[Federal Register Volume 59, Number 146 (Monday, August 1, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-18577]
[[Page Unknown]]
[Federal Register: August 1, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34435; File No. SR-PSE-92-48]
Self-Regulatory Organizations; Pacific Stock Exchange, Inc.;
Order Approving Proposed Rule Change, Relating to Requirements That
Market Makers Fill Incoming Orders or Update Existing Markets
July 22, 1994.
On December 22, 1992, the Pacific Stock Exchange, Inc. (``PSE'' or
``Exchange'') submitted to the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b) of the Securities Exchange
Act of 1934 (``Act'')\1\ and Rule 19b-4 thereunder,\2\ a proposed rule
change to amend PSE rules to expressly require its market makers and
lead market makers to respond to orders, represented in a trading crowd
at the currently disseminated bid or offer, either by satisfying the
order or by updating the existing market in the subject series.
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\1\15 U.S.C. 78s(b)(1) (1988).
\2\17 CFR 240.19b-4 (1993).
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The proposed rule change was published for comment in Securities
Exchange Act Release No. 31962 (March 8, 1993), 58 FR 13661 (March 12,
1993). No comments were received on the proposed rule change.
The proposal amends PSE Rule 6.37 to require PSE market makers or
lead market makers to either execute an order, at the quote they are
currently disseminating, in its entirety or update their quotes (by
either raising their bids or lowering their offers) to reflect that the
previously disseminated quote is no longer available.\3\ The amendment
also requires that market makers and lead market makers maintain these
updated quotes for a reasonable time period, which, unless specific
market changes occur, is defined as two minutes.\4\ Further, the
proposal amends PSE Rule 10.13 to make the failure to comply with the
obligation to trade or update quotes in response to an order a
violation of the PSE's Minor Rule Plan. As a violation of the PSE's
Minor Rule Plan, a member could be fined $100, $200, or $500 for a
first, second, or third violation, respectively. The Exchange
represents that such fines would be recommended, but not required, and
repeated or aggravated violations could entail formal disciplinary
action.
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\3\The Commission understands this provision to allow an
exchange, upon receipt of a market or marketable limit order, to
execute less than the total number of contracts contained in the
order, but the exchange then becomes obligated to update its
quotation if it is not willing to transact with any more of the
order at the same price. For example, if as a result of displaying a
more competitive offer, an exchange is sent an order to buy 50
contracts that was originally received by another exchange, it may
buy fewer than 50 contracts at its quoted price, but must then
revise its quotation to reflect that the price is no longer
available.
\4\Commentary .09 to PSE Rule 6.37 provides that a reasonable
period of time is presumed to be two minutes. The Commentary further
provides, however, that the revised market can be changed before the
two minutes are up if there is: (a) a change in the market quote in
the underlying security or a change in the size of the market
quoted; or (b) a quote change of \1/4\ of a point (or twice the
minimum price differential), in another options series on the same
underlying security, resulting from a customer order. Finally, the
Commentary provides that two floor officials may grant exemptions
from the trade or update requirements contained in Rule 6.37 if the
individual situation warrants such action.
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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).\5\ Specifically, the
Commission finds that requiring PSE market makers and lead market
makers to execute orders or update their markets facilitates
transactions in securities, protects investors and the public interest,
and promotes fair competition among options markets by reducing the
likelihood that an outdated quote from one options market will hinder
the execution of an order on another options market by making such
execution appear to be at an inferior price (i.e., a ``trade-
through'').
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\5\15 U.S.C. 78f(b)(5) (1988).
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Currently, in light of the expansion in the multiple trading of
options, the options exchanges have either implemented or are working
to implement systems upgrades which will prevent orders that are
identified as potential ``trade-troughs'' from being automatically
executed and will re-route these orders to the appropriate market maker
or specialist at each exchange for nonautomated execution. Further, to
attract order flow, many market makers and specialists from the
different options exchanges have represented to their customers that
they will execute the orders they receive at the best price available
at any of the five options exchanges. The current proposal, therefore,
will, consistent with Section 6(b)(5) of the Act, facilitate options
transactions by encouraging PSE market makers to keep their markets up-
to-date. This, in turn, should reduce the likelihood that outdated
quotes will cause orders on other exchanges, that could be
automatically executed, to be re-routed for non-automated handling. it
also should reduce the likelihood that outdated quotes will cause
orders executed on other exchanges at current market prices to appear
to be executed at inferior prices. The Commission further notes that,
concurrently with approval of this proposal, it is approving similar
proposals by the American Stock Exchange (``AMEX''), Chicago Board
Options Exchange (``CBOE''), New York Stock Exchange (``NYSE'') and the
Philadelphia Stock Exchange (``PHLX'').\6\
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\6\See Securities Exchange Act Release No. 34431, 34432, 34433,
and 34434, (July 22, 1994), respectively.
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\7\ that the proposed rule change (SR-PSE-92-48) is approved.
\7\15 U.S.C. 78s(b)(2) (1988).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\8\
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\8\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-18577 Filed 7-29-94; 8:45 am]
BILLING CODE 8010-01-M
