[Federal Register Volume 63, Number 236 (Wednesday, December 9, 1998)]
[Notices]
[Pages 67971-67972]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-32666]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40734; File No. SR-PCX-98-55]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change and Amendment No. 1 by the Pacific Exchange, Inc. Relating to
Crossed Markets Adjustments
December 1, 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 November 5, 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, II and III below, which Items have been prepared by the
Exchange. On November 30, 1998, the PCX submitted to the Commission an
amendment to the proposed rule change.\3\ The Commission is publishing
this notice to solicit comments on the proposed rule change from
interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ The proposed rule change was originally filed pursuant to
Section 19(b)(3)(A)(ii) of the Act. The amendment converted the
proposed rule change to a filing pursuant to Section 19(b)(2) of the
Act. Letter from Michael D. Pierson, Senior Attorney, Regulatory
Policy, PCX to Kelly McCormick, Attorney, Division of Market
Regulation, SEC, dated November 27, 1998 (``Amendment No. 1'').
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The PCX is proposing to clarify its rules on the automatic
execution of option orders when the PCX market and the market of a
competing exchange are crossed or locked (i.e., the bid disseminated
through the facilities of one exchange is higher than or equal to the
offer disseminated through the facilities of another exchange). The
change is intended to make consistent the Exchange's rules on the
handling of electronic orders in such circumstances. The text of the
proposed rule change follows. Additions to the proposed rule are in
italics; deletions are in [brackets].
Text of the Proposed Rule Change
para. 5231 Automatic Execution System
Rule 6.87(a)-(c)--No Change.
(d) Auto-Ex NBBO. The Options Floor Trading C[c]ommittee (``OFTC'')
may designate electronic orders in an option issue to receive automatic
executions at prices reflecting the national best bid or offer
(``NBBO''), provided that the OFTC may designate, for an option issue,
that an order will default for manual representation in the trading
crowd if[: (1)] the order would be executed at a price that is more
than one trading increment away from the PCX market price[; or (2) the
NBBO is crossed or locked].
(e) Crossed or Locked Markets. The OFTC may designate, for an
option issue, that an order will default for manual representation in
the trading crowd if the NBBO is crossed or locked.
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 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 IV below. The Exchange 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 September 8, 1998, the Commission approved a PCX rule change
regarding the automatic execution of option orders.\4\ The rule change
provides that the Exchange's Options Floor Trading Committee (``OFTC'')
may designate electronic orders in an option issue to receive automatic
executions at prices reflecting the National Best Bid or Offer
[[Page 67972]]
(``NBBO'').\5\ It further provides that the OFTC may designate, for an
option issue, that if the NBBO is crossed (e.g., 6\1/8\ bid, 6 asked)
or locked (e.g., 6 bid, 6 asked), then customer orders would exit the
automatic execution system of the Exchange and default for Floor Broker
representation in the trading crowd.\6\
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\4\ Exchange Act Release No. 40412 (September 8, 1998), 63 FR
49626 (September 16, 1998) (SR-PCX-98-27).
\5\ Id.
\6\ Id.
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After the Commission approved File No. SR-PCX-98-27, the PCX has
become aware that PCX Rule 6.87(d), the rule that the proposal changed,
could imply that the OFTC can designate an option issue for Floor
Broker representation in crossed and locked markets only if the issue
is eligible to receive automatic execution at the NBBO. The Exchange,
however, intended to allow the OFTC to designate any issue for Floor
Broker representation in crossed and locked markets. Accordingly, the
Exchange is now proposing to modify Rule 6.87 to clarify that the OFTC
may designate, for any option issue, that if the NBBO is crossed or
locked, then customer orders will default for Floor Broker
representation in the trading crowd regardless of whether the
Exchange's Auto-Ex system is set to execute orders at prices reflecting
the NBBO.
The Exchange is planning to implement a systems change to cover the
potential for Floor Broker representation of option orders during
crossed or locked markets. However, before effecting that change, the
Exchange has determined to file this proposal to clarify the Exchange's
procedure on the handling of option orders when the NBBO is crossed or
locked. Accordingly, upon approval of this proposal, the Exchange will
be in a position to effect the appropriate systems changes as quickly
as possible.
As with PCX-98-27, the Exchange believes that its proposal, if
implemented, will serve to protect public customers from receiving
inferior prices on their orders in situations where the NBBO is crossed
or locked. For example, if the PCX's market is 5 bid, 5\1/4\ asked, and
Exchange B's market is 4 bid, 4\1/4\ asked, the NBBO will be 5 bid,
4\1/4\ asked. If the 5 bid is based on a public customer order for 10
contracts, and that order is automatically executed, the customer would
be deprived of an opportunity to cancel the order at 5 and buy 10
contracts at Exchange B at 4\1/4\. This could occur regardless of
whether the PCX Auto-Ex is using the NBBO or PCX quotes. Moreover,
during the time that the market is crossed, it is not immediately clear
whether the crossed markets arise from errors resulting from
communication or system problems, keystroke errors, quotation
dissemination delays, or are in fact true markets. The default
mechanism will give Floor Brokers in the trading crowd an opportunity
to ascertain whether the markets are erroneous and to assure that
customers receive the best possible price.
While these situations occur very infrequently, the Exchange
believes that investors should be protected through the use of human
intervention. During these times (if so designated by the OFTC for a
particular option issue), public customer orders will be manually
represented in the trading crowd by Floor Brokers and handled in a
manner that is consistent with the Floor Brokers' best execution
obligations.\7\
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\7\ See PCX Rule 6.46 (``Responsibilities of Floor Brokers'').
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2. Basis
The proposal is consistent with Section 6(b)(5) \8\ of the Act
because it is designed to facilitate transactions in securities.
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\8\ 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. 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, 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, NW, Washington, DC 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 in the
Commission's Public Reference Room, 450 Fifth Street, NW, Washington,
DC 20549. Copies of such filing will also be available for inspection
and copying at the principal office of the PCX. All submissions should
refer to File No. SR-PCX-98-55 and should be submitted by December 30,
1998.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\9\
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\9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-32666 Filed 12-8-98; 8:45 am]
BILLING CODE 8010-01-M
