[Federal Register Volume 63, Number 148 (Monday, August 3, 1998)]
[Notices]
[Pages 41312-41314]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-20556]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40263; File No. SR-PCX-98-27]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 Thereto by the Pacific Exchange, Inc. 
Relating to the Automatic Execution of Option Orders

July 24, 1998.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on June 12, 1998, the Pacific 
Exchange, Inc. (``PCX'' or ``Exchange'') filed with the Securities 
Exchange Commission (``Commission'') the proposed rule

[[Page 41313]]

change as described in Items I, II, and III below, which Items have 
been prepared by the PCX. On July 14, 1998, the Exchange submitted to 
the Commission Amendment No. 1 to the proposed rule change.\2\ The 
Commission is publishing this notice to solicit comments on the 
proposed rule change, as amended, from interested persons.
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    \1\ U.S.C. 78s(b)(1).
    \2\ In Amendment No. 1 the Exchange altered the proposed rule 
language to clarify that exceptions to the rule would be applied on 
an option issue by option issue basis. See Letter from Michael D. 
Pierson, Senior Attorney, Regulatory Policy, to Ken Rosen, Attorney, 
Division of Market Supervision, Commission, dated July 13, 1998 
(``Amendment No. 1'').
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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 amend PCX Rule 6.87 (``Automatic 
Execution System'') to permit automatic executions of option orders on 
the Exchange at prices reflecting the National Best Bid or Offer 
(``NBBO''). The text of the proposed rule change is available at the 
principal office of the PCX and at the Commission.

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 IV below. The PCX 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
    Orders entered via the Exchange's Member Firm Interface (``MFI'') 
are delivered to one of three destinations: (a) to the Exchange's 
Automatic Execution System for options trading (``Auto-Ex''), where 
they are automatically executed at the disseminated bid or offering 
price; (b) to Auto-Book, which maintains non-marketable limit orders 
based on limit price and time of receipt; or (c) to a Member Firm's 
default destination, a particular firm booth or remote entry site, if 
the order fails to meet the eligibility criteria necessary for using 
either Auto-Ex or Auto-Book or if the Member Firm requests such default 
for its orders.\3\ Only non-broker/dealer customer orders for up to ten 
option contracts (or 20 option contracts, depending on the option 
issue) are eligible to be executed on Auto-Ex.\4\
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    \3\ See Securities Exchange Act Release No. 27633 (January 18, 
1990) 55 FR 2466 (January 24, 1990); Securities Exchange Act Release 
No. 39970 (May 7, 1998) 63 FR 26662 (May 13, 1998).
    \4\ See PCX Rule 6.87.
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    The Exchange is now proposing to adopt new PCX Rule 6.87(d), which 
would provide that the Exchange's Options Floor Trading Committee 
(``OFTC'') may designate electronic orders in an option issue to 
receive automatic executions at prices reflecting the NBBO, provided 
that the OFTC may designate, for an option issue, that an order will 
default for manual representation by a floor broker in the trading 
crowd if (1) the order would be executed at a price that is more than 
one trading increment away from the PCX disseminated market price; or 
(2) the NBBO is crossed or locked.
    For example, under the proposal, if the PCX market in an option 
series is 6 bid, 6\1/2\ asked, and if another market is disseminating a 
market in the same series of 6\3/8\ bid, 6\7/8\ asked--so that the NBBO 
is 6\3/8\ bid, 6\1/2\ asked, then, in the absence of the OFTC 
designating the orders for manual representation, the PCX will 
automatically execute customer sell orders at 6\3/8\ even though the 
PCX disseminated bid is only 6, and will automatically execute customer 
buy orders at 6\1/2\.
    The proposal would also allow the OFTC to designate, for an option 
issue, that an order will default for manual representation by a floor 
broker in the trading crowd if the order would be executed at a price 
that is more than one trading increment away from the PCX market 
price.\6\ Should such a designation be made, for the example above, 
where the PCX bid is 6 and the competing market's bid is 6\3/8\, a 
customer sell order entered on the PCX would default for manual 
representation because 6\3/8\ is ore than one trading increment away 
from the PCX disseminated bid price of 6.\6\ But if the PCX bid is 6 
and the competing market's bid is 6\1/8\, a customer sell order on the 
PCX would be executed at 6\1/8\ because 6\1/8\ is only one trading 
increment away from the PCX disseminated bid of 6.
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    \5\ The Exchange notes that the Chicago Board Options Exchange 
proposed a similar feature for its Retail Automatic Execution System 
(RAES), designated as the ``RAES Auto-Step-Up.'' See Securities 
Exchange Act Release No. 39992 (May 14, 1998) 63 FR 28019 (May 21, 
1998); Securities Exchange Act Release No. 40096 (June 16, 1998) 63 
FR 34209 (June 23, 1998) (approving feature).
    \6\ See PCX Rule 6.72, which provides that bids and offers above 
$3 must be expressed in eights of one dollar (e.g., 3\1/8\) and bids 
and offers below $3 must be expressed in sixteenths of one dollar 
(e.g., 1\1/16\).
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    The proposal would also permit the OFTC to designate, for an option 
issue, that if the NBBO is crossed (e.g., 6\1/8\ bid, 6 asked) or 
locked (e.g., 6 bid, 6 asked), then customer orders to buy or sell the 
series would default for manual representation in the trading crowd. 
However, the Exchange is proposing to maintain the flexibility to 
provide for automatic executions on the Exchange when the NBBO is 
locked or crossed. Such action may be appropriate, for example, when 
there is a large influx of electronic orders and a fair and orderly 
market would be better served by a reduction in the number of orders 
that default to a firm booth for manual representation in the trading 
crowd. In such situations, public customers would receive very 
favorable prices on their orders.
    The Exchange believes that implementation of the proposal will 
provide public investors with better prices on their orders, thus 
making the Exchange a more competitive marketplace to which order flow 
providers may send their option orders for execution.
2. Statutory Basis
    The Exchange believes that 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 facilitate transactions in securities; to 
protect investors and the public interest; to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system; and to promote just and equitable principles of trade.

B. Self-Regulatory Organizations' 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

[[Page 41314]]

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 proposed 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, 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. 
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-98-27 and should 
be submitted by August 24, 1998.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-20556 Filed 7-31-98; 8:45 am]
BILLING CODE 8010-01-M