[Federal Register Volume 59, Number 210 (Tuesday, November 1, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-26965]
[[Page Unknown]]
[Federal Register: November 1, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34891; File No. SR-PSE-94-19]
Self-Regulatory Organizations; Order Approving Proposed Rule
Change by the Pacific Stock Exchange, Inc., Relating to the Expansion
of the Exchange's Firm Quote Rule to 20 Contracts
October 25, 1994.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ on June 20, 1994, the
Pacific Stock Exchange, Inc. (``PSE'' or ``Exchange'') submitted to the
Securities and Exchange Commission (``SEC'' or ``Commission'') a
proposed rule change to amend PSE Rule 6.86, ``Trading Crowd Firm
Disseminated Market Quotes,'' to increase from 10 to 20 contracts the
minimum size of all non-broker/dealer customer option orders that are
guaranteed for execution at the bid/offer displayed as the disseminated
market quote at the time the order is announced or displayed at the
option's trading post.
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\1\15 U.S.C. 78s(b)(1) (1988).
\2\17 CFR 240.19b-4 (1993).
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The proposal was published for comment in the Federal Register in
Securities Exchange Act Release No. 34571 (August 22, 1994), 59 FR
44446 (August 29, 1994). No comments were received on the proposal.
Currently, PSE Rule 6.86 requires each trading crowd on the PSE to
provide a depth of 10 option contracts for all non-broker/dealer
customer orders at the bid/offer displayed as the disseminated market
quote at the time the order is announced or displayed at the option's
trading post. The PSE proposes to amend PSE Rule 6.86 to increase the
minimum size guarantee for non-broker/dealer options orders from 10 to
20 contracts. In addition, the PSE proposes to make conforming
amendments to PSE Rule 6.86(d) and to Commentaries .01, .02, and
.03.\3\
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\3\Currently, PSE Rule 6.86(d) provides that the order book
official shall allocate among the market makers present at the
trading post the balance of contracts necessary to provide an
execution on 10 contracts if the response of members at a trading
post is insufficient to provide a depth of 10 contracts. The
Exchange proposes to amend paragraph (d) to replace the term ``ten''
with ``twenty.'' In addition, the PSE proposes to replace the term
``ten'' with ``twenty'' in Commentaries .01, .02, and .03.
Commentary .01 states that if the bid or offer being displayed as a
disseminated market quote is on behalf of an order represented by a
floor broker or the order book official, and is for less than 10
contracts, the trading crowd is obligated to buy or sell the balance
of the contracts necessary to provide a depth of 10 contracts at the
disseminated bid or offering price. Commentary .02 provides that a
floor broker's failure to remove a bid or offer from the screen
after the bid or offer has been filled or cancelled may result in
the floor broker being held responsible for providing a depth of 10
contracts upon being present or returning to the trading crowd, and/
or being subject to disciplinary action by the Exchange. Commentary
.02 also provides that a market maker or floor broker who has caused
a bid or offer to be disseminated, but who leaves the trading post
without removing the bid or offer, may be held responsible for
providing a depth of 10 contracts upon returning to the trading
crowd, and/or being subject to disciplinary action by the Exchange.
Commentary .03 states that market maker orders for less than 10
contracts that are represented at a trading post by a floor broker
shall not be disseminated.
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The PSE states that the proposal is a response to competitive
market conditions and is designed to enhance the PSE's competitive
position in the securities industry. The Exchange believes that the
proposal will result in improved market quality and market maker
performance. In addition, the PSE believes that the proposal will
ensure greater depth of markets at the Exchange and will result in
better executions of customers orders to buy or sell 20 contracts or
less. According to the PSE, the proposal will also encourage Exchange
market makers to be more competitive in making markets, and thereby
will facilitate transactions in securities and improve the quality of
the PSE's options markets. Moreover, the Exchange believes that by
attracting greater customer order flow to the Exchange, the proposed
rule change should enhance market depth and liquidity and result in
tighter options pricing spreads.
Based on the combined capital of the members of each trading crowd,
the PSE believes that its market maker system can provide sufficient
liquidity to meet the needs resulting from this rule change. The
Exchange does not believe that the proposal will require its market
makers to assume undue risks. The PSE is able currently to provide a
guarantee for customer orders of 10 contracts or less in all options
series, including long-term options (``LEAPs''), and the Exchange
believes that it has the capacity to expand that guarantee to 20
contracts in all series, including LEAPs. Previously, the Exchange has
evaluated the operation of current PSE Rule 6.86 and has concluded that
the program has resulted in better executions for customer orders and
an improvement in the quality of the PSE's options markets and market
maker performance.\4\
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\4\See Securities Exchange Act Release No. 31824 (February 4,
1993), 58 FR 8078 (February 11, 1993) (order approving File No. SR-
PSE-92-40) (``10-Up Approval Order'').
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Finally, the Exchange believes that it has adequate systems
capacity that would be necessary if the Commission approves the
proposed rule change, and, further, that the proposal will have no
negative impact on the Exchange's Pacific Options Exchange Trading
System (``POETS'').
The PSE believes that the proposal is consistent with Section 6(b)
of the Act, in general, and with Section 6(b)(5), in particular, in
that it is designed to facilitate transactions in securities and to
promote just and equitable principles of trade.
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, Section 6(b)(5), in that it is designed to facilitate
transactions in securities and to protect investors and the public
interest.\5\
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\5\15 U.S.C. 78f(b)(5) (1988).
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The Commission believes that the proposal is designed to improve
the quality of the PSE's options markets and the performance of PSE
options market makers. Specifically, under the proposal, public
customers will be assured order execution to a minimum depth of 20
contracts at the best disseminated bid or offer, which, in turn, may
result in better executions of small customer orders by providing
greater depth to the PSE's options markets. In addition, the proposal
should encourage PSE market makers to become more competitive in making
larger sized markets, thereby facilitating transactions in securities
and contributing to a more free, open, and liquid market. The proposal
may also attract greater customer order flow to the Exchange, which
would further enhance market depth and liquidity and result in tighter
options pricing spreads.
In its order granting permanent approval to the PSE's 10-up pilot
program, the Commission noted that the Exchange had submitted a report
concerning the operation and effectiveness of the 10-up program.\6\ In
its report, the Exchange stated that the 10-up rule had resulted in
faster executions of public customer orders and had improved the
quality of the Exchange's options market and market maker performance.
The report also noted that the 10-up rule places greater obligations on
market makers since they must either keep their markets updated or run
the risk of having to fill a customer order based on a stale quote that
may not be competitive under current market conditions. The Commission
believes that the proposal to increase the 10-up guarantee to 20
contracts may continue to improve the performance of the PSE's market
makers and produce better executions of small public customer orders.
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\6\See 10-Up Approval Order, supra note 4.
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In addition, the Commission believes that the proposal is designed
to enhance fair competition among brokers and dealers and among
exchange markets. Presently, the American Stock Exchange, Inc.
(``Amex''), the Chicago Board Options Exchange, Inc. (``CBOE''), the
New York Stock Exchange, Inc. (``NYSE''), and the Philadelphia Stock
Exchange, Inc. (``PHLX''), all impose some form of 10-up requirement on
their markets.\7\ The Commission believes, as it has stated in the
past, that the PSE is entitled to respond competitively to the actions
of the other options exchanges in order to encourage brokerage firms
and their customers to trade in PSE options and, where those options
are multiple traded, to choose to route their orders to the PSE.\8\
Accordingly, the Commission finds that the proposal is consistent with
Sections 11A(a)(1)(C) (ii) and (iv) of the Act because it will promote
``fair competition among brokers and dealers'' and ``the practicability
of brokers executing investors' orders in the best market.''\9\
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\7\See Amex Rule 958A, ``Specialist Options Transactions,'' CBOE
Rule 8.51, ``Trading Crowd Firm Disseminated Market Quotes,'' NYSE
Rule 758A, ``Specialist Options Transactions,'' and PHLX Rule 1033,
``Bids and Offers--Premium.''
\8\See Securities Exchange Act Release No. 28021 (May 16, 1990),
55 FR 21131 (May 22, 1990) (order approving File No. SR-PSE-89-16).
\9\15 U.S.C. 78k-1 (1984).
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Moreover, although the Commission carefully scrutinizes
discriminatory order execution practices, the Commission believes that
limiting the 20 contract minimum to public customers furthers the
purposes of the Act by helping to ensure that market makers' volume
guarantees will not be exhausted by competitors to the detriment of
public customers.\10\
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\10\See Securities Exchange Act Release No. 34400 (July 19,
1994), 59 FR 38011 (July 26, 1994) (order approving File No. SR-
PHLX-91-45).
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The PSE has stated that its market maker system has sufficient
liquidity to meet the 20-contract guarantee, and that the proposal will
not require PSE market makers to assume undue risks. In this regard,
the Commission notes that market makers' clearing firms guarantee their
trades, and that the clearing firms are subject to Rule 15c3-1 under
the Act. In addition, under PSE Rule 6.82(c)(8), Lead Market Makers
(``LMMs'') must maintain cash or assets in the amount of $100,000 or an
amount sufficient to assume a position of 20 trading units of each
security in which the LMM holds an appointment. Finally, under PSE Rule
6.86(d), an Order Book Official will allocate among market makers at
the trading post the balance of contracts necessary to provide an
execution on 20 contracts if there is insufficient response by members
present at the trading post. In light of this, the Commission believes
that the PSE floor should be able to adequately handle the 20-up
requirement and that it will not place undue burdens or capital risks
on the PSE's options market makers.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\11\ that the proposed rule change (SR-PSE-94-19) is approved.
\11\15 U.S.C. 78s(b)(2) (1984).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\12\
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\12\17 CFR 200.30-3(a)(12) (1993).
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Jonathan G. Katz,
Secretary.
[FR Doc. 94-26965 Filed 10-31-94; 8:45 am]
BILLING CODE 8010-01-M
