[Federal Register Volume 62, Number 160 (Tuesday, August 19, 1997)]
[Notices]
[Pages 44159-44160]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-21908]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38927; File No. SR-PCX-97-21]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Pacific Exchange, Inc. Relating to the Suspension of its 
Automatic Execution System (``Auto-Ex'') During Unusual Market 
Conditions

August 12, 1997.
    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 June 4, 1997, the Pacific Exchange, Inc. (``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.\3\ The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ This notice includes Amendment No. 1 to the proposed rule 
change, supplementing the Statement of Purpose in Section II, which 
was filed with the Commission on August 8, 1997. See letter from 
Michael D. Pierson, Office of Regulatory Policy, Pacific Exchange, 
to Mandy S. Cohen, Office of Market Supervision, Division of Market 
Regulation, Commission (dated August 7, 1997).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange is proposing to adopt new rules on the suspension of 
its Automatic Execution System (``Auto-Ex'') for options trading during 
unusual market conditions, and the maximum bid-ask spread differentials 
that are permitted during unusual market conditions. The text of the 
proposed rule change is available at the Exchange.

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 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

Statement of Purpose
    The Exchange is proposing to modify its Rule 6.28 (``Unusual Market 
Conditions'') to address situations involving system failures, ranging 
from ``frozen screens'' in an issue (where quote changes are entered 
into the system, but such changes are not reflected in the market being 
disseminated) to a floor-wide system malfunction of the POETS system 
(where all screen displays on the floor fail).\4\ Rule 6.28 currently 
provides that whenever an Options Floor Official determines that ``an 
unusual condition or circumstance'' exists, because of an influx of 
orders or other unusual conditions or circumstances, and the interests 
of maintaining a fair and orderly market so require, such official may 
declare a ``fast market'' in one or more classes of option 
contracts.\5\ The proposed amendments are designed to provide 
additional safeguards and procedures to deal with such situations.
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    \4\ ``POETS'' is an acronym for the Pacific Options Exchange 
Trading System.
    \5\ See also PCX Options Floor Procedure Advice G-9 (``Fast 
Market Procedures'').
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    First, the Exchange is proposing to modify subsection (a) of Rule 
6.28 to require the agreement of two Options Floor Officials before a 
``fast market'' can be declared. Second, the Exchange is proposing to 
add a new subsection (b)(7), to allow the Options Floor Officials who 
have declared a fast market to suspend the Auto-Ex if, because of an 
influx of orders or other unusual market conditions or circumstances, 
they determine that such action is appropriate in maintaining a fair 
and orderly market. The initial suspension of Auto-Ex is limited to 
five minutes and a Floor Governor must be notified immediately. 
Suspension of

[[Page 44160]]

Auto-Ex may be continued, or its operation resumed for a longer period 
following determination by two Options Floor Officials and one Floor 
Governor (or a senior operations officer if no Floor Governor is 
available) determine that such action is appropriate. In the event that 
the three officials do not agree, a \2/3\ majority prevails.\6\ Upon 
suspension of the Auto-Ex system, all market and marketable limit 
orders thereafter entered through the Exchange's Member Firm Interface 
will be routed to a booth on the Floor designated by the firm that 
entered the order. The order can then be taken to the crowd manually 
and represented by a floor broker.
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    \6\ Cf. CBOE Rule 6.6(e).
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    The Exchange is also proposing to amend Rule 6.37 (``Obligations of 
Market Makers'') by adding a new subsection (b)(4), which provides that 
if the interest of maintaining a fair and orderly market so requires, 
two Floor Officials may declare a fast market and allow Market Makers 
in an issue to make bids and offers with spread differentials of up to 
two times, or in exceptional circumstances, up to three times, the 
legal limits permitted under Rule 6.37(b)(1). The rule further directs 
such Floor Officials to consider the following factors in making the 
determination to allow wider markets,: (A) whether there is an extreme 
influx of option orders due to pending news, a news announcement or 
other special events; (B) whether there is an imbalance of option 
orders in one series or on one side of the market; (C) whether the 
underlying security is trading outside the bid or offer in such 
security then being disseminated; (D) whether Floor Members receive no 
response to orders placed to buy or sell the underlying security; and 
(E) whether a vendor quote feed for POETS is clearly stale or 
unreliable.
    The Exchange is also proposing to amend its Rule 6.87 (``Automatic 
Execution System''), by adding three new subsections relating to 
suspensions of Auto-Ex. Whenever a POETS system or vendor quote feed 
malfunction affects the Exchange's ability to disseminate or update 
market quotes on a floor-wide basis, the senior person then in charge 
of the Exchange's Control Room will be able to halt Auto-Ex on a floor-
wide basis, upon declaration of a ``fast market'' by two Floor 
Officials.\7\
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    \7\ Proposed subsection (d)(1), Floor-Wide POETS System 
Malfunction.
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    Similarly, if a POETS malfunction occurs and Market Makers are 
physically unable to update their quotations in an issue or issues at 
the same trading post or trading quad, two Floor Officials may declare 
a ``fast market'' and direct the order book official (``OBO'') to turn 
off the Auto-Ex system in only the affected issue or issues.\8\ Under 
either scenario, once the system malfunction has been corrected that 
the market quotes have been updated, two Floor Officials (or the senior 
person then in charge of the Control Room in the event of a floor-wide 
malfunction) may re-start Auto-Ex.\9\
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    \8\ Proposed subsection (d)(2), Non-Floor-Wide POETS System 
Malfunction. Proposed subsection (d)(3) (``Other Unusual 
Conditions'') further provides that if there are other unusual 
market conditions not involving a POETS System malfunction, two 
Floor Officials may suspend Auto-EX in accordance with Rule 6.28(b).
    \9\ Cf. CBOE Rule 6.8, Interpretation and Policy .03.
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Statutory Basis
    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 
promote just and equitable principles of trade and to protect investors 
and the public interest.
Relation to Rule of Other Self-Regulatory Organizations
    The proposed rule change is based, in part, on Rules 6.6(e) and 
6.8.03 of the Rules of the Chicago Board Options Exchange (``CBOE'').

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 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 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 in the 
Commission's Public Reference Room, 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-PCX-97-21 and should be submitted by 
September 9, 1997.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-21908 Filed 8-18-97; 8:45 am]
BILLING CODE 8010-01-M