Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”), and rule 19b-4 thereunder, notice is hereby given that on July 10, 2000, the Pacific Exchange, Inc. (“PCX” 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 PCX. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons.
17 CFR 240.19b-4.
I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change
The Exchange is proposing to adopt a new rule requiring options market makers who log on to the Exchange's automatic execution system for options (“Auto-Ex”) during an expiration month to remain on Auto-Ex, while in the trading crowd, until the close of business on the next expiration Friday. The text of the proposed rule change is set forth below. Additions are in italics; deletions are in brackets.
5231 Automatic Execution System
Rule 6.87
(a)-(d) No change
(e) Market Maker Requirements for Eligibility. Any Exchange Member who is registered as a Market Maker and who has obtained written authorization from a clearing member is eligible to participate on the Auto-Ex system, subject to the following conditions and requirements:
(1)-(3) No change.
(4) Log-on Requirement. A Market Maker who has been logged on to Auto-Ex in an option issue at any time during an expiration month must continue to be logged on to Auto-Ex in that issue whenever present in that trading crowd, until the close of business on the next Expiration Friday. A Market Maker who is limited to “closing only” transactions pursuant to PCX Rules or the requirements of that Market Maker's clearing firm will be exempt from this provision upon approval of two Floor Officials. [A Market Maker who has logged onto Auto-Ex at any time during a trading day must participate on the Auto-Ex system in that option issue whenever present in that trading crowd during that trading day.]
(f)-(j) No Change.
II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, 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 Exchange 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
Currently, options market makers (other than lead market Makers) at the PCX may log on or off of the Auto-Ex System at their discretion, with four exceptions. First, a market maker who has logged on to or off of Auto-Ex at any time during a trading day must participate on the Auto-Ex System in that option issue whenever present in the trading crowd during that trading day. Second, a market maker may be required to log on to Auto-Ex in an issue if two floor officials determine that there is inadequate Auto-Ex participation in that issue. Third, market makers may not log off of Auto-Ex during the first ten minutes of a fast market that has been declared pursuant to PCX Rule 6.28. Finally, market makers may log on to Auto-Ex only when present in person and they must log off of Auto-Ex upon leaving the trading crowd (unless their departure is for a brief interval). Lead Market Makers at the PCX are required to remain logged on to Auto-Ex throughout the trading day.
The Auto-Ex system, a feature of the PCX's Pacific Options Exchange Trading System (“POETS”), 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 public limit order book (“Book”) priority in all options. If Auto-Ex determines that the Book price is at or better than the market quote, the Auto-Ex order is executed against the Book. Automatic executions through Auto-Ex are currently available for public customer orders between 20 and 50 contracts or less in all series of options traded on PCX's options floor. See generally Securities Exchange Act Release Nos. 27633 (January 18, 1990), 55 FR 2466 (January 24, 1990); 32908 (September 15, 1993), 58 FR 49076 (September 21, 1993); and 40598 (October 23, 1998), 63 FR 58439 (October 30, 1998).
PCX Rule 6.87(e)(4).
PCX Rule 6.87(e)(6). The Exchange represents that the purpose of proposed rule 6.87 is to prevent circumvention of log-on requirements by market makers who voluntarily log on to the Auto-Ex System, not those required—under PCX Rule 6.87(e)(6) or otherwise—to log on to Auto-Ex. Telephone conversation between Hassan Abedi, Attorney, PCX, and Steven Johnston, Special Counsel, Division of Market Regulation, Commission (July 27, 2000).
PCX Rule 6.87(e)(5).
PCX Rule 6.87(e)(3).
PCX Rule 6.82(c)(7).
The Exchange now proposes to amend rule 6.87(e)(4). As indicated above, the rule presently requires a market maker who has logged on to Auto-Ex for an option issue at any time during a trading day to participate in the Auto-Ex System in that option whenever present in the trading crowd during that day. The Exchange is now proposing to amend Rule 6.87(e)(4) to instead require a market maker who has logged on to Auto-Ex in an option issue at any time during an expiration month to remain logged on to Auto-Ex in that issue whenever present in that trading crowd, until the close of business on the next expiration Friday. It further provides that a market maker who is limited to “closing only” transactions pursuant to PCX Rules, or the requirements of the market maker's clearing firm, would be exempt from this provision upon approval of two floor officials.
The Exchange notes that under the current rule, a market maker must obtain written authorization from a clearing member before being permitted to participate on Auto-Ex. PCX Rule 6.87(e).
The purpose of the proposal is to assure that market makers who avail themselves of the benefits of Auto-Ex during favorable market conditions will also provide the necessary liquidity for inbound Auto-Ex orders when market conditions are unfavorable. The Exchange notes that the Commission has approved a similar rule on behalf of another options exchange. The Exchange believes that implementation of this rule will help to further the important objective of assuring fair and orderly markets at the PCX.
This requirement is currently codified in CBOE Rule 8.16(b). See Securities Exchange Act Release No. 25995 (August 15, 1988), 53 FR 31781 (August 19, 1988).
2. Statutory Basis
The Exchange represents that the proposed rule change is consistent with Section 6(b) of the Act, in general, and furthers the objectives of Section 6(b)(5), in particular, in that it is designed to promote just and equitable principles of trade and to protect investors and the public interest, by requiring market makers to remain on the floor if logged on to the Auto-Ex System, thereby providing adequate liquidity.
15 U.S.C. 78f(b)(5).
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
The Exchange has neither solicited nor received written comments on the proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
The proposed rule change has been filed by the Exchange as a non-controversial rule change pursuant to Section 19(b)(3)(A) of the Act and subparagraph (f)(6) of Rule 19b-4 thereunder, and has become effective upon filing because it: (1) does not significantly affect the protection of investors or the public interest; (2) does not impose any significant burden on competition; and (3) does not become operative for 30 days from the date on which it was filed; and the Exchange provided the Commission written notice of its intent to file the proposed rule change at least five business days prior to the filing date of the proposed rule change. At any time within 60 days of the filing of such proposed rule change, the Commission may summarily abrogate such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the propose of the Act.
17 CFR 240.19b-4(f)(6).
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposal is consistent with the Act. Persons making written submissions should file six copies thereof with the Secretary, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549-0609. 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 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 Phlx. All submissions should refer to File No. SR-PCX-00-20 and should be submitted by September 13, 2000.
For the Commission, by the Division of Market Regulation, pursuant to delegated authority.
17 CFR 240.30-3(a)(12).
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-21434 Filed 8-22-00; 8:45 am]
BILLING CODE 8010-01-M