[Federal Register Volume 65, Number 111 (Thursday, June 8, 2000)]
[Notices]
[Pages 36489-36492]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-14406]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42861; File No. SR-PCX-99-45]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 to the Proposed Rule Change by the Pacific 
Exchange, Inc. Relating to House-Keeping Amendments to Rules on Floor 
Brokers

May 30, 2000.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rules 19b-4 thereunder,\2\ notice is hereby given 
that on November 5, 1999, the Pacific Exchange, Inc. (``PCX'' 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 
Exchange. Additionally, on March 23, 2000, the Exchange filed with the 
Commission Amendment No. 1 to the proposal.\3\ 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 from Robert P. Pacileo, Senior Attorney, 
Regulatory Policy, PCX, to Nancy Sanow, Senior Special Counsel, 
Division of Market Regulations, SEC, dated March 22, 2000. The 
Amendment corrects several typographical errors and clarifies the 
wording of the proposed rule change.
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I. Self-Regulatory Organization's Statement on the Terms of 
Substance of the Proposed Rule Change

    The Exchange is proposing to modify its options Floor Broker rules 
by renumbering certain Options Floor Procedure Advices (``OFPAs''), 
clarifying existing provisions, eliminating superfluous provisions, and 
incorporating current policies and procedures into the text of Rule 6. 
The text of the proposed rule change is available at the PCX 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

[[Page 36490]]

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
    With regard to current PCX rules governing activities of Floor 
Brokers, the Exchange is proposing to make the following changes to the 
text of Rule 6 (``Options Trading--Rules Principally Applicable to 
Trading of Options Contracts''):
    First, the Exchange proposes to change the procedures on 
registration of Floor Brokers pursuant to Rule 6.44 \4\ Currently, the 
application for registration as a Floor Broker will be approved when 
the applicant passes a Floor Broker examination. The Exchange proposes 
to eliminate the current rule provision stating that the Options Floor 
Trading Committee (``OFTC'') must review and approve each application 
as outlined in Rule 6.44. The Exchange believes that the OFTC review 
and approval of each Floor Broker is unnecessary because each Floor 
Broker's name is routinely posted. If there are any problems with a 
particular Floor Broker that the Exchange has not otherwise identified, 
those problems can be brought to the attention of the Exchange's 
Membership Committee before the Floor Broker's application for 
membership is approved. In addition, the rule, as amended, will provide 
that an applicant Floor Broker's name will be posted on the bulletin 
board of the floor of the Exchange for ten calendar days (rather than 
three business days, as currently stated).\5\
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    \4\ Rule 6.44 currently states that:
    ``An applicant for registration as a Floor Broker shall file his 
application in writing with the Department of Operations on such 
forms as the Exchange may prescribe. Applications shall be reviewed 
by the Options Floor Trading Committee, which shall consider an 
applicant's ability as demonstrated by his passing a Floor Broker 
examination prescribed by the Exchange, or such other factors as the 
Option Floor Trading Committee deems appropriate. After reviewing 
the application, the Options Floor Trading Committee shall either 
approve or disapprove the applicant's registration as a Floor 
Broker. Before a registration shall become effective, the Exchange, 
upon direction of the Options Floor Trading Committee, shall post 
the name of the applicant on the bulletin board on the Floor of the 
Exchange for at least three (3) business days. The registration of 
any person as a Floor Broker may be suspended or terminated by the 
Options Floor Trading Committee upon a determination that such 
person has failed to perform properly as a Floor Broker.''
    \5\ Similar changes are proposed for registration of Market 
Makers under Rule 6.33. See Securities Exchange Act Release No. 
42035 (Oct. 19, 1999), 645 FR 57681 (Oct. 26, 1999) (File No. SR-
PCX-99-13).
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    Second, the Exchange proposes to add a provision to Rule 6.45 which 
states that, regarding FLEX Options, ``Floor Brokers may not act as 
such in respect of FLEX Options contracts unless one or more Letter(s) 
of Authorization on behalf of such Floor Brokers has been issued by a 
Clearing Member in accordance with Rule 8.115(b).'' This restates the 
same requirement as provided in Rule 8.115(b), and is being added to 
centralize the obligations of Floor Brokers in one section of the 
rules.
    Third, the Exchange proposes to renumber OFPA A-10, Subject: Broker 
Responsibility on Print Throughs, as Rule 6.46(d).\6\ The Exchange also 
proposes to make technical changes to new Rule 6.46(d). Specifically, 
the Exchange proposes to eliminate the third sentence of OFPA A-10, 
(proposed Rule 6.46(d)), which states that ``[w]ith respect to trading 
during the day, the Options Floor Trading Committee finds that it is a 
generally accepted industry practice that a Broker is responsible for 
whatever number of contracts print-through a limit order.'' The 
Exchange proposes to eliminate this language because it believes it is 
redundant and superfluous given the text of Rule 6.46 pertaining to the 
responsibilities of Floor Brokers and proposed Rule 6.46(d), which 
requires that Floor Brokers take responsibility for print-throughs. The 
Exchange proposes this rule change to centralize the responsibilities 
of Floor Broker with respect to print-throughs.
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    \6\ OFPA A-10 states that:
    ``Pursuant to Rule 6.46(a), the Options Floor Trading Committee 
has made a determination regarding print-throughs on limit orders 
held either by a Floor Broker, or an Order Book Official. This 
determination distinguishes print-throughs which occur intra-day 
from print-throughs occurring on the opening. With respect to 
trading during the day, the Options Floor Trading Committee finds 
that it is a generally accepted industry practice that a Broker is 
responsible for whatever number of contracts print-through a limit 
order. when a print-through is discovered, the Broker should 
ascertain whether the limit price or a more favorable price is 
available. If a more favorable price is available, the order for the 
customer should be filled at the more favorable price; if a more 
favorable price is not available, the Broker, or the Exchange, to 
the extent provided in Rule 6.59, in the case of a Book trade, is 
responsible at the original limit price for whatever number of 
contracts have traded-through the limit. The Options Floor Trading 
Committee has determined that print-throughs on the opening should 
be treated differently than those which occur intra-day. On the 
opening, the Floor Broker, or the Exchange, to the extent provided 
in Rule 6.59, in the case of a Book trade, is responsible for the 
number of contracts which trade-through the customer's limit at the 
opening price, rather than at the limit price. If a more favorable 
price than the opening price is available, the order should be 
filled at the more favorable price.''
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    Fourth, the Exchange proposes to renumber OFPA A-11, Subject: 
Broker Responsibility to Cancel Best Bid or Best Offer, as Rule 
6.46(e).\7\ The Exchange proposes this change to centralize the 
responsibilities of Floor Brokers with respect to their 
responsibilities to cancel bids and offers.
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    \7\ OFPA A-11 states that:
    ``Under certain circumstances a best bid or best or best offer 
is disseminated as a result of an order presented by a Floor Broker. 
It shall be the responsibility of the Floor Broker holding such 
order to instruct the Order Book staff to remove such bid or offer 
when it is canceled or when such order which represented such best 
bid or offer has been filled in its entirety.''
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    Fifth, the Exchange proposes to renumber OFPA D-4, Use of Order 
Which Specify More than One Contract, as Rule 6.46(f).\8\ The Exchange 
proposes to clarify the types of orders referred to in this rule. 
Specifically, where Floor Brokers may accept orders that bid for or 
offer a specified number of contracts and no less, the Exchange 
proposes to codify that these orders include designated as ``fill or 
kill,'' ``all or none,'' or ``immediate or cancel,'' (including such 
orders specifying that any unfilled portion of a multiple order is to 
be immediately canceled). However, the Floor Brokers must assure that 
all such orders (including the contingency) are vocalized in the 
trading crowd, and that the bid or offer is not disseminated. The 
Exchange proposes this change to clarify and centralize the 
responsibilities of Floor Brokers with respect to trading 
responsibilities.
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    \8\ OFPA D-4 states that:
    ``Rule 6.74 states in part: `A bid or offer for more than one 
option contract shall be deemed to be for that amount or any lesser 
number of option contracts, unless specified otherwise.' This Rule 
permits Floor Brokers to accept orders which bid for or offer a 
specified number of contracts and no less. Thus the Rule permits 
vocalization of such bids or offers in the trading crowds. However, 
any Floor Broker making a bid or offer contingent upon the execution 
of a specified amount of contracts must vocalize such contingent 
[sic] and should use diligence in assuring that the posted market 
does not reflect such bid or offer. `Immediate or cancel' orders 
which specify that any unfilled portion of a multiple order is to be 
immediately canceled, are covered by this provision.''
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    Sixth, the Exchange also proposes to change Rule 6.46, Commentary 
.02, which currently requires Floor Brokers to make all persons in the 
trading crowd aware of each request for a quote. Since this requirement 
is not feasible when applied to large, active trading crowds, the 
Exchange proposes to modify the rule to require Floor Brokers to make 
reasonable attempts to make all persons in the crowd aware of such 
requests.
    Seventh, the Exchange proposes to add Rule 6.47(c)(5), relating to 
crossing

[[Page 36491]]

of solicited orders, to allow a Floor Broker to step out of a crowd to 
solicit interest, after announcing an order, and then return to the 
crowd without re-announcing the order if he continued to be within 
hearing distance while outside the crowd. Specifically, the Exchange 
proposes that if a Floor Broker announces an order in the trading 
crowd, and then steps out of the trading crowd to solicit interest, but 
continues to be within hearing distance, the Floor Broker need not re-
announce the order upon returning to the trading crowd. This change is 
intended to codify the current practice on the trading floor.
    Eighth, the Exchange proposes to renumber OFPA A-6, Subject: 
Responsibility of Floor Brokers in Effecting A Cross Trassanaction as 
new PCX Rules 6.47(d), (e) and (f).\9\ Specifically, the Exchange 
proposes to renumber paragraph one of OFPA A-6, pertaining to the 
requirement of a Floor Broker to allow members in the trading crowd a 
reasonable period in which to respond to the bid and/or offer prior to 
consummating a cross transaction, as Rule 6.47(d).
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    \9\ ``Floor Brokers are cautioned that they must allow members 
in the trading crowd a reasonable period in which to respond to the 
bid and/or offer prior to consummating the cross transaction. While 
the Options Floor Trading Committee will not attempt to define a 
reasonable period in terms of a specific time limit, they will deem 
an obvious attempt to execute the cross in an uninterrupted sequence 
with the announcement of the bid and offer to be a violation of Rule 
6.47, and grounds for objection to the cross transaction. In some 
instances, a Floor Broker may deem it necessary to place one side of 
the proposed cross transaction on the Order Book with the intention 
of effecting the cross transacting with the Order Book. To effect 
such a transaction, the Floor Broker must use the following 
procedure: Following the announcement of the new bid or offer by the 
Order Book Official or his clerk, the Floor Broker must again 
request a market in the series, and upon determination that the bid 
or offer represented by the Order Book is the best market, he may 
then execute the cross by trading with the order on the Book. When a 
stock/option order is taken to a crowd for execution, the stock 
transaction must be effected prior to the option transaction 
pursuant to Rule 6.47, Commentary .04. The following procedure 
should be observed: After agreement with other members of the crowd 
has been reached as to the terms of the transaction, the option 
order tickets shall be written up and time-stamped, However, the 
order tickets should not be turned in to the Order Book Official at 
this time. The members shall attempt to immediately effect the 
transaction in the underlying or related security. If the stock 
transaction cannot be executed immediately or is effected at a price 
different than the agreed-upon price, the members shall not be held 
to the option transaction. If the stock transaction is effected at 
the agreed-upon price, then all the members who participated in the 
option transaction shall be held to their agreed-upon price. At the 
time the stock transaction is effected, the option trade tickets 
should be given to the Order Book Official. This procedure applies 
to all executions of stock/option orders.''
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    The Exchange also proposes to renumber the second and third 
paragraphs of OFPA A-6 as Rule 6.47(e). The second and third paragraphs 
of OFPA AA-6 pertain to situations when a Floor Broker may deem it 
necessary to place one side of the proposed cross transactions on the 
Order Book with the intention of effecting the cross transaction with 
the Order Book.
    With respect to the renumbering of OFPA AA-6, the Exchange proposes 
to renumber the fourth and fifth paragraphs of OFPA AA-6, pertaining to 
stock/option orders, as Rule 6.47(f). The Exchange proposes these 
changes to centralize rules relating to crossing transactions within 
Rule 6.47.
    Ninth, the Exchange proposes to renumber OFPA AA-9, Subject: 
Discretionary Transactions (Floor Brokers) as Rule 6.48(b).\10\ The 
Exchange also proposes to renumber OFPA BA-10, Subject: Discretionary 
Transactions by Market Makers, as Rule 6.48(c).\11\ The Exchange 
proposes to renumber OFPA A-9 and B-10 to centralize obligations of 
Members regarding Discretionary Transactions by Floor Brokers and 
Market Makers.
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    \10\ OFPA A-9 states that:
    ``Pursuant to Rule 6.48, the Options Floor Trading Committee has 
determined that no Floor Broker shall hold concurrently a `not held' 
market order to buy [sic] a `not held' market order to sell (or 
orders which have the effect of such `not held' market orders to buy 
and to sell) the same series of options for the same account or for 
accounts of the same beneficial owner. Holding such orders will be 
interpreted as allowing the Floor Broker discretion with respect to 
whether to purchase or sell such options. A `not held' order is an 
order market `not held,' `NH' or which bears any qualifying notation 
giving discretion as to the price or time at which such order is to 
be executed.''
    \11\ OFPA B-10 states that:
    ``Rule 6.48 provides that a Floor Broker shall not exercise 
discretion with respect to choice of class or series of options to 
be bought or sold, number of contracts to be bought or sold, or 
whether the trnsaction shall be a purchase or a sale. It further 
provides that a Market Maker shall not exercise discretion over an 
account unless he has a direct interest in such account. The Options 
Floor Trading Committee has determined that a Market Maker may not 
exercise discretion over any account other than: (i) A joint account 
approved pursuant to Rule 6.39, or (ii) an account in which he has a 
direct interest. For purposes of this Advice and Rule 6.48, the term 
`direct interest' in an account shall be limited in its meaning to 
include only a participation in the profits and losses in such 
account, or in the case of a partnership or corporation, a 
representative of such partnership or corporation who has a 
supervisory responsibility over such account. Furthermore, only 
persons registered as Market Makers and subject to the performance 
obligations set forth in Rule 6.37, may exercise discretion over an 
account. A Market Maker wishing to effect such discretionary 
transactions for accounts other than his personal account or a joint 
account must enter the order with a Floor Broker and the procedures 
set forth in Options Floor Procedure Advice BA-6 shall be applicable 
with the following modifications: (A) The name of the Market Maker 
for whom the transaction is being executed must be printed at the 
bottom of the ticket (BA-6A-1(c)), along with the badge number of 
the Market Maker exercising discretion (i.e., Joe Trader/M07); and 
(B) A `D' shall be placed after the Market Maker's number, for whose 
account the trade is executed, in the firm box (i.e., M05 D). NOTE: 
The identification of the order as a discretionary order is required 
under Rule VI, Section 43(7), `Record of Orders.'''
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    Tenth, the Exchange proposes to adopt new Rule 6.49(a) to provide 
that Floor Brokers who are required to establish and maintain error 
accounts pursuant to Rule 4.21 may only use such accounts for the 
purpose of correcting bona fide errors. The Exchange proposes this rule 
change to clarify the Floor Broker's proper use of an error account. 
This change is consistent with the provisions of Rule 6.14.
    Finally, the Exchange proposes to renumber OFPA A-2, Subject: Floor 
Broker Acting as Both Principal and Agent in the Same Transaction, as 
Rule 6.50.\12\ The Exchange proposes these changes to centralize all 
rules applicable to Floor Brokers with respect to use of error 
accounts.
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    \12\ OFPA A-2 states that:
    ``Under Rule 6.43, a Floor Broker `is an individual * * * who is 
registered with the Exchange for the purpose, while on the Exchange 
Floor, of accepting and executing option orders received from 
members.' Pursuant to this Rule, a Floor Broker holding an agency 
order shall under no circumstances fill any part of such order as 
principal unless he inadvertenly `misses the market' for the account 
of his customer and, owing a report at a specified price or better, 
cannot effect the necessary transaction except by filling all or 
some portion of the order as principal. For the purposes of 
facilitating a customer order via the firm error account, in 
connection with a broker's `missing the market,' the Options Floor 
Trading Committee has determined that the following procedures shall 
be applicable. (1) Floor Broker errors (positions resulting from a 
broker's error or omission) shall be liquidated promptly except for 
unusual circumstances which are beyond the control of such Floor 
Broker. (2) Error account positions not liquidated by the next 
business day shall be maintained in a customer (investment) account 
and subject to customer margin. (3) Error account positions, not 
initially established as part of an investment transaction (i.e., 
executed as agent) may not subsequently be transferred, adjusted, or 
journaled into a market maker account. (4) The price and size of the 
transaction, if made through the Exchange's adjustment system, must 
be justified by the market condition at the time the order was 
entered, if it was a market order and at the limit or better if it 
was a limit order.''
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2. Basis
    The Exchange believes that the proposal is consistent with Section 
6(b) \13\ of the Act, in general, and Section 6(b)(5) \14\ in 
particular, because it is designed to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, and, in general, to protect investors and the public 
interest.
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    \13\ 15 USC 78f(b).
    \14\ 15 USC 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. 20549-0609. 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 
PCX. All submissions should refer to File No. SR-PCX-99-45 and should 
be submitted by June 29, 2000.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-14406 Filed 6-7-00; 8:45 am]
BILLING CODE 8010-01-M