[Federal Register Volume 70, Number 172 (Wednesday, September 7, 2005)]
[Notices]
[Pages 53262-53263]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-17707]


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SECURITIES AND EXCHANGE COMMISSION

[Docket No. 34-52345; File No. SR-PCX-2005-61]


Self-Regulatory Organizations; Pacific Exchange, Inc.; Order 
Approving Proposed Rule Change, and Amendment No. 1 Thereto 
Establishing a De Minimis Exception to the 80/20 Test

August 26, 2005.

I. Introduction

    On April 26, 2005, the Pacific Exchange, Inc. (``PCX'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to section 19(b)(1) of the Securities 
Exchange Act of 1954 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change seeking to modify the 80/20 Test in determining 
limitations on Principal Order \3\ access under the rules imposed by 
the Plan for the Purpose of Creating and Operating an Intermarket 
Option Linkage (``Linkage Plan'') \4\ and related rules. On July 29, 
2005, the Exchange submitted Amendment No. 1 to the proposed rule 
change. The proposed rule change, as amended, was noticed for comment 
in the Federal Register on July 27, 2005.\5\ The Commission received no 
comments on the proposed rule change. This order approves the proposed 
rule change, as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The Exchange defines a Principal Order as an order for a 
principal account of an eligible Market Maker that does not relate 
to a customer order the Market Maker is holding. See PCX Rule 
6.92(a)(12)(ii).
    \4\ On July 28, 2000, the Commission approved a national market 
system plan for the purpose of creating and operating an intermarket 
options market linkage (``Linkage'') proposed by the American Stock 
Exchange, LLC, Chicago Board Options Exchange, Inc., and the 
International Stock Exchange, Inc. See Securities Exchange Act 
Release No. 43086 (July 28, 2000), 65 FR 48023 (August 4, 2000). 
Subsequently, the Philadelphia Stock Exchange, Inc., the PCX and the 
Boston Stock Exchanges, Inc. joined the Linkage Plan. See Securities 
Exchange Act Release Nos. 43573 (November 16, 2000), 65 FR 70851 
(November 28, 2000); 43574 (November 16, 2000), 65 FR 70850 
(November 28, 2000); and 49198 (February 5, 2004), 69 FR 7029 
(February 12, 2004).
    \5\ See Securities Exchange Act Release No. 52070 (July 20, 
2005), 70 FR 43490 (July 27, 2005).

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[[Page 53263]]

II. Description

    The purpose of this proposed rule change, as amended, is to 
implement proposed Joint Amendment No. 17 to the Linkage Plan. Joint 
Amendment No. 17, together with this proposed rule change, would modify 
the ``80/20 Test'' set forth in section 8(b)(iii) of the Linkage Plan 
and PCX Rule 6.96. PCX Rule 6.96 stats that Market Makers should send 
Principal Orders through Linkage on a limited basis and not as a 
primary aspect of their business. The 80/20 Test implements this 
general principle by prohibiting a Market Maker from sending Principal 
Orders in an eligible option class if, in the last calendar quarter, 
the Market Maker's Principal Order contract volume is disproportionate 
to the Market Maker's contract volume executed against customer orders 
in its own market.
    The Exchange believes that applying the 80/20 Test has resulted in 
anomalies for Market Makers with limited volume in an eligible option 
class. Specifically, if a Market Maker has very little overall trading 
volume in an option, the execution of one or two Principal Orders 
during a calendar quarter could result in the Market Maker failing to 
meet the Test. This would bar the Market Maker from using the Linkage 
to send Principal Orders in that option class for the following 
calendar quarter. The Exchange contends that it was not its intention 
to bar Market Makers with limited volume from sending Principal Order 
through the Linkage in these circumstances since such trading was not 
``a primary aspect of their business.'' Thus, the proposed rule would 
create a de minimis exemption from the 80/20 Test for Market Makers 
that have total contract volume of less than 1,000 contracts in an 
option class for a calendar quarter.

III. Discussion

    After careful review, 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.\6\ 
In particular, the Commission finds that the proposed rule change is 
consistent with the requirements of section 6(b)(5) of the Act \7\ 
which requires, among other things, that the rules of an exchange be 
designed to promote just and equitable principles of trade, to remove 
impediments to and perfect the mechanism of a free and open market, and 
to protect investors and the public interest. The Commission believes 
that the proposed rule change will increase the availability of Linkage 
to members of the Participants by limiting the applicability of the 80/
20 Test in situations where market makers have minimal trading volume 
in a particular options class.
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    \6\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, completion, and 
capital formation. 15 U.S.C. 78c(f).
    \7\ 15 U.S.C. 78f(b)(5).
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    The Commission recognizes that the Exchange does not believe that 
it is necessary to bar market makers with limited volume from sending 
Principal Orders through the Linkage, as such trading does not raise 
concerns that a member is sending such orders as ``a primary aspect of 
their business.'' The Commission believes that the de minimus exemption 
from the 80/20 Test proposed by the Exchange for market makers that 
have a total contract volume of less than 1,000 contracts in an options 
class for a calendar quarter should ensure that members with relatively 
low volume in a particular options class can send a reasonable number 
of Principal Orders without being barred from using the Linkage by 
application of the 80/20 Test in the following calendar quarter.

IV. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change is consistent with the requirements of the Act and the 
rules and regulations thereunder.
    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\8\ that the proposed rule change (SR-PCX-2005-61), as amended, is 
approved.
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    \8\ 15 U.S.C. 78s(b)(2).

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 05-17707 Filed 9-6-05; 8:45 am]
BILLING CODE 8010-01-M