[Federal Register Volume 63, Number 11 (Friday, January 16, 1998)]
[Notices]
[Pages 2711-2713]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-1112]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39532; File No. SR-PCX-97-28]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 Thereto by the Pacific Exchange, Inc. 
Relating to Exchange-Sponsored Hand-Held Terminals for Options Floor 
Brokers

January 9, 1998.
    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 3, 1997 and December 12, 1997, respectively, the Pacific 
Exchange, Inc. (``PCX'' or ``Exchange'') filed with the Securities and 
Exchange Commission (``SEC'' or ``Commission'') the proposed rule 
change and amendment No. 1 to 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, as amended, from 
interested persons.
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    \1\ 15 U.S.C. Sec. 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 Exchange is proposing to adopt a new program to allow floor 
brokers on the Options Floor to use Exchange-sponsored hand-held 
terminals to receive orders sent electronically by Member Firms located 
off the floor. The proposal will also establish new procedures for 
electronic order flow handling, routing, execution and trade reporting 
under the program. The test of the proposed rule change 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 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 test 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
    General Description. The Exchange's Member Firm Interface (``MFI'') 
\3\ currently permits Exchange Member Firms to use an electronic link 
with the Exchange to send their option orders directly to the Exchange 
for delivery to POETS (Pacific Option Exchange Trading System).\4\ 
Under the proposal, member firms would be able to use the MFI 
connection to route orders directly to the member firm booth (not by 
default) or to a floor broker's hand-held terminal located in the 
trading crowd.\5\
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    \3\ The MFI is an electronic order delivery and reporting system 
that allows member firms to route orders for execution by the 
automatic execution feature of POETS as well as to route limit 
orders to the Options Public Limit Order Book. Orders that do not 
reach those two destinations are defaulted to a member firm booth. 
MFI also provides member firms with instant confirmation of 
transactions to their systems. Member firms may access POETS by 
establishing an MFI mainframe-to-mainframe connection.
    \4\ Orders entered via MFI are delivered to one of three 
destinations: (a) to Auto-Ex, where they are automatically executed 
at the disseminated bid or offering price; (b) to Auto-Book which 
maintains non-marketable limit orders based on limit price and time 
of receipt; or (c) to a Member Firm's default destination--a 
particular firm booth or remote entry site--if the order fails to 
meet the eligibility criteria necessary for either Auto-Ex or Auto-
Book or if the Member Firm requests such default for its orders. See 
generally Exchange Act Release No. 27633 (January 18, 1990), 55 FR 
2466 (``POETS Approval Order'').
    \5\ In that regard, the Exchange is proposing to add a new Rule 
6.88(a), which provides: ``Members and Member Organizations may send 
orders electronically through the Exchange's Member Firm Interface 
and route them directly to POETS, to a Member Firm booth on the 
Options Floor, to a Floor Broker Hand-Held Terminal located on the 
Options Floor, or to any other location designated by the Exchange, 
provided that the Member or Member Organization has been approved by 
the Exchange to do so.''
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    Under the program, Member Firms will be permitted to send their 
orders electronically to the Exchange via MFI and route them to one of 
three destinations on the trading floor: (a) To a floor broker standing 
in the trading crowd; (b) to a Member Firm booth location on the 
trading floor; or (c) to POETS, where they will be automatically 
executed by Auto-Ex or maintained in Auto-Book. All orders so 
transmitted will first be sent through the Server.\6\ Orders sent to a 
Member Firm booth via the Server may be sent subsequently either to 
POETS or to a floor broker in the trading crowd. Orders sent via the 
Server to a floor broker in the trading crowd may subsequently be 
transmitted to a Member Firm booth, to POETS, or to another floor 
broker on the trading floor.
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    \6\ The Exchange notes that there will be no appreciable delay 
in order entry due to the transmission of orders through the Server. 
The Exchange also notes that if a Member Firm routes an order to 
POETS via MFI for automatic execution or maintenance in Auto-Book, 
the order will not be sent through the Server. Only orders to be 
transmitted through the Hand-Held Terminal system will be sent 
through the Server.
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    The Exchange intends to furnish hand-held terminals to be used by 
floor brokers under the program. In addition, the Exchange will supply 
booth devices that will have the capability to retrieve and display all 
orders that were submitted through the device. The Exchange intends to 
assess users a monthly rental fee for such use.\7\
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    \7\ The Exchange will submit a separate rule filing to the 
Commission to establish these fees.

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[[Page 2712]]

    Exchange rules on order representation and order execution will 
generally be unchanged under the program.\8\ However, the Exchange is 
proposing to modify its rules on orders to provide that an order sent 
electronically through MFI will be deemed to be a ``written order'' for 
purposes of Rule 6.67. The order information that must be reported to 
the Exchange in connection with each transaction that is executed on 
the trading floor will be also unchanged under the program.\9\
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    \8\ See, e.g., PCX Rules 5.1(e), 6.43-6.48 and Options Floor 
Procedure Advices A-1-A-11 and G-1-G12.
    \9\ See PCX Rule 6.69.
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    Prohibition of Market Making Function. The Exchange is proposing to 
adopt new Rule 6.88(b) providing that no Floor Broker may knowingly use 
a Floor Broker Hand-Held Terminal, on a regular and continuous basis, 
to simultaneously represent orders to buy and sell options contracts in 
the same series for the account of the same beneficial holder. The rule 
further provides that if the Exchange determines that a person or 
entity has been sending, on a regular and continuous basis, orders to 
simultaneously buy and sell option contracts in the same series for the 
account of the same beneficial holder, the Exchange may prohibit orders 
for the account of such person or entity from being sent through the 
Exchange's Member Firm Interface for such period of time as the 
Exchange deems appropriate.\10\
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    \10\ The Exchange notes that the Commission has previously 
approved rule change proposals that prohibit the use of floor-broker 
hand-held terminals from performing a market maker function. See, 
eg., Securities Exchange Act Release No. 38054 (Dec. 16, 1996), 61 
FR 67365 (Dec. 20, 1996) (Order Approving SR-CBOE-95-48). The PCX 
has filed a similar proposal, which is currently pending with the 
Commission. See Securities Exchange Act Release No. 38270 (Feb. 11, 
1997), 62 FR 7286 (Feb. 18, 1997) (Notice of filing of SR-PSE-97-
02).
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    Implementation. The Exchange is proposing a two-phase approach to 
integrating the new hand-held technology into the floor environment. In 
Phase I, the Exchange will allow limited implementation of the program 
to evaluate the use of hand-held terminals and to identify and correct 
any problems that may arise. In this regard, the Exchange will select a 
representative cross-section of floor members and off-floor members for 
the execution of various types of order flow in both lightly-traded and 
heavily-traded issues. Phase I will last for about four months. It will 
involve approximately two off-floor Member Firms, two Member Firm booth 
devices and 12 floor broker hand-held terminals. The Exchange, in 
conjunction with its Options Floor Trading Committee, will select 
Members and Member Firms to participate in Phase I on an objective 
basis.\11\ During Phase I, floor brokers will not be permitted to 
transmit orders to other floor brokers (they will be limited to 
transmitting orders either to POETS or to a Member Firm booth).
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    \11\ Factors will include the nature of order flow (retail or 
institutional), the nature of the issue (lightly-traded or heavily-
traded), nature of the floor brokerage operation, time of 
application, limitations in the number of participants who may 
participate, and other such factors.
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    In Phase II, the Exchange will roll out the program on a floor-wide 
basis, allowing any qualified Floor Member or off-floor Member who 
wishes to participate in the program to do so.\12\
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    \12\ The term ``qualified Floor Member or off-floor Member'' 
refers to the requirement that all floor brokers and order flow 
providers who participate in the program must be approved by the 
Exchange to do so. Floor brokers are eligible to participate if they 
are registered with the Exchange as floor brokers pursuant to Rule 
6.44 and have arranged with a member firm to receive order flow 
through the system. Member firms are eligible to participate in the 
program if they have made arrangements with a floor broker for the 
transmission and execution of orders. Moreover, program participants 
will be required to pay the Exchange a fee in an amount to be 
specified in a rule change proposal to be filed with the Commission.
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    Order Tickets. Under the proposal, initially, floor brokers using 
terminals will not need to write up order tickets because the trade-
related floor broker terminal information will be passed electronically 
to POETS and then to POPS (Pacific Options Processing Information) for 
clearing purposes. Yet the party on the other side of the trade, if it 
is executed by a market maker of a floor broker not using a terminal, 
will have to submit a paper order ticket to the Exchange for 
processing. Later, when advancements in technology allow for it, no 
paper tickets will be required because all market makers and floor 
brokers will be able to interface with each other through hand-held 
terminals--but that change will be the subject of another filing. With 
regard to proprietary hand held terminals, the order ticket requirement 
would be the same as with the Exchange-sponsored terminals, i.e., if 
the trade information is not sent to the Exchange electronically, it 
will have to be conveyed by means of a written order ticket.
    Clearing and Trade Reporting. Once an order has been executed, the 
Hand-Held Terminal system will route trade information to POETS, which, 
in turn, will route the information to a computer for trade match and 
clearing purposes. At the same time, the Exchange will send a trade 
report to the Member Firm that entered the order. In addition, the 
Exchange will transmit trade information to OCC, OPRA and certain 
vendors.
    Audit Trail. Order information sent through the Hand-Held Terminal 
system will become audit trail information that is available to the 
Exchange for regulatory purposes. However, if an order is routed to the 
Member Firm booth by telephone or wire, and not through MFI, and the 
order is then sent to POETS or to a floor broker in the crowd, the 
audit trail information will commence when the order is sent from the 
booth. An audit trail of all actions taken by the hand-held terminal 
that result in an interaction with the Server will be maintained. Upon 
receipt of an order in the Server from POETS or a booth device, the 
order will be time stamped and retained in the Server's database. When 
orders are executed at a hand-held device, they will be time stamped 
upon receipt by the Server. The Exchange believes that the audit trail 
information will be more accurate than current information, which is 
recorded manually on order tickets.
    System Capacity. The Exchange believes, based upon extensive 
analysis and testing, that implementation of the program will not 
adversely affect POETS system capacity or functionality.
    Use of Other Hand-Held Terminal Devices. The Exchange will not 
prohibit floor brokers from using proprietary hand-held terminals \13\ 
for order entry on the Options Floor as long as they do not interfere 
with any Exchange-sponsored hand-held terminals, with POETS or with 
other equipment on the floor.\14\
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    \13\ The Exchange notes that a rule filing to permit Exchange 
floor brokers to use proprietary order routing terminals on the 
Options Trading Floor is currently pending before the Commission. 
See Securities Exchange Act Release No. 38270 (Feb. 11, 1997), 62 FR 
7286 (Feb. 18, 1997) (Notice of filing of SR-PSE-97-02).
    \14\ The term ``interfere'' refers to electronic interference 
that may occur between a member's proprietary device and another 
electronic system or piece of equipment on the Trading Floor. For 
example, if the use of a proprietary device on the floor caused the 
POETS automatic execution to halt, or if it disrupted telephonic 
communications on the floor, or if it prevented another member firm 
from being able to receive electronic orders through another order-
routing system, then the device causing the interference could not 
be used on the floor until it was rendered compatible with the order 
electronic systems in use.
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2. Statutory Basis
    The Exchange represents that the proposal is consistent with 
Section 6(b) of the Act,\15\ in general, and Section 6(b)(5) of the 
Act,\16\ in particular, is that it is designed to promote just and 
equitable principles of trade; to foster

[[Page 2713]]

cooperation and coordination with persons engaged in regulating, 
processing information with respect to, and facilitating transactions 
in securities; to remove impediments to and perfect the mechanism of 
free and open market and a national market system; to protect investors 
and the public interest; and is not designed to permit unfair 
discrimination between customer, issuers, brokers or dealers.
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    \15\ 15 U.S.C. Sec. 78f(b).
    \16\ 15 U.S.C. Sec. 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 inappropriate burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or 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. Sec. 552, will be available for inspection and copying at 
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-97-28 and 
should be submitted by February 6, 1998.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 98-1112 Filed 1-15-98; 8:45 am]
BILLING CODE 8010-01-M