[Federal Register Volume 64, Number 140 (Thursday, July 22, 1999)]
[Notices]
[Pages 39548-39550]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-18657]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-41611; File No. SR-PCX-99-04]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Pacific Exchange, Inc. Relating to an Increase in the
Maximum Size of Option Orders That May Be Executed Automatically
July 9, 1999.
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 February 10, 1999, the Pacific Exchange, Inc. (``PCX'' or
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I, II, and III below, which Items have been prepared by the PCX.
On February 25, 1999 the Exchange submitted Amendment No. 1 to the
proposed rule change.\3\ On May 25, 1999 the Exchange
[[Page 39549]]
submitted Amendment No. 2 to the proposed rule change.\4\ On July 2,
1999 the Exchange submitted Amendment No. 3 to the proposed rule
change.\5\ 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\ Amendment No. 1 sets the maximum order size for execution
through Auto-Ex for equity options and for index options on the PSE
Technology Index, the Wilshire Small Cap Index, and the Morgan
Stanley Emerging Growth Index at fifty contracts. Additionally, in
Amendment No. 1 the PCX withdrew SR-PCX-99-05, which was filed with
the Commission on February 22, 1999. See letter from Robert P.
Pacileo, Staff Attorney, PCX, to Michael A. Walinskas, Deputy
Associate Director, Division of Market Regulation, Commission, dated
February 24, 1999.
\4\ In Amendment No. 2 the Exchange proposed to add a subsection
to PCX Rule 6.87 to address the unbundling of Auto-Ex orders See
letter from Robert P. Pacileo, Staff Attorney, PCX, to Michael A.
Walinskas, Associate Director, Division of Market Regulation,
Commission, dated May 24, 1999.
\5\ In Amendment No. 3 the Exchange replaced the proposal in its
entirety to restate and clarify the purpose of the proposal, to
address technical modifications to PCX Rule 6.87 made in a separate
filing with the Commission (SR-PCX-99-23), and to add a proposal to
amend PCX Rule 6.86. See letter from Robert P. Pacileo, Staff
Attorney, PCX, to Michael A. Walinskas, Associate Director, Division
of Market Regulation, Commission, dated July 1, 1999.
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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 modify its rules on the automatic execution
of option orders by expanding the maximum number of contracts that may
be designated for automatic execution on an issue-by-issue basis.
Specifically, the Exchange proposes to change the maximum order size
for execution of equity options orders that are eligible to be executed
electronically on the Exchange's Automatic Execution System (``Auto-
Ex'') from twenty contracts to fifty contracts.
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 III below. The PCX 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
First, the Exchange proposes to amend its Rule 6.86, governing
Trading Crowd Firm Disseminated Market Quotes. The Exchange proposes to
add subsection 6.86(g) and to make technical changes to Rule 6.86 to
make it consistent with proposed Rule 6.87(b).\6\
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\6\ PCX Rule 6.87 has been renumbered and reorganized under SR-
PCS-99-23, filed with the Commission on June 14, 1999. See
Securities Exchange Act Release No. 41582 (June 30, 1999).
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Specifically, the Exchange proposes to add subsection 6.86(g) to
require that, if the Options Floor Trading Committee (``OFTC'')
determines, pursuant to Rule 6.87(b), the size of orders in an issue
that are eligible to be executed on Auto-Ex will be greater than twenty
contracts, then the trading crowd will be required to provide a market
depth in that greater amount. The Exchange proposes this rule change to
update, clarify and keep consistent PCX rules governing size of market
orders and market depth.
Second, the Exchange proposes to modify its rules on the automatic
execution of Equity and Index Option orders by expanding the maximum
number of contracts that may be designated for automatic execution, on
an issue-by-issue basis, to fifty contracts.\7\ Currently, the PCX Rule
6.87(b) provides that the Exchange's OFTC shall determine the size of
orders that are eligible to be executed electronically on the
Exchange's Auto-Ex system.\8\ The rule provides that the OFTC may
change the order size parameter of orders that may be executed on Auto-
Ex on an issue-by-issue basis. The rule further provides that the
maximum order size that the OFTC may designate for execution on Auto-Ex
is twenty contracts.\9\
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\7\ The PCX Technology Department has confirmed that Pacific
Options Exchange Trading System (``POETS'') is capable of, and has
the capacity to, execute trades at 50-up on an issue-by-issue basis,
which can equate to floor-wide 50-up if done for all issues.
\8\ The Commission approved the POETS and its Auto-Ex features
as a pilot program in January 1990. See Securities Exchange Act
Release No. 27633 (January 18, 1990), 55 FR 2466 (order approving
File No. SR-PSE-89-26). On July 30, 1993, the Commission approved
the program on a permanent basis. See Securities Exchange Act
Release No. 32703 (July 30 ,1993), 58 FR 42117 (August 6, 1993). The
Auto-Ex system permits eligible market or marketable limit orders
sent from member firms to be executed automatically at the displayed
bid or offering price. Participating market makers are designated as
the contra side to each Auto-Ex order. Participating market makers
are assigned by Auto-Ex on a rotating basis, with the first market
maker selected at random from the list of signed-on market makers.
Auto-Ex preserves Book priority in all options. Automatic executions
through Auto-Ex are currently available for public customer orders
of ten contracts or less (or in certain issues, for twenty contracts
or less) in all series of options traded on the Options Floor of the
Exchange.
\9\ Currently, however, PCX Rule 6.87(c) provides: ``The Options
Floor Trading Committee may increase the size of Auto-Ex-eligible
orders in one or more classes of multiply traded equity options to
the extent that other options exchanges permit such larger size
orders in multiply traded equity options of the same class or
classes to be entered into their own automated execution systems. If
the Options Floor Trading Committee intends to increase the Auto-Ex
order size eligibility pursuant to this subsection, the Exchange
will notify the Securities and Exchange Commission pursuant to
Section 19(b)(3)(A) of the Exchange Act.''
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The Exchange proposes to distinguish between Equity and Index
Options for matters relating to expansion of the maximum number of
contracts that may be designated for automatic execution. The PCX
proposes to increase the maximum size of Equity Option orders that the
OFTC may designate for automatic execution in an issue from twenty
contracts to fifty contracts. The PCX also proposes to allow the OFTC
the ability to determine the size of Index Options orders that are
eligible to be executed on Auto-Ex on an issue-by-issue basis for the
following Index Options, with a maximum order size of fifty contracts:
(1) the PSE Technology Index; (2) the Wilshire Small Cap Index; and (3)
the Morgan Stanley Emerging Growth Index. The Exchange proposes these
changes in an effort to meet the changing needs of customers in the
market place and to give the Exchange better means of competing with
other options exchanges for order flow, particularly in multiply traded
issues. The Exchange also believes that the proposal will allow the
Exchange to enhance its operational efficiency, particularly during
times when large influxes of manual orders crate undue congestion in
particular trading crowds.
Third, the Exchange proposes to add subsection 6.87(k) to address
the unbundling of Auto-Ex orders. Specifically, the Exchange proposes
that the OFTC will determine, on an issue-by-issue basis, the manner in
which orders entered through the Auto-Ex system will be assigned to
individual Market Makers for execution. Each Marker Maker who is
participating on the Auto-Ex system will be required to execute a
maximum of ten option contracts per Auto-Ex trade, except that, the
OFTC may permit individual Market Makers and Lead Market Makers
(``LMM'') to be allocated a number of contracts greater than ten and no
more than fifty, upon the request of the individual Market Maker or
LMM.
Fourth, the Exchange proposes that, in accordance with the
provision on
[[Page 39550]]
LMMs' guaranteed participation in Rule 6.82(d)(2), the LMM in an issue
will be required to either (i) participate in every other trade
executed on Auto-Ex in that issue or (ii) participate in a percentage
of every trade consistent with the amount of the LMM's guaranteed
participation. The Exchange also proposes that the OFTC may require
Market Makers or an LMM who is participating on Auto-Ex in a particular
issue to execute a number of contracts greater than ten. However,
before doing so, the OFTC must take into account whether doing so would
place a Market Maker at undue risk based on that Market Maker's
capitalization.
Finally, the Exchange proposes that the OFTC seek to assure that
each Market Maker participating on Auto-Ex in a particular issue will
be assigned up to the same maximum number of option contracts per Auto-
Ex trade. The OFTC may permit exceptions to this procedure only in
unusual situations where the OFTC finds good cause for permitting
differences in the maximum number of contracts executed by individual
Market Makers.
2. Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b) \10\ of the Act, in general, and furthers the
objectives of Section 6(b)(5),\11\ in particular, in that it is
designed to facilitate transactions in securities, to protect investors
and the public interest and to promote just and equitable principles of
trade.
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\10\ 15 U.S.C. 78f(b).
\11\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
PCX 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
No written comments were solicited or received with respect to the
proposed rule change.
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, 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 20549-0609.
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-99-04 and should
be submitted by August 12, 1999.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\12\
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\12\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-18657 Filed 7-22-99; 8:45 am]
BILLING CODE 8010-01-M
