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 May 30, 2002, the Pacific Exchange, Inc. (“PCX” or “Exchange”) filed with the Securities and Exchange Commission (“Commission”) the proposed rule change as described in Items I and II below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. For the reasons discussed below, the Commission is granting accelerated approval of the proposed rule change.
17 CFR 240.19b-4.
I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change
The PCX is proposing to amend its rules relating to the firm quote size applicable to disseminated market quotes for customer orders entered on the Exchange. Specifically, the Exchange proposes to make a systems change to allow the true size of customer orders in the limit order book to be disseminated through the Options Price Reporting Authority (“OPRA”) as the PCX firm quote size whenever such orders represent the best bid or offer on the Exchange.
The text of the proposed rule change appears below. New text is in italics; deletions are in brackets.
PACIFIC EXCHANGE, INC.
RULES OF THE BOARD OF GOVERNORS
Text of the Proposed Rule Change:
¶ 5221 Firm Quotes
Rule 6.86(a)-(b)—No change.
(c) Obligations of Responsible Brokers or Dealers
(1) Customer Orders. Except as provided in subsection (d), below, each Responsible Broker or Dealer is obligated to execute any customer order in a listed option series in an amount up to the quotation size established by rule and periodically published by the Exchange. The minimum quotation size established by rule and published by the Exchange for customer orders will be one contract [20 contracts] for each option series.
(A) Dissemination of the Size of Orders in the Limit Order Book. If one or more orders in the limit order book represent the best bid or offer on the Exchange, then the Exchange will disseminate via OPRA the aggregate size of such order or orders as the firm quote size for which the Responsible Broker or Dealer will be firm. In such circumstances:
(i) If one or more additional limit orders at the same price to buy or sell the same series of option contracts are entered into the limit order book for representation on the Exchange, then the firm quote size then being disseminated in that series will be automatically increased to reflect the adjusted size of such orders in the limit order book at that price; and
(ii) If the number of contacts in the limit order book at the same price to buy or sell the same series of option contracts has been reduced because of an execution or cancellation of one or more orders in the limit order book, then the firm quote size then being disseminated in that series will be automatically decreased to reflect the adjusted size of such orders in the limit order book at that price.
II. 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 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
The Exchange currently complies with Rule 11Ac1-1 under the Act (“Quote Rule”), by having established by rule and periodically publishing the quotation size for which each Responsible Broker or Dealer on the Exchange is obligated to execute an order to buy or sell an option series that is a reported security at its published bid or offer. Specifically, the minimum quotation size established by rule and periodically published by the Exchange for “customer” orders is currently twenty contracts for each option series. In addition, the minimum quotation size established by rule and periodically published by the Exchange for “broker-dealer orders” is currently one contract for each option series.
17 CFR 240.11Ac1-1. See generally Securities Exchange Act Release No. 44145 (April 2, 2001), 66 FR 18662 (April 10, 2001) (order approving rule changes relating to the application of the Quote Rule to options trading).
The Exchange proposes to amend its PCX Rule 6.86(c)(1), which relates to the obligations of Responsible Brokers or Dealers with respect to customer orders. PCX Rule 6.86(c)(1) currently provides:
PCX Rule 6.86(a)(2) provides, in part, that “the term ‘Responsible Broker or Dealer’ means that with respect to any bid or offer for any listed option made available by the Exchange to quotation vendors, the Lead Market Maker (“LLM”) and any registered Market Makers constituting the trading crowd in such option series will collectively be the Responsible Broker or Dealer to the extent of the aggregate quotation size specified.”
“Except as provided in subsection (d), * * * each Responsible Broker or Dealer is obligated to execute any customer order in a listed option series in an amount up to the quotation size established by rule and periodically published by the Exchange. The minimum quotation size established by rule and published by the Exchange for customer orders will be 20 contracts for each option series.”
The Exchange proposes to amend the second sentence of this rule, so that it would state: “The minimum quotation size established by rule and published by the Exchange for customer orders will be one contract for each option series.”
The Exchange notes that its LMMs are currently obligated to “[h]onor guaranteed markets, including markets required by PCX Rule 6.86, Firm Quotes, and any better markets pledged during the allocation process.” Since all LMMs on the PCX have pledged during the allocation process to make markets for at least twenty contracts (and in some cases more than twenty contracts), LMMs would continue to be required to disseminate, at a minimum, firm quotes for at least twenty contracts (in issues currently allocated to such LMMs), unless such pledges are rescinded. Accordingly, LMM quotes generally would be for at least twenty contracts or such other minimum number that the LMM has pledged to honor during the allocation process. The effect of the proposed rule change, however, is that if the Exchange is disseminating a quote on behalf of a customer order, and that order is for less than twenty contracts, the Exchange would no longer disseminate twenty contracts on behalf of that customer order, and instead, would disseminate the order's true size. Consequently, in such circumstances, the Responsible Broker or Dealer will no longer be required buy or sell option contracts at the price established by a customer order for less than twenty contracts.
See PCX Rule 6.82(c)(2).
The Exchange also notes that with respect to option issues to be allocated in the future, LMMs may commit to making minimum size markets in an amount other than twenty contracts, but these pledges will apply only if the Options Allocations Committee accepts them.
For example, assume the LMM is disseminating a market of 2 bid, 2.20 asked, in a particular option series for which the guaranteed size is twenty contracts. Then assume that an incoming customer order to buy one contract for 2.10 is entered on the Exchange, making the new best bid and offer on the Exchange 2.10 bid, 2.20 asked. Under the current rule, the Exchange disseminates twenty contracts as the size of the 2.10 bid. If a market order to sell twenty contracts is then entered in that series, the Responsible Broker or Dealer (generally, the LMMs) is obligated to buy the balance of 19 contracts at a price of 2.10. The risk from these types of situations discourages LMMs from increasing their guaranteed sizes (whether for Auto-Ex or Firm Quote Rule purposes) because the greater their guaranteed sizes, the greater the potential liability. Under the proposed rule change, the Exchange will disseminate the true size of the customer order for one contract and the Responsible Broker or Dealer will no longer be obligated to “fill in” the difference between one contract and the guaranteed size.
The Exchange is also proposing to adopt new subsection (A) to Rule 6.86(c)(1), relating to the dissemination of the size of orders in the Exchange's limit order book. Currently, if the best bid or offer on the Exchange is represented by one or more orders in the limit order book, and the aggregate size of such order or orders is less than the minimum customer firm quote size (i.e., twenty contracts), then the Exchange disseminates the minimum customer firm quote size via OPRA as its firm quote. Under the proposal, if one or more orders in the limit order book represent the best bid or offer on the Exchange, then the Exchange would disseminate via OPRA the aggregate size of such order or orders as the firm quote size for which the Responsible Broker or Dealer would be firm.
The Exchange notes that pursuant to PCX Rule 6.75(a)-(b), orders in the limit order book have priority over all other bids or offers at the same price then being represented at the trading post. Accordingly, such orders in the limit order book must be filled in their entirety before other bids or offers at the same price are filled.
In that regard, the Exchange proposes to increase or decrease the firm quote size in such circumstances as follows: First, if one or more additional limit orders at the same price to buy or sell the same series of option contracts are entered into the limit order book for representation on the Exchange, then the firm quote size then being disseminated in that series would be automatically increased to reflect the adjusted size of such orders in the limit order book at that price. Second, if the number of contacts in the limit order book at the same price to buy or sell the same series of option contracts has been reduced because of an execution or cancellation of one or more orders in the limit order book, then the firm quote size then being disseminated in that series would be automatically decreased to reflect the adjusted size of such orders in the limit order book at that price.
The Exchange believes that the proposed rule change would encourage deeper and more liquid markets on the Exchange. Specifically, the proposed rule change would reduce the risk that LMMs and Market Makers would be obligated to buy or sell option contracts at prices established by other investors, and, therefore, they would face less liability when increasing their guaranteed Auto-Ex or firm quote sizes.
2. Statutory Basis
The Exchange believes 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) of the Act, in particular, in that it is designed to promote just and equitable principles of trade, remove impediments to and perfect the mechanism of a free and open market and a national market system, foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in securities, and, in general, protect investors and the public interest.
15 U.S.C. 78f(b)(5).
B. Self-Regulatory Organization's Statement on Burden on Competition
The PCX does not believe that the proposed rule change would 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
No written comments were solicited or received with respect to the proposed rule change.
III. 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 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 in the Commission's Public Reference Room. Copies of the filing will also be available for inspection and copying at the principal offices of the Exchange. All submissions should refer to File No. SR-PCX-2002-30 and should be submitted by July 3, 2002.
IV. Commission Findings and Order Granting Accelerated Approval of Proposed Rule Change
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. In particular, the Commission believes the proposed rule change is consistent with the section 6(b)(5) of the Act requirement that the rules of an exchange be designed to facilitate transactions in securities, promote just and equitable principles of trade, remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest.
In approving this proposal, the Commission has considered the proposed rule's impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
15 U.S.C. 78f(b)(5).
The Commission notes that the proposal to change the firm quote size for customer orders from twenty contracts to one contract for each option series is consistent with Rule 11Ac1-1(d) under the Act. The Commission also believes that the Exchange's proposal to disseminate the actual size of customer limit orders whenever such orders are the best bid or offer on the Exchange should help to increase transparency by providing more accurate quotation information, which is consistent with section 11A of the Act. Finally, the Commission understands that the proposed rule change is a step towards implementing the Exchange's plan to disseminate quotations with actual size on a floor-wide basis in the near future, which should further increase transparency and enhance the quality of PCX's quotation information that is disseminated to the public.
17 CFR 240.11Ac1-1(d).
15 U.S.C. 78k-1. The Commission notes that in Section 11A(a)(1)(C)(iii) of the Act, Congress found that it is in the public interest and appropriate for the protection of investors and the maintenance of fair and orderly markets to assure the availability of information with respect to quotations for securities. 15 U.S.C. 78k-1(a)(1)(C)(iii).
The Commission finds good cause, consistent with section 19(b)(2) of the Act, to approve the proposed rule change prior to the thirtieth day after the date of publication of the notice of filing thereof in the Federal Register. The Commission notes that the PCX has represented that it is technologically capable of implementing the proposal immediately upon approval from the Commission. The Commission believes that accelerated approval of this proposal should permit the PCX to immediately begin to disseminate quotes with actual size when customer limit orders represent the best price on the Exchange, which should reflect more accurate trading interest. Accordingly, the Commission finds that there is good cause, consistent with section 19(b)(2) of the Act, to approve the proposal on an accelerated basis.
Id.
It is therefore ordered, pursuant to section 19(b)(2) of the Act, that the proposed rule change (SR-PCX-2002-30) is approved on an accelerated basis.
Id.
For the Commission, by the Division of Market Regulation, pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-14717 Filed 6-11-02; 8:45 am]
BILLING CODE 8010-01-P