[Federal Register Volume 64, Number 182 (Tuesday, September 21, 1999)]
[Notices]
[Pages 51171-51173]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-24501]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41867; File No. SR-PCX-99-18]
September 13, 1999.


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

    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 June 4, 1999, the Pacific Exchange, Inc. (``PCX'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``Commissioin'' or 
``SEC'') the proposed rule change as described in Items I, II, and III 
below, which Items have been prepared by the PCX. 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 PCX proposes to amend PCX Rule 6.47(b), governing Facilitation 
Crosses, to provide firms with a guaranteed percentage of cross trades 
when a firm holds an order for a public customer or a broker-dealer 
(``customer order'') and an order for the proprietary account of a 
member organization (``facilitation order'') that is representing that 
customer. The text of the proposed rule change follows. Additions are 
italicized and deletions are bracketed.

para.4987  ``Crossing Orders''

Rule 6.47  Non-Facilitation (Regular Way) Crosses

    (a) No change.

Facilitation Crosses

    (b) A Floor Broker who holds an order for a public customer [of 
a member organization] or a broker-dealer (``customer order'') and 
an [facilitation] order for the proprietary account of a member 
organization that is representing that customer (the ``facilitation 
order'') may cross those [such] orders [provided that he proceeds in 
the following manner.] only if the following procedures and 
requirements are followed:
    (1) The size of the customer order subject to facilitation must 
be at least two hundred (200) contracts.
    (2) [(1)] The option order tickets for [of] both the 
facilitation order and the [public] customer order [subject to 
facilitation] must display all of the terms of such orders, 
including any [contingency] contingencies involving, and all related 
transactions in, either options or underlying or related securities. 
The Floor Broker must disclose all securities that are components of 
the customer order.
    [(2) The Floor Broker shall disclose all securities which are 
components of the order subject to facilitation and then shall 
request bids and offers for the execution of all components of the 
order, making all persons in the trading crowd, including the Order 
book Official, aware of his request for a market.]
    [(3) After providing an adequate opportunity for such bids and 
offers to be made, the Floor Broker must, on behalf of the public 
customer whose order is subject to facilitation, either bid above 
the highest bid in the market or offer below the lowest offer in the 
market, identify the order as being subject to facilitation, and 
disclose all terms and conditions of such order. After all other 
market participants are given an opportunity

[[Page 51172]]

to accept the bid or offer made on behalf of the public customer 
whose order is subject to facilitation, the Floor Broker may cross 
all or any remaining part of such order and the facilitation order 
at such customer's bid or offer by announcing in public outcry that 
he is crossing and by stating the quantity and price(s). Once such 
bid or offer has been made, the order subject to facilitation has 
precedence over any other bid or offer in the crowd at the same 
price, to trade immediately with the facilitation order. The order 
subject to facilitation may not be blocked by revised bids or 
offers; however, the bid or offer of the order subject to 
facilitation may be accepted or improved by members in the trading 
crowd or orders represented in the trading crowd.]
    (3) The Floor Broker must request bids and offers for all 
components of the orders and clearly disclose his intention to 
execute a facilitation cross transaction to the trading crowd. Once 
the trading crowd has provided a quote, it will remain in effect 
until: (A) a reasonable amount of time has passed, or (B) there is a 
significant change in the price of the underlying security, or (C) 
the facilitation market has been improved. (The term ``significant 
change'' will be interpreted on a case-by-case basis by two Floor 
Officials based upon the extent of recent trading in the option and 
in the underlying security, and any other relevant factors.)
    (4) Once a market has been established and all customer orders 
represented in the trading crowd have been satisfied, the Floor 
Broker may cross:
    (A) fifty percent (50%) of any remaining contracts at a price 
between the trading crowd's quoted market (e.g., if the trading 
crowd's quoted market is 2\1/8\-2\1/2\, and the Floor Broker is 
representing a customer order to buy 1000 contracts, then the Floor 
Broker may cross 50% of 1000 at 2\1/4\ or any other improved price); 
or
    (B) twenty-five (25%) of the contracts at the trading crowd's 
best bid or offer (e.g., if the trading crowd's quoted market size 
is 500 x 500, and the Floor Broker is representing a customer order 
to buy 1000 contracts, then the Floor Broker may cross 25% of 1000 
at the trading crowd's best bid or offer).
    (5) If the facilitation trade occurs at the LMM's quoted bid or 
offer in their allocated issue, then the LMM's guaranteed 
participation level shall apply only to the number of contracts 
remaining after all customer orders and the firm facilitation order 
being represented by the Floor Broker have been satisfied pursuant 
to this rule. If the trade occurs at a price other than the LMM's 
quoted bid or offer, the LMM is entitled to no guaranteed 
participation.
    (6) The members of the trading crowd who established the 
facilitation market will have priority over all other orders that 
were not represented in the trading crowd at the time that the 
facilitation market was established and will maintain priority over 
non-customer orders unless the facilitation quote is improved. A 
Floor Broker who is holding a customer order and a facilitation 
order and who calls for a facilitation market will be deemed to be 
representing both the customer order and the facilitation order, so 
that the customer order and the facilitation order will also have 
priority over all other orders that were not being represented in 
the trading crowd at the time that the facilitation market was 
established.

Crossing of Solicited Orders

    (c) No Change.
    Commentary .01-.06 No Change.

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 PCX 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 PCX 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
    Background. Currently, PCX Rule 6.47(b) does not guarantee a firm 
any cross trades when that firm holds an order for a public customer 
and a facilitation order for the proprietary account of a member 
organization that is representing that customer order. The rule states 
that a Floor Broker holding an order for a public customer and a 
facilitation order may cross such orders provided he discloses all 
securities that are components of the order subject to facilitation; 
requests bids and offers for the execution of all components of the 
order; and makes all persons in the trading crowd, including the Order 
Book Official, aware of his request for a market. After providing an 
adequate opportunity for such bids and offers to be made, the Floor 
Broker must then identify the order as being subject to facilitation, 
and disclose all terms and conditions of such order. After all other 
market participants are given an opportunity to accept the bid or offer 
made on behalf of the public customer whose order is subject to 
facilitation, the Floor Broker may cross all or any remaining part 
(whatever maybe left after the trading crowd has had an opportunity to 
trade) of such order and the facilitation order at such customer's bid 
or offer by announcing in public outcry that he is crossing and by 
stating the quantity and price(s). The current rule does not guarantee 
the Floor Broker who brings the customer order to the trading floor any 
part of the cross trades.
    Proposal. The PCX proposes to change PCX Rule 6.47(b), governing 
facilitation crosses, to provide firms with a guaranteed percentage of 
cross trades when a firm holds a customer order and a facilitation 
order. Specifically, for customer orders of at least 200 contracts, the 
PCX proposes that a Floor Broker representing the orders must disclose 
all securities that are components of the customer order and must 
display all of the terms of such orders on the option order tickets for 
both the customer order and the facilitation order (including any 
contingencies involving, and all related transactions in, either 
options or underlying or related securities). The PCX further proposes 
that the Floor Broker must also request bids and offers for all 
components of the orders and clearly disclose his intention to execute 
a facilitation cross transaction to the trading crowd.\3\
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    \3\ Proposed subsection (b)(3) states that once the trading 
crowd has provided a quote, it will remain in effect until: (A) A 
reasonable amount of time has passed or (B) there is a significant 
change in the price of the underlying security or (C) the 
facilitation market has been improved. (The term ``significant 
change'' will be interpreted on a case-by-case basis by two Floor 
Officials based upon the extent of recent trading in the option and 
in the underlying security, and any other relevant factors.)
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    The PCX proposes that, once a market has been established and all 
customer orders represented in the trading crowd have been satisfied, 
the Floor Broker may cross fifty percent (50%) of any remaining 
contracts at a price between the trading crowd's quoted market, or 
twenty-five percent (25%) of the contracts at the trading crowd's best 
bid or offer.
    In addition, the PCX proposes that if the facilitation trade occurs 
at the LMM's quoted bid or offer in its allocated issue, then the LMM's 
guaranteed participation level shall apply only to the number of 
contracts remaining after all customer orders and the firm facilitation 
order being represented by the Floor Broker have been satisfied 
pursuant to PCX Rule 6.47(b). If the trade occurs at a price other than 
the LMM's quoted bid or offer, the LMM is entitled to no guaranteed 
participation.
    Finally, with regard to priority of orders, the PCX proposes that 
the members of the trading crowd who established the facilitation 
market will have priority over all other orders that were not 
represented in the trading crowd at the time that the facilitation 
market was established and will maintain priority over non-customer 
orders unless the facilitation quote is

[[Page 51173]]

improved. Furthermore, the PCX proposes that a Floor Broker who is 
holding a customer order and a facilitation order who calls for a 
facilitation market will be deemed to be representing both the customer 
order and the facilitation order, so that the customer order and the 
facilitation order will also have priority over all other orders that 
were not being represented in the trading crowd at the time that the 
facilitation market was established.
    The Exchange believes that the effect of this rule change will be 
to provide Market Makers with an additional incentive to quote tighter 
markets in response to a request for quotes and at the same time 
encourage member firms to bring their order flow to the PCX options 
floor. In addition, the Exchange believes that the rule change will 
provide Floor Brokers with an additional incentive to trade between the 
quoted bid and ask, thereby passing on the benefits of additional price 
discovery to customers.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
Section 6(b) \4\ of the Act, in general, and furthers the objectives of 
Section 6(b)(5) \5\ in particular, become it is designed to promote 
just and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in facilitating transactions in 
securities, and to remove impediments and perfect the mechanisms of a 
free and open market and a national market system and to protect 
investors and the public interest.
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    \4\ 15 U.S.C. 78f(b).
    \5\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.

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

    Written comments on the proposed rule change were neither solicited 
nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    Within 35 days of the 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. In particular, the Commission seeks comment on 
whether the proposed rule change will result in fair executions for the 
various orders and parties represented in the crossing transaction.\6\ 
Persons making written submissions should file six copies thereof with 
the Secretary, Securities and Exchange Commission, 450 Fifth Street, 
NW., Washington, D.C. 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 will also be available for inspection 
and copying at the principal office of the PCX. All submissions should 
refer to File No. SR-PCX-99-18 and should be submitted by October 12, 
1999.
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    \6\ The PCX has also filed a proposed rule change concerning 
``cross-only'' contingency orders (SR-PCX-99-31).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-24501 Filed 9-20-99; 8:45 am]
BILLING CODE 8010-01-M