Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change by the Pacific Exchange, Inc. Relating to Automated Opening Rotations

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41774; File No. SR-PCX-99-24]

Self-Regulatory Organizations; Notice of Filing of Proposed Rule

Change by the Pacific Exchange, Inc. Relating to Automated Opening

Rotations

August 20, 1999.

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 July 13, 1999, 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 August 4, 1999, the

Exchange filed with the Commission 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\ In Amendment No. 1, the Exchange further clarifies the

operation of automated openings, provides rule text related to the

new procedures, and justifies its request for accelerated approval.

See letter from Michael D. Pierson, Director, Regulatory Policy,

PCX, to Michael A. Walinskas, Associate Director, Commission, dated

August 3, 1999 (``Amendment No. 1'').

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

Substance of the Proposed Rule Change

The Exchange is proposing to adopt a new procedure for handling

customer orders and executing option transactions during the opening

rotation. This rule change is intended to automate the current

procedures for opening rotations, except for those situations in which

the opening rotation will continue to be conducted manually. The test

of the proposed rule change follows. New text is italicized.

para.5073--Trading Rotations

Rule 6.64(a)--No additional change.

(b) Automated Opening Rotation. The Exchange may employ automated

opening rotations in designated series of options. All option series

that are eligible for participation in the Automatic Opening Rotation

will be opened automatically. Conversely, if an option series is not

opened automatically pursuant to this Rule, then that series must be

opened manually pursuant to applicable Exchange Rules. Automated

Opening Rotations, when held, will be based upon the following

procedures.

(1) Establishing a Market for the Opening Rotation: Prior to the

opening rotation in a particular option series, the Order Book Official

will determine whether there are any manual orders being represented in

the trading crowd to be executed during the opening rotation. In doing

so, the Order Book Official will call for bids and offers from the

trading crowd once the underlying security has opened. The trading

crowd may determine that the bids and offers then being displayed on

the overhead screens are accurate, or alternatively, may modify those

bids and offers by public outcry.

(2) Designating Series that are Not Eligible for the Automated

Opening Rotation. The Order Book Official must identify, prior to the

opening, all option series that are not eligible for the automated

opening rotation. These series include:

(A) Series for which there are no market or marketable limit orders

in the POETS system.

(B) Series for which there are one or more manual orders being

represented in the trading crowd that are likely to be executed during

the opening rotation, as determined by an Order Book Official.

(C) Series for which one or more members of the trading crowd has

reasonably requested that a manual opening rotation be conducted. Two

Floor Officials may deny member requests for manual opening rotations

in the absence of reasonable justification for doing so. Prior to the

opening, the OBO, in conjunction with the members of the trading crowd,

will set for each option issue a number of contracts that constitutes

an imbalance threshold, i.e., a specific number of option contracts to

buy in excess of the number of contracts to sell or a specific number

of contracts to sell in excess of the number of contracts to buy. The

POETS system will not automatically open any series with an imbalance

exceeding the threshold for that issue.

(3) Automated Opening Rotations. Series Eligible for the Automated

Opening Rotation will be opened automatically based on the following

principles and procedures:

(A) The POETS system will determine a single price at which a

particular option series will be opened, as provided in Commentary .03,

below.

(B) Orders in the system will maintain priority over Market Maker

bids and offers. Orders in the system will be matched up with one

another, if possible, before they are executed against the accounts of

Market Makers participating on the Automatic Execution System.

(C) If there is an imbalance in the number of contacts to buy or

sell at the opening, then the imbalance will be cleaned up by the

Market Makers who are participating on the Automatic Execution System.

Accordingly, each Market Maker will be assigned a number of option

contracts for execution until the imbalance has been exhausted. The

maximum number of option contracts that may be assigned to a Market

Maker is established pursuant to Rule 6.87. When the Auto-Ex System

assigns the imbalance of contracts to Market Makers, the assignments

will be made in the same manner in which option contracts are allocated

to Market Makers who are participating on the Auto-Ex System pursuant

to Rule 6.87. The maximum number of contracts assigned will be the same

as the number assigned under the Auto-Ex procedures established

pursuant to Rule 6.87.

[[Page 47211]]

Commentary:

.01-.02--No Change.

.03--Determining the Opening Price of a Single Price Opening. The

appropriate price to be used in a single price opening on the Exchange

is determined in the following manner: Once the trading crowd has

established the bid and offering prices in a particular series, the

Order Book Official will identify the number of contracts available to

sell at the previously-established bid price and the number of

contracts available to buy at the previously-established offering

price.

(a) If the number of contracts available to sell at the bid price

is greater than the number available to buy at the offering price, then

the opening price will be the bid price.

(b) If the number of contracts available to buy at the offering

price is greater than the number available to sell at the bid price,

then the opening price will be the offering price.

(c) If eligible market and marketable limit orders can be

completely satisfied by trading against other orders in the Limit Order

Book, then the market may open between the established bid and ask

prices, with no Market Maker participation. For example, if the market

is 2-2\1/4\, with an order in the Limit Order Book to sell 20 contracts

at 2\1/8\, and there is a market order to buy 5 contracts, the single

price open, will occur with 5 contracts trading at 2-\1/8\. The opening

price will always be on or between the established bid and offer.

(d) If there is no trading increment available at the half-way

point between the bid and offering prices e.g., as in the case of a

market of bid, 2\1/16\ asked), then the opening price will be

established at the price closest to the last sale price of option

contracts in that series.

II. Self-Regulatory Organization's Statement of the Purpose of, and

Statutory Basis for, the Proposed Rules Change

In its filing with the Commission, the Exchange 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 place specified in Item

IV 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

Introduction. The Exchange is proposing to adopt a new procedure to

facilitate trading of option contracts during the opening rotation.\4\

Opening rotations are held promptly following the opening of the

underlying security on the principal market where it is traded.\5\

Opening rotations are conducted by an Order Book Official (``OBO''),

who is an Exchange employee.\6\ The PCX rules on opening rotations

apply to both index and equity option contracts.\7\

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\4\ The Exchange intends to continue to employ the current

(manual) procedures for closing rotations.

\5\ See PCX Rule 6.64, Comment. .01(a).

\6\ See PCX Rules 6.51 and 6.64.

\7\ See PCX Rule 7.10.

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Curent Procedures for Opening Rotations. Prior to the opening,

firms and floor brokers may enter customer orders into the Limit Order

Book (``Book'') for handling by the OBO to facilitate a single price

opening. It is the responsibility of the floor broker to make the OBO

aware of orders that may be expected to trade on the opening.\8\

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\8\ See OFPA A-1.

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In conducting the opening rotation, the OBO first asks the trading

crowd whether the quotes generated by Auto-Quote \9\ are consistent

with the trading crowd's markets. At that time, the market makers have

an opportunity to adjust the Auto-Quote parameters, including the

volatility settings. If one or more members of the trading crowd

determines to improve a market, they may do so. Alternatively, the

trading crowd or LMM may establish a market without the use of the

Auto-Quote function, and in that case, the OBO will request bids and

offers from members of the trading crowd and enter the quotes manually.

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\9\ The Auto-Quote feature of POETS allows market quotes to be

generated systematically, using programmed theoretical models and

variable criteria that are entered through the Auto-Quote function

by Book staff. See Securities Exchange Act Release No. 27633

(January 18, 1990), 55 FF 2466 (January 24, 1990).

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Once the best bid and ask prices have been established, each option

series,\10\ is opened as follows: First, if there are no orders in the

Book and no orders being manually represented in the trading crowd of

which the OBO is aware, the series is flagged ``open,'' free trading is

commenced in that series and the Auto-Ex System \11\ is flagged on in

that series. Second, if there are one or more market or marketable

limit orders in the Book, or one or more orders being manually

represented in the trading crowd and designed for trading at the

opening rotation, the OBO will call for a market and attempt to

determine from floor brokers the sizes and prices of those orders.\12\

The OBO will then ask the floor brokers in the crowd what customers

orders they are holding to be executed at the opening and, when

possible, match all customers orders at the appropriate price.\13\ If

imbalances occur, the OBO asks the market makers if they can clean up

the imbalance at the established price and, if not, establish

[[Page 47212]]

where the orders can be filled.\14\ Market makers who respond with bids

or offers are entitled to participate based on existing rules on

priority of bids and offers.\15\

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\10\ The term ``series'' means all option contracts of the same

class (puts or calls) having the same expiration date and exercise

price, and the same unit of trading. In general, when a new issue is

first listed and traded on the Exchange, there will be 24 series

available for trading. These include series that are in-, at- and

out-of-the money, for both puts and calls, and for each of four

expiration months. As the price of the underlying stock moves and

new series are added, the number of series outstanding at any given

time can be greater than 100. For example, on July 1, 1999, the

number of series outstanding in options on America Online, Inc. was

104.

\11\ The Auto-Ex system permits eligible market or marketable

limit orders sent from member firms to be executed automatically at

the displayed bid or offering price. Participating market makers are

designated as the contra side to each Auto-Ex order. Participating

market makers are assigned by Auto-Ex on a rotating basis, with the

first market maker selected at random from the list of signed-on

market makers. Auto-Ex preserves Book Priority in all options.

Automatic executions through Auto-Ex are currently available for

public customer orders of 20 contracts or less in most option issues

traded on the Exchange (however, the maximum size of orders eligible

for Auto-Ex is ten contracts in a small number of issues).

\12\ See OFPA C-1. If the OBO believes that the response to the

request for markets is insufficient either as to price or size, the

OBO may request markets from each market maker who did not respond

and/or may call for supplemental market makers. See OFPA C-1.

\13\ See OFPA C-1. The appropriate price that is used in a

single price opening is determined in the following manner: Once the

bid and offering prices in a particular series have been determined,

the OBO will identify the number of contracts available to sell at

the bid price and the number of contracts available to buy at the

offering price. If the number available to sell at the bid price is

greater than the number available to buy at the offering price, then

the opening price will be the bid price, and vice versa. If the

number of contracts to sell is equal to the number to buy, then the

opening price will be established halfway between the bid and

offering price. However, if there is no trading increment available

at the half-way point between the bid and offering prices (e.g., as

in the case of a market 2 bid, 2\1/16\ asked), then the opening

price will be established at the price closest to the last sale

price of option contracts of that series.

If market and marketable limit orders can be completely

satisfied by trading against other orders in the Book, then the

market may open between the established bid and ask prices, with no

market maker participation. For example, if the market is 2-2\1/4\,

with an order in the Book to sell 20 contracts at 2\1/8\, and a

market order to buy 5 contracts, the single price opening will occur

with 5 contracts trading at 2\1/8\ (public customer to public

customer). The market quote at the opening will then be 2-2\1/8\.

\14\ See OFPA C-1. During the opening rotation, OBOs are

permitted to match market orders at the opening price, but floor

brokers who present these orders to the OBO must remain on the

trading floor during the rotation (or must designate another floor

broker to represent those market orders in his or her place). See

OFPA A-1.

\15\ See PCX Rules 6.73 and 6.75.

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While conducting the opening rotation, the OBO will attempt to

match all public customer orders at a single price.\16\ If there is an

imbalance of public customer orders in the Book, the OBO will seek

market maker and firm participation to establish the opening price.\17\

The OBO may give market orders that are entitled to participate at the

opening \18\ priority over limit orders at the same opening price on

the Book.

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\16\ See PCX Rule 6.75(c)(2).

\17\ See PCX Rule 6.75(c)(2).

\18\ The OFTC is required to establish a cut-off-time for orders

entitled to participate in the opening. See PCX Rule 6.75(c)(1).

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Generally, each option issue traded at a given trading post is to

be opened in the same order in which opening transactions are reported

in the underlying securities.\19\ In opening a particular option issue,

the OBO will ordinarily first open one or more series of a given class

having the nearest expiration, and then proceed to series of options

having the next most distant expiration, and so forth, until all series

in that issue have been opened.\20\ Unless the Options Floor Trading

Committee (``OFTC'') provides otherwise, the OBO will determine whether

to open puts first or calls first, but may alternate the opening of put

series and call series, or may open all series of one type (puts or

calls) before opening series of the other type, depending upon market

conditions.\21\

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\19\ See PCX Rule 6.64, Comment. .01(a).

\20\ See PCX Rule 6.64, Comment. .01(a).

\21\ See PCX Rule 6.64, Comment. .01(a).

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New Automated Opening Rotation (``AOR'') Process. The Exchange is

proposing to adopt a new procedure that will allow the OBO to establish

electronically a single price opening for executing eligible market and

marketable limit orders in the POETS system. In the event of an

imbalance, any remaining orders in the system that are eligible to be

executed will be assigned to market makers participating on the Auto-Ex

System. The new process involves three basic steps: first, the markets

are established; second, the opening rotation is automatically

processed for the majority of series; and finally, any series was

manual orders or complication is opened manually i.e., pursuant to the

current procedures for opening rotations as described above.\22\

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\22\ See Current Procedures for Opening Rotations, supra.

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More specifically, under the new AOR process, opening rotations on

the PCX will occur in the following manner: Prior to the opening, the

OBO will determine whether there are any orders in the trading crowd to

be executed at the opening.\23\ Once the underlying security has

opened, the OBO will request from the trading crowd bids and offers in

the specific option issue. The trading crowd may determine that the

posted bids and offers are accurate, or alternatively, may request by

public outcry that certain quotes be modified.\24\

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\23\ These may include, for example, orders that cannot be

represented in POETS, such as contingency orders, broker/dealer

orders, orders designated ``not held,'' orders for spreads or

straddlers, combination orders, all-or-none orders, as well as any

order the floor broker determines to represent manually. As noted

above, it is the floor brokers' obligation to notify the OBO of such

orders prior to the opening. See note 8, supra.

\24\ Prior to an automated opening, the members of the trading

crowd must establish a bid and offer for each series in a given

issue. This occurs basically as follows: The OBO will first display

a bid price and an offering price for a particular series. (These

prices will have been established either by the Auto-Quote feature

of POETS or by manual process, i.e., a member or members of the

trading crowd will vocalize bids and offers that a Market Quote

Terminal Operator will enter into the system and display on the

overhead screen.) The OBO will then ask the crowd if the displayed

prices are ``all right'' (or other words to that effect). There will

then be a short window period when the displayed prices may be

adjusted. While the trading crowd is establishing the market, any

member may vocalize a bid or offer that improves the market, and the

OBO will be required to update the market accordingly. See Amendment

No. 1.

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Once the bid and asking price in each series has been ascertained,

the OBO and AOR system will identify all series that are eligible for

the AOR and that can be opened immediately, and will also identify all

series that are not eligible for the AOR. Those that are not eligible

for the AOR must be opened manually. Procedures for automatic and

manual opening are discussed below.

1. Automatic Opening

The Exchange intends to use the AOR in all issues traded on the

PCX. The Exchange also expects that particular series will only be

designated for manual openings (i.e., ``de-selected'' from the

automated procedure) in unusual circumstances. The Exchange does not

anticipate any situations where all series of a given issue will be

opened manually when the AOR is operational. The Exchange also does not

anticipate that any particular series will be de-selected and opened

manually on a routine or regular basis.\25\

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\25\ See Amendment No. 1.

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To prepare for an automated opening, the AOR will first exclude

series for which there are no market or marketable limit orders in the

system,\26\ as well as all series deemed ineligible for AOR. The series

eligible for AOR will be promptly opened in accordance with the

following principles and procedures. First, the system will determine a

single price at which the series will be opened.\27\ Second, orders in

the system will maintain priority over market maker bids and offers, so

orders in the system will be matched up with one another, if possible,

before executing against the accounts of market makers. Third, if there

is an imbalance in the number of contracts to buy or sell at the

opening,\28\ then the imbalance will be ``cleaned up'' by the market

makers who are participating on the Auto-Ex system, i.e., the system

will assign a set number of contracts (generally 20) to each

participating market marker until the imbalance has been exhausted.

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\26\ There can be single price opening unless there are orders

eligible for trading being represented.

\27\ The formula that the Exchange intends to use for

establishing a single price opening in automated openings is set

forth above. See note 13, supra.

\28\ For example, if there are market or marketable limit orders

collectively representing interest to buy 500 contracts and to sell

100 contracts at a single price, the imbalance will be 400

contracts. As discussed below, an imbalance in an amount greater

than a previously-established threshold level will render the series

ineligible for the AOR.

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Currently, under the manual process, the imbalance will be cleaned

up based on auction market principles: Any member can bid or offer for

some (or all) of the imbalance at the established price. If there are

no bids or offers for the imbalance, the OBO will allocate the

imbalance to the members of the trading crowd. Under the proposal,

however, the imbalance will be allocated to the members of the trading

crowd using the Exchange's existing Auto-Ex system. When the Auto-Ex

System assigns the imbalance of contracts to market makers, the

assignments will be made in the same manner in which option contracts

are allocated to market makers who are participating on the Auto-Ex

System pursuant to PCX Rule 6.87. The maximum number of contracts

assigned will be the same as the number assigned under the Auto-Ex

procedures established pursuant to PCX Rule 6.87.\29\

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\29\ See Amendment No. 1.

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The number of contracts allocated to each market will depend on the

Auto-Ex size guarantee established for that particular issue. If that

number is 20 (which currently applies to most issues currently traded

on the PCX), then based on the example, two market

[[Page 47213]]

markers will each receive automatic executions of 20 contracts against

their trading accounts at the opening price. Under the proposal,

whatever the opening price, the system will guarantee that all

contracts constituting an imbalance will be cleaned by the Auto-Ex

System.\30\

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\30\ Id.

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Under the proposal, orders may participate in the automated opening

rotation regardless of size. An order will not be prohibited from

participating in the automated opening rotation on the ground that the

order is ineligible from being executed over the Auto-Ex System due to

its size.\31\

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\31\ Id.

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2. Manual Opening

As noted above, all series that are not eligible for AOR will have

been identified before any series are opened automatically. The OBO can

designate a series as ineligible for AOR by deliberately not entering a

quote into the system for that series. Series not eligible for the AOR

include series for which: (a) there are orders requiring special

handling; \32\ (b) there is an imbalance of contracts exceeding an

established threshold; or (c) the trading crowd and OBO determine that

the series should be opened manually.

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\32\ The following types of orders are ineligible to participate

in the automated opening rotation: (1) broker/dealer orders; (2)

contingency orders; (3) spreads; (4) straddles; (5) not held orders;

and (6) combination orders. These types of orders are defined in PCX

Rule 6.62. If any of these types of orders are being represented in

the trading crowd and are likely to participate in the opening based

on price, a manual opening rotation will be held in that series. See

Amendment No. 1.

Market orders and plain limit orders (i.e., limit orders with no

contingencies) are eligible to participate in the automated opening

rotation. See PCX Rule 6.75(c)(1); OFPA A-1 (eligibility of market

orders); and Amendment No. 1.

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a. Manual Orders Requiring Special Handling

A series will be deemed ineligible for AOR if a broker in the crowd

is holding an order that is likely to be executed during the opening.

In general, manual orders to buy at relatively low prices or to sell at

relatively high prices generally will not likely participate in the

opening.\33\

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\33\ If there is an order in the crowd that is ineligible to

participate in the automated opening rotation due to its type, and,

based on its price, that order is likely to participate in the

opening (e.g., there is a broker/dealer order to buy puts at 5\1/4\

and the established market is 4\7/8\-5), the opening rotation will

be conducted manually for that series. On the other hand, if the

market were 5\1/2\-5\7/8\, the 5\1/4\ bid would not likely

participate in the opening, so it will not be required that a manual

process be held. (A manual opening is required under proposed PCX

Rule 6.64(b)(2)(B) for a series if there are one or more manual

orders in the trading crowd ``that are likely to be executed during

the opening rotation, as determined by the Order Book Official.'')

However, in the second example above, the broker/dealer order to buy

puts at 5\1/4\ will be eligible to be executed in free trading

immediately following the opening of that series. See Amendment No.

1.

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b. Imbalance of Contracts Exceeding Established Thresholds

The Exchange will establish, for each option issue, a number of

contracts that constitutes an imbalance threshold. This number will

attempt to reflect the relative liquidity in the trading crowd and size

of the trading crowd.\34\ The AOR will calculate imbalance on a series-

by series basis and flag those series for which the imbalance threshold

has been exceeded. The threshold level will vary by issue and by

trading crowd. For example, assume the established market is 5-5\1/4\

and there are orders for 100 contracts to buy at 5\1/4\ and orders for

500 contracts to sell at 5. Since the imbalance is 400 contracts, the

threshold will be exceeded unless the established level is greater than

400. If the established level is greater than 400, the opening will

occur under AOR. If the threshold is exceeded there will be a manual

opening.

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\34\ The Exchange anticipates that the number of contracts

constituting an imbalance threshold will be established by the OBO

in consultation with the trading crowd. The Options Floor Trading

Committee will monitor and supervise the general process of

designating imbalance thresholds on the trading floor. The Exchange

believes that it is necessary to provide a reasonable amount of

flexibility in the process of establishing particular thresholds,

and further that there is little risk of abuse in providing

flexibility because if low thresholds are established by a trading

crowd, the result will merely be that certain series will have to be

opened manually. Although the Exchange does not anticipate that

there will be any problems in this area, the Exchange will study the

process during the first six months of use of the new system, and if

rule changes appear necessary, the Exchange will file a rule filing

with the Commission to effect the changes necessary. See Amendment

No. 1.

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c. Crowd's Request for Manual Opening

A member or members of a trading crowd may request a particular

series to be opened manually, and the OBO will honor reasonable

requests. These requests may typically be made in a series with a large

amount of open interest or for other reasons.\35\ Although the Exchange

does not anticipate problems resulting from such requests, in the event

of a dispute the matter would be resolved by floor officials.\36\

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\35\ The Exchange represents that it does not anticipate that

this provision will be used with any regularity, but instead, should

be used under extraordinary circumstances. For example, there may be

a series that has a very large amount of open interest, and the

underlying stock is involved in a takeover or merger. The crowd may

prefer to have a particular series opened manually because the

proposed takeover price is equal to the strike price of that series.

In this exceptional case, the use of the open outcry system would be

preferable to the use of the auto-ex system because the allocation

of contracts would more likely be consistent with the trading

strategies of the members of the trading crow. See Amendment No. 1.

\36\ See PCX Constitution, art. IV, sec. 8. On the PCX, floor

officials are members of the OFTC who are responsible for the

general supervision of the dealings of members on the Options Floor.

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Obligations and Eligibility of Market Makers. Market makers may

participate in the AOR if they are otherwise eligible to participate on

the Auto-Ex system during the trading day pursuant to PCX Rule 6.87.

Generally, to participate on Auto-Ex, a market maker must be present in

the trading crowd and that trading crowd must be included within that

market maker's primary appointment zone. If there is inadequate

participation in a particular option issue, two floor officials may

require market makers who are members of the trading crowd, as defined

in subsection (6) of PCX Rule 6.87, to log on to Auto-Ex, while present

in the trading crowd, absent reasonable justification or excuse for

non-participation. The Exchange proposes that these rules will apply to

market maker participation in the AOR with respect to contracts

allocated to market makers during the opening rotation process.

Surveillance of Market Maker Procedures. The market makers

participating on AOR will be required to price the contracts fairly, in

a manner consistent with their obligations under PCX Rule 6.37. In

conjunction with the implementation of the AOR system, the Exchange

will publish a regulatory bulletin to remind market makers of their

obligation to set Auto-Quote fairly. The Exchange believes that a

number of factors, including scrutiny by customers and firms

representing customer orders, will ensure that market makers adjust the

Auto-Quote values consistent with their obligation. Moreover, market

makers are required to vocalize their changes to Auto-Quote, which

allows OBO's to oversee the markets and alerts market makers who may

want to improve the markets. In addition, if an OBO notices any unusual

activity in the setting of Auto-Quote values, the OBO must fill out an

OBO Unusual Activity Report which will be investigated by the Exchange.

Finally, the Exchange's Auto-Quote has an audit trail log that details

every quote change resulting from the use of Auto-Quote. This audit

trail report can be studied in the event of any concerns with the way

the Auto-Quote values were established for AOR.

2. Statutory Basis

The Exchange believes the proposed rule change is consistent with

Section

[[Page 47214]]

6(b) \37\ of the Act, in general, and furthers the objectives of

Section 6(b)(5),\38\ in particular, in that it is designed to

facilitate transactions in securities, to promote just and equitable

principles of trade, to protect investors and the public interest, to

remove impediments to and to perfect the mechanism of a free and open

market and a national market system. Specifically, the proposal is

designed to facilitate the execution of orders at the opening by

providing a means of establishing a single price opening. This will

expedite the opening of option issues on the Exchange, which will serve

all market participants. It will eliminate problems associated with

later openings, including the elimination of backlogs of unexecuted

orders that can result when opening rotations are conducted entirely

manually.

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\37\ 15 U.S.C. 78f(b).

\38\ 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 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, including whether the proposed rule

change is consistent with the Act. 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 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-99-24 and

should be submitted by [insert date 21 days from date of publication].

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.\39\

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\39\ 17 CFR 200.30-3(a)(12).

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Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 99-22427 Filed 8-27-99; 8:45 am]

BILLING CODE 8010-01-M