[Federal Register Volume 67, Number 62 (Monday, April 1, 2002)]
[Notices]
[Pages 15445-15446]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-7779]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-45641; File No. SR-PCX-2001-48]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval to a Proposed Rule Change and Amendment
No. 1 Thereto by the Pacific Exchange, Inc. To Increase to Two Hundred
Fifty Contracts the Maximum Permissible Number of Equity and Index
Option Contracts Executable Through Auto-Ex
March 25, 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 November 27, 2001, the Pacific Exchange, Inc. (``PCX'' or
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I and II below, which Items have been prepared by the PCX. The
PCX filed Amendment No. 1 on December 5, 2001.\3\ The Commission is
publishing this notice to solicit comments on the proposed rule change,
as amended, from interested persons and is approving the proposal on an
accelerated basis.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See letter from Mia S. Shiver, Senior Attorney, Regulatory
Policy, PCX, to Nancy J. Sanow, Assistant Director, Division of
Market Regulation, Commission, dated December 4, 2001 (``Amendment
No. 1''). In Amendment No. 1, the PCX revised the rule text of the
proposed rule change to reflect current PCX Rule 6.87.
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The PCX is proposing to increase to 250 contracts the maximum size
of equity and index option contracts that may be designated for
automatic execution.
Below is the text of the proposed rule change, as amended. Proposed
new language is italicized; proposed deletions are in brackets.
* * * * *
Automatic Execution System
Rule 6.87(a)-(b)(4)--No change.
(b)(5) The [Options Floor Trading Committee (``OFTC'')] OFTC shall
determine the size of orders that are eligible to be executed on Auto-
Ex. Although the order size parameter may be changed on an issue-by-
issue basis by the OFTC, the maximum order size for execution through
Auto-Ex is as follows:
(A) Equity Options: the maximum order size for execution through
Auto-Ex for equity options is [one hundred (100)] 250 contracts;
(B) Index Options: the maximum order size for execution through
Auto-Ex is [one hundred (100)] 250 contracts. [for:
(i) The PSE Technology Index;
(ii) the Wilshire Small Cap Index; and
(iii) the Morgan Stanley Emerging Growth Index.]
(6)--No change.
(c)-(p)--No change.
* * * * *
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 III 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
The Exchange's automatic execution system (``Auto-Ex'')
automatically executes public customer market and marketable limit
orders within certain size parameters. The Exchange represents that
Auto-Ex has proven to be a credible system offering prompt and
efficient automatic trade executions at the disseminated, quoted
prices. PCX Rule 6.87(b) currently provides that the Exchange's Options
Floor Trading Committee (``OFTC'') shall determine, on an issue-by-
issue basis, the size of orders that are eligible to be executed
through Auto-Ex. The maximum order size for execution through Auto-Ex
is currently 100 contracts for both equity and index options.\4\ The
Exchange is now proposing to increase the maximum size of option orders
that are eligible for automatic execution, subject to designation by
the OFTC on an issue-by-issue basis, to 250 contracts.
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\4\ See Securities Exchange Act Release No. 43887 (January 25,
2001), 66 FR 8831 (February 2, 2001) (approving PCX proposal to
increase the maximum size of index and equity option orders that may
be automatically executed through Auto-Ex to 100 contracts).
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The Exchange believes that increasing the number of option
contracts executable through Auto-Ex to 250 contracts will enable the
Exchange to more effectively and efficiently manage increased order
flow in actively traded option issues consistent with its obligations
under the Act. The Exchange believes that this increase will help it to
meet the changing needs of customers in the marketplace and give the
Exchange better means of competing with other options exchanges for
order flow, particularly in multiply traded issues. In addition, the
Exchange represents that this increase should bring the speed and
efficiency of automated execution to a greater number of retail orders.
The Exchange represents that it further believes that its systems
capacity is sufficient to accommodate the increased number of automatic
executions anticipated to result from implementation of the proposed
rule change.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with section 6(b) \5\ of the Act, in general, and furthers the
objectives of section 6(b)(5) of the Act,\6\ in particular, in that it
is designed to facilitate transactions in securities, to promote just
and equitable principles of trade, to enhance competition and to
protect investors and the public interest.
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\5\ 15 U.S.C. 78f(b).
\6\ 15 U.S.C. 78f(b)(5).
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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
No written comments were solicited or received with respect to the
proposed rule change.
III. 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. Persons making written
[[Page 15446]]
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 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-2001-48 and should be submitted by April 22, 2002.
IV. Commission's Findings and Order Granting Accelerated Approval
of Proposed Rule Change
After careful review, the Commission finds that the proposed rule
change, as amended, is consistent with the requirements of the Act and
the rules and regulations thereunder applicable to a national
securities exchange and, in particular, the requirements of section 6
of the Act. Among other provisions, section 6(b)(5) of the Act requires
that the rules of an exchange be designed to foster cooperation and
coordination with persons engaged in regulating, clearing, settling,
processing information with respect to, and facilitating securities
transactions; remove impediments to and perfect the mechanism of a free
and open market and a national market system; and protect investors and
the public interest.\7\
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\7\ 15 U.S.C. 78f(b)(5).
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While increasing the maximum order size limit from 100 contracts to
250 contracts for automatic execution eligibility by itself does not
raise concerns under the Act, the Commission believes that this
increase raises collateral issues that the PCX will need to monitor and
address. Increasing the maximum order size for particular option
classes will make a larger number of option orders eligible for Auto-
Ex. These orders may benefit from greater speed of execution, but at
the same time create greater risks for market maker participants.
Market makers signed on to Auto-Ex will be exposed to the financial
risks associated with larger-sized orders being routed through the
system for automatic execution at the displayed price. When the market
for the underlying security changes rapidly, it may take a few moments
for the related option's price to reflect that change. In the interim,
customers may submit orders that try to capture the price differential
between the underlying security and the option. The larger the orders
accepted through Auto-Ex, the greater the risk market makers must be
willing to accept. The Commission does not believe that, because the
PCX's OFTC determines to approve orders as large as 250 contracts as
eligible for Auto-Ex, the OFTC or any other PCX committee or officials
should disengage Auto-Ex more frequently by, for example, declaring an
``unusual market condition.'' \8\ Disengaging Auto-Ex can negatively
affect investors by making it slower and less efficient to execute
their orders. It is the Commission's view that the PCX, when increasing
the maximum size of orders that can be sent through Auto-Ex, should not
disadvantage all customers--the vast majority of whom enter orders for
less than 250 contracts--by making their automatic execution systems
less reliable.
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\8\ The PCX has filed a proposed rule change (File No. SR-PCX-
2001-13) with the Commission that would specify the Exchange's
procedures governing the disengagement of Auto-Ex for ``unusal
market conditions,'' and would require documentation of the reasons
for any action to disengage Auto-Ex to operate in a manner other
than the usual manner. The proposed rule change was filed pursuant
to the Order Instituting Public Administrative Proceedings Pursuant
to section 19(h)(1) of the Securities Exchange Act of 1934, Making
Findings and Imposing Remedial Sanctions, Securities Exchange Act
Release No. 43268 (September 11, 2000) (File No. 3-10282) and is
pending with the Commission.
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In addition, pursuant to section 19(b)(2) \9\ of the Act, the
Commission finds good cause for approving the proposed rule change
prior to the 30th day after the date of publication of notice thereof
in the Federal Register.\10\ The Commission believes that granting
accelerated approval will provide the PCX with flexibility to compete
for order flow with other exchanges immediately.\11\
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\9\ 15 U.S.C. 78s(b)(2).
\10\ In approving this proposal, the Commission has considered
its impact on efficiency, competition, and capital formation. 15
U.S.C. 78c(f).
\11\ See Securities Exchange Act Release No. 45628 (March 22,
2002) (order approving an increase to 250 contracts the maximum
permissible number of equity and index option contracts executable
through AUTO-EX); see also Securities Exchange Act Release No. 45629
(March 22, 2002) (order approving an increase to 250 contracts in
the maximum guarantee size for AUTO-X orders in options overlying
the QQQs).
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V. Conclusion
For the foregoing reasons, the Commission finds that the proposed
rule change, as amended, is consistent with the Act and the rules and
regulations thereunder applicable to a national securities exchange,
and, in particular, with section 6(b)(5) of the Act.\12\
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\12\ 15 U.S.C. 78f(b)(5).
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It is therefore ordered, pursuant to section 19(b)(2) of the
Act,\13\ that the proposed rule change (SR-PCX-2001-48), as amended, is
hereby approved on an accelerated basis.
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\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).
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-7779 Filed 3-29-02; 8:45 am]
BILLING CODE 8010-01-P