[Federal Register Volume 62, Number 67 (Tuesday, April 8, 1997)]
[Notices]
[Pages 16886-16887]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-8877]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38462; File No. SR-PSE-96-45]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change by the Pacific Stock Exchange Incorporated Relating to the 
Exchange's Lead Market Maker Options Book Pilot Program

April 1, 1997.

I. Introduction

    On December 10, 1996, the Pacific Stock Exchange Incorporated 
(``PSE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 
thereunder\2\ a proposal to expand the scope of its Lead Market Maker 
(``LMM'') Book Pilot Program to allow additional LMMs to participate 
and to allow a greater number of option issues to be eligible under the 
program. The proposal was published for comment in the Federal Register 
on February 19, 1997.\3\ No comments were received on the proposal. 
This order approves the Exchange's proposal.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. Sec. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 38273 (February 12, 
1997), 62 FR 7489.
---------------------------------------------------------------------------

II. Description of the Proposal

    On October 11, 1996, the Commission approved an Exchange proposal 
to adopt a one-year pilot program under which some LMMs are permitted 
to manage the options public limit order book (``Book'') in certain 
designated issues.\4\ Under the pilot, the approved LMMs manage the 
Book function, take responsibility for trading disputes and errors, set 
rates for Book execution, and pay the Exchange a fee for systems and 
services.\5\ The program allows LMMs to have greater control over their 
operations on the Exchange floor by allowing them, among other things, 
to set their own rates for execution services provided to customers.
---------------------------------------------------------------------------

    \4\ See Securities Exchange Act Release No. 37810 (October 11, 
1996), 61 FR 54481 (``Pilot Approval Order'').
    \5\ More specifically, under the rule changes approved by the 
Commission, LMMs may perform all functions of the Order Book 
Official (``OBO'') in designated issues pursuant to Rules 6.51 
through 6.59. In that regard, the Exchange will allow the LMM to 
utilize Exchange personnel to assist the LMM in performing the OBO 
function, and the Exchange will charge the LMM a reasonable fee for 
such use of Exchange personnel. If the program is made permanent, 
LMMs would be responsible for hiring and maintaining their own 
employees, but the Exchange would provide employees to assist LMMs 
when necessary due to market conditions. In all cases, however, 
employees working in the Book operation will be subject to all 
rules, policies, and procedures established by the Exchange. With 
regard to their duties as market makers, LMMs would be required to 
perform all obligations provided in Rules 6.35 through 6.40 and 
6.82.
---------------------------------------------------------------------------

    Under the pilot as approved by the Commission, the program is 
limited to no more than three LMMs and no more than forty option 
symbols in total,\6\ during a one-year pilot phase. The PSE is 
proposing to expand the scope of the program to allow additional LMMs 
to participate, and to allow a greater number of option issues to be 
eligible under the Program. Specifically, the Exchange proposed an 
expansion of the Book Pilot Program to allow for up to nine LMMs and up 
to 150 options symbols.
---------------------------------------------------------------------------

    \6\ Each option issue typically has only one symbol associated 
with it, unless LEAPs are traded on that issue, in which case there 
usually would be two additional symbols related to the issue, or 
unless a contract adjustment is necessary due, for example, to a 
merger or stock split, in which case one additional symbol usually 
would be added.
---------------------------------------------------------------------------

    The LMMs who participate during the pilot phase are selected by the 
Options Floor Trading Committee based on certain designated factors.\7\ 
Approved LMMs must maintain ``minimum net capital,'' as provided in 
Rule 15c3-1 under the Act,\8\ and also must maintain a cash or liquid 
asset position of at least $500,000, plus $25,000 for each issue over 
five issues for which they perform the function of an OBO. Only 
multiply-traded option issues are eligible during the pilot phase.
---------------------------------------------------------------------------

    \7\ See Pilot Approval Order, supra note 4.
    \8\ 17 CFR 240.15c3-1.
---------------------------------------------------------------------------

III. Discussion

    After careful consideration, the Commission finds that the 
Exchange's proposal to expand the Book Pilot Program is consistent with 
the requirements of the Act and the rules and regulations thereunder 
applicable to a national securities exchange in that the proposal is 
consistent with Section 6(b) of the Act,\9\ in general, and Section 
6(b)(5),\10\ in particular, in that it is designed to facilitate 
transactions in securities, to promote just and equitable

[[Page 16887]]

principles of trade, and to protect investors and the public 
interest.\11\ Allowing the PSE to appoint up to six additional LMMs to 
the Book Pilot Program and increasing the number of options symbols 
available to the program by 110 constitutes a reasonable and limited 
expansion of the Book Pilot Program. The expansion should provide the 
Exchange with sufficient experience administering the pilot in order to 
better determine whether the Book Pilot Program should be made 
permanent upon its scheduled expiration on October 31, 1997.\12\
---------------------------------------------------------------------------

    \9\ 15 U.S.C. Sec. 78f(b).
    \10\ 15 U.S.C. Sec. 78f(b)(5).
    \11\ In approving the rule change, the Commission has considered 
the proposed rule changes' impact on efficiency, competition, and 
capital formation. 15 U.S.C. Sec. 78c(f).
    \12\ The PSE has represented that it has experienced no 
operational problems and received no complaints regarding the 
operation of the Book Pilot Program. Telephone conversation between 
Janet W. Russell-Hunter, Special Counsel, Office of Market 
Supervision, Division of Market Regulation, SEC, and Michael D. 
Pierson, Senior Attorney, Regulatory Policy, PSE, April 1, 1997.
---------------------------------------------------------------------------

    As noted in the Pilot Approval Order, before the Book Pilot Program 
can be approved on a permanent basis, or further extended, the Exchange 
must provide the Commission, within 6 months prior to its expiration, 
with a report on the operation of the Book Pilot Program. Specifically, 
the PSE must submit an updated pilot program report by April 1997 that 
addresses: (1) Whether there have been any complaints regarding the 
operation of the pilot; (2) whether the PSE has taken any disciplinary 
or performance action against any member due to the operation of the 
pilot; (3) whether the PSE has reassigned any options issues traded 
pursuant to the pilot; and (4) the impact of the pilot on the bid/ask 
spreads, depth and continuity in PSE options markets.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\13\ that the proposed rule change (File No. SR-PSE-96-45), is 
approved.
---------------------------------------------------------------------------

    \13\ 15 U.S.C. 78s(b)(2) (1988).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
---------------------------------------------------------------------------

    \14\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-8877 Filed 4-7-97; 8:45 am]
BILLING CODE 8010-01-M