[Federal Register: December 13, 2002 (Volume 67, Number 240)]
[Notices]
[Page 76771-76773]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr13de02-117]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-46947; File No. SR-PCX-2002-55]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change and Amendment No. 1 Thereto by the Pacific Exchange, Inc.
Regarding Market Maker Quoting Obligations
December 4, 2002.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and rule 19b-4 thereunder,\2\ notice is hereby given that
on August 7, 2002, the Pacific Exchange, Inc. (``PCX'' 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 Exchange. On November 8, 2002, the
Exchange submitted Amendment No. 1 to the proposed rule change.\3\ The
Commission is publishing this notice to solicit comments on the
proposed rule change, as amended, from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See letter from Steven B. Matlin, Senior Counsel, PCX, to
Nancy J. Sanow, Assistant Director, Division of Market Regulation
(``Division''), Commission, dated November 7, 2002 (``Amendment No.
1''). In Amendment No. 1, the Exchange amended the proposed rule
change by: (i) Changing the quotation minimum from 20 contracts to
10 contracts; (ii) adding an exception for market makers where a
transaction occurs as a result of being assigned contracts by the
order book official; (iii) making technical corrections to the rule
text; and (iv) offering a basis for requesting accelerated
effectiveness for the proposal.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to adopt PCX rules 6.37(a)(5) and 6.37(c)(4),
and amend commentary .05 to PCX rule 6.37 to require options market
makers to vocalize a legal-width, two-sided market for a minimum of 10
contracts whenever a floor broker enters a trading crowd and calls for
a market in an option series that is one of the 120 most actively
traded equity options.\4\
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\4\ Subject to the conditions set forth in proposed PCX rule
6.37(b)(5)(A)-(D).
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The text of the proposed rule change appears below. New text is in
italics.
* * * * *
Text of the Proposed Rule Change
Pacific Exchange, Inc.; Rules of the Board of Governors
]4935 Obligations of Market Makers
Rule 6.37(a)--No change.
(b) Appointment as a Primary Market Maker.--No change.
(1)-(4)--No change.
(5) Whenever a Floor Broker enters a trading crowd and calls for a
market in a particular option series, each Market Maker present at the
trading post will be obligated to vocalize a two-sided, legal-width
market (pursuant to rule 6.37(b)(1)) for a minimum of 10 contracts.
This obligation only applies to:
(A) Market Makers who have executed a transaction in the issue, but
not those who have been assigned contracts by the Order Book Official
pursuant to Commentary .05, on the day of the Floor Broker's call for a
market or on the previous business day;
(B) Option issues that are ranked in the 120 most actively traded
equity options based on the total number of contracts traded nationally
as reported by the Options Clearing Corporation. For each current
month, the Exchange's determination of whether an equity option ranks
in the top 120 most active issues will be based on volume statistics
for the one month of trading activity that occurred two months prior to
the current month;
(C) Non-broker-dealer orders; and
(D) Series not designated as LEAPS (pursuant to rule 6.4).
(c) In Classes of Option Contracts Other Than Those to Which
Appointed.--No change.
(1)-(3)--No change.
(4) Whenever a Floor Broker enters a trading crowd and calls for a
market in a particular option series, each Market Maker present at the
trading post will be obligated to vocalize a two-sided, legal-width
market (pursuant to rule 6.37(b)(1)) for a minimum of 10 contracts.
This obligation only applies to:
(A) Market Makers who have executed a transaction in the issue, but
not those who have been assigned contracts by the Order Book Official
pursuant to Commentary .05, on the day of the Floor Broker's call for a
market or on the previous business day;
(B) Option issues that are ranked in the 120 most actively traded
equity options based on the total number of contracts traded nationally
for a specified month based on volume as reported by the Options
Clearing Corporation. For each current month, the Exchange's
determination of whether an equity option ranks in the top 120 most
active issues will be based on volume statistics for the one month of
trading activity that occurred two months prior to the current month;
(C) Non-broker-dealer orders; and
[[Page 76772]]
(D) Series not designated as LEAPS (pursuant to rule 6.4).
(d)-(f)--No Change.
Commentary .01-.04--No Change.
Commentary .05--Whenever a Floor Broker enters a trading crowd and
calls for a market in any class and series at that post, each Market
Maker present at the post where the option is traded is obligated, at a
minimum, to make a market for one contract except as provided for in
rule 6.37(b)(5) and rule 6.37(c)(4), at the established price. In
addition, the Options Floor Trading Committee may determine that Market
Makers in trading crowds shall increase the depth of their markets as
set forth in Options Floor Procedure Advice B-12. In the event a Floor
Broker is unable to satisfy his order from bids and offers given in the
crowd, the Order Book Official may assign one contract to every Market
Maker present within the primary zone to assist the Floor Broker in
satisfying his order. If a Market Maker at the post either bids lower
or offers higher than the established market, such Market Maker shall
be obligated to trade one contract at the price quoted by the Market
Maker.
* * * * *
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, PCX included statements
concerning the purpose of, and basis for, the proposed rule change, as
amended, 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 III below. The Exchange 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
The Exchange proposes to modify PCX rule 6.37 to provide that,
subject to certain conditions, whenever a floor broker enters a trading
crowd and calls for a market, certain market makers present at the
trading post will be obligated to vocalize a two-sided, legal-width
market for a minimum of 10 contracts. This obligation would apply to:
(a) Market makers who have executed a transaction in the issue, but not
those who have been assigned contracts by the Order Book Official
pursuant to PCX rule 6.37, commentary .05, on either the day of the
floor broker's call for a market or on the previous business day;\5\
(b) option issues that are ranked in the top 120 most actively traded
equity options; (c) non-broker dealer orders; and (d) series not
designated as LEAPS.\6\ The proposed rule change would apply to market
makers regardless of whether the issue is included in their primary
appointment zones.
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\5\ See Amendment No. 1.
\6\ See PCX rule 6.4.
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The Exchange would determine whether an equity option ranks in the
top 120 most active, nationally-traded issues, based on volume
statistics reported by the Options Clearing Corporation.\7\ The list of
designated issues will be based on volume statistics for trading
activity that occurred two months prior to the current month. For
example, February's list of top 120 issues will be based on December's
volume, March's list of top 120 issues will be based on January's
volume, and so forth. Thereafter, the Exchange will continue to
designate the top 120 issues based on a two-month lag time. The
Exchange intends to notify its Members of the issues that are
designated to be in the top 120 via a regulatory bulletin that will be
published at the beginning of each month.
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\7\ The Exchange notes that it intends to use the same procedure
for designating the top 120 activity traded issues that it currently
uses in designating such issues for purposes of its ``shortfall
fee.'' See Securities Exchange Act Release No. 45351 (January 29,
2002), 67 FR 5631 (February 6, 2002) (SR-PCX-2001-51).
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The Exchange represents that the proposed rule change is intended
to enhance the quoting obligations of Exchange market makers.
Currently, when floor brokers enter a trading crowd and request a
market, market makers are only required to make a market for one
contract.\8\ The Exchange believes that the proposed rule change will
also provide greater depth and liquidity to the marketplace, and will
therefore benefit the public.
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\8\ See PCX rule 6.37, commentary .05.
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2. Statutory Basis
The Exchange believes that the proposed rule change, as amended, is
consistent with section 6(b) of the Act,\9\ in general, and furthers
the objectives of section 6(b)(5) of the Act,\10\ in particular, in
that it is designed to promote just and equitable principles of trade,
to prevent fraudulent and manipulative acts and practices, and to
protect investors and the public interest.
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\9\ 15 U.S.C. 78f(b).
\10\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
PCX does not believe that the proposed rule change, as amended,
would 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, as amended, 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 Exchange consents, the Commission will:
(A) By order approve such proposed rule change, as amended; 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, as amended, is consistent with the Act. Specifically, the
Commission solicits comments on whether the proposal would have a
detrimental effect on competition and liquidity on the Exchange. The
Commission notes that the proposal to increase the quote size
obligations for Top 120 options would apply to all market makers that
have executed a trade on the same or previous day that a floor broker
requests a market in a particular Top 120 option. The Commission
understands that PCX market makers have continuous market making
obligations in those options for which they have a primary
appointment.\11\ In addition, the Commission understands that PCX
market makers are permitted to make markets in option issues that are
outside of their primary appointment.\12\ Accordingly, the Commission
questions whether the proposal to increase market makers' quote size
obligations would discourage some market makers from executing
transactions in option issues
[[Page 76773]]
that are outside of their primary appointment.
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\11\ See PCX rule 6.37(b). See also PCX rule 6.35.
\12\ See PCX rule 6.37(c).
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Persons making written submissions should file six copies thereof
with the Secretary, Securities and Exchange Commission, 450 Fifth
Street, NW., Washington, DC 20549-0609. 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 the filing will also be available for
inspection and copying at the principal offices of the Exchange. All
submissions should refer to File No. SR-PCX-2002-55 and should be
submitted by January 3, 2003.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\13\
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\13\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 02-31401 Filed 12-12-02; 8:45 am]
BILLING CODE 8010-01-P