[Federal Register Volume 65, Number 164 (Wednesday, August 23, 2000)]
[Notices]
[Pages 51392-51395]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-21435]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43149; File No. SR-PCX-99-44]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Pacific Exchange, Inc. Relating to Changes to Rule 6, 
Options Trading, Trading Practices and Procedures

August 11, 2000.
    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 October 29, 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. On January 7, 2000, the PCX submitted Amendment No. 1 to the 
proposed rule change.\3\ On May 25, 2000, the PCX submitted Amendment 
No. 2 to the proposed rule change.\4\ 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\ Letter from Robert P. Pacileo, Staff Attorney, Regulatory 
Policy, PCX, to Richard Strasser, Assistant Director, Division of 
Market Regulation (``Division''), SEC, dated January 6, 2000 
(``Amendment No. 1''). In Amendment No. 1, the Exchange proposed to 
eliminate Options Floor Procedure Advices (``OFPA'') D-7 and D-8b 
because the provisions found in these OFPAs are already addressed in 
current PCX Rules 6.67 and 6.76 respectively.
    \4\ Letter from Robert P. Pacileo, Senior Attorney, Regulatory 
Policy, PCX, to Jack Drogin, Assistant Director, Division, SEC, 
dated May 24, 2000 (``Amendment No. 2''). In Amendment No. 2, the 
PCX clarified the purpose of the proposed changes to PCX Rule 
6.64(7), PCX Rule 6.64(c), PCX Rule 6.67(c)(1), PCX Rule 6.69, PCX 
Rule 6.70, Commentary .01 to PCX Rule .673, and PCX Rule 6.75. In 
addition, the Exchange corrected typographical errors, clarified the 
proposed changes made to PCX Rule 6.64(b)(8) and explained why OFPA 
F-1 is proposed to be deleted.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The PCX proposed to modify its rules relating to trading practices 
and procedures on the options floor by clarifying existing provisions, 
eliminating superfluous provisions, incorporating current policies and 
procedures, and merging certain OFPAs into the text of PCX Rule 6. The 
text of the proposed rule change is available at the Office of the 
Secretary, 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 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 options trading practices and procedures, the 
Exchange is proposing to make the following changes to the text of PCX 
Rule 6.
    a. OFPAs: The Exchange proposes to delete the following OFPAs: OFPA 
A-1, Subject: Responsibility of Floor Brokers at the Opening; OFPA A-3, 
Subject: Procedure for Entering Orders in the Book Under Certain 
Circumstances; OFPA A-7, Subject: Floor Broker Giving Up a Name Other 
Than His Own as Executing Member; OFPA C-1, Subject: Procedures for 
Opening Rotations; OFPA D-7, Subject: Expressing Fractions in Writing; 
\5\ OFPA D-8b, Subject: Priority on Split Price Transactions,\6\ OFPA 
D-11, Subject: Record Retention Requirements; OFPA F-5, Subject: Means 
of Communication on the Options Floor; OFPA G-1, Subject: Options 
Transactions Based on Erroneous Prints of Underlying Security; OFPA G-
2, Subject: Imbalance of Orders at Openings; OFPA G-5, Subject: Trading 
Procedures for Combination, Spread, or Straddle Orders Under Priority 
Rules; OFPA G-

[[Page 51393]]

10, Subject: Public Outcry/OBO Awareness; and OFPA G-12, Subject: 
Reporting of Trade Information. The Exchange proposes to delete these 
OFPAs and to incorporate relevant language from them into the text of 
PCX Rule 6 to centralize rules and obligations pertaining to options 
trading practices and procedures.
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    \5\ See Amendment No. 1.
    \6\ Id.
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    b. Proposed PCX Rule 6.64, Trading Rotations: The PCX proposes to 
make several changes to PCX Rule 6.64 relating to trading rotations.\7\ 
First, the Exchange proposes to allow two Floor Officials, rather than 
the OFTC, as currently required, to direct that a trading rotation be 
employed. The Exchange proposes this change to expedite the trading 
rotation process.
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    \7\ PCX Rule 6.64 currently states that a ``trading rotation'' 
is a series of very brief time periods during each of which bids, 
offers, and transactions in only a single, specified option contract 
can be made. The Options Floor Trading Committee (``OFTC'') may 
direct that one or more trading rotations be employed on any 
business day to aid in producing a fair and orderly market. For each 
rotation so employed, the OFTC shall specify the particular option 
contracts to be included and the sequence of such option contracts 
in the rotation. Two or more trading rotations may be employed 
simultaneously, if the OFTC so prescribes.
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    Second, the Exchange proposes to modify and renumber PCX Rule 6.64, 
Commentary .01(a) as PCX Rule 6.64(b),\8\ OFPA C-1, Subject Procedures 
for Opening Rotations, as PCX Rule 6.64(b)(1) through (7), and OFPA G-
2, Subject: Imbalance of Orders at Openings, as PCX Rule 6.64(b)(8). 
The Exchange proposes these changes to codify and centralize the 
responsibilities of the OBO at the opening rotation in the text of PCX 
Rule 6.
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    \8\ Current PCX Rule 6.64, Commentary .01(a) states that the 
opening rotation, when used, shall be held promptly following the 
opening of the underlying security on the principal market where it 
is traded. As a rule, an Order Book Official (``OBO'') acting in 
more than one class of options should open them in the same order in 
which opening transactions are reported in the underlying 
securities. In conducting each such opening rotation, the OBO should 
first open the one or more series of options of a given class having 
the nearest expiration, then proceed to the series of options having 
the next most distant expiration, and so forth, until all series 
have been opened. Except as otherwise provided by the OFTC, if both 
puts and calls covering the same underlying security are traded, the 
OBO shall determine which type of option should open first, and may 
alternate the opening of put series and call series or may open all 
series of one type before opening any series of the other type, 
depending on current market conditions.
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    Third, the Exchange proposes to renumber PCX Rule 6.64, Commentary 
.01(b) as PCX Rule 6.64(c).\9\ In addition, the Exchange proposes to 
modify procedures under proposed PCX Rule 6.64(c) whereby book staff 
should notify floor brokers by 12:50 p.m. that a closing rotation may 
be necessary, and a procedure whereby a closing rotation should 
commence at least ten minutes after the trading floor has been 
notified. The Exchange also proposes to codify an express requirement 
in proposed PCX Rule 6.64(c) which states that only orders that have 
been entered before 1:02 p.m. are eligible for execution during the 
closing rotation. The Exchange proposes these changes to simplify and 
centralize the rules regarding trading rotations, to give notice to 
floor broker of closing rotations, and to simplify the closing rotation 
process.
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    \9\ Current PCX Rule 6.64, Commentary .01(b) states that ``(b) 
Closing Rotations. Transactions may be effected in a class of 
options after 1:02 p.m. (Pacific Time) if they occur during a 
trading rotation. Such a trading rotation may be employed in 
connection with the opening or reopening of trading in the 
underlying security after 12:30 p.m. (Pacific Time) or due to the 
declaration of a ``fast market'' pursuant to OFPA G-9. The decision 
to employ a trading rotation after 12:30 p.m. shall be publicly 
announced on the trading floor prior to the commencement of such 
rotation. No more than one trading rotation may be commenced after 
1:02 p.m. If a trading rotation is in progress and Floor Officials 
determine that a final trading rotation is needed to ensure a fair 
and orderly close, the rotation in progress shall be halted and a 
final rotation begun as promptly as possible after 1:02 p.m. Any 
trading rotation conducted after 1:02 p.m. may not begin until ten 
minutes after news of such rotation is disseminated. [para.] (1) 
When a closing rotation is necessary, the Order Book Official shall 
use a single price closing procedure. In a closing rotation, 
customer orders will receive the same priority as they do during 
opening rotations. [para.] (2) Except as otherwise provided by the 
OFTC, if both puts and calls covering the same underlying security 
are traded, the Order Book Official shall determine the order of 
closing each series of such puts and calls in light of current 
market conditions, in the manner provided in paragraph (a) for 
opening rotations.''
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    Fourth, the Exchange proposes to renumber PCX Rule 6.64, Commentary 
.01(c) as PCX Rule 6.64(d) and to renumber PCX Rule 6.64, Commentary 
.02 as PCX Rule 6.64(e).\10\ The Exchange proposes these rule changes 
to reorganize the centralize the responsibilities pertaining to trading 
rotations.
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    \10\ Current PCX Rule 6.64, Commentary .01(c) and Commentary .02 
are as follows: Commentary .01(c) states that ``[a] closing trading 
rotation shall be employed for each series of individual stock 
options on the last business day prior to its expiration. The 
closing rotation shall commence at 1:02 p.m. Pacific Time, or after 
a closing price of the stock in its primary market is established, 
whichever is later. Open trading on expiring series of index options 
shall be permitted on the last business day prior to expiration 
until 1:15 p.m. Pacific Time, but a closing rotation for such 
expiring series of index options shall not be employed.'' Commentary 
.02 states that ``[f]or those option classes and within such time 
periods as the OFTC may designate, members may, prior to opening 
rotation, enter option market quote indications based upon the 
anticipated opening price of the securities underlying such 
designated option class.''
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    Fifth, with respect to proposed changes to PCX Rule 6.64, the 
Exchange proposes to renumber OFPA A-1, Subject: Responsibility of 
Floor Brokers at the Opening, as PCX Rule 6.64(f). The Exchange 
proposes this rule change to centralize the responsibilities of floor 
brokers at the opening.
    c. Proposed PCX Rule 6.65, Trading Halts and Suspensions: 
Currently, PCX Rule 6.65, Commentary .02 requires an Options Floor 
Official that authorizes a trading halt and the OBO assigned to the 
halted option to file a report with the Exchange Options Floor 
Committee and the Department of Member Firms. The Exchange proposes to 
amend where the trading halt report is filed. The Exchange proposes to 
have the report filed with Exchange Operations because it is 
responsible for keeping all trading activity records.\11\
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    \11\ See Amendment No. 2.
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    d. Proposed PCX Rule 6.66, Order Identification: The Exchange 
proposes to renumber OFPA A-7, Subject; Floor Broker Giving Up a Name 
Other Than His Own as Executing Member, as proposed PCX Rule 6.66(d). 
The Exchange proposes this rule change to centralize rules relating to 
Floor Broker Identification.
    e. Proposed PCX Rule 6.67, Orders Required to be in Written Form: 
First, with the regard to changes to PCX Rule 6.67, Orders Required to 
be in Written Form, the Exchange proposes to renumber PCX Rule 6.67, 
Commentary .02 as PCX Rule 6.67(a) to simplify and centralize rules 
pertaining to orders transmitted to the floor.\12\ The Exchange also 
proposes to renumber OFPA F-5, Subject: Means of Communication on the 
Options Floor, as PCX Rule 6.67(d).
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    \12\ Currently, PCX Rule 6.67, Commentary .02 states that 
``[o]rders sent electronically through the Exchange's Member Firm 
Interface are deemed to be written orders for purposes of Rule 
6.67.''
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    Second, the Exchange proposes to renumber PCX Rule 6.67, Commentary 
.01 as PCX Rule 6.67(e).\13\ The Exchange proposes these changes to 
simplify and centralize rules relating to orders required to be in 
written form.
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    \13\ Currently, PCX Rule 6.67, Commentary .01 states that any 
member desiring to use an order form in a format other than that 
provided by the Exchange must submit such form to the OFTC and 
obtain its approval prior to using such form on the floor.
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    Finally, in Amendment No. 1, the Exchange proposes to eliminate 
OFPA D-7, which reiterates the requirement of PCX Rule 6.67 that all 
orders must be in written form and in a form approved by the Exchange.
    f. Proposed PCX Rule 6.68, Record of Orders: The Exchange proposes 
to renumber OFPA D-11, Subject: Record Retention Requirements, as PCX 
Rule

[[Page 51394]]

6.68(b). In addition, the Exchange proposes to delete superfluous and 
repetitive language in proposed PCX Rule 6.68(b) that states that 
members are reminded that pursuant to PCX Rule 6.68, every member 
organization is required to maintain and preserve for the period of 
time required in Rule 17a-4 under the Act,\14\ a written record of 
every order. The Exchange proposes this rule change to centralize PCX 
record retention rules.
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    \14\ 17 CFR 240.17a-4.
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    g. Proposed PCX Rule 6.69, Reporting Duties: The Exchange proposes 
to renumber OFPA G-12, Subject: Reporting of Trade Information, as PCX 
Rule 6.69, Commentary .02. In addition, the Exchange proposes that 
market maker clearing firms are directed to instruct their respective 
trading desks to identify market maker orders that are entered from off 
the floor and not entitled to market maker margin treatment by placing 
a ``C'' after the market maker's number in the ``firm'' box on the 
ticket. Floor Brokers, when accepting an order by phone from a market 
maker, are similarly directed to identify that order in the same 
manner. The Exchange is proposing this change to enable it to better 
track how, and by whom, trades are being executed.\15\
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    \15\ See Amendment No. 2.
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    Finally, with regard to changes to Rule 6.69, the Exchange proposes 
to add Commentary .04 which makes it clear that time stamping on the 
back of the hard card does not meet the Exchange's time stamp 
requirements because the hard card is not submitted or retained by the 
Exchange. The Exchange proposes these changes to centralize and 
organize requirements pertaining to reporting of trade information.
    h. Proposed Rule 6.70, Price Binding Despite Erroneous Report: The 
Exchange proposes to renumber OFPA G-1, Subject: Options Transactions 
Based on Erroneous Prints of Underlying Security, as PCX Rule 6.70, 
Commentary .01. In addition, the Exchange has added language to account 
for differences in bids and offers as compared to previous bids and 
offers that give rise to the probability that a print or market may be 
erroneous. The Exchange proposes these changes to centralize rules 
regarding the binding of prices despite erroneous prints.
    i. Proposed PCX Rule 6.73, Manner of Bidding and Offering: The 
Exchange proposes to renumber OFPC G-10, Subject: Public Outcry/OBO 
Awareness, as PCX Rule 6.73, Commentary .01. In addition, the Exchange 
proposes to eliminate the requirement that the OBO be fully aware of 
all quotes and transactions at his/her assigned post because it is 
impractical for the OBO to keep track of all bids and offers and 
transactions. The Exchange proposes these changes to centralize and 
simplify rules pertaining to the manner of bidding and offering on the 
options floor.
    j. Proposed PCX Rule 6.75, Priority of Bids and Offers: The 
Exchange proposes to renumber PCX Rule 6.75, Commentary .03 as PCX Rule 
6.75(c)(3).\16\ The Exchange also proposes to renumber OFPA A-3, 
Subject: Procedure for Entering Orders in the Book Under Certain 
Circumstances, as PCX Rule 6.75, Commentary .03 and OFPA G-5, Subject: 
Trading Procedures for Combination, Spread or Straddle Orders Under 
Priority Rules, as PCXX Rule 6.75, Commentary .04. The Exchange 
proposes these changes to reorganize and centralize rules pertaining to 
priority of bids and offers.
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    \16\ Currently, PCX Rule 6,75, Commentary .03 states that, 
pursuant to PCX Rule 6.75(c), the OFTC has determined that firm 
orders and market maker orders held by floor brokers with limit 
prices better than the opening price are not entitled to participate 
in the opening rotation unless the OBO has called for market maker 
and firm participation in response to an imbalance of customer 
orders.
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    k. Proposed PCX Rule 6.76, Priority of Split Price Transactions: 
The Exchange proposes to make technical changes to PCX Rule 6.76(a). 
Specifically, the Exchange proposes to change reference to ``he'' and 
``his'' to ``the member.'' The Exchange proposes to change language in 
PCX Rule 6.76 to read as follows: ``[i]f a member purchases one or more 
option contracts of a particular series at a particular price or 
prices, the member must, at the next lower price at which another 
member bids, have priority in purchasing up to the equivalent number of 
option contracts of the same series that the member purchased at the 
higher price or prices, provided that the member's bid is made promptly 
and continuously and that the purchases effected represents the 
opposite side of a transaction with the same order or offer as the 
earlier purchase or purchases.''
    In addition, the Exchange proposes to eliminate OFPA D-8b because 
it simply reiterates the requirements under PCX Rule 6.76 pertaining to 
priority on split price transactions.
2. Basis
    The Exchange believes that the proposal is consistent with Section 
6(b) of the Act,\17\ in general, and Section 6(b)(5),\18\ 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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    \17\ 15 U.S.C. 78f(b).
    \18\ 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 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, NW., Washington, DC 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

[[Page 51395]]

submissions should refer to File No. SR-PCX-99-44 and should be 
submitted by September 13, 2000.


For the Commission, by the Division of Market Regulation, pursuant 
to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-21435 Filed 8-22-00; 8:45 am]
BILLING CODE 8010-01-M