[Federal Register Volume 62, Number 32 (Tuesday, February 18, 1997)]
[Notices]
[Pages 7286-7288]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-3915]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38270; File No. SR-PSE-97-02]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Pacific Stock Exchange Incorporated Relating to 
Proprietary Brokerage Order Routing Terminals

February 11, 1997.
    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 January 17, 1996, the Pacific Stock Exchange Incorporated (``PSE'' 
or ``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') 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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The PSE is proposing to adopt a formal policy governing the use by 
PSE Members and Member Organizations (``Members'') of any proprietary 
brokerage order routing terminals (``Terminals'') on the Options Floor 
of the Exchange. The text of the proposed policy is available at the 
Office of the Secretary, the Exchange, 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 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 places 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

    The Exchange is proposing to adopt a policy governing proprietary 
brokerage order routing terminals that Members may use on the Options 
Floor of the Exchange. The Policy includes specific provisions on 
Exchange approval of Terminals; Restrictions on Members' use of 
Terminals; Exchange Inspection and Audit; Exchange Liability; 
Termination of Exchange Approval; and pilot status of the program.
Exchange Approval
    The proposed Policy specifies that Members must obtain prior 
Exchange approval to use any proprietary brokerage order routing 
terminals on the Options Floor. It states that the Exchange may grant 
such approval for use on an issue-by-issue basis. To request such 
approval, Members must submit a letter of application to the Exchange 
specifying the make, model number, functions and intended use of the 
equipment, and must also provide additional information upon the 
request of the Exchange. The policy further provides that the format of 
any orders to be transmitted over the Terminals must also be pre-
approved by the Exchange.
    The Exchange believes that it should have the flexibility to permit 
the use of Terminals on an issue-by-issue basis so that it will have an 
opportunity to observe the use of Terminals in particular trading 
crowds and to consider the benefits and any unforeseen problems that 
may result before floor-wide implementation occurs.
    Paragraph 2 of the Policy states that, in considering the approval 
of an application, as well as whether a previously issued approval 
should be withdrawn, the Exchange will take into

[[Page 7287]]

account such factors as the physical size of the Terminal; space 
available at the post where the Terminal is to be used; 
telecommunication, electrical and radio frequency requirements; 
Terminal characteristics and capacity; and any factors that the 
Exchange considers relevant in the interest of maintaining fair and 
orderly markets, the orderly and efficient conduct of Exchange 
business, the maintenance and enhancement of competition, the ability 
of the Exchange to conduct surveillance of the use of the Terminal and 
the business transmitted through it, the adequacy of applicable audit 
trails, and the ability of the Terminal to interface with other 
Exchange facilities.
    Paragraph 3 of the Policy provides that Members must report to the 
Exchange every proposed material change in functionality of a Terminal 
and every proposed change in the use of a Terminal. It further provides 
that Members must not implement any such proposed changes unless and 
until they have been approved by the Exchange, and that Members must 
also promptly file with the Exchange supplements to their applications 
whenever the information currently on file becomes inaccurate or 
incomplete for any reason.
Restrictions on Use of Terminals
    Paragraph 4 sets forth four restrictions applicable to Members' use 
of Terminals on the Options Floor. The first restriction is that 
Members may receive brokerage orders in the trading crowd via 
Terminals, but must represent such orders in the trading crowd by open 
outcry in a manner that is consistent with Exchange rules.
    The second restriction states that when a Member executes an order 
that was received over a Terminal, the Member must fill out and time 
stamp a trading ticket within one minute of the execution. Exchange 
rules on record keeping and trade reporting are unchanged.
    The third restriction states that Terminals may be used to receive 
brokerage orders only, and that Terminals may not be used to perform a 
market making function. It states that any system used by a Member to 
operate a Terminal must be separate and distinct from any system that 
may be used by a Member of any person associated with a Member in 
connection with market making functions. It further states that, for 
the purpose of this paragraph, orders initiated from off the floor of 
the Exchange that are not counted as ``Market Maker transactions'' 
within the meaning of PSE Rule 6.32 and that do not create a pattern of 
offering in the aggregate either to make two-sided markets or 
simultaneously to represent opposite sides of the market in any class 
of options shall not be deemed to be used to perform a market making 
function.
    The Exchange believes that if Terminals were permitted to be used 
to perform market making functions from off the floor of the Exchange, 
it may become undesirable for Exchange market makers to continue to 
assume the costs and obligations associated with being a registered 
market maker, which in turn could harm the liquidity and quality of the 
Exchange's market. The Exchange is particularly concerned that off-
floor market making effectively would establish a market making 
structure devoid of affirmative market making obligations that could 
result in less deep and liquid markets during periods of market stress, 
when off-floor Terminal market makers would not be required to continue 
making markets. Moreover, the Exchange believes that surveillance of 
market making through the Terminals currently would be particularly 
difficult.
    The Exchange intends to interpret the term ``market making'' in 
accordance with its traditional definition as defined under the Act, 
i.e., holding one's self out as being willing to buy and sell a 
particular security on a regular or continuous basis.\3\ The definition 
of market making would not capture parties who enter orders on one side 
of the market; nor would it capture parties who enter two-sided limit 
orders on occasion. A party would not be deemed to be engaging in 
market making unless it regularly or continuously holds itself out as 
willing to buy and sell securities.
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    \3\ See. 15 U.S.C. 78c(a)(38).
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    The fourth restriction in Paragraph 4 states that no Member or any 
person associated with a Member may use for the benefit of such member 
or any person associated with such Member any information contained in 
any brokerage order in the Terminal system until that information has 
been disclosed to the trading crowd. Accordingly, prior to placing an 
order or making or changing a bid or offer on the Exchange or in any 
other securities or futures market, a Member must disclose such 
information to the trading crowd. The Exchange believes that this 
restriction will help to ensure that Members using Terminals trade on 
the same terms and conditions as other market participants and do not 
receive any trading advantages to interact with orders transmitted 
through the Terminals.
Inspection and Audit
    Paragraph 5 of the proposed policy states that the operation and 
use of all aspects of the Terminal and all orders entered through the 
Terminal are subject to inspection and audit by the Exchange at any 
time upon reasonable notice. It further provides that Members must 
furnish to the Exchange such information concerning the Terminal as the 
Exchange may from time to time request upon reasonable notice, 
including without limitation an audit trail identifying transmission, 
receipt, entry, execution and reporting of all orders. For the purpose 
of this paragraph, a notice of at least twenty-four hours shall be 
deemed to be reasonable (however, shorter periods may be provided in 
appropriate circumstances).
Exchange Liability
    Paragraph 6 states that neither the Exchange nor its directors, 
officers, employees or agents shall be liable to a Member, a Member's 
employees, a Member's customers or any other person for any loss, 
damage, cost, expense or liability arising from the installation, 
operation, relocation, use of, or inability to use a Terminal on the 
floor of the Exchange (including any failure, malfunction, delay, 
suspension, interruption or termination in connection therewith).
Termination of Approval
    Paragraph 7 of the Policy provides that the Exchange may at any 
time determine to terminate all approvals for the installation and use 
by Members of Terminals on the floor of the Exchange or at particular 
trading posts, in which event such approvals will be deemed terminated 
on the 30th calendar day following the day on which the Exchange gives 
notice to such Member(s) of such termination of approval. It further 
provides that Members who incur costs in developing or implementing 
proprietary systems do so at their own risk, due to the fact that the 
Exchange intends to roll out its own brokerage order routing system for 
Floor Brokers. It further provides that a Member's approval to use a 
Terminal may also be summarily terminated by the Exchange, once notice 
has been provided to the affected Member, if any statement by such 
Member in its application or any supplement thereto is inaccurate or 
incomplete, or if such Member has failed to comply with any provision 
of this Policy, or if the operation of the Terminal is causing 
operational difficulties on the floor of the Exchange, and the Member 
has

[[Page 7288]]

failed to cure the same within seven calendar days following the giving 
of notice (or such shorter period of time as the Exchange may deem 
appropriate if it determines the circumstances have created a situation 
requiring a shortened cure period). It states that Members must 
immediately stop using their Terminals and must remove such Terminals 
from the floor of the Exchange upon the termination of approval 
pursuant to this paragraph, and that nothing in this paragraph shall be 
construed as a waiver of or limitation upon whatever right Members may 
otherwise have to seek appropriate relief pursuant to PSE Rule 11 in 
the event the Exchange terminates approval of a Member's Terminal 
pursuant to this paragraph.\4\
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    \4\ PSE Rule 11.7 provides due process protections for persons 
who have been aggrieved by Exchange action. It gives such persons an 
opportunity to be heard and to have the complained of action 
reviewed by the Exchange.
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Pilot Program
    Finally, Paragraph 8 of the proposed policy states that the Pilot 
Program expires six months after its implementation, but may be renewed 
upon an Exchange filing with the Securities and Exchange Commission 
pursuant to the Securities Exchange Act of 1934.
    The Exchange notes that, except in certain minor respects, the 
proposed Policy is consistent with an approved rule change of the 
Chicago Board Options Exchange (``CBOE'') relating to the use of 
proprietary brokerage order routing terminals on the CBOE floor.\5\
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    \5\ See Exchange Act Release No. 38054 (December 16, 1996), 61 
FR 67365 (December 20, 1996).
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Basis
    The Exchange believes that proposal is consistent with Section 6(b) 
of the Act, in general, and Section 6(b)(5) of the Act, in particular, 
in that it is designed to facilitate transactions in securities; to 
foster cooperation and coordination with persons engaged in regulating, 
clearing, settling, and processing with respect to transactions in 
securities; to promote just and equitable principles of trade; and to 
protect investors and the public interest.

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. 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 in the 
Commission's Public Reference Room, 450 Fifth Street, N.W., Washington, 
D.C. 20549. Copies of such filing will also be available for inspection 
and copying at the principle office of the PSE. All submissions should 
refer to File No. SR-PSE-97-02 and should be submitted by March 11, 
1997.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\6\
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    \6\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-3915 Filed 2-14-97; 8:45 am]
BILLING CODE 8010-01-M