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[Federal Register: July 22, 1999 (Volume 64, Number 140)]

[Notices]

[Page 39548-39550]

From the Federal Register Online via GPO Access [wais.access.gpo.gov]

[DOCID:fr22jy99-114]

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'') filedwith 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

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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.

\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 filedwith 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.

1. 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.

2. 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.

   1. 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\

      \6\ PCX Rule 6.87 has been renumbered and reorganized under SR- PCS-99-23, filedwith the Commission on June 14, 1999. See Securities Exchange Act Release No. 41582 (June 30, 1999).

      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\

      \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.''

      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

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      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.

      \10\ 15 U.S.C. 78f(b).

      \11\ 15 U.S.C. 78f(b)(5).

   2. 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.

   3. 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.

3. 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.

4. 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 filedwith 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\

   \12\ 17 CFR 200.30-3(a)(12).

   Margaret H. McFarland, Deputy Secretary.

   [FR Doc. 99-18657 Filed7-22-99; 8:45 am]

   BILLING CODE 8010-01-M