Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change by the Pacific Exchange, Inc., Relating to Its Specialist Evaluation Program

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38712; File No. SR-PCX-97-19]

June 3, 1997.

Self-Regulatory Organizations; Notice of Filing of Proposed Rule

Change by the Pacific Exchange, Inc., Relating to Its Specialist

Evaluation Program

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 May 29,

1997, 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 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 Propose Rule Change

The PCX is proposing to extend its pilot program regarding the

evaluation of its equity specialists until January 1, 1998. In

addition, the Exchange is proposing to implement certain changes to the

pilot program.

Self-Regulatory Organizations 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 receive don 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

1. Purpose

On October 1, 1996, the Commission approved a nine-month pilot

program for the evaluation of PCX equity specialists.\1\ The Exchange

is now proposing to extend the pilot program for an additional six

month period, until January 1, 1998. The reason for the extension is

that the Exchange needs more time to evaluate the impact of the SEC's

new order handling rules \2\ on the performance criteria. During the

extension of the pilot, the Exchange will determine an organization

overall passing score and individual passing scores for each criterion

used in the pilot program. In addition, the Exchange proposes to

implement for use in the evaluation program, beginning with the third

quarter review period of 1997 (i.e., July 1, 1997 to September 30,

1997), certain programming changes requested by the Commission in its

October 1, 1996 order approving the pilot program. Specifically, the

Commission requested that the Exchange reprogram its systems so that

the following criteria are calculated using the NBBO instead of the

primary market quote: Trading Between the Quote, Book Display Time, and

Quote Performance (Equal or Better Quote Performance and Better Quote

Performance). The description of these performance criteria will be

modified as follows:

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\1\ Prior to the adoption of the pilot program, PCX Rule 5.37(a)

provided that the Exchange's Equity Allocation Committee (``EAC'')

evaluate all registered specialists on a quarterly basis and that

each specialist receive an overall evaluation rating based on three

criteria of specialist performance: (1) Specialist Evaluation

Questionnaire Survey (``Questionnaire''); (2) SCOREX Limit Order

Acceptance Performance; and (3) National Market System Quote

Performance. The pilot program modifies Rule 5.37(a) by adding three

new criteria of performance and eliminating one performance

criterion. The new criteria are: (1) Executions (itself consisting

of four criteria; (a) Turnaround Time; (b) Holding Orders Without

Action; (c) Trading Between the Quote; and (d) Executions in Size

Greater Than BBO); (2) Book Display Time; and (3) Post-1 p.m.

Parameters. The SCOREX Limit Order Acceptance Performance criterion

has been eliminated. The pilot also adds more questions to the

Questionnaire and expands the National Market System Quote

Performance criterion (renamed Quote Performance under the pilot) to

include within it a submeasure for bettering the quote. For a more

detailed description of the performance criteria utilized in the

PCX's pilot program, see Securities Exchange Act Release No. 37770

(October 1, 1996), 61 FR 52820 (October 8, 1996) (File No. SR-PSE-

96-28). See generally PCX Rule 5.37 (description of the standards

and procedures applicable to the EAC's evaluation of specialists).

\2\ See Securities Exchange Act Release No. 37619A (September 6,

1996), 61 FR 48290 (September 12, 1996) (File No. S7-30-95).

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a. Trading Between the Quote \3\

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\3\ ``Trading Between the Quote'' is one of the four criteria

which together constitute ``Executions'' criterion. See supra note

1.

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``Trading Between the Quote'' currently measures the number of

market and marketable limit orders that are executed between the best

primary market bid and offer. For this criterion

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to count toward the overall evaluation score, ten orders or more must

have been executed during the quarter in which the specialist is being

evaluated. If less than ten orders are executed, this criterion will

not be counted and the rest of the evaluation criteria will be given

more weight.

When a market or marketable limit order is executed, the execution

price is compared to the primary market bid and offer. The specialist

will be awarded points based on the percentage of orders the specialist

receives that are executed between the primary market bid and offer. If

the execution price falls between the primary market bid and offer, the

trade is counted as one that traded between the quote at the time of

execution. Each time a trade is executed, the primary market quote will

be noted. If the spread of that quote is two or more trading fractions

apart, that trade will count as one eligible for the comparison of the

execution price to the quote.

The Exchange is now proposing to continue using this criterion, but

to replace references to the ``primary market bid and offer'' with

references to the ``NBBO.''

b. Book Display Time

This criterion calculates the percentage of book shares at the best

price in the book that is displayed in the specialist's quote, by

symbol, and the duration of time that each percentage is in effect.

This criterion rates the P/COAST book displayed 100% of the time. The

sizes of all open buy limit orders at the best price for the symbol in

the specialist's book are totaled and compared to the bid size quote.

The sizes of all open sell limit orders at the best price for the

symbol in the book are totaled and compared to the offer size quote.

This will be done for each symbol traded by the specialist, but only

for those orders within the primary market quote. Limit orders in the

book that were priced beyond the primary market quote will not be

included; they will not be executed until they reach the price in the

primary market quote, so the specialist should not be required to cover

them in his (her) quote sizes.

The Exchange is now proposing to continue using this criterion, but

to replace references to the ``primary market bid and offer'' to

references to the ``NBBO.''

c. Quote Performance

This criterion, on which 10% of each specialist evaluation is

based, consists of two submeasures: (a) Equal or Better Quote

Performance; and (b) Better Quote Performance.

Equal or Better Quote Performance calculates for each issue traded,

the percentage of time in which a specialist's bid or offer is equal to

or better than the primary market quote with a 500 share market size or

the primary market size, whichever is less, with a 200 share minimum.

Better Quote Performance calculates for each issue traded, the

percentage of time in which a specialist's bid or offer is better than

the primary market quote with a 500 share market size or the primary

market size, whichever is less, with a 200 share minimum.

The Exchange is proposing to continue using this criterion, but to

replace references to the ``primary market bid and offer'' with

references to the ``NBBO.''

Further, the Commission has requested that the Exchange file a

report regarding the Exchange's experience with the pilot.

This report has been filed with the Commission under separate

cover. In addition, the Exchange will submit a proposed rule change

with the Commission pursuant to Rule 19b-4 under the Act \4\ by

November 15, 1997, that will specify an overall passing score for the

performance evaluation and individual passing scores for each

criterion, as well as a request to further extend the pilot beyond

January 1, 1998.

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\4\ 17 CFR 240.19b-4.

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2. Statutory Basis

The proposed rule change is consistent with Section 6(b)(5) of the

Act \5\ in that it is designed to prevent fraudulent and manipulative

acts and practices and to perfect the mechanism of a free and open

market.

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\5\ 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

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 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 the 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 at the

Commission's Public Reference Section, 450 Fifth Street, N.W.,

Washington, D.C. 20549. Copies of such filing will also be available

for inspection and copying at the principal office of the Exchange. All

submissions should refer to File No. SR-PCX-97-19 and should be

submitted by July 2, 1997.

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97-15255 Filed 6-10-97; 8:45 am]

BILLING CODE 8010-01-M