[Federal Register Volume 61, Number 168 (Wednesday, August 28, 1996)]
[Notices]
[Pages 44376-44379]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-21891]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37590; File No. SR-PSE-96-28]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Pacific Stock Exchange Incorporated Relating to Its Rule
on the Evaluation of Its Equity Specialists
August 21, 1996.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on August
18, 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.
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange is proposing to adopt a pilot program amending its
rule on the evaluation of its equity specialists.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its fling 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
1. Purpose
The Exchange is proposing to adopt a pilot program amending its
rule relating to specialists evaluations for a nine month period from
October 1, 1996 to June 30, 1997. Currently, PSE Rule 5.37(a) provides
that the Equity Allocation Committee (``EAC'') shall evaluate all
registered specialists on a quarterly basis and that each registered
specialist shall receive an overall evaluation rating based on the
following three measures of performance: (1) Specialist Evaluation
Questionnaire Survey (``Questionnaire''); (2) SCOREX Limit Order
Acceptance Performance; and (3) National Market System Quote
Performance.
The Exchange is proposed to modify PSE Rule 5.37(a) by adding three
new measures of performance and eliminating one measure of performance.
The new measures are: (1) Executions; (2) Book Display Time; and (3)
Post 1-P.M. Parameters. The Exchange is also proposing to: add more
questions to the Questionnaire and to expand the National Market System
Quote Performance measure (for the nine month pilot, this criterion
will be referred to as ``Quote Performance'') \1\ to include a
performance measure for bettering the quote. In addition, the Exchange
is proposing to eliminate SCOREX Limit Order Acceptance Performance as
a measure of specialist performance. The Exchange's new rule for the
evaluation of specialists will therefore consist of five separate
measures of performance, as specified below:
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\1\ See infra text accompanying note 4.
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a. Executions. This category, on which 50% of each specialist
evaluation is based, consists of four subcategories: (a) Turnaround
Time; (b) Holding Orders Without Action; (c) Trading Between the Quote;
and (d) Executions in Size Greater Than BBO.
``Turnaround Time'' calculates the average number of seconds for
all eligible orders up to 1,099 shares based upon the number of seconds
between the receipt of a market or marketable limit order in P/COAST
and the execution, partial execution, stopping, or cancellation of the
order. An order that is moved from the auto-ex screen to the manual
screen will accumulate time until it is executed, partially executed,
stopped, or canceled. This measurement begins after the stock opens for
the day on the primary market. Only those orders received by P/COAST
after the
[[Page 44377]]
stock opens will be counted. If there is a trading halt or period when
the P/COAST system is experiencing problems, Turnaround Time will not
be included for those blocks of time. A specialist will be awarded
points based on the average number of seconds between the receipt of
eligible market or marketable limit orders and any of the actions
specified above being taken upon such orders. This category will count
for 15% of the overall score. The parameter ranges and corresponding
points for Turnaround Time are listed below:
------------------------------------------------------------------------
Number of seconds parameter range Points
------------------------------------------------------------------------
1-8............................................................ 10
9-10........................................................... 9
11-12.......................................................... 8
13-14.......................................................... 7
15-16.......................................................... 6
17-18.......................................................... 5
19-20.......................................................... 4
21-22.......................................................... 3
23-24.......................................................... 2
25-26.......................................................... 1
27+............................................................ 0
------------------------------------------------------------------------
``Holding Orders Without Action'' measures the number of market and
marketable limit orders up to 10,099 shares that are held without
action for greater than 25 seconds. As in the Turnaround Time
calculation, a cancellation, a stop, an execution, or partial execution
stops the clock. This measurement begins after the stock opens for the
day on the primary market. Only those orders received by P/COAST after
the stock opens will be counted. If there is a trading halt or period
when the P/COAST system is experiencing problems, those blocks of time
will be excluded from the Holding Orders Without Action calculation.
The specialist will be awarded points based on the percentage of orders
that are held under the established time period.\2\ This category will
count for 15% of the overall score. The parameter ranges and
corresponding points for Holding Orders Without Action are listed
below:
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\2\ I.e., a specialist will receive fewer points the larger the
percentage of orders that he (she) holds for greater than 25
seconds.
------------------------------------------------------------------------
Percent of orders parameter range Points
------------------------------------------------------------------------
1-3............................................................ 10
4-6............................................................ 9
7-9............................................................ 8
10-12.......................................................... 7
13-15.......................................................... 6
16-18.......................................................... 5
19-21.......................................................... 4
22-24.......................................................... 3
25-27.......................................................... 2
28-30.......................................................... 1
31+............................................................ 0
------------------------------------------------------------------------
``Trading Between the Quote'' measures the number of market and
marketable limit orders that are executed between the best primary
market bid and offer. For this criterion to count toward the overall
evaluation score, ten orders or more must have been executed during the
quarter the specialist is being evaluated. If less than ten orders are
executed, this criterion will not be counted and the rest of the
evaluation criteria will be given more weight.
When a market or marketable limit order is executed, the execution
price is compared to the primary bid and offer. The specialist will be
awarded points based on the percentage of orders the specialist
receives that are executed between the primary bid and offer. If the
execution price falls between the primary bid and the primary offer,
the trade is counted as one that traded between the quote at the time
of execution. Each time a trade is executed, the primary market quote
will be noted. If the spread of that quote is two or more trading
fractions apart, that trade will count as one eligible for the
comparison of the execution price to the quote. If there is a trading
halt or period when the P/COAST system is experiencing problems, those
blocks of time will not be included in the Trading Between the Quote
calculation.
This category will count for 10% of the overall score. The
parameter ranges and corresponding points for Trading Between the Quote
are listed below:
------------------------------------------------------------------------
Percent of orders parameter range Points
------------------------------------------------------------------------
51+............................................................ 10
46-50.......................................................... 9
41-45.......................................................... 8
36-40.......................................................... 7
31-35.......................................................... 6
26-30.......................................................... 5
21-25.......................................................... 4
16-20.......................................................... 3
11-15.......................................................... 2
5-10........................................................... 1
0-4............................................................ 0
------------------------------------------------------------------------
``Executions in Size Greater Than BBO'' measures the number of
market and marketable limit orders which exceed the best bid and offer
(``BBO'') size. When a market or marketable limit order is executed,
the order must meet two tests to be counted: first, the original order
size must be greater than the BBO size; and second, the execution size
must be greater than the BBO size. If the execution size is greater
than the bid size (for a sell order) or offer size (for a buy order),
the trade is counted as one that was executed in size greater than the
BBO. If there is a trading halt or period when the P/COAST system is
experiencing problems, those blocks of time will not be included in the
Executions in Size Greater Than BBO calculation. For this criterion to
count toward the overall evaluation score, ten orders or more must have
been executed during the quarter the specialist is being evaluated. If
less than ten orders are executed, this criterion will not be counted
and the rest of the evaluation criteria will be given more weight.
The specialist will be awarded points based on the percentage of
orders that are executed that exceed the BBO size. This category will
count for 10% of the overall score. The parameter ranges and
corresponding points for Executions In Size Greater than BBO are listed
below:
------------------------------------------------------------------------
Percent of orders parameter range Points
------------------------------------------------------------------------
98-100......................................................... 10
95-97.999...................................................... 9
92-94.999...................................................... 8
89-91.999...................................................... 7
86-88.999...................................................... 6
83-85.999...................................................... 5
80-82.999...................................................... 4
77-79.999...................................................... 3
74-76.999...................................................... 2
71-73.999...................................................... 1
0-70.999....................................................... 0
------------------------------------------------------------------------
b. Specialist Evaluation Questionnaire Survey. The Questionnaire is
filled out by equity floor brokers on a quarterly basis. The
Questionnaire responses will count for 15% of the overall score. Each
question in the Questionnaire has a possible rating of 1 to 10. Each
question will be weighted equally and will count for 1.875% of the
overall evaluation score.
The Questionnaire currently solicits from floor brokers ratings in
the following categories: the quality of markets maintained by the
specialist; the specialist's effectiveness in his (her) handling of
orders; communication; and the specialist's handling of clerical and
administrative matters. The Questionnaire will be expanded to solicit
from floor brokers ratings on the specialist's: handling of manual
orders for a size greater than that provided for in the BBO; failure
trade on displayed quotes; representation of the broker's orders in his
(her) quotes; and facilitation of crosses.
The new questions proposed to be added to the Questionnaire are the
following: Does the specialist handle manual orders from floor brokers
for greater than the BBO size? Does the specialist fail to trade on his
(her) displayed quotes?; Does the specialist adequately represent
brokers' orders in the quotes?; and Does the specialist allow for each
facilitation of crosses?
c. Book Display Time. This criterion calculates the percentage of
the book shares at the best price in the book that
[[Page 44378]]
are displayed in the specialist's quote, by symbol, and the duration of
time that each percentage is in effect. This criterion rates the P/
COAST book displayed 100% of the time. The sizes of all open buy limit
orders at the best price for the symbol in the specialist's book will
be totaled and compared to the bid size quote. The sizes of all open
sell limit orders at the best price for the symbol in the book will be
totaled and compared to the offer size quote. This will be done for
each symbol traded by the specialist, and only for those orders priced
within the primary quote. Limit orders in the book which are priced
beyond the primary quote will not be included; they will not be
executed until they reach the price in the primary quote, so the
specialist should not be required to cover them in his (her) quote
sizes.
The specialist will be awarded points on the basis of the
percentage of the book that the specialist displays. This category will
count for 15% of the overall score. The parameter ranges and
corresponding points for Book Display Time are listed below:
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Percent of book parameter range Points
------------------------------------------------------------------------
80+............................................................ 10
75-79.......................................................... 9
70-74.......................................................... 8
65-69.......................................................... 7
60-64.......................................................... 6
55-59.......................................................... 5
50-54.......................................................... 4
45-49.......................................................... 3
40-44.......................................................... 2
35-39.......................................................... 1
0-34........................................................... 0
------------------------------------------------------------------------
d. Post-1 P.M. Parameters. This criterion measures the specialist's
quote performance in the post-1 p.m. (Pacific Time) auction market
(``Extended Trading Session'').\3\ The Post-1 P.M. Parameters criterion
has the following features:
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\3\ The PSE's Extended Trading Session is an auction market
trading session that runs from 1:00-1:50 p.m. (Pacific Time).
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1. Specialists' activity is recorded in post-1 p.m. files, where
there is one record for each quote and trade per post and symbol as
they occur during the extended trading session.
2. Specialists are not subject to the post-1 p.m. quote-spread
parameters until after 1:10 p.m. This allows the specialists time to do
any primary market runoff business that is necessary.
3. The specialist's quote prices in effect ten minutes past the
beginning of the Extended Trading Session must be within the defined
number of trading fractions of the primary closing quote.
A. If the primary exchange is the NYSE, and the primary bid price
at closing on that day for the stock is under $1.00, the trading
fraction is \1/16\; if the price is at or over $1.00, it is \1/8\.
B. If the primary exchange is the Amex, and the primary bid price
at closing on that day for the stock is under $10.00, the trading
fraction is \1/16\; if the price is at or over $10.00, it is \1/8\.
4. The specialist's quote sizes in effect ten minutes past the
beginning of the Extended Trading Session must be 500 shares or more if
the primary bid price is less than $50.00, or 200 shares if the primary
bid price is $50.00 or more.
5. The specialist's quote-spread parameters must apply to a minimum
of 25% of the stocks traded at the post to receive full credit on the
evaluation (i.e., 10 points).
6. If the specialist executes any trades after ten minutes of the
Extended Trading Session and they are priced within the allowable
trading fraction of the primary closing quote price, the quantity of
the trade is deducted from the required quote size.
7. If the specialist changes his (her) quote at any time on the
same day for that symbol while the required quote size is not zero, his
(her) quote price must be within the allowable trading fraction from
the primary closing bid price and his (her) quote size must be at least
the remaining quote size required (as adjusted for trades, as explained
in item 6). If either the price or size on either side of the quote for
that symbol does not comply, the symbol is not counted as adhering to
the parameters for that day.
8. If, at the end of the Extended Trading Session, the required
quote size is still not zero (after adjusted for trades) for bid and/or
ask, but the specialist has complied with the quote price and size
guidelines on both bid and ask, the symbol is counted as one that
adhered to the parameters.
This category will count for 10% of the overall score. The
parameter ranges and corresponding points for Post-1 P.M. Parameters
are listed below:
------------------------------------------------------------------------
Percent of book parameter range Points
------------------------------------------------------------------------
25+........................................................... 10
22-24.999...................................................... 9
19-21.999...................................................... 8
16-18.999...................................................... 7
13-15.999...................................................... 6
10-12.999...................................................... 5
7-9.999........................................................ 4
4-6.999........................................................ 3
0-3.999........................................................ 0
------------------------------------------------------------------------
e. Quote Performance. This category, on which 10% of each
specialist evaluation is based, consists of two subcategories: (a)
Equal or Better Quote Performance; and (b) Better Quote Performance.
``Equal or Better Quote Performance'' calculates for each issue
traded, the percentage of time in which a specialist's bid or offer is
equal to or better than the primary market quote with a 500-share
market size or the primary market size, whichever is less, with a 200-
share minimum. This category will count for 5% of the overall score.
The parameter ranges and corresponding points for Equal or Better Quote
Performance are listed below:
------------------------------------------------------------------------
Percent of time parameter range Points
------------------------------------------------------------------------
40+............................................................ 10
36-39.......................................................... 9
32-35.......................................................... 8
28-31.......................................................... 7
24-27.......................................................... 6
20-23.......................................................... 5
16-19.......................................................... 4
12-15.......................................................... 3
8-11........................................................... 2
4-7............................................................ 1
0-3............................................................ 0
------------------------------------------------------------------------
``Better Quote Performance'' calculates for each issue traded, the
percentage of time in which a specialist's bid or offer, is better than
the primary quote with a 500-share market size or the primary market
size, whichever is less, with a 200-share minimum. This category will
count for 5% of the overall score. The parameter ranges and
corresponding points for Better Quote Performance are listed below:
------------------------------------------------------------------------
Percent of time parameter range Points
------------------------------------------------------------------------
4+............................................................. 10
3--3.999....................................................... 9
2--2.999....................................................... 8
1--1.999....................................................... 7
0--0.999....................................................... 0
------------------------------------------------------------------------
The Exchange notes that the pilot program only modifies the
performance criteria of PSE Rule 5.37(a). Consequently, during the
pilot the EAC will evaluate the performance of specialists in
accordance with the standards and procedures found in PSE Rule 5.37.
During the nine month pilot, the Exchange will re-program its computer
program so that the following three criteria are based upon the
national best bid and offer instead of the primary market bid and
offer: Trading Between the Quote, Book Display Time, and Quote
Performance.\4\ Also, during the pilot, the Exchange will establish an
overall passing score for the performance evaluation as well as
individual passing scores for each criterion. The exchange will file a
proposed rule change with the Commission pursuant to Rule 19b-4 of
[[Page 44379]]
the Act that will include these changes by May 1, 1997.
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\4\ See supra note 1.
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2. Statutory Basis
The proposed rule change is consistent with Section 6(b)(5) of the
Act \5\ in that it is designed to prevent fraudulent and manipulative
acts and practices and to perfect the mechanism of a free and open
market.
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\5\ 15 U.S.C. 78f(b)(5).
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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 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 the 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 at the
Commission's Public Reference Section, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Copies of such filing will also be available
for inspection and copying at the principal office of the Exchange. All
submissions should refer to File No. SR-PSE-96-28 and should be
submitted by September 18, 1996.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-21891 Filed 8-27-96; 8:45 am]
BILLING CODE 8010-01-M
