[Federal Register Volume 64, Number 33 (Friday, February 19, 1999)]
[Notices]
[Pages 8426-8429]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-4114]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41051; File No. SR-PCX-98-41]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 Thereto by the Pacific Exchange, Inc. 
Relating to Its Remote Trading Access Program for Specialists

    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 September 4, 1998, the Pacific Exchange, Inc. (``PCX'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') a proposed rule change and file an 
amendment thereto on January 21, 1999,\3\ as described in Items I, II 
and III below, which Items have been prepared by the Exchange. 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.
    \3\ See letter, dated January 20, 1999, from Michael D. Pierson, 
Senior Attorney, Regulatory Policy, PCX to S. Kevin An, Special 
Counsel, Division of Market Regulation, Commission (``Amendment No. 
1''). Among other things, Amendment No. 1 made several technical 
corrections and also explained how the Exchange will conduct 
surveillance of Remote Specialists. The substance of Amendment No. 1 
is incorporated into this Notice.
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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 Remote Trading Access Program 
for Specialists (``Program'') under which Registered PCX Specialists 
will be permitted to conduct their regular trading activities from off 
the Trading Floor, at a remote location. Below is the text of the 
proposed rule, which is entirely new.
 * * * * *

Remote Trading Access Program

    Rule 5.38(a). The Remote Trading Access Program allows 
Registered PCX Specialists to conduct their regular trading 
activities from off the Trading Floor, at remote locations, subject 
to the approval of the Equity Floor Trading Committee. Specialists 
participating

[[Page 8427]]

in the program (``Remote Specialists'') will be linked to the 
Trading Floors via a telecommunications network using private lines.
    (b) Unless otherwise specified, all of the PCX Rules and 
provisions of the PCX Constitution will apply to the activities of 
Remote Specialists. In particular, Remote Specialists must meet all 
of the obligations of Registered Specialists pursuant to PCX Rule 5 
and the Equity Floor Procedure Advices, provided that the following 
rules will not apply to Remote Specialists: EFPA 1-A, EFPA 1-B and 
EFPA 1-C. In addition, Remote Specialists will not be required to 
make their markets known in an audible tone pursuant to Rules 5.5(a) 
and 5.30(a).
    (c) Trading Floor Definition. For purposes of Rules 4.2, 5.1(e), 
5.1(f), 5.6(d), 5.6(e), 5.8(a), 5.8(c), 5.8(e), 5.8(k), 5.10, 
5.11(c), 5.12(b), 5.13(g), 5.13(h), 5.14(a), 5.14(b), 5.16(a), 5.20 
Com. .01-.02, 5.21(a)(1), 5.23(a), 5.25(a), 5.29(d), 5.29(f), 
5.29(g), 5.30(b), 5.30(c), 5.30(d), 5.31(a)-(b), 5.33(c), 5.51(b), 
5.51(n), 5.51(o), 5.53(a)-(b), 5.53(e) and 5.53(g), the terms 
``floor'' and ``trading floor'' will include both the physical 
trading floors in San Francisco and Los Angeles, as well as the 
electronic facilities of the Exchange at remote locations.
    (d) Approval Process. Only Specialists who are registered with 
the Exchange pursuant to Rule 5.27 will be eligible to participate 
in the Program. The Equity Floor Trading Committee (``EFTC'') will 
select from among the applicants and will determine which candidates 
are best suited to participate in the Program. In making its 
selections, the EFTC will consider the following factors: (1) past 
experience of the applicant, including the length of time that the 
applicant has served as a Specialist on the Exchange or on another 
exchange, and the nature of the applicant's activities as a 
Specialist on the Exchange or on another exchange; (2) recent 
specialist performance ratings of the applicant (including all 
available evaluation scores for the last eight quarters); (3) the 
applicant's disciplinary history; and (4) any other relevant factors 
that the EFTC may consider.
    (e) Evaluation Process. Remote Specialists will be evaluated 
pursuant to Rule 5.37.
    (f) Pilot Program. The Remote Trading Access Program will be 
implemented in three phases. In Phase I, four Specialists (two in 
San Francisco and two in Los Angeles) will conduct their regular 
trading activities at locations off the Trading Floor itself but in 
close proximity within the building--for example, in a room adjacent 
to the Trading Floor. Unless it is necessary, these specialists will 
not engage in face-to-face interactions with other floor members 
during this phase, so that the Exchange may identify and correct any 
problems that may arise. Phase I will last for approximately one 
month. In Phase II, which will last up to six months, the Exchange 
will permit up to twenty Specialists to conduct their trading 
activities from locations away from the Exchange's premises. These 
locations may include a home or an office. In Phase III, the 
Exchange will permit an unlimited expansion of the Program.

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

    (a) Purpose.
    The PCX currently has two Equities Trading Floors, one in San 
Francisco and one in Los Angeles. There are generally two Specialists 
continuously making markets during trading hours in each equity 
security traded on the Exchange. Implementation of the Program will be 
the first step of an expansion of the Exchange's two-floor system, to 
permit electronic trading from multiple locations both on and off the 
Trading Floors. Having operated two Equities Trading Floors since 1957, 
the Exchange is well experienced in coordinating market quotations for 
multiple specialists, in executing trades on behalf of parties located 
in different cities, and in providing administrative support from one 
city to members located in another city.
    Under the Program, the Exchange will establish a telecommunications 
network using private lines to link the Remote Specialists to the 
Trading Floors. Remote Specialists will have the same access to the 
Exchange's trading system (``P/COAST'') as Specialists located on the 
Trading Floors. Remote Specialists will also have access to the 
Intermarket Trading System (``ITS'') via the Regional Computer 
Interface (``RCI'') feature of P/COAST. In addition, Remote Specialists 
will routinely communicate with Exchange staff and persons on the 
Trading Floors by telephone, e-mail and facsimile.
    The Exchange believes that the rule change would significantly 
expand the structure on which equities trading is based on the 
Exchange. Accordingly, the Exchange is proposing to expand the meaning 
of the term ``trading floor,'' as used in certain of the Rules on 
Equities trading, so that it will include both the Trading Floors and 
the electronic facilities of the Exchange at remote locations. For 
example, Rule 5.1(e), which currently provides that non-members ``shall 
not consummate transactions on the trading floor,'' would be expanded 
to prohibit non-members from consummating transactions either on the 
Trading Floor or through the electronic facilities of the Exchange.
    1. Implementation: The Exchange is proposing to implement the 
Program in three phases. In Phase I, four Specialists (two in San 
Francisco and two in Los Angeles) will conduct their regular trading 
activities at locations off the Trading Floor itself but in close 
proximity within the building, for example, in a room adjacent to the 
Trading Floor. Unless it is necessary, these Specialists will not 
engage in face-to-face interactions with other floor members during 
this phase, so that the Exchange may identify and correct any problems 
that may arise. Phase I will last for approximately one month. In Phase 
II, which will last up to six months, the Exchange will permit up to 
twenty Specialists to conduct their trading activities from locations 
away from the Exchange's premises. These locations may include a home 
or an office. Finally, in Phase III, the Exchange will permit an 
unlimited expansion of the Program.
    2. Selection Process: Only Specialists who are registered with the 
Exchange pursuant to Rule 5.27 will be eligible to participate in the 
Program. The Equity Floor Trading Committee (``EFTC'') will select from 
among the applicants and will determine which candidates are best 
suited to participate in the Program. In making its selections, the 
EFTC will consider the following factors: (a) Past experience of the 
applicant, including the length of time that the applicant has served 
as a Specialist on the Exchange or on another exchange, and the nature 
of the applicant's activities as a Specialist on the Exchange or on 
another exchange; (b) recent specialist performance ratings of the 
applicant (including all available evaluation scores for the last eight 
quarters; (c) the applicant's disciplinary history; and (d) any other 
relevant factos that the EFTC may consider.
    3. Order Execution: It is anticipated that the vast majority of 
orders executed by a Remote Specialist will be orders entered 
electronically through the Exchange's Member Firm Interface (``MFI'') 
or through Floor Input.\4\ Remote Specialists will execute orders in 
the same manner as Registered

[[Page 8428]]

Specialists. All orders entered through the MFI or Floor Input will be 
entered into the Exchange's Consolidated Limited Order Book (``CLOB''), 
which will ensure that they are afforded priority pursuant to Exchange 
Rules. Incoming market and marketable limit orders are immediately 
excecuted against orders in the CLOB based on price and time priority. 
However, before any market or marketable limit order is executed, P/
COAST will display it for 15 seconds on the terminal of the Specialist 
who is representing it , so that he or she will have an opportunity to 
improve the execution price. Incoming orders other than market and 
marketable limit orders will be maintained in the CLOB, but will be 
represented by the Specialist designated to receive them. If a 
Specialist manually executes a limit order that does not have priority, 
P/COAST will generate a message that a priority violation has been 
committed so that the Specialist can take corrective action 
immediately. In addition, the Exchange's Surveillance Department will 
receive a report of the priority violation.
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    \4\ However, a relatively small number of orders will continue 
to require interaction between a Floor Broker and all of the 
Specialists in the issue.
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    4. Remote Specialist Obligations: Except as otherwise provided, 
Remote Specialist will be required to meet all of the obligations of a 
PCX Registered Specialist, including the following:
     Remote Specialist will be required to make continuous two-
sided markets during regular trading hours.
     They must engage in a course of dealings for their own 
accounts to assist in the maintenance, insofar as reasonably 
practicable, of a fair and orderly market on the Exchange, and must 
engage, to a reasonable degree under the existing circumstances, in 
dealings for their own accounts in round-lots when lack of price 
continuity or lack of depth in the round-lot market or temporary 
disparity between supply and demand in either the round-lot or the odd-
lot market exists or is reasonable to be anticipated. (Rule 5.29(f))
     They will be responsible for the execution of all orders 
that they have accepted. (Rule 5.29(f))
     They will be required to remain within the immediate 
vicinity of their P/COAST terminals commencing 30 minutes before the 
opening and throughout the trading day.\5\
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    \5\ The Exchange notes that Remote Specialists who choose not to 
remain within the immediate vicinity of their P/COAST terminals will 
be subjecting themselves to significant market risk as a result of 
executions against incoming orders and other orders in the CLOB. 
They will also be subject themselves to poor performance ratings 
pursuant to PCX Rule 5.37 if they fail to keep their markets 
current.
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     They may be required to remain one or more clerks at their 
remote locations. (Rule 5.28(e))
     They will be required to prepare trading tickets or other 
appropriate records relating to orders. (Rules 5.13(c), 528(b) and 
5.29(a))
     They will perform their obligations as odd-lot dealers in 
securities pursuant to Rule 5.34.
     The performance of Remote Specialists will be evaluated 
pursuant to PCX Rule 5.37 and they will be subject to all procedures 
and restrictions that may be based on their overall evaluation ratings.
     They will be required to meet the same capital 
requirements and net capital requirements as Registered Specialists. 
These include the requirements set forth in PCX Rule 2.2(a) and SEC 
Rule 15c3-1.
     They will be subject to all rules, policies and procedures 
governing the ITS. (Rules 5.20-5.23)
    5. Exemptions from PCX Rules: Remote Specialists are exempt from 
complying with the following Rules that otherwise apply to Specialists 
located on the Trading Floors:
     They will be required to vocalize bids or offers. (Rule 
5.5(a) and 5.30(a))
     They will not be subject to the applicable rules on floor 
decorum, floor conduct, badges, and visitors. (EFPA 1-A through 1-C).
    6. Technical Support: The Exchange will provide Remote Specialists 
with hardware and software maintenance and support through a third 
party vendor. The vendor will provide routine service and repairs of 
the Remote Specialists' equipment. PCX staff will also provide 
informational support either over the telephone or by e-mail.
    7. P/COAST Service Center: The P/COAST Service Center will provide 
support in answering status inquiries from member firms, Specialist and 
floor brokers, enters trading corrections; entering ``exception'' 
orders that would otherwise be defaulted from the MFI (e.g., order with 
special settlements and orders for non-multiply-listed stocks); and 
general assistance during fast markets.
    8. ITS Staff Support: Remote Specialists will receive the same ITS 
Staff support as Registered Specialists. Exchange staff will provide 
support by telephone, fax or e-mail, including; responding to 
complaints and facilitating problem resolution (e.g., where trade-
throughs are alleged); responding to general inquiries; performing ITS 
trade corrections; coordinating with Securities Industry Automation 
Corporation in response to system problems; processing trading halt 
requests and instructions; and providing general support for P/COAST 
ITS functions.
    9. PCX Surveillance: The Exchange believes that its current 
surveillance procedures and automated reports already cover the vast 
majority of remote trading surveillance issues, including priority 
violations, frontrunning, and other rule violations. Exchange staff 
will communicate telephonically with the Remote Specialist during the 
course of the trading day to conduct routine surveillance activities or 
to convey ruling of Floor Officials or the EFTC affecting the Remote 
Specialist. With regard to surveillance to assure that remote 
specialists will be present throughout the trading day, the Exchange 
believes that this can be conducted partly by confirming that the 
Remote Specialist is maintaining two-sided markets.
    The Exchange also expects to develop a report to identify instances 
in which a Remote Specialist fails to input quotes, and to conduct 
``spot'' checks by calling or visiting Remote Specialists at their 
locations.
    10. Communications with Floor Officials: Remote Specialists will 
communicate by telephone with Floor Officials in particular rulings.
    11. Post Cashiering: The Post Cashiering Department will maintain 
telephonic and other communication with the Remote Specialist to verify 
money settlement; to activate specialist lines of credit; to initiate 
or re-transmit ``buy-ins'' for failed trades; to address issues 
regarding specialist post capital requirements; and otherwise to 
resolve question and problem on back office functions of trade 
clearance and settlement. 
    12. PCX Administrative Information--Bulletins and Reports: The 
Exchange will install an electronic mechanism to distribute routine 
reports, bulletins and memoranda that are distributed by PCX staff. 
Prior to the opening, and in some cases during the trading day, the 
Exchange will disseminate the following reports to the Remote 
Specialists: the Trade Blotter, Security Ledgers, Bulletins, MIS 
Reports, SPE Reports, and other documents. Other PCX bulletins and 
memoranda, as well as business and personal mail, will be forwarded to 
the Remote Specialists as appropriate.
    13. Disaster Recovery/Contingency: As noted previously in the 
section on ``Technical Support,'' third party vendors will provide 
Remote Specialists with routine service and repairs of hardware and 
software. In addition, the remote operation will have a

[[Page 8429]]

configuration that includes backup capabilities and on-site resources 
in the event of local system or telecommunication problem or disaster. 
However, if a Remote Specialist's service is interrupted and cannot be 
promptly restored, PCX staff will either re-route the Remote 
Specialist's order flow to a Specialist who is affiliated with the 
Remote Specialist or will provide sufficient support and assistance to 
ensure that the Remote Specialist is adequately informed of the status 
of market and marketable limit orders that are active, so that the 
Remote Specialist can provide directions for their handling.
    (b) Basis.
    The Exchange believes the proposed rule change is consistent with 
Section 6(b) \6\ of the Act, in general, and furthers the objectives of 
Section 6(b)(5),\7\ in particular, in that it is designed to perfect 
the mechanisms of a free and open market, to promote just and equitable 
principles of trade, to facilitate transactions in securities, and in 
general, to protect investors and the public interest. In addition, the 
Exchange believes that the proposed rule change is consistent with 
Section 11A(a)(1)(B) of the Act, which states that new data processing 
and communications techniques create the opportunity for more efficient 
and effective market operations.
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    \6\ 15 U.S.C. 78f(b).
    \7\ 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 proposal is 
consistent with the Act. 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 
submissions, 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 PCX. All 
submissions should refer to File No. SR-PCX-98-41 and should be 
submitted by March 12, 1999.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-4114 Filed 2-18-99; 8:45 am]
BILLING CODE 8010-01-M