[Federal Register Volume 59, Number 30 (Monday, February 14, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-3322]
[[Page Unknown]]
[Federal Register: February 14, 1994]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33586; File No. SR-PSE-93-03]
Self-Regulatory Organizations; Pacific Stock Exchange, Inc.;
Order Approving Proposed Rule Change and Notice of Filing and Order
Granting Accelerated Approval of Amendment No. 1 to the Proposed Rule
Change Relating to Waiver of Maximum Bid/Ask Differentials in
Individual Equity Options
February 7, 1994
On February 9, 1993, the Pacific Stock Exchange, Inc. (``PSE'' or
``Exchange'') submitted to the Securities and Exchange Commission
(``Commission'' or ``SEC''), 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 permit two Floor Officials to
waive, on a case-by-case basis, the required maximum bid/ask
differentials for options when the bid/ask differential in the security
underlying an options contract is greater than one-half of a point.
Notice of the proposed rule change appeared in the Federal Register on
December 23, 1993.\3\ No comments were received on the proposed rule
change. On February 7, 1994, the Exchange submitted Amendment No. 1 to
the proposed rule change.\4\ This order approves the proposal.
---------------------------------------------------------------------------
\1\15 U.S.C. 78s(b)(1) (1982).
\2\17 CFR 240.19b-4 (1993).
\3\See Securities Exchange Act Release No. 33351 (December 16,
1993), 58 FR 68185 (December 23, 1993).
\4\In Amendment No. 1, the Exchange proposes to: (1) Move the
last sentence from Rule 6.37(b)(1) to Rule 6.36(b)(3); and (2)
delete the references to in-the-money options series from the
language originally proposed to be added to Rule 6.37(b)(3). Letter
from Michael Pierson, Senior Attorney, Market Regulation, PSE, to
Brad Ritter, Attorney, Office of Derivatives Regulation, Division of
Market Regulation, Commission, dated February 7, 1994 (``Amendment
No. 1'').
---------------------------------------------------------------------------
The Exchange proposes to amend its rule establishing the maximum
bid/ask differentials that may be created in making a market in options
contracts. Rule 6.37(b)(1) currently provides, for example, that a
Market Maker may bid and/or offer so as to create differences of no
more than one-quarter of a point between the bid and the offer when the
bid is less than $2. The current rule also provides, however, that the
Exchange's Options Floor Trading Committee (``Committee'')\5\ may
establish maximum spreads other than those specified. Additionally,
Rule 6.37(b)(1) also currently provides that in the event the bid/ask
differential in the underlying security is greater than the bid/ask
differential contained in the rule, the permissible price differential
for any in-the-money option series may be identical to those in the
underlying security market.
---------------------------------------------------------------------------
\5\The Committee is comprised of the Exchange's 14 Floor
Officials: (1) Seven Floor brokers, and (2) seven Market Makers or
Lead Market Makers. Telephone conversation between Michael Pierson,
Senior Attorney, Market Regulation, PSE, and Brad Ritter, Attorney,
Office of Derivatives Regulation, Division of Market Regulation,
Commission, on February 2, 1994.
---------------------------------------------------------------------------
Under the proposal, the last sentence from Rule 6.37(b)(1), which
provides an exemption from the maximum specified bid/ask differentials
for in-the-money options series in certain circumstances, would be
moved to Rule 6.37(b)(3).\6\ Additionally, new language is proposed to
be added to Rule 6.37(b)(3) which would allow two Floor Officials to
waive the requirements of Rule 6.37(b)(1) for at-the-money and out-of-
the-money options series, on a case-by-case basis, when the bid/ask
differential for the underlying security is greater than one-half of a
point. In such instances, the spreads for at-the-money and out-of-the-
money options series may be, at most, one-half as wide as the bid/ask
differential in the underlying security in the primary market. The
proposed rule also provides that exemptions granted pursuant to the
rule are subject to Committee review.
---------------------------------------------------------------------------
\6\See Amendment No. 1, supra note 4.
---------------------------------------------------------------------------
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, the requirements of section 6(b)(5).\7\ In particular, the
Commission believes that the proposed rule change is designed to
facilitate transactions in securities, to remove impediments to and
perfect the mechanism of a free and open market and a national market
system, and to promote just and equitable principles of trade.
Specifically, by incorporating objective standards into the rule and
providing Floor Officials with the discretion to grant exemptions when
those standards are met, the proposal will give Market Makers more
flexibility to apply to alter the maximum bid/ask differential when
quoting options where the market in the underlying security is illiquid
and therefore has wider spreads. The Commission notes that under the
current rule, Market Makers may already obtain approval to alter the
spreads specified in the rule for any options series. Such approval,
however, must be obtained from the Committee at either a regular or
special meeting of the Committee.\8\ The proposal would alleviate any
potential delay in granting Market Makers requests to adjust their
spreads by permitting such relief to be granted by two Floor Officials
rather than the full Committee.
---------------------------------------------------------------------------
\7\15 U.S.C. 78f(b)(5) (1982).
\8\Telephone conversation between Michael Pierson, Senior
Attorney, Market Regulation, PSE, and Brad Ritter, Attorney, Office
of Derivatives Regulation, Division of Market Regulation,
Commission, on February 2, 1994.
---------------------------------------------------------------------------
Although the Commission recognizes that the proposal could result
in more requests by Market Makers to obtain permission to increase
maximum spreads because such requests could be granted by two Floor
Officials as opposed to the full Committee, the Commission believes
that the rule ensures that exemptions can only be granted in limited
circumstances. First, an exemption can only be granted for at-the-money
and out-of-the-money options series where the spread in the underlying
security is greater than one-half of a point. Second, even with the
exemption for the bid/ask differentials for at-the-money and out-of-
the-money options series, the maximum spread for those series can be at
most, one-half as wide as the spread in the underlying security.
Finally, any exemption granted by the Floor Officials will be subject
to Committee review. This review authority will allow the full
Committee to monitor the use of the exemptions and to detect any
situations where, for example, exemptions have been improperly granted
by certain Floor Officials, and to take appropriate steps to prevent
subsequent abuses of the rule.
The Commission finds good cause for approving Amendment No. 1 to
the proposed rule change prior to the thirtieth day after the date of
publication of notice thereof in the Federal Register. Amendment No. 1
merely clarifies that the intent of the proposed rule change is to
provide objective standards for allowing Floor Officials to grant
exemptions from Rule 6.37(b)(1) for at-the-money and out-of-the-money
options series, not to change the current rule with respect to the
exemption for in-the-money options series. Moreover, the Commission
notes that this proposal was published for the full 21-day comment
period and no comments were received by the Commission. Therefore, the
Commission believes it is consistent with sections 6(b)(5)\9\ and
19(b)(2)\10\ of the Act to approve Amendment No. 1 to the proposal on
an accelerated basis.
---------------------------------------------------------------------------
\9\15 U.S.C. 78f(b)(5) (1988).
\10\15 U.S.C. 78f(b)(5) (1988).
---------------------------------------------------------------------------
Interested persons are invited to submit written data, views and
arguments concerning Amendment No. 1 to the proposed rule change.
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 Section, 450 Fifth Street, NW., Washington, DC. Copies of
such filing will also be available for inspection and copying at the
principal office of the PSE. All written submissions should refer to
File No. SR-PSE-93-03 and should be submitted by March 7, 1994.
It is therefore ordered, Pursuant to section 19(b)(2) of the
Act,\11\ that the proposed rule change (SR-PSE-93-03) is approved.
\11\15 U.S.C. 78s(b)(2) (1982).
---------------------------------------------------------------------------
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\12\
---------------------------------------------------------------------------
\12\17 CFR 200.30-3(a)(12) (1993).
---------------------------------------------------------------------------
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-3322 Filed 2-11-94; 8:45 am]
BILLING CODE 8010-01-M
