[Federal Register Volume 63, Number 122 (Thursday, June 25, 1998)]
[Notices]
[Pages 34676-34677]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-16952]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40097; File No. SR-PCX-98-04]
Self-Regulatory Organizations; Order Approving Proposed Rule
Change and Notice of Filing and Order Granting Accelerated Approval of
Amendment No. 1 Thereto by the Pacific Exchange, Inc. Relating to the
Identification of Broker-Dealer Orders on the Options Floor
June 17, 1998.
I. Introduction
On January 23, 1998, the Pacific Exchange, Inc. (``PCX'' or
``Exchange'') filed with 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\ proposed rule changes to amend PCX Rule 6.66(c), Rule
6.2, and Rule 6.77 to require the broker-dealer status of an order to
be identified by public outcry to the trading crowd prior to execution,
regardless of whether the order is to be executed at the trading
crowd's dissemiated bid or offering price, and to add certain
violations of Rule 6.66(c) as amended to the list of those violations
that may cause a transaction to be nullified or adjusted. Notice of the
proposal was published for comment and appeared in the Federal Register
on February 24, 1998.\3\ Not comment letters were received on the
proposal. On June 1, 1998, the PCX filed an amendment to the proposed
rule change (``Amendment No. 1'').\4\ This order approves the
Exchange's proposal. In addition, the Commission hereby publishes
notice to solicit comments from interested persons on Amendment No. 1
on the proposal and approves that amendment to an accelerated basis.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Exchange Act Release No. 39649 (February 11, 1998), 63
FR 9276.
\4\ Letter from Michael D. Pierson, Senior Attorney, Regulatory
Policy, PCX to Ann L. Vlcek, Division of Market Regulation,
Commission, dated June 1, 1998.
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II. Description of the Proposal
PCX is proposing to amend its rules on the identification of
broker-dealer orders by requiring that, if an order is for an account
in which a broker-dealer has an interest, the broker-dealer status of
the order must be disclosed to the trading crowd prior to execution,
regardless of whether the order is to be executed at the trading
crowd's disseminated bid or offering price.
On July 21, 1994, the Commission approved an Exchange proposal to
adopt new Rule 6.66(c), which currently states: ``Prior to executing an
order in which a broker-dealer has an interest, a member must indicate
by public outcry that such order is for a broker-dealer if the order is
to be executed at the trading crowd's disseminated bid or offering
price. This rule applies regardless of whether such broker-dealer is an
Exchange member.'' \5\ The Exchange is now proposing to expand the
scope of Rule 6.66(c) by striking the words ``if the order is to be
executed at the trading crowd's disseminated bid or offering price''
from the text of Rule 6.66(c). Accordingly, under the amended rule,
prior to executing an order in which a broker-dealer has an interest, a
Floor Broker would be required to indicate by public outcry that the
order is for a broker-dealer.
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\5\ See Exchange Act Release No. 34426 (July 21, 1994), 59 FR
38497 (July 28, 1994) (order approving SR-PSE-92-14).
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The proposal is intended to facilitate transactions in option
contracts by making the member in the trading crowd and the Order Book
Official staff aware of the nature of orders being represented on the
Floor, thereby assuring that broker-dealer orders will not be
represented inadvertently as public customer orders. In that regard,
the Exchange notes that only non-broker-dealer orders are entitled to
be placed in the public limit order book and to be given priority over
broker-dealer orders under certain circumstances.\6\ The Exchange
further notes that only non-broker-dealers are entitled to receive a
guaranteed minimum of 20 contracts at the disseminated bid or offering
price.\7\
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\6\ See PCX Rules 6.52(a) and 6.75.
\7\ See PCX Rule 6.86(a).
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The Exchange believes their proposal will make the existing rule
less complicated and easier to follow by removing the distinction
between broker-dealer orders to be executed at the bid or offering
price, and those that are not. In that regard, the Exchange notes that
there is no such distinction applicable to Market Maker orders, the
identification of which is governed by Rule 6.66(b), which requires
Floor Brokers to verbally identify Market Maker orders as such prior to
their execution.\8\ Thus, removing the subject distinction from Rule
6.66(c) will make the Exchange's option rule disclosure rules uniform,
consistent, and easier to follow.
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\8\ Rule 6.66(b) states: ``A Floor Broker holding an order for
the account of a Market Maker shall verbally identify the order as
such prior to consummating a transaction, and shall, after effecting
the trade, supply the name of the Market Maker concerned, by public
outcry, upon the request of any member or members in the trading
crowd.''
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The Exchange is also proposing to amend Rules 6.2 and 6.77 by
adding certain violations of Rule 6.66(c) as amended to the list of
those violations that may give rise to a circumstance in which two
Floor Officials may nullify a transaction or adjust its terms.\9\
Specifically, such action could be taken if a Floor Broker failed to
identify a broker-dealer order for 20 contracts or less. The reason for
the limitation on the number of contracts is that, under Rule 6.86,
only non-broker-dealer orders are eligible for a guaranteed execution
of 20 contracts at the displayed price. If a Floor Broker does not
disclosure that an order for 20 contracts or less is for a broker-
dealer (under the proposed rule), the members in the trading crowd may
incorrectly assume that the order is for a public customer and provide
an execution at the displayed price, without having an opportunity to
update their quotes.\10\ The Exchange believes that adding this
provision is simply a logical extension of the existing Commentary
.05(v) to Rule 6.2, which permits two Floor Officials to nullify, or
adjust the terms of, any order
[[Page 34677]]
executed in violation for Rule 6.86, which states that only non-broker-
dealer orders are eligible for a guarantee of up to 20 option contracts
at the disseminated market price.
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\9\ Specifically, the Exchange proposes to move Commentary .05
from Rule 6.2 to Rule 6.77 and renumber it as Commentary .01. The
existing subparagraphs will then be relettered and a new
subparagraph, (f), added to address violations of Rule 6.66(c) as
amended.
\10\ See PCX Rule 6.37(d) and Rule 6.37, Commentary .05 (Market
Makers are required to make a market for, at a minimum, one contract
for broker-dealer orders; they must also lower their bids or raise
their offers if they do not satisfy an order in its entirety).
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III. Discussion
The Commission finds that the proposed rule changes are consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to a national securities exchange and, in
particular, with the requirements of Section 6(b)(5)\11\ in that they
are designed to facilitate transactions in securities, promote just and
equitable principles of trade, and protect investors and the public
interest.\12\
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\11\ 15 U.S.C. 78f(b)(5).
\12\ In approving this rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. 15 U.S.C. 78c(f).
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Specifically, the Commission believes that the proposal will
facilitate transactions in option contracts and afford greater
protection of investors and the public interest by making the members
in the trading crowd and the Order Book Official staff aware of the
nature of the orders being represented on the Floor, thereby assuring
that broker-dealer orders will not be represented inadvertently as
public customer orders. The Commission notes that only non-broker-
dealer orders are entitled to be placed in the Exchange's public limit
order book and to be given priority over broker-dealer orders under
certain circumstances, and that only non-broker-dealers are entitled to
receive a guaranteed minimum of 20 contracts at the disseminated bid or
offering price. In view of these existing constraints upon broker-
dealer orders and of the added protection afforded public customers by
the proposal, the Commission does not believe that requiring all
broker-dealer orders to be identified as such public outcry will cause
any unnecessary burden upon a member.
The Commission agrees with the Exchange that the proposal will make
the existing rule less complicated and easier to follow by removing the
distinction between broker-dealer orders to be executed at the bid or
offering price, and those that are not. The Commission notes that there
is no such distinction applicable to Market Maker orders, which must be
verbally identified as such prior to their execution. Thus, the
Commission believes that removing the subject distinction from Rule
6.66(c) will facilitate transactions in option contracts by making the
Exchange's option order disclosure rules uniform, consistent, and
easier to follow.
The Commission also believes that it is appropriate for the
Exchange to amend Rule 6.2 by deleting Commentary .05 from that rule,
which relates to the member's overall conduct and manner of dress on
the options trading floor, and adding it as Commentary .01 to Rule
6.77, which relates to the issue of when bids and offers constitute
binding contracts. In view of the proposed amendment of Rule 6.66(c),
the Commission believes it appropriate for the Exchange to add a new
subparagraph (f) to this Commentary, which would add certain violations
of Rule 6.66(c) as amended to the list of those violations that may
rise to a circumstance in which two Floor Officials may nullify a
transaction or adjust its terms. Specifically, such action could be
taken if a Floor Broker failed to identify a broker-dealer order for 20
contracts or less. The Commission agrees with the Exchange that adding
this provision is simply a logical extension of the existing Commentary
.05(v) of Rule 6.2, which permits two Floor Officials to nullify, or
adjust the terms of, any order executed in violation of Rule 6.86,
which states that only non-broker-dealer orders are eligible for a
guarantee of up to 20 option contracts at the disseminated market
price. The Commission believes that enabling Floor Officials to nullify
or adjust the terms of a transaction that would violate Rule 6.66(c) as
amended will afford greater protection of investors and the public
interest.
For the foregoing reasons, the Commission finds that PCX's proposal
to require the broker-dealer status of an order to be identified by
public outcry to the trading crowd prior to execution, regardless of
whether the order is to be executed at the trading crowd's disseminated
bid or offering price, and to add certain violations of rule 6.66(c) as
amended to the list of those violations that may cause a transaction to
be nullified or adjusted, is consistent with the requirements of the
Act and with the rules and regulations thereunder.
In addition, the Commission finds good cause consistent with the
Act for approving Amendment No. 1 to the proposed rule change prior to
the thirtieth day after the date of publication of notice of filing
thereof in the Federal Register. Specifically, Amendment No. 1 simply
corrects certain typographical errors in the text of the rule proposal
and repharases the new subparagraph (f) being added to Commentary .01
of Rule 6.77. The amendment does not substantively change the proposal
as originally filed. Accordingly, the Commission approves Amendment No.
1 on an accelerated basis.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments, including whether the submission is consistent with the Act,
concerning Amendment No. 1. 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 Room. 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-98-04 and should be
submitted by July 14, 1998.
V. Conclusion
It is therefore Ordered, pursuant to Section 19(b)(2) of the
Act,\13\ that the proposed rule change (SR-PCX 98-04), as amended, is
approved.
\13\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\14\
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\14\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-16952 Filed 6-24-98; 8:45 am]
BILLING CODE 8010-01-M
