[Federal Register Volume 61, Number 95 (Wednesday, May 15, 1996)]
[Notices]
[Pages 24521-24523]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-12172]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37186; File No. SR-PSE-96-12]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Pacific Stock Exchange, Inc. Relating to Financial 
Arrangements of Market Makers

May 9, 1996.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on April 5, 1996, the Pacific 
Stock Exchange Incorporated (``PSE'' or ``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. 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) (1988).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The PSE proposes to amend its rules on the trading restrictions 
that apply to Options Floor Members with ``financial arrangements'' as 
defined in PSE Rule 6.40.

[[Page 24522]]

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

    PSE Rule 6.40(a) currently provides that two Members have a 
``financial arrangement'' with each other for purposes of Rule 6.40 if: 
(1) one Member directly finances the other Member's dealings on the 
Exchange and has a beneficial interest in the other Member's trading 
account such that the first Member is entitled to at least 10% of the 
second Member's trading profits; or (2) both Members are trading for 
the same joint account. Rule 6.40(b) provides that two Members with a 
financial arrangement may not bid, offer and/or trade in the same 
trading crowd without a written exemption from two floor officials.\2\ 
Commentary .06 sets forth the circumstances under which the Options 
Floor Trading Committee (``OFTC'') ordinarily may grant an exemption to 
those trading restrictions, i.e., to provide liquidity in the trading 
crowd.
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    \2\ Under PSE Rule 6.40, Commentary .05, two or more Lead Market 
Makers (``LMMs'') who are trading on behalf of the same Member 
organization may not trade in the same option series at the same 
time, but may trade in the same trading crowd at the same time.
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    The Exchange proposes to redefine the term ``financial 
arrangements'' for purposes of Rule 6.40, so that two Members have a 
financial arrangement with each other if: (1) One Member directly 
finances the other Member's dealings on the Exchange, the amount 
financed is $5,000 or more, and the Member providing the financing is 
entitled to a share of the other Member's trading profits; or (2) both 
Members are registered with the Exchange as nominees of the same Member 
Organization; or (3) both Members are registered with the Exchange to 
trade on behalf of the same joint account; or (4) both Members' 
dealings on the Exchange are financed by the same source, the amount 
financed is $5,000 or more, and the Member providing the financing is 
entitled to a share of each of the other Members' trading profits. The 
proposal states that Members with ``financial arrangements,'' as 
defined, may not bid, offer and/or trade in the same trading crowd at 
the same time in the absence of an exemption from the OFTC.
    The proposal further provides for both long-term and short-term 
exemptions that can be provided by the OFTC or two Floor Officials, 
respectively. Proposed Rule 6.40(b)(4) states, more specifically, that 
the OFTC may grant long-term exemptions to Members on a case-by-case 
basis if it determines that a fair and orderly market would not be 
impaired by allowing such Members with financial arrangements to trade 
in the same trading crowd at the same time. It further states that in 
making such determinations, the Committee shall consider the following 
factors; (1) The nature of the financial arrangement; (2) the degree of 
independence to be maintained by the applicants in making trading 
decisions; (3) the impact on competition in the trading crowd if an 
exemption were granted; (4) the applicants' prior patterns of trading 
if they have traded previously in the same trading crowd at the same 
time; and (5) any other information relevant to whether the applicants 
would tend collectively to dominate the market in a particular trading 
crowd or a particular option series. The proposal further states that 
the Committee may revoke any long-term exemption granted pursuant to 
this subsection if it determines that a fair and orderly market 
otherwise would be impaired by a continuation of the exemption. The 
Exchange believes that the proposed criteria to be used by the OFTC in 
granting long-term exemptions will provide for even-handed treatment of 
Members who apply for a long-term exemption. With respect to short-term 
exemptions, the proposal states that two Floor Officials may grant 
short-term exemptions to Members on a case-by-case basis if such Floor 
Officials determine that a fair and orderly market would not be 
impaired and that the need for liquidity in the trading crowd warrants 
such action.
    The Exchange believes that the proposed definition improves upon 
the current definition by expanding, to an appropriate extent, the 
scope of persons who are covered by its terms. Specifically, the 
current rule allows two or more Members who are backed financially by 
the same source (i.e., Members with ``indirect'' financial 
arrangements), to trade in the same crowd or same series as long as 
they are not receiving trading profits from each other and are not 
trading for the same joint account. This however, allow for certain 
situations where the spirit (i.e., to prevent one source from 
dominating the market in a particular option issue or dominating a 
particular trading crowd), but not the letter, of Rule 6.40 might be 
violated. The Exchange believes that the proposed rule would better 
assure that such situations do not occur and that competition will 
continue to be maintained in each trading crowd.\3\
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    \3\ Current Commentary .04 to Rule 6.40 attempts to address the 
problem of market domination by multiple traders with ``indirect'' 
financial arrangements by expressly prohibiting unfair domination of 
markets. In this regard, the Exchange believes that the proposed 
rule improves upon the current rule by relying more on the nature of 
the financial arrangement and less on patterns of trading.
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    The Exchange also proposed to remove a provision in the current 
rule that states that the primary appointment of a market maker may not 
include trading posts that constitute the primary appointment of any 
market maker with whom the first market maker has an existing financial 
arrangement.\4\ The Exchange believes that that rule is superfluous in 
light of the trading restrictions set forth in Rule 6.40. Moreover, the 
Exchange believes that Members trading for joint accounts should be 
permitted to establish overlapping primary appointment zones to allow 
for coverage on the floor when members who trade for those accounts are 
temporarily absent from the floor. In this regard, the Exchange notes 
that the Commission recently approved a PSE rule change to increase 
from two to six the maximum number of trading posts that may be 
included within a market marker's primary appointment zone.\5\
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    \4\ See PSE Rule 6.35, Commentary .05.
    \5\ See Exchange Act Release No. 36370 (October 13, 1995), 60 FR 
54273.
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    Finally, the PSE proposes to add violations of Rule 6.40(b) to the 
Exchange's Minor Rule Plan \6\ with recommended fines of $500, $1,000 
and $1,500 for first-, second- and third-time violations, respectively. 
The Exchange believes that violations of Rule 6.40(b) are easily 
ascertainable and easily verifiable, and, therefore, are appropriate 
for inclusion in the Minor Rule Plan.
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    \6\ PSE Rule 10.13.
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    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 promote just and equitable principles of trade, 
and to protect investors and the public interest.

[[Page 24523]]

(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 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. 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 Section, 450 Fifth Street, N.W., 
Washington, D.C. Copies of such filing will also be available for 
inspection and copying at the principal office of the above-mentioned 
self-regulatory organization. All submissions should refer to File No. 
SR-PSE-96-12 and should be submitted by June 5, 1996.

    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. 96-12172 Filed 5-14-96; 8:45 am]
BILLING CODE 8010-01-M