regulatory organizations; proposed rule changes: Pacific Exchange, Inc.,
[Federal Register: August 3, 1998 (Volume 63, Number 148)]
[Notices]
[Page 41312-41314]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr03au98-120]
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40263; File No. SR-PCX-98-27]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change and Amendment No. 1 Thereto by the Pacific Exchange, Inc. Relating to the Automatic Execution of Option Orders
July 24, 1998.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act''),\1\ notice is hereby given that on June 12, 1998, the Pacific Exchange, Inc. (``PCX'' or ``Exchange'') filedwith the Securities Exchange Commission (``Commission'') the proposed rule
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change as described in Items I, II, and III below, which Items have been prepared by the PCX. On July 14, 1998, the Exchange submitted to the Commission Amendment No. 1 to the proposed rule change.\2\ The Commission is publishing this notice to solicit comments on the proposed rule change, as amended, from interested persons.
\1\ U.S.C. 78s(b)(1).
\2\ In Amendment No. 1 the Exchange altered the proposed rule language to clarify that exceptions to the rule would be applied on an option issue by option issue basis. See Letter from Michael D. Pierson, Senior Attorney, Regulatory Policy, to Ken Rosen, Attorney, Division of Market Supervision, Commission, dated July 13, 1998 (``Amendment No. 1'').
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Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change
The Exchange is proposing to amend PCX Rule 6.87 (``Automatic Execution System'') to permit automatic executions of option orders on the Exchange at prices reflecting the National Best Bid or Offer (``NBBO''). The text of the proposed rule change is available at the principal office of the PCX and at the Commission.
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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 IV below. The PCX has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements.
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Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
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Purpose
Orders entered via the Exchange's Member Firm Interface (``MFI'') are delivered to one of three destinations: (a) to the Exchange's Automatic Execution System for options trading (``Auto-Ex''), where they are automatically executed at the disseminated bid or offering price; (b) to Auto-Book, which maintains non-marketable limit orders based on limit price and time of receipt; or (c) to a Member Firm's default destination, a particular firm booth or remote entry site, if the order fails to meet the eligibility criteria necessary for using either Auto-Ex or Auto-Book or if the Member Firm requests such default for its orders.\3\ Only non-broker/dealer customer orders for up to ten option contracts (or 20 option contracts, depending on the option issue) are eligible to be executed on Auto-Ex.\4\
\3\ See Securities Exchange Act Release No. 27633 (January 18, 1990) 55 FR 2466 (January 24, 1990); Securities Exchange Act Release No. 39970 (May 7, 1998) 63 FR 26662 (May 13, 1998).
\4\ See PCX Rule 6.87.
The Exchange is now proposing to adopt new PCX Rule 6.87(d), which would provide that the Exchange's Options Floor Trading Committee (``OFTC'') may designate electronic orders in an option issue to receive automatic executions at prices reflecting the NBBO, provided that the OFTC may designate, for an option issue, that an order will default for manual representation by a floor broker in the trading crowd if (1) the order would be executed at a price that is more than one trading increment away from the PCX disseminated market price; or (2) the NBBO is crossed or locked.
For example, under the proposal, if the PCX market in an option series is 6 bid, 6\1/2\ asked, and if another market is disseminating a market in the same series of 6\3/8\ bid, 6\7/8\ asked--so that the NBBO is 6\3/8\ bid, 6\1/2\ asked, then, in the absence of the OFTC designating the orders for manual representation, the PCX will automatically execute customer sell orders at 6\3/8\ even though the PCX disseminated bid is only 6, and will automatically execute customer buy orders at 6\1/2\.
The proposal would also allow the OFTC to designate, for an option issue, that an order will default for manual representation by a floor broker in the trading crowd if the order would be executed at a price that is more than one trading increment away from the PCX market price.\6\ Should such a designation be made, for the example above, where the PCX bid is 6 and the competing market's bid is 6\3/8\, a customer sell order entered on the PCX would default for manual representation because 6\3/8\ is ore than one trading increment away from the PCX disseminated bid price of 6.\6\ But if the PCX bid is 6 and the competing market's bid is 6\1/8\, a customer sell order on the PCX would be executed at 6\1/8\ because 6\1/8\ is only one trading increment away from the PCX disseminated bid of 6.
\5\ The Exchange notes that the Chicago Board Options Exchange proposed a similar feature for its Retail Automatic Execution System (RAES), designated as the ``RAES Auto-Step-Up.'' See Securities Exchange Act Release No. 39992 (May 14, 1998) 63 FR 28019 (May 21, 1998); Securities Exchange Act Release No. 40096 (June 16, 1998) 63 FR 34209 (June 23, 1998) (approving feature).
\6\ See PCX Rule 6.72, which provides that bids and offers above $3 must be expressed in eights of one dollar (e.g., 3\1/8\) and bids and offers below $3 must be expressed in sixteenths of one dollar (e.g., 1\1/16\).
The proposal would also permit the OFTC to designate, for an option issue, that if the NBBO is crossed (e.g., 6\1/8\ bid, 6 asked) or locked (e.g., 6 bid, 6 asked), then customer orders to buy or sell the series would default for manual representation in the trading crowd. However, the Exchange is proposing to maintain the flexibility to provide for automatic executions on the Exchange when the NBBO is locked or crossed. Such action may be appropriate, for example, when there is a large influx of electronic orders and a fair and orderly market would be better served by a reduction in the number of orders that default to a firm booth for manual representation in the trading crowd. In such situations, public customers would receive very favorable prices on their orders.
The Exchange believes that implementation of the proposal will provide public investors with better prices on their orders, thus making the Exchange a more competitive marketplace to which order flow providers may send their option orders for execution. 2. Statutory Basis
The Exchange believes that the proposal is consistent with Section 6(b) of the Act, in general, and Section 6(b)(5), in particular, in that it is designed to facilitate transactions in securities; to protect investors and the public interest; to remove impediments to and perfect the mechanism of a free and open market and a national market system; and to promote just and equitable principles of trade.
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Self-Regulatory Organizations' 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.
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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.
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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
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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.
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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. 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-98-27 and should be submitted by August 24, 1998.
For the Commission, by the Division of Market Regulation, pursuant to delegated authority.\7\
\7\ 17 CFR 200.30-3(a)(12).
Margaret H. McFarland, Deputy Secretary.
[FR Doc. 98-20556Filed7-31-98; 8:45 am]
BILLING CODE 8010-01-M
