[Federal Register Volume 65, Number 185 (Friday, September 22, 2000)]
[Notices]
[Pages 57416-57419]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-24353]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43293; File No. SR-PCX-99-36]


Self-Regulatory Organizations; Order Granting Approval to 
Proposed Rule Change and Amendment No. 1 by the Pacific Exchange, Inc. 
Relating to Options Trading Rules

September 14, 2000.

I. Introduction

    On October 1, 1999, the Pacific Exchange, Inc. (``PCX'' or 
``Exchange'') submitted to the Securities and Exchange Commission 
(``SEC'' or ``Commissiion''), 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 options trading 
rules. Amendment No. 1 was filed with the Commission on March 28, 
2000.\3\ The proposed rule change was published for comment in the 
Federal Register on April 4, 2000.\4\ No comments were received on the 
proposal. This order approves the proposal, as amended.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, the Exchange withdrew the proposed 
changes to PCX Rule 6.6 because the changes were previously made and 
approved in Securities Exchange Act Release No. 40875 (December 31, 
1998), 64 FR 1842 (January 12, 1999). See letter from Michael D. 
Pierson, Director-Regulatory Policy, PCX, to Heather Traeger, 
Attorney, Division of Market Regulation, SEC, on March 27, 2000 
(``Amendment No. 1'').
    \4\ Securities Exchange Act Release No. 42590 (March 29, 2000), 
65 FR 17690.
---------------------------------------------------------------------------

II. Description of the Proposal

    The proposed rule change would make the following changes to the 
text of the PCX rules on options trading.

A. Definition of Term ``Option Issue''

    The proposal would adopt new Rule 6.1(b)(12) to define the term 
``option issue'' as ``the option contract overlying a particular 
underlying security.'' The Exchange notes that the commonly-used term 
``issue'' appears in several locations in the PCX Rulels.\5\ The 
Exchange believes that the term ``issue'' means the same as ``option'' 
or ``option contract'' when used, for example, as in PCX Rule 6.65(a), 
which states: ``Trading on the Exchange in any option contract shall be 
halted or suspended

[[Page 57417]]

whenever * * *.'' However, the Exchange believes that the use of the 
terms ``option'' and ``option contract'' would often result in 
ambiguities that the use of ``issue'' would not create. While the term 
``class of options'' is used in many PCX Rules to refer generally to 
options overlying a particular underlying security,\6\ the Exchanges 
believes that the use of the term ``class'' can be ambiguous because it 
may refer either to a ``put class'' or a ``call class.'' \7\ 
Accordingly, the proposed rule change would formally adopt the 
definition of the term ``option issue.''
---------------------------------------------------------------------------

    \5\ See, e.g., PCX Rule 6.8 Com. .08(a) (``If a firm desires to 
facilitate customer orders in the XYZ option issue * * *.''); PCX 
Rule 6.28(a)(9) (``the permissible size of orders that may be 
automaticallay executed'' may be increased ``in a particular issue, 
or for all option issues.* * *''); PCX Rule 6.82(e) (``[t]he 
allocation of option issues to LMMs shall be effected by the Options 
Allocation Committee.* * *'').
    \6\ See, e.g., PCX Rule 6.4(a) (``After a particular class of 
option * * * has been opened for trading * * *.''); PCX Rule 6.37(c) 
(``Whenever a Market Maker enters the trading crowd for a class of 
options in which he does not hold a Primary Appointment * * *''); 
PCX Rule 6.64, Com. .02 (``For those opotion classes and within such 
time periods as the Options Floor Trading Committee may designate * 
* *.'').
    \7\ PCX Rule 6.1(a)(10) states that ``[t]he term `class of 
options' means all option contracts of the same type of option 
covering the same underlying stock'' (emphasis added), while the 
term ``type of option'' is defined in PCX Rule 6.1(a)(7) to mean 
``the classification of an option contract as either a put or call 
(emphasis added).'' Therefore, the term ``class'' may refer to 
either a put class or a call class of option contracts.
---------------------------------------------------------------------------

B. General Rules Applicable to Options Trading

    PCX Rule 6.1 sets forth a list of general PCX trading rules that 
are applicable, by cross-reference, to Exchange transactions in option 
contracts. Most of these rules relate primarily to the trading of 
equity securities on the Exchange. The proposed rule change would 
remove PCX Rules 5.2(a), 5.6(a)-(c), 5.8(d), 5.8(h), 5.12(a) and 
5.13(a)-(b) from that list. Each of the cross-references to be removed 
is discussed below:
     PCX Rule 5.2(a)--``Types of Orders.'' \8\ The Exchange 
believes that the first part of this rule--the part stating that all 
orders on the Exchange must be ``day,'' ``immediate or cancel'' or 
``good 'til canceled''--applies to options trading, and accordingly, 
the proposed rule change would adopt PCX Rule 6.62, Commentary .01, to 
incorporate this part of the rule into the rules on options trading. 
However, the Exchange believes that the remainder of PCX Rule 5.2(a) 
either does not apply to options trading \9\ or is superfluous.\10\
---------------------------------------------------------------------------

    \8\ PCX Rule 5.2(a) states: ``All orders on the Exchange must 
either be `day,' `immediate or cancel,' `good 'til canceled' 
(`GTC'), or `good 'til canceled that are eligible for execution in 
the post--1:00 p.m. auction market trading and closing price 
protection sessions' (`GTX'). Each class of orders must be recorded 
on the proper ticket provided therefore.''
    \9\ ``GTX'' orders are not recognized on the Options Floor. See 
PCX Rule 5.25(f) (``GTX Orders Under P/COAST'').
    \10\ The Exchange believes that the order ticket requirement of 
PCX Rule 5.2(a) is superfluous because current PCX Rules 6.67-6.69 
expressly cover the use of order tickets for option orders.
---------------------------------------------------------------------------

     PCX Rule 5.6(a)--``Bids--Offers--Quotations.'' \11\ The 
Exchange believes that PCX Rule 6.74 \12\ adequately covers the meaning 
of bids and offers as applied to options trading. Further the Exchange 
believes that the part of PCX Rule 5.6 covering the display of bids and 
offers on other market centers is superfluous in light of PCX Rule 
6.73, which provides the requirements for bids and offers to have 
standing on the Options Floor.\13\ Moreover, bids and offers are not 
displayed on the Options Floor for Intermarket Trading System (``ITS'') 
purposes.
---------------------------------------------------------------------------

    \11\ PCX Rule 5.6(a) states: ``Bids and offers shall be for one 
trading unit or multiples thereof to constitute an Exchange 
quotation. Bids and offers in other market centers which may be 
displayed on the Floor for the purpose of ITS or other purposes 
shall have no standing in the trading crowd on the Floor.''
    \12\ PCX Rule 6.74 states: ``Unless otherwise specified, all 
bids or offers made on the floor shall be deemed to be for one 
option contract unless a specific number is expressed in the bid or 
offer. 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.''
    \13\ PCX Rule 6.73 states: ``Bids and offers to be effective 
must be made at the post by public outcry, except that bids and 
offers made by the Order Book Official shall be effective if 
displayed in a visible manner in accordance with PCX Rule 6.55. All 
bids and offers shall be general ones and shall not be specified for 
acceptance by particular members.''
---------------------------------------------------------------------------

     PCX Rule 5.6(b)--``Regular Way.'' \14\ The Exchange 
believes that the current cross-reference to this equity trading rule 
is also superfluous because, unlike settlement of equity securities, 
settlement of option contracts is not based on a distinction between 
``regular way'' and ``non-regular way.''
---------------------------------------------------------------------------

    \14\ PCX Rule 5.6(b) states: ``Bids and offers made without 
stated conditions shall be considered to be `regular way.' `Regular 
way' bids or offers have priority over conditional bids or offers.''
---------------------------------------------------------------------------

     PCX Rule 5.6(c)--``All or None.'' \15\ The Exchange 
believes that the cross-reference to this equity trading rule is 
erroneous and inconsistent with current practices. For example, assume 
that a floor broker who is holding an order to sell twenty option 
contracts enters a trading crowd and calls for a market. Next, assume 
that there are two responses: (1) A floor broker holding an ``all or 
none'' order for twenty contracts for a customer bids $3, and (2) a 
market maker bids $3. Under current practices and consistent with PCX 
Rule 6.75(a), if the broker were first to vocalize a bid, the broker 
would have first priority to execute the order.\16\ However, if PCX 
Rule 5.6(c) were applied, the market maker's bid would have priority, 
even if it were made second in sequence. The Exchange believes that PCX 
Rule 6.75 should prevail over PCX Rule 5.6(c), in accordance with 
current practices.
---------------------------------------------------------------------------

    \15\ PCX Rule 5.6(c) states: ``A bid or offer may be made `all 
or none'; however, regular bids or offers at equal or better prices 
shall have priority. No `all or none' transaction in round lots may 
be effected unless all regular bids or offers at equal or better 
prices are executed thereby or simultaneously or unless the holders 
of such regular bids or offers consent thereto. All bids and offers, 
unless specifically made `all or none,' shall be subject to split-up 
without objection except that in no case may a division of stock be 
made of less than round lots except by mutual consent.''
    \16\ PCX Rule 6.75(a) provides in part that ``If two or more 
bids represent the highest price * * * priority shall be afforded to 
such bids in the sequence in which they are made.''
---------------------------------------------------------------------------

     PCX Rule 5.8(d)--``Simultaneous Bids and Offers.'' \17\ 
The Exchange notes that simultaneous bids and offers are not recognized 
in the general rules on priority of bids and offers for options 
contracts. The Exchange believes that PCX Rules 6.75 and 6.76 are 
exhaustive and that the cross-reference to Rule 5.8(d) is erroneous.
---------------------------------------------------------------------------

    \17\ PCX Rule 5.8(d) states: ``When bids or offers are made 
simultaneously, or when it is impossible to determine clearly the 
order of time in which they were made, all such bids or offers shall 
be on parity, except as noted in Rule 5.8(e).''
---------------------------------------------------------------------------

     PCX Rule 5.8(h)--``Marking Stop Loss Orders.'' \18\ This 
rule covers the manual handling of stop loss orders. The Exchange 
believes that the procedure covered by this rule is unnecessary and 
that the responsibility of floor brokers to use due diligence in their 
handling of orders, as codified in the rules on option trading, is 
sufficient.\19\
---------------------------------------------------------------------------

    \18\ PCX Rule 5.8(h) states: ``All stop loss orders must clearly 
indicate in writing that they are such and, in addition, the amount 
and the price of the stock appearing at the top of the buy and sell 
ticket must be circled.''
    \19\ See PCX Rule 6.46 (``Responsibilities of Floor Brokers'').
---------------------------------------------------------------------------

     PCX Rule 5.12(A)--``Seller Responsible for Recording.'' 
\20\ The Exchange believes that the specific procedures currently set 
forth for reporting options transactions--codified in PCX Rule 6.69 and 
OFPA G-12--adequately address this procedure and that the cross-
reference to PCX Rule 5.12 is unhelpful and unnecessary.
---------------------------------------------------------------------------

    \20\ PCX Rule 5.12(a) states: ``The seller shall be responsible 
for transactions being properly recorded by the floor reporters.''
---------------------------------------------------------------------------

     PCX Rule 5.13(a)-(b)--``Comparisons.'' \21\ The Exchange

[[Page 57418]]

believes that PCX Options Rule 6.16 adequately covers the Exchange 
procedures for comparison of trade information and that the cross-
reference to PCX Rules 5.13(a)-(b) is superfluous.
---------------------------------------------------------------------------

    \21\ PCX Rule 5.13(a) states: ``Every transaction on the 
Exchange must be compared as provided herein unless the same shall 
have been officially removed from the record in accordance with 
Exchange rules.'' PCX Rule 5.13(b), Comparison Ticket, states ``The 
comparison ticket shall contain and constitute a record of the name, 
quantity and price of the securities traded and the names of the 
buying and selling members from which daily transaction sheets will 
be prepared for member firms.''
---------------------------------------------------------------------------

C. Trading Floor Badges

    The proposed rule change would eliminate provisions currently set 
forth in OFPA F-1 and F-6 relating to trading floor badges on the 
Options Floor that the Exchange believes are superfluous and 
unnecessary.\22\ The proposal also would redesignate the remaining text 
of those as paragraphs (d)(1) and (d)(2) of PCX Rule 6.2.
---------------------------------------------------------------------------

    \22\ The provisions being eliminated include the following:
    ``Rule 6.45 requires that each Floor Broker shall have in effect 
a Letter of Authorization that has been issued for such Floor Broker 
by a clearing member, and Section 77 of Rule VI requires that each 
Market Maker shall have in effect a Letter of Guarantee which has 
been issued for such market maker by a clearing firm.'' (OFPA F-6)
---------------------------------------------------------------------------

D. Visitors to the Options Floor

    The proposal would redesignate OFPA F-2 as PCX Rule 6.2(e) 
(``Visitors on the Options Floor''). The proposal also would eliminate 
subsection 6 of OFPA F-2, which limits the number of visitors and 
lengths of time during which visitors are permitted on the Options 
Floor.\23\ In addition, the proposal would make technical changes to 
OFPA F-2 and eliminate superfluous provisions, including a summary of 
the provisions of current PCX Rule 6.2(a).\24\ Finally, the proposal 
would add a new provision to PCX Rule 6.2(e), stating that a group of 
visitors comprising more than fifteen persons may not enter the Trading 
Floor without prior approval of the Chair or Vice Chair of the Options 
Floor Trading Committee.
---------------------------------------------------------------------------

    \23\ Subsection of OFPA F-2 currently provides: ``The inviting 
member or member organization floor manager may not sign in more 
than four guests at any given time. Visitors may remain on the 
Options Trading Floor a maximum of two hours during the trading 
session and one-half hour after it. Visitors, except those referred 
to in paragraph #4 above, may not be allowed on the Options Trading 
Floor more than five times in a calendar month, regardless of the 
duration of each visit.''
    \24\ This part of OFPA F-2 states: ``Rule 6.2(a) limits 
admission to the Floor to members, employees of the Exchange, clerks 
or messengers employed by members, and such other persons as may be 
provided for in the Rules. Pursuant to this Rule, the Exchange 
encourages the presence of appropriate visitors on the Options 
Trading Floor, but it is deemed necessary to strictly enforce 
certain procedures governing the admission to the Floor of such 
visitors.''
---------------------------------------------------------------------------

E. Complaints From Floor Members

    The proposal would eliminate OFPA E-5 \25\ and OFPA E-6 \26\ and 
replace it with new PCX Rule 6.2(f), which advises options floor 
members as to where they may direct complaints concerning situations 
arising on or relating to the Options Trading Floor. Specifically, the 
proposed rule would state that Floor Members may direct complaints 
concerning situations arising on or relating to the Options Trading 
Floor to the Options Surveillance Department or to the Enforcement 
Department so that appropriate follow-up action may be taken.
---------------------------------------------------------------------------

    \25\ OFPA E-5 states:
    ``A Member of the Options Floor with a complaint concerning a 
situation arising on or relating to the Floor, should: (1) Notify 
the Surveillance Department of the circumstances involved, and (2) 
subsequent to such notification, submit the complaint in writing to 
the Surveillance Director. If the concerned Member believes it 
necessary for the Surveillance Department to personally review or 
rectify the situation, a member of the Department will immediately 
come to the Floor. A study will be conducted on all matters referred 
to the Surveillance Department pursuant to this floor Procedure 
Advice. Upon completion of such study, the Member(s) filing the 
complaint will be informed of the conclusion (i.e., filed closed or 
referred to the Compliance Department for further review or action). 
A written report of each study will be submitted to the Options 
Floor Trading Committee. General Information regarding such study 
may be given to concerned Members; however, the specific details 
shall remain confidential.''
    \26\ OFPA E-6 states:
    ``Upon receipt of a written complaint from a member of the 
Options Floor, the Compliance Department shall commence an 
investigation into the allegations contained in such complaint. The 
Compliance Department may, among other things, interview the 
Complainant, and any witnesses and parties to the action which gave 
rise to the complaint. The Compliance Department may request a 
written response from the parties involved and any witnesses. Upon 
the Compliance Department obtaining the facts pertinent to the 
issue, a written recommendation will be drafted and presented to the 
Options Floor Trading Committee. After the Options Floor Trading 
Committee has received the written recommendation of the Compliance 
Department, the item should be placed on the Committee's agenda for 
discussion, and final action, insofar as the Options Floor Trading 
Committee is concerned. The Compliance Department may, in addition, 
commence Disciplinary Proceedings based upon any violation of the 
Pacific Exchange Constitution, Rules, Commentaries or procedures 
uncovered during the investigation of the complaint.''
---------------------------------------------------------------------------

F. Series of Options Open for Trading

    The proposal would update PCX Rule 6.4(a) \27\ so that it will 
conform with current Exchange practices by changing from three to four 
the number of different expiration months that will normally be opened 
at the commencement of trading a particular option issue.\28\ The 
proposed rule change also would remove provisions the Exchange believes 
are erroneous on the specific expiration month that may be added at the 
commencement of trading of a particular issue and at the time a 
previous month's series expires. The rule currently states that three 
months will normally be opened, with the first expiration month being 
within approximately three months thereafter, the second month being 
approximately three months after the first and the third being 
approximately three months after the second. In addition, the rule 
states that additional series of the same class may be opened for 
trading on the Exchange at or about the time a prior series expires, 
and the expiration month of each such series shall normally be 
approximately nine months following the expiration of such series. 
However, the current industry practice is normally to add four 
expiration months, the first two being the two nearest months, and the 
third and fourth being the next two months of the quarterly cycle 
previously designated by the Exchange for that specific issue.\29\ When 
a previous expiration month's series expires, a new expiration month is 
added to assure that there are always four expiration months.
---------------------------------------------------------------------------

    \27\ The proposal would also fix a typographical error in PCX 
Rule 6.4(e).
    \28\ Cf. CBOE Rule 5.5, Interp. & Policy .03.
    \29\ Id.
---------------------------------------------------------------------------

G. Verification of Compared Trades

    The proposal would reduce the amount of time during which members 
or their representatives are required to remain available on the 
trading floor after the Trade Processing Department closes. The 
reduction would be based on the number of transactions processed per 
trading day. Specifically, the proposed rule change would require that 
members or their representatives be available after Trade Processing 
closes for 30 to 60 minutes, depending on the number of transactions 
involved. Currently, members or their representatives are required by 
PCX Rule 6.17, Commentary .01 to remain available after the close as 
follows: when fewer than 8,000 transactions on the Exchange have 
occurred, 45 minutes; but when more than 8,000 trades have occurred, 
one hour and 15 minutes. Under the proposal, these times would be 
modified as follows: 0-8,000 transactions, 30 minutes; 8,000-12,000 
transactions, 45 minutes; and over 12,000 transactions, 60 minutes. The 
Exchange believes that the new requirements are more reasonable and 
better reflect the Exchange's needs.

H. Resolution of Uncompared Trades

    The proposal would modify PCX Rule 6.21 by changing the basis for 
establishing a loss as the result of an

[[Page 57419]]

uncompared trade so that it will be the opening price on the business 
day following the trade date. Currently, the basis is the lesser of 
either the opening price on the business day following the trade date 
or the price at which the uncompared trade was closed. After careful 
consideration and review of this proposal by Exchange members and 
member firms, the Exchange proposes this change in an effort to 
simplify and make uniform the administration of pricing uncompared 
trades.\30\ The proposal also would require that notice of uncompared 
trades must be provided no later than the scheduled commencement of 
trading (unless a floor official directs otherwise). The Exchange 
believes that the current time requirement--15 minutes from the 
scheduled commencement of trading--is overly flexible.
---------------------------------------------------------------------------

    \30\ Cf. CBOE Rule 6.61, Interp. & Policy .01.
---------------------------------------------------------------------------

I. Reports of Open Exercise Positions

    The proposal would clarify and simplify PCX Rule 6.27, which 
currently requires member organizations to file certain reports on open 
positions with the Exchange. The proposed rule change would include the 
last sentence of PCX Rule 6.27, the text of commentary .01 to that 
rule, and eliminate commentaries .01, .02 and .03.\31\ As amended, PCX 
Rule 6.27 would provide that the Exchange may require each member 
organization to file with the Exchange a report, as of the 15th of each 
month, of all open positions resulting from the exercise of options 
contracts in accounts carried by a member organization. It would then 
incorporate current Commentary .01 into the rule by adding that such 
reports, when required, must be filed no later than the second business 
day following the day as of which the report is made.
---------------------------------------------------------------------------

    \31\ Commentary .02 provides: ``An open exercise position shall 
include any position with respect to which the Options Clearing 
Corporation has assigned an exercise notice to the member 
organization and the member organization has not delivered the 
shares of the underlying stock in accordance with the Rules of the 
Options Clearing Corporation and these Rules.'' Commentary .03 
provides: ``All such reports shall be delivered to the Department of 
Member Organizations of the Exchange.'' The Exchange does not 
believe that a specific department needs to be identified in this 
rule and, in any event, member firms are currently on notice that 
such reports must be filed with the Department of Options 
Surveillance.
---------------------------------------------------------------------------

J. Fast Markets

    The proposal would change PCX Rule 6.28 by redesignating OFPA G-9 
as paragraph (b) of PCX Rule 6.28. Currently, OFPA G-9 lists procedures 
that become effective in a fast market situation. The Exchange proposes 
this change to simplify and consolidate rules relating to fast market 
and unusual market conditions. In addition, the proposal adds as 
paragraph (b)(5) a cross-reference to the current requirement that 
market makers have under Rule 6.37(f) to trade a minimum of one 
contract based on quoted markets during fast markets. The proposal 
would specify in new paragraph (b)(6) that regular trading procedures 
will be resumed when two floor officials determine that the conditions 
supporting the fast market no longer exist. Finally, it would remove, 
as unnecessary, the current provision allowing floor officials to 
assign brokerage responsibilities for particular series to specific 
floor brokers in the trading crowd during fast markets.

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, and in 
particular, with the requirements of Section 6(b).\32\ The proposal 
would modify certain rules relating to options trading on the PCX by 
clarifying existing provisions, eliminating unnecessary provisions, and 
codifying current policies and procedures. By clarifying and updating 
its rules and obligations for market participants, the Commission 
believes the proposal is consistent with the Act and will promote just 
and equitable principles of trade, foster cooperation and coordination 
with persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, and protect investors and the public interest.\33\
---------------------------------------------------------------------------

    \32\ 15 U.S.C. 78f(b).
    \33\ In approving this rule, the Commission has considered the 
proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

IV. Conclusion

    It Is Therefore Ordered, pursuant to section 19(b)(2) of the 
Act,\34\ that the proposed rule change (SR-PCX-99-36), as amended, is 
approved.
---------------------------------------------------------------------------

    \34\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\35\
---------------------------------------------------------------------------

    \35\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary
[FR Doc. 00-24353 Filed 9-21-00; 8:45 am]
BILLING CODE 8010-01-M