[Federal Register Volume 62, Number 232 (Wednesday, December 3, 1997)]
[Notices]
[Pages 64035-64037]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-31615]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-39358; File No. SR-PCX-97-43]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Pacific Exchange, Inc. Relating to an Extension of the
Exchange's Specialist Evaluation Pilot Program
November 25, 1997.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on November
17, 1997,\1\ the Pacific Exchange, Inc. (``PCX'' or ``Exchange'') filed
with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I, II, and III below, which
Items have been prepared by the self-regulatory organization. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ See letter from Jeffrey S. Norris, Manager, Regulatory
Development, PCX, to Heather Seidel, Attorney, Market Regulation,
Commission, dated November 24, 1997 (``Amendment No. 1''). The
substance of Amendment No. 1 is incorporated into the notice.
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
PCX is proposing to extend its pilot program regarding the
evaluation of its equity specialists until January 1, 1999. In
addition, the Exchange is proposing to implement certain changes to the
pilot program.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
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 IV below. The self-regulatory organization
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
On June 3, 1997, the Commission approved a six-month extension of
the pilot program for the evaluation of equity specialists.\2\ The
reason for the extension was to allow the PCX more time to evaluate the
impact of the SEC's new order handling rules on the performance
criteria and to determine an appropriate overall passing score and
individual passing scores for each criterion. The Exchange now is
proposing to extend the pilot program until January 1, 1999. The PCX
has established an overall passing score and individual passing scores
for each criterion and has determined when specialists that do not
attain the minimum passing scores should meet with the Equity
Allocation Committee (``EAC''). The Exchange is also proposing to
replace the ``Bettering the Quote'' criterion with Price Improvement
and to lower the weighting of the Specialist Evaluation Questionnaire
from 15% to 10% so that Price Improvement can be given a weight of 10%.
Since the Bettering the Quote criterion is now measured against the
NBBO instead of the primary market, the PCX believes it is no longer
[[Page 64036]]
a viable criterion. Previously, the ``Bettering the Quote'' criterion
was measured against the primary market, which provided opportunities
for the specialist to better the primary market quote. However, since
the NBBO by definition is the best market, it does not provide the same
opportunities for specialists to better the quote, especially when the
PCX is the NBBO. The PCX believes that Price Improvement is a
meaningful criterion that should be given a 10% weighting, which should
be accomplished by lowering the Specialist Evaluation Questionnaire
weighting to 10%. This will allow the Exchange to achieve its goal of
providing its specialists with a more objective rating system. The
description of the Price Improvement criterion as well as the overall
passing score and individual passing scores are as follows:
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\2\See Securities Exchange Act Release No. 38712 (June 3, 1997),
62 FR 17941 (July 8, 1997).
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a. Price improvement. ``Price Improvement'' measures the number of
trades involving market and marketable limit orders that improve the
NBBO if the NBBO quote spread at the time the original order is
received is greater than or equal to two trading differentials, but
less than or equal to eight trading differentials for that security.
The execution price for stopped market or marketable limit orders will
be compared with the guaranteed price (which is the NBBO at the time
the order was received).
Orders completely or partially executed will be considered for
price improvement. All one-sided market or marketable limit orders \3\
with an NBBO quote spread greater than \1/8\ point are eligible for
price improvement. Only agency orders entered or received by an
exchange are eligible for price improvement. Orders with time-in-force
designations such as good until canceled (GTC), good through day of
entry (DAY), immediate or cancel (IOC), and good until executed will be
eligible for price improvement. In addition, stocks, rights, warrants,
preferred stock, when issued, and when distributed equity securities
will be eligible for price improvement.
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\3\ The regional exchanges have agreed to the following
definition for marketable limit orders: A marketable limit order to
buy is priced at or above the NBBO offer, a marketable limit order
to sell is priced at or below the NBBO bid.
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The following types of orders will not be considered under the
category of price improvement: all preopening market and limit orders,
limit order executions out of the limit book (i.e., booked orders),
electronically entered limit orders whose price falls in between the
NBBO, non-regular-way trades (i.e., cash, next day and seller's
option), negotiated trades or trades identified as crosses, bonds,
orders designated as possible duplicates (POSS DUPE) or try to stop
(TTS), canceled orders, odd-lot market and odd-lot limit orders, orders
designated as all or none (AON), all tick sensitive executions (i.e.,
buy minus, sell plus, sell short, etc.), market quotations under 200
shares, and principal and program trade account types.\4\
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\4\ Preopening market and limit orders were excluded because all
such orders are entered prior to there being a market that is
trading, so there is no market to improve upon.
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Specialists will be measured on the percentage of trades that are
price improved. The following table gives the parameters and
corresponding point values:
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Percent of eligible trades improved Points
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40 +........................................................... 10
36-39.99....................................................... 9
32-35.99....................................................... 8
28-31.99....................................................... 7
24-27.99....................................................... 6
20-23.99....................................................... 5
Limit order executions out of the limit book (i.e., booked orders)
were not included because they are filled as the market moves toward
them, not when they are outside of the NBBO. Electronically entered
limit orders whose price falls in between the NBBO were excluded
because these are not executable at the time they are entered, unless
the specialist chooses to fill them. Non-regular-way trades (i.e.,
cash, next day and seller's option) and negotiated trades are not
included because they are negotiated and the price does not necessarily
depend upon the NBBO. Trades identified as crosses were excluded
because specialists do not participate in crosses, by definition. Bonds
and orders designated as possible duplicates (POSS DUPE) were not
included because they are entered manually. Canceled orders were
excluded because orders cannot be improved upon if they are not allowed
to be executed. Odd-lot market and odd-lot limit orders were not
included because they are executed automatically in the background, and
the specialist never has the opportunity to improve upon them. Orders
designated as all or none (AON) and all tick sensitive executions
(i.e., buy minus, sell plus, sell short, etc.) were excluded because
they are conditional orders. Market quotations under 200 shares were
not included because they are usually computer generated and the
specialists generally have no opportunity to improve them. Principal
orders were excluded because they cannot be sent via PCOAST. Program
trades were not included because they involve a large portfolio of
stocks and derivative index products, which are not generally routed to
a regional exchange for execution.
16-19.99....................................................... 4
12-15.99....................................................... 3
8-11.99........................................................ 2
4-7.99......................................................... 1
Below 4........................................................ 0
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b. Overall Passing Score. The PCX has established an overall
passing score of 60 as the minimum standard that each specialist must
attain each quarter. A specialist will have to obtain better than a
passing score in each individual criterion (see minimum passing scores
shown below) to obtain a minimum passing score of 60. Any specialist
who falls below the minimum passing score will have to appear before
the EAC and will be subject to the following restrictions: no new
allocations and no trading in alternate specialist stocks for the
quarter following the quarter that the specialist was evaluated. Such
specialists will have the right to request the lifting of one or more
of the restrictions based upon mitigating circumstances. Any specialist
who does not attain a passing score in any three out of four quarters
will also be subject to other restrictions imposed by the EAC,
including reallocation of one or more stocks. The EAC will evaluate the
effectiveness of the overall passing score and will adjust it
accordingly.
c. Individual Criterion Passing Scores. The PCX has established
individual passing scores for each individual criterion based upon
third quarter 1997 evaluation results. The third quarter of 1997 was
the first evaluation period that the Trading Between the Quote, Book
Display Time, and Quote Performance calculations were based upon the
NBBO instead of the primary market. In addition, the evaluation results
in the third quarter were based upon one-sixteenth trading increments
instead of one-eighth increments. As a result of the NBBO changes and
the change to sixteenths, individual passing scores in the affected
criteria were lower than in previous quarters. Previous quarter scores
were not used to determine individual criterion passing scores because
of the aforementioned changes. The EAC will evaluate the effectiveness
of the individual passing scores and will adjust them accordingly. The
individual passing scores for each criterion are as follows:
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Passing
Evaulation criterion score
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Turnaround Time................................................ 12.0
Holding Orders Without Action.................................. 7.5
Trading Between the Quote...................................... 5.0
Executions in Size Greater Than NBBO........................... 2.0
Specialist Evaluation Questionnaire Survey..................... 5.0
[[Page 64037]]
Book Display Time.............................................. 10.5
Equal or Better Quote Performance.............................. 1.0
Post 1 P.M. Parameters......................................... 3.0
Price Improvement.............................................. 4.0
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Any specialist who does not attain a minimum passing score in a
particular criterion for two or more consecutive quarters or more will
be subject to the following:
1. If a specialist does not attain an overall passing score in any
particular individual criterion for 2 consecutive quarters, the
specialist will have to appear before the EAC. The EAC will meet with
the specialist with the intent of helping the specialist to improve the
score.
2. If a specialist does not attain an overall passing score in any
particular individual criterion for 3 out of 4 consecutive quarters,
the specialist will either not be permitted to trade any alternate
specialist stocks or not be able to apply for any new stocks for one
quarter. The Equity Allocation Committee will decide which restriction
will apply.
3. If a specialist does not attain an overall passing score in any
particular individual criterion for 4 out of 5 consecutive quarters, 5
out of 6 quarters, etc., the specialist will be subject to both the
alternate specialist and no new stock restrictions for one quarter. The
EAC may also, at its discretion, impose other restrictions, including
reallocating one or more of the specialist stocks
The EAC will have the discretion not to impose any of these
restrictions if there are mitigating circumstances.
The PCX intends to file a rule change to PCX 5.37 to reflect all of
the aforementioned changes to its Specialist Evaluation Pilot Program.
The Commission has requested that the Exchange file a report
regarding the Exchange's experience with the Pilot, for the period from
April 1, 1997 to September 30, 1997, and this report has been filed
under separate cover.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b) of the Act,\5\ in general, and Section 6(b)(5) in
particular, in that it is designed to promote just and equitable
principles of trade and to protect investors and the public.
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\5\ 15 U.S.C. 78f(b).
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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 inappropriate burden on competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing
for Commission Action
Within 35 days of the publication of this notice in the Federal
Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) by order approve the proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing. 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 will also be
available for inspection and copying at the principal office of the
Exchange. All submissions should refer to File No. SR-PCX-97-43 and
should be submitted by December 24, 1997.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-31615 Filed 12-2-97; 8:45 am]
BILLING CODE 8010-01-M
