Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change by the Pacific Stock Exchange, Inc., Relating to the Expansion of the Exchange's Firm Quote Rule to 20 Contracts

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-34571; File No. SR-PSE-94-19]

Self-Regulatory Organizations; Notice of Filing of Proposed Rule

Change by the Pacific Stock Exchange, Inc., Relating to the Expansion

of the Exchange's Firm Quote Rule to 20 Contracts

August 22, 1994.

Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934

(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on June 20,

1994, the Pacific Stock Exchange, Inc. (``PSE'' or ``Exchange'') filed

with the Securities and Exchange Commission (``SEC'' or ``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.

I. Self-Regulatory Organization's Statement of the Terms of Substance

of the Proposed Rule Change

Currently, PSE Rule 6.86, ``Trading Crowd Firm Disseminated Market

Quotes,'' requires each trading crowd on the PSE to provide a depth of

10 option contracts for all non-broker/dealer customer orders at the

bid/offer displayed as the disseminated market quote at the time the

order is announced or displayed at the option's trading post. The PSE

proposes to amend PSE Rule 6.86 to increase the minimum size guarantee

for non-broker/dealer options orders from 10 to 20 contracts.

The text of the proposed rule change is available at the Office of

the Secretary, PSE 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 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 Purpose

The Exchange proposes amend Exchange Rule 6.86 to increase--from 10

contracts to 20 contracts--the minimum size of orders that are

guaranteed for execution at the disseminated bid or offering price

being displayed at the time such orders are represented in the

appropriate trading crowd on the floor of the Exchange. The PSE is

proposing the rule change as a response to competitive market

conditions and to enhance the PSE's competitive position in the

securities industry.

Currently, PSE Rule 6.86 provides that each trading crowd is

required to provide a depth of 10 option contracts for all non-broker/

dealer customer orders at the bid or offer which is displayed as the

disseminated market quote at the time such orders are announced or

displayed at the trading post designated for trading the subject option

class. The Exchange proposes to amend this provision by replacing the

term ``ten'' with ``twenty.''

PSE Rule 6.86(d) currently provides that, should the response of

members at a trading post be insufficient to provide a depth of 10

contracts, the order book official shall allocate among the market

makers present at the trading post the balance of contracts necessary

to provide an execution on 10 contracts. The Exchange proposes to amend

paragraph (d) to replace the term ``ten'' with ``twenty.''

Similarly, the PSE proposes to amend Commentaries .01, .02, and .03

to PSE Rule 6.86 to increase the required number of option contracts

from 10 to 20. Specifically, PSE Rule 6.86, Commentary .01 states that

if the bid or offer being displayed as a disseminated market quote is

on behalf of an order represented by a floor broker or the order book

official, and is for less than 10 contracts, the trading crowd is

obligated to buy or sell the balance of the contracts necessary to

provide a depth of ten contracts at the disseminated bid or offering

price. The PSE proposes to amend Commentary .01 by replacing the term

``ten'' with ``twenty.''

PSE Rule 6.86, Commentary .02 provides that a floor broker's

failure to remove a bid or offer from the screen after the bid or offer

has been filled or cancelled may result in the floor broker being held

responsible for providing a depth of 10 contracts upon being present or

returning to the trading crowd, and/or being subject to disciplinary

action by the Exchange. Commentary .02 also provides that a market

maker or floor broker who has caused a bid or offer to be disseminated,

but who leaves the trading post without removing the bid or offer, may

be held responsible for providing a depth of 10 contracts upon

returning to the trading crowd, and/or being subject to disciplinary

action by the Exchange. The PSE proposes to amend Commentary .02 by

replacing the term ``ten'' with ``twenty.''

PSE Rule 6.86, Commentary .03 provides that market maker orders for

less than 10 contracts that are represented at a trading post by a

floor broker shall not be disseminated. The PSE proposes to amend

Commentary .03 to replace the term ``ten'' with ``twenty.''

The Exchange believes that the proposal will result in improved

market quality and market maker performance. The PSE believes that the

proposal will ensure greater depth of markets at the Exchange and will

result in better executions of customer orders to buy or sell 20

contracts or less. According to the Exchange, the proposal will also

encourage Exchange market makers to be more competitive in making

markets, and thereby will facilitate transactions in securities and

improve the quality of the PSE's options markets. Moreover, the

Exchange believes that by attracting greater customer order flow to the

Exchange, the proposed rule change should enhance market depth and

liquidity and result in tighter options pricing spreads.

The Exchange also believes that its market maker system can provide

sufficient liquidity to meet the needs resulting from this rule change,

based on the combined capital of the members of each trading crowd. The

Exchange does not believe that the proposal will require its market

makers to assume undue risks. The PSE is able currently to provide a

guarantee for customer orders of 10 contracts or less in all options

series, including long-term options (``LEAPs'')--and the Exchange

believes that it has the capacity to expand that guarantee to 20

contracts in all series, including LEAPS. Previously, the Exchange has

evaluated the operation of current PSE Rule 6.86 and has concluded, and

the Commission has agreed, that the program has resulted in better

executions for customer orders and an improvement in the quality of the

PSE's options markets and market maker performance.\1\

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\1\See Securities Exchange Act Release No. 31824 (February 4,

1993), 58 FR 8078 (February 11, 1993) (order approving File No. SR-

PSE-92-40).

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Currently, the Exchange has two proposals pending with the

Commission which would also amend PSE Rule 6.86.\2\ However, the PSE

does not believes that the current proposal is inconsistent with, or

would cause any need for amendments to, those two filings.

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\2\See Securities Exchange Act Release Nos. 32880 (September 14,

1993), 58 FR 49343 (September 22, 1993) (notice of proposal to

define the term ``public customer'' for purposes of PSE Rule 6.86)

(File No. SR-PSE-93-10); and 32299 (May 12, 1993), 58 FR 29246 (May

19, 1993) (notice of proposal to amend floor trading rules

applicable to PSE Rule 6.86) (File No. SR-PSE-93-01).

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Finally, the Exchange believes that it has adequate systems

capacity that would be necessary if the Commission approves the

proposed rule change, and, further, that the proposal will have no

negative impact on the Exchange's Pacific Options Exchange Trading

System (``POETS'').

Basis

The PSE believes that the proposal is consistent with section 6(b)

of the Act, in general, and with section 6(b)(5), in particular, in

that it is designed to facilitate transactions in securities and to

promote just and equitable principles of trade.

(B) Self-Regulatory Organization's Statement on Burden on Competition

The PSE does not believe that the proposed rule changes 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 reason 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 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 at the

Commission's Public Reference Section, 450 Fifth Street NW.,

Washington, DC. 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 the file

number in the caption above and should be submitted by September 19,

1994.

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\3\

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\3\17 CFR 200.30-3(a)(12) (1993).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 94-21234 Filed 8-26-94; 8:45 am]

BILLING CODE 8010-01-M