------------------------------------------------------------
Percent of orders parameter range Points
------------------------------------------------------------------------
98-100........................................................ 10
95-97.999..................................................... 9
92-94.999..................................................... 8
89-91.999..................................................... 7
86-88.999..................................................... 6
83-85.999..................................................... 5
80-82.999..................................................... 4
77-79.999..................................................... 3
74-76.999..................................................... 2
71-73.999..................................................... 1
0-70.999..................................................... 0
------------------------------------------------------------------------
b. Specialist Evaluation Questionnaire Survey
The Questionnaire is filled out by equity floor brokers on a
quarterly basis. The Questionnaire responses will count for 15% of the
overall score. Each question in the Questionnaire has a possible rating
of 1 to 10. Each question will be weighted equally and will count for
1.875% of the overall evaluation score.
The Questionnaire currently solicits from floor brokers ratings in
the following categories: the quality of markets maintained by the
specialists; the specialists's effectiveness in his (her) handling of
orders; communication; and the specialist's handling of clerical and
administrative matters. The Questionnaire will be expanded to solicit
from floor brokers ratings on the specialist's: Handling of manual
orders for a size greater than that provided for in the BBO; failure to
trade on displayed quotes; representation of the broker's orders in his
(her) quotes; and facilitation of crosses.
The new questions proposed to be added to the Questionnaire are the
following: Does the specialist handle manual orders from floor brokers
for greater than the BBO size?; Does the specialist fail to trade on
his (her) displayed quotes?; Does the specialist adequately represent
brokers' orders in the quotes?; and Does the specialist allow for easy
facilitation of crosses?
c. Book Display Time
This criterion calculates the percentage of the book shares at the
best price in the book that are displayed in the specialist's quote, by
symbol, and
[[Page 52822]]
the duration of time that each percentage is in effect. This criterion
rates the P/COAST book displayed 100% of the time. The sizes of all
open buy limit orders at the best price for the symbol in the
specialist's book will be totaled and compared to the bid size quote.
The sizes of all open sell limit orders at the best price for the
symbol in the book will be totaled and compared to the offer size
quote. This will be done for each symbol traded by the specialist, and
only for those orders priced within the primary quote. Limit orders in
the book which are priced beyond the primary quote will not be
included; they will not be executed until they reach the price in the
primary quote, so the specialist should not be required to cover them
in his (her) quote sizes.
The specialist will be awarded points on the basis of the
percentage of the book that the specialist displays. This category will
count for 15% of the overall score. The parameter ranges and
corresponding points for Book Display Time are listed below:
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Percent of book parameter range Points
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80 +.......................................................... 10
75 - 79....................................................... 9
70 - 74....................................................... 8
65 - 69....................................................... 7
60 - 64....................................................... 6
55 - 59....................................................... 5
50 - 54....................................................... 4
45 - 49....................................................... 3
40 - 44....................................................... 2
35 - 39....................................................... 1
0 - 34....................................................... 0
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d. Post-1 P.M. Parameters
This criterion measures the specialist's quote performance in the
post-1 p.m. (Pacific Time) auction market (``Extended Trading
Session'').\5\ The Post-1 P.M. Parameters criterion has the following
features:
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\5\ The PSE's Extended Trading Session is an auction market
trading session that runs from 1:00-1:50 p.m. (Pacific Time).
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1. Specialists' activity is recorded in post-1 p.m. files, where
there is one record for each quote and trade per post and symbol as
they occur during the Extended Trading Session.
2. Specialists are not subject to the post-1 p.m quote-spread
parameters until after 1:10 p.m. This allows the specialists time to do
any primary market runoff business that is necessary.
3. The specialist's quote prices in effect ten minutes past the
beginning of the Extended Trading Session must be within the defined
number of trading fractions of the primary closing quote.
A. If the primary exchange is the NYSE, and the primary bid price
at closing on that day for the stock is under $1.00, the trading
fraction is \1/16\; if the price is at or over $1.00, it is \1/8\.
B. If the primary exchange is the Amex, and the primary bid price
at closing on that day for the stock is under $10.00, the trading
fraction is \1/16\; if the price is at or over $10.00, it is \1/8\.
4. The specialist's quote sizes in effect ten minutes past the
beginning of the Extended Trading Session must be 500 shares or more if
the primary bid price is less than $50.00, or 200 shares if the primary
bid price is $50.00 or more.
5. The specialist's quote-spread parameters must apply to a minimum
of 25% of the stocks traded at the post to receive full credit on the
evaluation (i.e, 10 points).
6. If the specialist executes any trades after ten minutes of the
Extended Trading Session and they are priced within the allowable
trading fraction of the primary closing quote price, the quantity of
the trade is deducted from the required quote size.
7. If the specialist changes his (her) quote at any time on the
same day for that symbol while the required quote size is not zero, his
(her) quote price must be within the allowable trading fraction from
the primary closing bid price and his (her) quote size must be at least
the remaining quote size required (as adjusted for trades, as explained
in item 6). If either the price or size on either side of the quote for
that symbol does not comply, the symbol is not counted as adhering to
the parameters for that day.
8. If, at the end of the Extended Trading Session, the required
quote size is still not zero (after adjusted for trades) for bid and/or
ask, but the specialist has complied with the quote price and size
guidelines on both and ask, the symbol is counted as one that adhered
to the parameters.
This category will count for 10% of the overall score. The
parameter ranges and corresponding points for Post-1 P.M. Parameters
are listed below:
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Percent of book parameter range Points
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25 +.......................................................... 10
22 - 24.999................................................... 9
19 - 21.999................................................... 8
16 - 18.999................................................... 7
13 - 15.999................................................... 6
10 - 12.999................................................... 5
7 - 9.999................................................... 4
4 - 6.999................................................... 3
0 - 3.999................................................... 0
------------------------------------------------------------------------
e. Quote Performance
This category, on which 10% of each specialist evaluation is based,
consists of two subcategories: (a) Equal of Better Quote Performance;
and (b) Better Quote Performance.
Equal or Better Quote Performance calculates for each issue traded,
the percentage of time in which specialist's bid or offer is equal to
or better than the primary market quote with a 500-share market size or
the primary market size, whichever is less, with a 200-share market
minimum. This category will count for 5% of the overall score. The
parameter ranges and corresponding points for Equal or Better Quote
Performance are listed below:
------------------------------------------------------------------------
Percent of time parameter range Points
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40 +.......................................................... 10
36 - 39....................................................... 9
32 - 35....................................................... 8
28 - 31....................................................... 7
24 - 27....................................................... 6
20 - 23....................................................... 5
16 - 19....................................................... 4
12 - 15....................................................... 3
8 - 11....................................................... 2
4 - 7....................................................... 1
0 - 3....................................................... 0
------------------------------------------------------------------------
Better Quote Performance calculates for each issue traded, the
percentage of time in which a specialist's bid or offer, is better than
the primary quote with a 500-share market size or the primary market
size, whichever is less, with a 200-share minimum. This category will
count for 5% of the overall score. The parameter ranges and
corresponding points for Better Quote Performance are listed below;
------------------------------------------------------------------------
Percent of time parameter range Points
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34 +.......................................................... 10
3 - 3.999..................................................... 9
2 - 2.999..................................................... 8
1 - 1.999..................................................... 7
0 - 0.999..................................................... 0
------------------------------------------------------------------------
The Exchange noted that the pilot program only modifies the
performance criteria of PSE Rule 5.37(a); consequently, during the
pilot the EAC will evaluate the performance of specialists in
accordance with the standards and procedures found in PSE Rule 5.37.
The Exchange represented that during the nine month pilot, it will re-
program its computer program so that the following three criteria are
based upon the national best bid and offer (``NBBO'') instead of the
primary market bid and offer: Trading Between the Quote, Book Display
Time, and Quote Performance.\6\ The Exchange also represented that
during the pilot it will establish an overall passing score for the
[[Page 52823]]
performance evaluation as well as individual passing scores for each
criterion. The Exchange further stated that it will file a proposed
rule change with the Commission pursuant to Rule 19b-4 of the Act that
will include these changes by May 1, 1997.\7\
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\6\ See Securities Exchange Act Release No. 37590 (August 21,
1996), 61 FR 44376 (August 28, 1996).
\7\ Id.
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III. Discussion
The Commission believes that specialists play a crucial role in
providing stability, liquidity, and continuity to the trading of
stocks. Among the obligations imposed upon specialists by the Exchange,
and by the Act and the rules promulgated thereunder, is the maintenance
of fair and order markets in their designated securities.\8\ To ensure
that specialists fulfill these obligations, it is important that the
Exchange conduct effective oversight of their performance. The PSE's
specialist evaluation program is critical to this oversight.
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\8\ Rule 11b-1, 17 CFR 240.11b-1; PSE Rules 5.29(f).
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The PSE's proposed pilot program adds three new objective measures
to the Exchange's specialist evaluation program and eliminates one of
its objective performance measures. The first new objective measure,
Executions, consists of four submeasures: Turnaround Time, Holding
Orders Without Action, Trading Between the Quote, and Executions in
Size Greater Than BBO. Turnaround Time and Holding Orders Without
Action (30% of the overall program weight) apply to the timeliness of
executions of orders received by specialists; Trading Between the Quote
(10%) applies to the execution prices of orders directed to
specialists; and Executions in Size Greater That BBO, applies to the
depth of the markets provided by specialists.
The Commission notes that these submeasures are almost identical to
the objective measures currently used in the Boston Stock Exchange,
Inc.'s (``BSE'') specialist performance evaluation program
(``SPEP'').\9\ The Commission believes that the adoption of the
Execution measure will greatly enhance the Exchange's specialist
evaluation program in that its component submeasures should generate
sufficiently detailed information to enable the Exchange to make
accurate assessments of specialist performance in the areas of
timeliness of executions, price performance, and market depth.
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\9\ See infra notes 15-16 and accompanying text. For a detailed
description of the BSE's SPEP, see Securities Exchange Act Release
Nos. 31890 (February 19, 1993), 58 FR 11647 (February 26, 1993)
(order approving incorporation of objective criteria into BSE SPEP);
37581 (August 19, 1996), 61 FR 43797 (August 26, 1996) (order
approving revision of program weights applicable to objective
criteria).
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The second proposed measure of specialist performance, Book Display
Time, calculates for each security the percentage of shares in the
specialist's book at the best price in the book that are displayed in
the specialist's quote, and the duration of time that each percentage
is in effect. The Commission also believes that the adoption of this
measure is appropriate, in that it may encourage PSE specialists to
display a greater percentage of the best priced limit orders in a
security in their quotes, thereby increasing PSE market depth and the
possibility of execution for such limit orders.\10\
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\10\ However, the Exchange's use of the primary market quote
instead of the NBBO in calculating this measure may reduce the
possibility of these beneficial effects occurring during the pilot
program. See infra notes 15-16 and accompanying text.
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The third proposed measure of specialist performance, Post 1-P.M.
Parameters, calculates each specialist's quote performance during the
Exchange's Extended Trading Session. Given that the PSE is one of
either two or three national securities exchanges conducting an auction
market trading session between 1:00 and 1:30 p.m. (PT),\11\ and the
only such exchange doing so between 1:30 and 1:50 p.m. (PT), the
quality of PSE specialists' quote performance is of particular
importance during this time. The Exchange's current evaluation program
does not include a performance measure specifically tailored to the
Extended Trading Session. Accordingly, Commission believes that the
adoption of this measure is appropriate as it will provide such a
performance measure as well as a possible incentive to PSE specialists
to maintain or improve their quote performance during this time.
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\11\ The Philadelphia Stock Exchange, Inc. conducts a post-4
p.m. (ET) auction market trading session between 4:00-4:15 p.m.
(ET), while the Chicago Stock Exchange, Incorporated conducts such a
session between 4:00-4:30 p.m. (ET).
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The Commission finds that the Exchange's proposal to expand its
former National Market System Quote Performance measure (referred to as
Quote Performance for the nine-month pilot) to include a performance
measure for bettering the quote is, with one qualification discussed
below,\12\ responsive to the previous request by the Division of Market
Regulation for the inclusion of such a measure in the PSE's evaluation
program.\13\
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\12\ See infra notes 15-16 and accompanying text.
\13\ Telephone Conversation between Jeff Norris, Special
Projects and Financial Administration Manager, PSE, and Sharon
Lawson, Senior Special Counsel, SEC, dated July 20, 1995.
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Furthermore, the exchange is proposing to eliminate SCOREX Limit
Order Acceptance Performance, which calculates the percentage of limit
orders accepted by specialists, as a measure of specialist performance.
In light of the adoption of the three new performance measures into the
Exchange's evaluation program, one of which will measure limit order
handling in particular (Book Display Time), the Commission believes
that the elimination of this proposal from the PSE's evaluation program
is appropriate.
The Exchange is also proposing to add four new questions to its
Questionnaire and to reduce the weight of the Questionnaire from 45% to
15% of the overall evaluation program. The Commission believes that the
new questions should solicit additional relevant information as to the
market making performance of PSE specialists. Moreover, the Commission
finds that the reduction in the weight of the Questionnaire is
appropriate in that it will accommodate the inclusion of the proposed
new objective criteria into the PSE's evaluation program, while still
maintaining the combination of a subjective floor broker survey and
objective performance criteria that, as the Commission previously
stated, should provide an exchange with an effective and fair means of
evaluating specialist performance.\14\
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\14\ See, e.g. Securities Exchange Act Release No. 28843
(February 1, 1991), 56 FR 5040 (February 7, 1991) (order permanently
approving PSE specialist evaluation program); SEC, Division of
Market Regulation, The October 1987 Market Break Report (``Market
Break Report'') (February 1988), at xvii.
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Despite the improvements to the existing specialist performance
evaluation program being adopted herein, the Commission is concerned
with the Exchange's use of the primary market quote, instead of the
NBBO, in the proposed Trading Between the Quote, Book Display Time, and
Quote Performance measures.\15\ The Commission believes that the use of
the NBBO in this context is necessary to guage the performance of PSE
specialists in comparison with their competitors in the national market
system. The Exchange's proposed use of the primary market quote in
these three measures does not allow for such comparisons to be made in
instances where the primary market quote is not equal to the NBBO.\16\
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\15\ See supra notes 8, 9, and 11.
\16\ The following illustrates the difficulties arising out of
the PSE's use of the primary market quote instead of the NBBO in
these three measures: PSE specialists will receive credit in Trading
Between the Quote when the primary market bid (offer) is lower
(higher) than the NBBO and the specialist effects a trade at the
NBBO; PSE specialists will receive credit in Book Display Time for
displaying its limit orders priced at the primary market bid (offer)
is lower (higher) than the NBBO; and, PSE specialists may receive
credit in either component of the Quote Performance measure when the
specialist's quote is equal to or better than the primary market
quote but either inferior or equal to the NBBO.
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[[Page 52824]]
Although the Commission is concerned about approving a specialist
evaluation program containing objective measures that are more
appropriately based on the NBBO,\17\ the Commission believes that
approval of the proposal on a pilot basis is appropriate. The Exchange
has represented that during the operation of the pilot it will
reprogram its computer systems so that these three measures are
calculated using the NBBO instead of the primary market quote and will
submit a rule change pursuant to Rule 19b-4 by May 1, 1997 to effect
this change.\18\ Moreover, the Exchange has represented that the
reprogramming of these measures may take up to six months. As the
Exchange's revision of its objective performance measures already has
been subject to significant delays,\19\ and the Commission feels that
the proposed specialist evaluation program is a substantial improvement
over the existing program even with the use of the primary market quote
in these measures, the Commission believes that it is appropriate to
approve the proposal on a pilot basis. This will allow the PSE to
commence using the new measures immediately for the last quarter of
1996.
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\17\ The use of the primary market quote rather than the NBBO
may be appropriate in limited circumstances. For example, the
primary market closing price may be useful as a benchmark to
specialist performance in a post-4 p.m. action market trading
session, and is therefore appropriate for use in the proposed Post--
1 p.m. Parameters measure.
\18\ See Securities Exchange Act Release No. 37590, supra note
6.
\19\ See Letter from Sharon Lawson, Senior Special Counsel, SEC,
to David P. Semak, Vice President--Regulation, PSE, dated January 9,
1995 (requesting PSE to submit revised specialist evaluation program
by October 31, 1995); Letter from David P. Semak, Vice President--
Regulation, PSE, to Sharon Lawson, Senior Special Counsel,
Commission, dated April 6, 1995 (requesting extension to April 30,
1996); Letter from David P. Semak, Vice President--Regulation, PSE,
to Sharon Lawson, Senior Special Counsel, Commission, dated August
11, 1995 (requesting extension to July 31, 1996).
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The Commission has previously stated that true relative performance
standards are the preferable means to evaluate comparative performance
of specialists on a national securities exchange.\20\ Moreover, the
Commission has also stated that an effective evaluation program should
subject specialists who meet minimum performance levels on the overall
program, but need help or guidance in improving their performance in a
particular area, to review. While PSE's specialist evaluation program
subjects those specialists falling into the bottom 10% of all
specialists on his or her trading floor to review by the EAC, it does
not set a minimum performance level on the overall program. In
addition, the Exchange has not established minimum performance
standards for individual performance measures. However, the Commission
notes that the PSE has represented that it will establish an overall
passing score for the evaluation program as well as individual passing
scores for each performance measure during the course of the pilot.
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\20\ By relative performance standards the Commission means
standards that automatically subject specialists that fall below a
predetermined threshold of performance to a special performance
review by the appropriate exchange authority. See Securities
Exchange Act Release No. 28843, supra note 14; Market Break Report
at xvii and 4-28 to 4-29.
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Accordingly, the Commission believes that it is appropriate to
approve this rule filing on a nine-month pilot basis, expiring July 1,
1997. This nine-month period will enable the Exchange to determine the
appropriateness of the newly adopted objective measures, their
respective weights and the acceptable levels of performance; reprogram
its systems so that Trading Between the Quote, Book Display Time and
Quote Performance are calculated using the NBBO instead of the primary
market quote; develop an overall passing score for the performance
evaluation as well as individual pausing scores for each criterion; as
well as to review the effectiveness of the overall PSE Rule 5.37 equity
evaluation program.
The Commission therefore requests that the PSE submit by May 15,
1997 a proposed rule change pursuant to Rule 19b-4 to revise the pilot
to utilize the NBBO to calculate the Trading Between the Quote, Book
Display Time, and Quote Performance measures; a passing score for the
overall performance evaluation as well as each criterion, and a request
to extend the pilot beyond July 1, 1997. The Commission also requests
that the PSE submit a report to the Commission, by May 15, 1997,
describing its experience with the pilot. At a minimum, this report
should contain data, for the last review period of 1996 and the first
review period of 1997, on (1) the number of registered specialists who
scored in the bottom 10% of all registered specialists on his or her
trading floor in the overall program; (2) the number of specialists
who, as a result of scoring in the bottom 10% in any one quarterly
evaluation, appeared before the EAC, and the type of restrictions that
were imposed on such specialists (i.e., restriction on new allocations
or acting as an alternate specialist), or any further action that was
taken against such specialists; (3) the number of specialists who, as a
result of scoring in the bottom 10% in any two out of four consecutive
quarterly evaluations, appeared before the EAC, whether any
restrictions were imposed on such specialists, and whether formal
proceedings were initiated against such specialists; and (4) the number
of specialists for whom formal proceedings were initiated, the results
of such proceedings, including a list of any stocks reallocated from a
particular unit.
For the reasons discussed above, the Commission finds that the
PSE's proposal to modify its Rule 5.37 specialist evaluation program
performance measures is consistent with the requirements of section
6(b) and 11 of the Act \21\ and the rules and regulations thereunder
applicable to a national securities exchange. Specifically, the
Commission finds that the proposed rule change is consistent with the
Section 6(b)(5) requirement that the rules of an exchange be designed
to promote just and equitable principles of trade, to remove
impediments to and perfect the mechanism of a free and open market and
a national market system, and, in general, to protect investors and the
public interest.
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\21\ 15 U.S.C. 78f (b) and 78k.
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Further, the Commission finds that the proposal is consistent with
Section 11(b) of the Act \22\ and Rule 11b-1 thereunder which allow
securities exchanges to promulgate rules relating to specialists in
order to maintain fair and orderly markets and to remove impediments to
and perfect the mechanism of a national market system.
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\22\ 15 U.S.C. 78k (b).
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IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\23\ that the proposed rule change (SR-PSE-96-28) is approved on a
pilot basis, through July 1, 1997.
\23\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\24\
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\24\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 96-25762 Filed 10-7-96; 8:45 am]
BILLING CODE 8010-01-M
