[Federal Register Volume 65, Number 138 (Tuesday, July 18, 2000)]
[Notices]
[Pages 44559-44561]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-18072]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43025; File No. SR-PCX-99-40]


Self-Regulatory Organizations; Pacific Exchange, Inc.; Order 
Approving Proposed Rule Change and Notice of Filing and Order Granting 
Accelerated Approval of Amendment No. 1 to the Proposed Rule Change 
Relating to Order Book Officials

July 12, 2000.

I. Introduction

    On October 8, 1999, the Pacific Exchange, Inc. (``PCX'' or 
``Exchange'') submitted to the Securities and Exchange Commission 
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to modify its rules pertaining to 
the Exchange's order book officials (``OBOs''). The proposed rule 
change was published for comment in the Federal Register on November 4, 
1999.\3\ The Commission received on comments on the proposal. On May 
25, 2000, the Exchange submitted Amendment No. 1 to the proposed rule 
change.\4\ This order approves the proposal, as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Exchange Act Release No. 42068 (October 28, 1999), 64 FR 
60259.
    \4\ Letter from Robert P. Pacileo, Senior Attorney, Regulatory 
Policy, PCX, to Nancy J. Sanow, Senior Special Counsel, Division of 
Market Regulation, SEC, dated May 24, 2000 (``Amendment No. 1''). In 
Amendment No. 1, the Exchange clarified how the Exchange determines 
when an order is considered to be reasonably away from the book 
market, pursuant to PCX Rule 6.52(c). In addition, the Exchange 
stated that a floor broker that violates PCX Rule 6.52(c) may be 
subject to a Minor Rule Plan Violation under PCX Rule 10.13(h)(16) 
or may be found to be in violation of PCX Rule 6.2(c)(2).

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[[Page 44560]]

II. Description of the Proposal

    The Exchange proposes to amend PCX Rule 6 (``Options Trading--Rules 
Principally Applicable to Trading of Options Contracts'') by deleting 
certain Options Floor Procedure Advices (``OFPAs'') and incorporating 
their relevant language into the text of PCX Rule 6.
    OFPA E-2 addresses market maker assignments and will be 
incorporated into PCX Rule 6.51(b). This proposed change will require 
that a list of market makers holding primary appointments in a 
particular issue be maintained by the OBO at each trading post where 
the issue is traded. This modifies the current rule by requiring the 
OBO to maintain the market maker appointment list, instead of the 
Options Floor Manager and the Options Appointment Committee, which 
currently maintain the lists.
    OFPA A-4, which addresses the timeliness of entering orders in the 
limit order book, is proposed to become PCX Rule 6.52(c). In addition, 
the Exchange proposes to require OBOs to report to Floor Officials, 
instead of the Options Floor Trading Committee (``OFTC''), any 
instances that appear to violate a floor broker's obligation to ensure 
that the urgency of dealing with the book at any given moment is 
consistent with the maintenance of a fair and orderly book market. 
Floor brokers are required to enter orders into the book in a timely 
manner. In some instances, however, a floor broker's attempt to enter 
an order that is reasonably away from the market,\5\ which therefore 
does not possess an immediate urgency, may be disruptive to the book 
market. In such instances, the OBO is currently required to report such 
disruptive behavior to the OFTC. The Exchange proposes to permit the 
OBO to report such violations to a Floor Official instead of the 
OFTC.\61\
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    \5\ According to the Exchange, floor officials determine on a 
case-by-case basis if an order is reasonably away from the book 
market by considering, among other things, market volatility, 
spreads, unusual market conditions, and the number of contracts 
traded in the issue. See Amendment No. 1.
    \6\ A floor broker that attempts to enter an order that is 
reasonably away from the book market may be found in violation of 
Minor Rule Plan Violation Rule 10.13(h)(16) or may be found in 
violation of PCX Rule 6.2(c)(2) regarding standards of conduct on 
the floor. Upon a report by an OBO, the Floor Official will document 
the alleged violation and forward it to the Exchange's Enforcement 
Division for review. See Amendment No. 1.
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    In addition, the Exchange proposes to delete the last sentence of 
Commentary .01 to PCX Rule 6.52. This sentence currently states ``(a)s 
of the effective date of these rules, the Committee has not designated 
any additional types of orders that may be accepted by the order book 
officials.''
    Finally, OFPA B-7, which details when a call for market makers is 
issued, is proposed to become Commentary .01 to PCX Rule 6.53; and OFPA 
G-4, which defines the term ``displayed'' as used in PCX Rule 6.56, is 
proposed to be added to the text of PCX Rule 6.56. Neither of these two 
proposals contains any substantive amendments.

III. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange.\7\ In 
particular, the Commission finds that the proposed rule change is 
consistent with the requirements of Section 6(b)(5) of the Act,\8\ 
which requires, among other things, that the rules of an exchange be 
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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    \7\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \8\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that the proposed rule change should foster 
efficiency in the implementation and enforcement of the Exchange's 
rules. Currently, members have to refer to both the Exchange's rules as 
well as the OFPAs to ensure that they are complying with the rules of 
the Exchange. The proposal combines selected OFPAs and Exchange rules 
that address the obligations of OBOs into one location. The Commission 
believes that this change should make it easier for Exchange members to 
locate pertinent rule language.
    The proposed rule change also contains some amendments to the 
Exchange's current procedures. For example, OBOs will now be required 
to maintain market maker assignment lists at each trading post. 
Currently, the Options Floor Manager, along with the Options 
Appointment Committee maintain the market maker assignment list. The 
Commission believes that because the OBO will be able to provide market 
maker assignment information faster than the current procedure, this 
change should foster efficiency on the floor of the Exchange. In 
addition, this proposal should assist trading functions on the floor 
because market makers are more readily identifiable by OBOs.
    The Commission also finds the proposal to amend the procedure for 
reporting violations by floor brokers of their obligation to deal with 
the book in a manner that is consistent with the maintenance of an 
orderly book market to be consistent with the Act. Currently, such 
violations by floor brokers must be reported to the entire OFTC. Upon 
approval of this order, OBOs will have to report such violations to a 
Floor Official. This should allow the Exchange to take more immediate 
action after a violation occurs because OBOs will only have to report 
disruptive action to a Floor Official instead of the entire OFTC.
    The Exchange proposed to delete language in Commentary .01 to PCX 
Rule 6.52, which relates to the OFTC's authority to designate the types 
of orders that must be accepted by the OBOs. The Commission believes 
that the deleted language is redundant and, therefore, unnecessary when 
read in relation to the first sentence of the Commentary. The first 
sentence specifically states that OBOs are obligated to accept limit 
orders and such other orders as may be designated by the OFTC. The 
deleted language only states that no other orders have been so 
designated by the OFTC as of the date of the Rules. Thus, OBOs are 
still required to accept all orders designated by the OFTC.
    Finally, the Commission finds good cause to accelerate approval of 
Amendment No. 1 to the proposed rule change prior to the thirtieth day 
after the date of publication of notice thereof in the Federal 
Register. In Amendment No. 1, the Exchange clarified how Floor 
Officials determine if an order is reasonably away from the book market 
for purposes of proposed PCX Rule 6.52(c). In addition, the Exchange 
stated that floor brokers will be subject to disciplinary action for 
violations of proposed PCX Rule 6.52(c). The commission believes that 
Amendment No. 1 provides only further clarification to the proposed 
rule change and does not change the substance of the proposed rule. 
Therefore, the Commission believes that good cause exists, consistent 
with Section 6(b)(5) \9\

[[Page 44561]]

and Section 19(b) \10\ of the Act, to accelerate approval of Amendment 
No. 1 to the proposed rule change.
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    \9\ 15 U.S.C. 78f(b)(5).
    \10\ 15 U.S.C. 78s(b).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\11\ that the proposed rule change (SR-PCX-99-40), as amended, is 
approved.
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    \11\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority. \12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-18072 Filed 7-17-00; 8:45 am]
BILLING CODE 8010-01-M