[Federal Register Volume 63, Number 122 (Thursday, June 25, 1998)]
[Notices]
[Pages 34676-34677]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-16952]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40097; File No. SR-PCX-98-04]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change and Notice of Filing and Order Granting Accelerated Approval of 
Amendment No. 1 Thereto by the Pacific Exchange, Inc. Relating to the 
Identification of Broker-Dealer Orders on the Options Floor

June 17, 1998.

I. Introduction

    On January 23, 1998, the Pacific Exchange, Inc. (``PCX'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ proposed rule changes to amend PCX Rule 6.66(c), Rule 
6.2, and Rule 6.77 to require the broker-dealer status of an order to 
be identified by public outcry to the trading crowd prior to execution, 
regardless of whether the order is to be executed at the trading 
crowd's dissemiated bid or offering price, and to add certain 
violations of Rule 6.66(c) as amended to the list of those violations 
that may cause a transaction to be nullified or adjusted. Notice of the 
proposal was published for comment and appeared in the Federal Register 
on February 24, 1998.\3\ Not comment letters were received on the 
proposal. On June 1, 1998, the PCX filed an amendment to the proposed 
rule change (``Amendment No. 1'').\4\ This order approves the 
Exchange's proposal. In addition, the Commission hereby publishes 
notice to solicit comments from interested persons on Amendment No. 1 
on the proposal and approves that amendment to an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Exchange Act Release No. 39649 (February 11, 1998), 63 
FR 9276.
    \4\ Letter from Michael D. Pierson, Senior Attorney, Regulatory 
Policy, PCX to Ann L. Vlcek, Division of Market Regulation, 
Commission, dated June 1, 1998.
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II. Description of the Proposal

    PCX is proposing to amend its rules on the identification of 
broker-dealer orders by requiring that, if an order is for an account 
in which a broker-dealer has an interest, the broker-dealer status of 
the order must be disclosed to the trading crowd prior to execution, 
regardless of whether the order is to be executed at the trading 
crowd's disseminated bid or offering price.
    On July 21, 1994, the Commission approved an Exchange proposal to 
adopt new Rule 6.66(c), which currently states: ``Prior to executing an 
order in which a broker-dealer has an interest, a member must indicate 
by public outcry that such order is for a broker-dealer if the order is 
to be executed at the trading crowd's disseminated bid or offering 
price. This rule applies regardless of whether such broker-dealer is an 
Exchange member.'' \5\ The Exchange is now proposing to expand the 
scope of Rule 6.66(c) by striking the words ``if the order is to be 
executed at the trading crowd's disseminated bid or offering price'' 
from the text of Rule 6.66(c). Accordingly, under the amended rule, 
prior to executing an order in which a broker-dealer has an interest, a 
Floor Broker would be required to indicate by public outcry that the 
order is for a broker-dealer.
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    \5\ See Exchange Act Release No. 34426 (July 21, 1994), 59 FR 
38497 (July 28, 1994) (order approving SR-PSE-92-14).
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    The proposal is intended to facilitate transactions in option 
contracts by making the member in the trading crowd and the Order Book 
Official staff aware of the nature of orders being represented on the 
Floor, thereby assuring that broker-dealer orders will not be 
represented inadvertently as public customer orders. In that regard, 
the Exchange notes that only non-broker-dealer orders are entitled to 
be placed in the public limit order book and to be given priority over 
broker-dealer orders under certain circumstances.\6\ The Exchange 
further notes that only non-broker-dealers are entitled to receive a 
guaranteed minimum of 20 contracts at the disseminated bid or offering 
price.\7\
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    \6\ See PCX Rules 6.52(a) and 6.75.
    \7\ See PCX Rule 6.86(a).
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    The Exchange believes their proposal will make the existing rule 
less complicated and easier to follow by removing the distinction 
between broker-dealer orders to be executed at the bid or offering 
price, and those that are not. In that regard, the Exchange notes that 
there is no such distinction applicable to Market Maker orders, the 
identification of which is governed by Rule 6.66(b), which requires 
Floor Brokers to verbally identify Market Maker orders as such prior to 
their execution.\8\ Thus, removing the subject distinction from Rule 
6.66(c) will make the Exchange's option rule disclosure rules uniform, 
consistent, and easier to follow.
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    \8\ Rule 6.66(b) states: ``A Floor Broker holding an order for 
the account of a Market Maker shall verbally identify the order as 
such prior to consummating a transaction, and shall, after effecting 
the trade, supply the name of the Market Maker concerned, by public 
outcry, upon the request of any member or members in the trading 
crowd.''
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    The Exchange is also proposing to amend Rules 6.2 and 6.77 by 
adding certain violations of Rule 6.66(c) as amended to the list of 
those violations that may give rise to a circumstance in which two 
Floor Officials may nullify a transaction or adjust its terms.\9\ 
Specifically, such action could be taken if a Floor Broker failed to 
identify a broker-dealer order for 20 contracts or less. The reason for 
the limitation on the number of contracts is that, under Rule 6.86, 
only non-broker-dealer orders are eligible for a guaranteed execution 
of 20 contracts at the displayed price. If a Floor Broker does not 
disclosure that an order for 20 contracts or less is for a broker-
dealer (under the proposed rule), the members in the trading crowd may 
incorrectly assume that the order is for a public customer and provide 
an execution at the displayed price, without having an opportunity to 
update their quotes.\10\ The Exchange believes that adding this 
provision is simply a logical extension of the existing Commentary 
.05(v) to Rule 6.2, which permits two Floor Officials to nullify, or 
adjust the terms of, any order

[[Page 34677]]

executed in violation for Rule 6.86, which states that only non-broker-
dealer orders are eligible for a guarantee of up to 20 option contracts 
at the disseminated market price.
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    \9\ Specifically, the Exchange proposes to move Commentary .05 
from Rule 6.2 to Rule 6.77 and renumber it as Commentary .01. The 
existing subparagraphs will then be relettered and a new 
subparagraph, (f), added to address violations of Rule 6.66(c) as 
amended.
    \10\ See PCX Rule 6.37(d) and Rule 6.37, Commentary .05 (Market 
Makers are required to make a market for, at a minimum, one contract 
for broker-dealer orders; they must also lower their bids or raise 
their offers if they do not satisfy an order in its entirety).
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III. Discussion

    The Commission finds that the proposed rule changes are consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange and, in 
particular, with the requirements of Section 6(b)(5)\11\ in that they 
are designed to facilitate transactions in securities, promote just and 
equitable principles of trade, and protect investors and the public 
interest.\12\
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    \11\ 15 U.S.C. 78f(b)(5).
    \12\ In approving this rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
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    Specifically, the Commission believes that the proposal will 
facilitate transactions in option contracts and afford greater 
protection of investors and the public interest by making the members 
in the trading crowd and the Order Book Official staff aware of the 
nature of the orders being represented on the Floor, thereby assuring 
that broker-dealer orders will not be represented inadvertently as 
public customer orders. The Commission notes that only non-broker-
dealer orders are entitled to be placed in the Exchange's public limit 
order book and to be given priority over broker-dealer orders under 
certain circumstances, and that only non-broker-dealers are entitled to 
receive a guaranteed minimum of 20 contracts at the disseminated bid or 
offering price. In view of these existing constraints upon broker-
dealer orders and of the added protection afforded public customers by 
the proposal, the Commission does not believe that requiring all 
broker-dealer orders to be identified as such public outcry will cause 
any unnecessary burden upon a member.
    The Commission agrees with the Exchange that the proposal will make 
the existing rule less complicated and easier to follow by removing the 
distinction between broker-dealer orders to be executed at the bid or 
offering price, and those that are not. The Commission notes that there 
is no such distinction applicable to Market Maker orders, which must be 
verbally identified as such prior to their execution. Thus, the 
Commission believes that removing the subject distinction from Rule 
6.66(c) will facilitate transactions in option contracts by making the 
Exchange's option order disclosure rules uniform, consistent, and 
easier to follow.
    The Commission also believes that it is appropriate for the 
Exchange to amend Rule 6.2 by deleting Commentary .05 from that rule, 
which relates to the member's overall conduct and manner of dress on 
the options trading floor, and adding it as Commentary .01 to Rule 
6.77, which relates to the issue of when bids and offers constitute 
binding contracts. In view of the proposed amendment of Rule 6.66(c), 
the Commission believes it appropriate for the Exchange to add a new 
subparagraph (f) to this Commentary, which would add certain violations 
of Rule 6.66(c) as amended to the list of those violations that may 
rise to a circumstance in which two Floor Officials may nullify a 
transaction or adjust its terms. Specifically, such action could be 
taken if a Floor Broker failed to identify a broker-dealer order for 20 
contracts or less. The Commission agrees with the Exchange that adding 
this provision is simply a logical extension of the existing Commentary 
.05(v) of Rule 6.2, which permits two Floor Officials to nullify, or 
adjust the terms of, any order executed in violation of Rule 6.86, 
which states that only non-broker-dealer orders are eligible for a 
guarantee of up to 20 option contracts at the disseminated market 
price. The Commission believes that enabling Floor Officials to nullify 
or adjust the terms of a transaction that would violate Rule 6.66(c) as 
amended will afford greater protection of investors and the public 
interest.
    For the foregoing reasons, the Commission finds that PCX's proposal 
to require the broker-dealer status of an order to be identified by 
public outcry to the trading crowd prior to execution, regardless of 
whether the order is to be executed at the trading crowd's disseminated 
bid or offering price, and to add certain violations of rule 6.66(c) as 
amended to the list of those violations that may cause a transaction to 
be nullified or adjusted, is consistent with the requirements of the 
Act and with the rules and regulations thereunder.
    In addition, the Commission finds good cause consistent with the 
Act for approving Amendment No. 1 to the proposed rule change prior to 
the thirtieth day after the date of publication of notice of filing 
thereof in the Federal Register. Specifically, Amendment No. 1 simply 
corrects certain typographical errors in the text of the rule proposal 
and repharases the new subparagraph (f) being added to Commentary .01 
of Rule 6.77. The amendment does not substantively change the proposal 
as originally filed. Accordingly, the Commission approves Amendment No. 
1 on an accelerated basis.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments, including whether the submission is consistent with the Act, 
concerning Amendment No. 1. 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. 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-98-04 and should be 
submitted by July 14, 1998.

V. Conclusion

    It is therefore Ordered, pursuant to Section 19(b)(2) of the 
Act,\13\ that the proposed rule change (SR-PCX 98-04), as amended, is 
approved.

    \13\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-16952 Filed 6-24-98; 8:45 am]
BILLING CODE 8010-01-M