[Federal Register Volume 61, Number 95 (Wednesday, May 15, 1996)]
[Notices]
[Pages 24521-24523]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-12172]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37186; File No. SR-PSE-96-12]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Pacific Stock Exchange, Inc. Relating to Financial
Arrangements of Market Makers
May 9, 1996.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on April 5, 1996, the Pacific
Stock Exchange Incorporated (``PSE'' 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\ 15 U.S.C. 78s(b)(1) (1988).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The PSE proposes to amend its rules on the trading restrictions
that apply to Options Floor Members with ``financial arrangements'' as
defined in PSE Rule 6.40.
[[Page 24522]]
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
PSE Rule 6.40(a) currently provides that two Members have a
``financial arrangement'' with each other for purposes of Rule 6.40 if:
(1) one Member directly finances the other Member's dealings on the
Exchange and has a beneficial interest in the other Member's trading
account such that the first Member is entitled to at least 10% of the
second Member's trading profits; or (2) both Members are trading for
the same joint account. Rule 6.40(b) provides that two Members with a
financial arrangement may not bid, offer and/or trade in the same
trading crowd without a written exemption from two floor officials.\2\
Commentary .06 sets forth the circumstances under which the Options
Floor Trading Committee (``OFTC'') ordinarily may grant an exemption to
those trading restrictions, i.e., to provide liquidity in the trading
crowd.
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\2\ Under PSE Rule 6.40, Commentary .05, two or more Lead Market
Makers (``LMMs'') who are trading on behalf of the same Member
organization may not trade in the same option series at the same
time, but may trade in the same trading crowd at the same time.
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The Exchange proposes to redefine the term ``financial
arrangements'' for purposes of Rule 6.40, so that two Members have a
financial arrangement with each other if: (1) One Member directly
finances the other Member's dealings on the Exchange, the amount
financed is $5,000 or more, and the Member providing the financing is
entitled to a share of the other Member's trading profits; or (2) both
Members are registered with the Exchange as nominees of the same Member
Organization; or (3) both Members are registered with the Exchange to
trade on behalf of the same joint account; or (4) both Members'
dealings on the Exchange are financed by the same source, the amount
financed is $5,000 or more, and the Member providing the financing is
entitled to a share of each of the other Members' trading profits. The
proposal states that Members with ``financial arrangements,'' as
defined, may not bid, offer and/or trade in the same trading crowd at
the same time in the absence of an exemption from the OFTC.
The proposal further provides for both long-term and short-term
exemptions that can be provided by the OFTC or two Floor Officials,
respectively. Proposed Rule 6.40(b)(4) states, more specifically, that
the OFTC may grant long-term exemptions to Members on a case-by-case
basis if it determines that a fair and orderly market would not be
impaired by allowing such Members with financial arrangements to trade
in the same trading crowd at the same time. It further states that in
making such determinations, the Committee shall consider the following
factors; (1) The nature of the financial arrangement; (2) the degree of
independence to be maintained by the applicants in making trading
decisions; (3) the impact on competition in the trading crowd if an
exemption were granted; (4) the applicants' prior patterns of trading
if they have traded previously in the same trading crowd at the same
time; and (5) any other information relevant to whether the applicants
would tend collectively to dominate the market in a particular trading
crowd or a particular option series. The proposal further states that
the Committee may revoke any long-term exemption granted pursuant to
this subsection if it determines that a fair and orderly market
otherwise would be impaired by a continuation of the exemption. The
Exchange believes that the proposed criteria to be used by the OFTC in
granting long-term exemptions will provide for even-handed treatment of
Members who apply for a long-term exemption. With respect to short-term
exemptions, the proposal states that two Floor Officials may grant
short-term exemptions to Members on a case-by-case basis if such Floor
Officials determine that a fair and orderly market would not be
impaired and that the need for liquidity in the trading crowd warrants
such action.
The Exchange believes that the proposed definition improves upon
the current definition by expanding, to an appropriate extent, the
scope of persons who are covered by its terms. Specifically, the
current rule allows two or more Members who are backed financially by
the same source (i.e., Members with ``indirect'' financial
arrangements), to trade in the same crowd or same series as long as
they are not receiving trading profits from each other and are not
trading for the same joint account. This however, allow for certain
situations where the spirit (i.e., to prevent one source from
dominating the market in a particular option issue or dominating a
particular trading crowd), but not the letter, of Rule 6.40 might be
violated. The Exchange believes that the proposed rule would better
assure that such situations do not occur and that competition will
continue to be maintained in each trading crowd.\3\
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\3\ Current Commentary .04 to Rule 6.40 attempts to address the
problem of market domination by multiple traders with ``indirect''
financial arrangements by expressly prohibiting unfair domination of
markets. In this regard, the Exchange believes that the proposed
rule improves upon the current rule by relying more on the nature of
the financial arrangement and less on patterns of trading.
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The Exchange also proposed to remove a provision in the current
rule that states that the primary appointment of a market maker may not
include trading posts that constitute the primary appointment of any
market maker with whom the first market maker has an existing financial
arrangement.\4\ The Exchange believes that that rule is superfluous in
light of the trading restrictions set forth in Rule 6.40. Moreover, the
Exchange believes that Members trading for joint accounts should be
permitted to establish overlapping primary appointment zones to allow
for coverage on the floor when members who trade for those accounts are
temporarily absent from the floor. In this regard, the Exchange notes
that the Commission recently approved a PSE rule change to increase
from two to six the maximum number of trading posts that may be
included within a market marker's primary appointment zone.\5\
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\4\ See PSE Rule 6.35, Commentary .05.
\5\ See Exchange Act Release No. 36370 (October 13, 1995), 60 FR
54273.
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Finally, the PSE proposes to add violations of Rule 6.40(b) to the
Exchange's Minor Rule Plan \6\ with recommended fines of $500, $1,000
and $1,500 for first-, second- and third-time violations, respectively.
The Exchange believes that violations of Rule 6.40(b) are easily
ascertainable and easily verifiable, and, therefore, are appropriate
for inclusion in the Minor Rule Plan.
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\6\ PSE Rule 10.13.
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The Exchange believes that the proposal is consistent with Section
6(b) of the Act, 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 interest.
[[Page 24523]]
(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 date of 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 such 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 in the
Commission's Public Reference Section, 450 Fifth Street, N.W.,
Washington, D.C. Copies of such filing will also be available for
inspection and copying at the principal office of the above-mentioned
self-regulatory organization. All submissions should refer to File No.
SR-PSE-96-12 and should be submitted by June 5, 1996.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\7\
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\7\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-12172 Filed 5-14-96; 8:45 am]
BILLING CODE 8010-01-M
