[Federal Register Volume 66, Number 6 (Tuesday, January 9, 2001)]
[Notices]
[Pages 1713-1715]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-538]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43779; File No. SR-PCX-99-44]


Self-Regulatory Organizations; Pacific Exchange Inc.; Order 
Approving Proposed Rule Change Relating to PCX Rule 6, Options Trading, 
Trading Practices and Procedures

December 28, 2000.

I. Introduction

    On October 29, 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 amend some of its options 
trading rules. On January 7, 2000, the PXC 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 proposed rule 
change, as amended by Amendment Nos. 1 and 2, was published in the 
Federal Register on August 23, 2000.\5\ On December 22, 2000, the 
Exchange submitted Amendment No. 3 to the proposed rule change.\6\ The 
Commission did not receive any comments on the proposed rule change. 
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\ See 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'').
    \4\ See letter from Robert P. Pacileo, Senior Attorney, 
Regulatory Policy, PCX, to Jack Drogin, Assistant Director, 
Division, SEC, dated May 24, 2000 (``Amendment No. 2'').
    \5\ Securities Exchange Act Release No. 43149 (August 11, 2000), 
65 FR 51392.
    \6\ See letter from Peter D. Bloom, Director, Regulatory 
Projects, Regulatory Policy, PCX, to Kelly Riley, Division, SEC, 
dated December 20, 2000 (``Amendment No. 3''). In Amendment No. 3, 
the Exchange made non-substantive reference changes to proposed PCX 
Rules 6.51, 6.64 and 6.65 to reflect other amendments made to the 
rules. Because the changes in Amendment No. 3 were non-substantive, 
notice is not required.

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[[Page 1714]]

II. Description of the Proposal

    The Exchange proposed to modify its rules to trading practices and 
procedures on its options floor by clarifying existing provisions, 
eliminating superfluous provisions, incorporating current policies and 
procedures, and merging certain Options Floor Procedure Advices 
(``OFPAs'') into the text of PCX Rule 6.

a. OFPAs

    The Exchange proposed 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 Executive Member; OFPA C-1, Subject: Procedures for 
Opening Rotations; OFPA D-7, Subject: Expressing Fractions in Writing; 
OFPA D-8b, Subject: Priority on Split Price Transactions; OFPA D-11, 
Subject: Record Retention Requirements; OFPA F-1, Subject: Admission to 
the Trading Floor, 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-
10, Subject: Public Outcry/OBO Awareness; and OFPA G-12, Subject: 
Reporting of Trade Information.

b. Proposed PCX Rule 6.64, Trading Rotations

    The PCX proposed to make several changes to PCX Rule 6.64 relating 
to trading rotations. First, the Exchange proposed to allow two Floor 
Officials, rather than the Options Floor Trading Committee (``OFTC''), 
as currently required, to direct that a trading rotation be employed. 
Second, the Exchange proposed to modify and renumber PCX Rule 6.64, 
Commentary .01 (a) as proposed PCX Rule 6.64(b), OFPA C-1, Subject: 
Procedures for Opening Rotations, as proposed PCX Rule 6.64(b)(1) 
through (7), and OFPA G-2, Subject: Imbalance of Orders at Openings, as 
proposed PCX Rule 6.64(b)(8).
    Third, the Exchange proposed to renumber PCX Rule 6.64, Commentary 
.01(b) as proposed PCX Rule 6.64(d). In addition, under proposed Rule 
6.64(d), the Exchange proposed to specify that the book staff should 
notify floor brokers by 12:50 p.m. Pacific time that a closing rotation 
may be necessary. The Exchange also clarified that closing rotations 
should commence at least ten minutes after the trading floor has been 
notified. Finally, under proposed Rule 6.64(d), the Exchange proposed 
to codify an express requirement that only orders that have been 
entered before 1:02 p.m. Pacific time are eligible for execution during 
a closing rotation.
    Fourth, the Exchange proposed to remember PCX Rule 6.64, Commentary 
.01(c) as proposed PCX Rule 6.64(d) and to renumber PCX Rule 6.64, 
Commentary .02 as proposed PCX Rule 6.64(e). Fifth, the Exchange 
proposed to renumber OFPA A-1, Subject: Responsibility of Floor Brokers 
at the Opening, as proposed PCX Rule 6.64(f). Finally, the Exchange 
proposed to renumber Commentaries .03 and .04 as Commentaries .01 and 
.02 respectively.

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 order book official 
(``OBO'') assigned to the halted option to file a report with the 
Exchange Options Floor Committee and the Department of Member Firms. 
The Exchange proposed to have the report filed with Exchange 
Operations.

d. Proposed PCX Rule 6.66, Order Identification

    The Exchange proposed to remember OFPA A-7, Subject: Floor Broker 
Giving Up a Name Other Than His Own as Executing Member, as proposed 
PCX Rule 6.66(d).

e. Proposed PCX Rule 6.67, Orders Required to be in Written Form

    First, the Exchange proposed to renumber PCX Rule 6.67, Commentary 
.02 as proposed PCX Rule 6.67(a). Second, the Exchange proposed to 
renumber OFPA F-5, Subject: Means of Communication on the Options 
Floor, as proposed PCX Rule 6.67(d). Third, the Exchange proposes to 
renumber PCX Rule 6.67, Commentary .01 as proposed PCX Rule 6.67(e). 
Finally, the Exchange proposed to eliminate OFPA D-7, which reiterated 
the requirement of PCX Rule 6.67 that all orders must be in a written 
form that is approved by the Exchange.

f. Proposed PCX Rule 6.68, Record of Orders

    The Exchange proposed to renumber OFPA D-11, Subject: Record 
Retention Requirements, as proposed PCX Rule 6.68(b). In addition, the 
Exchange proposed to delete language in proposed PCX Rule 6.68(b) that 
reminded members that, pursuant to PCX Rule 6.68, every member 
organization is required to maintain and preserve for the period of 
time required in 17a-4 under the Act.\7\ a written record of every 
order.
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    \7\ 17 CFR 240.17a-4.
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g. Proposed PCX Rule 6.69, Reporting Duties

    The Exchange proposed to renumber OFPA G-12, Subject, Reporting of 
Trade Information, as proposed PCX Rule 6.69, Commentary .02. In 
addition, the Exchange proposed that market maker clearing firms be 
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. The Exchange proposed 
that floor brokers that accept market maker orders by phone to identify 
such orders in the same manner. Finally, in proposed PCX Rule 6.69, the 
Exchange proposed to add Commentary .04, which clarifies that time 
stamping on the back of the hard card does not meet the Exchange's time 
stamp requirements.

h. Proposed PCX Rule 6.70, Price Binding Despite Erroneous Report

    The Exchange proposed to renumber OFPA G-1, Subject: Options 
Transactions Based on Erroneous Prints of Underlying Security, as 
proposed PCX Rule 6.70, Commentary .01. In addition, the Exchange added 
language to provide that members should use reasonable care when 
effecting transactions based on bids and offers that differ from 
previous bids and offers because of the probability that a print or 
market may be erroneous.

i. Proposed PCX Rule 6.73, Manner of Bidding and Offering

    The Exchange proposed to renumber OFPC G-10, Subject: Public 
Outcry/OBO Awareness, as proposed PCX Rule 6.73, Commentary .01. In 
addition, the Exchange proposed to eliminate the requirement that the 
OBO by fully aware of all quotes and transactions at his or her 
assigned post.

j. Proposed PCX Rule 6.75, Priority of Bids and Offers

    The Exchange proposed to renumber PCX Rule 6.75, Commentary .03. as 
proposed PCX Rule 6.75(c)(3). The Exchange also proposed to renumber 
OFPA A-3, Subject: Procedure for Entering Orders in the Book Under 
Certain Circumstances, as proposed PCX Rule 6.75, Commentary .03 and 
OFPA G-5, Subject: Trading Procedures for

[[Page 1715]]

Combination, Spread, or Straddle Orders Under Priority Rules, as 
proposed PCX Rule 6.75, Commentary .04.

k. Proposed PCX Rule 6.76, Priority of Split Price Transactions

    In PCX Rule 6.76(a), the Exchange proposed to change reference to 
``he'' and ``his'' to ``the member.'' The Exchange also proposed to 
change language in proposed 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 proposed to eliminate OFPA D-8b, which 
simply reiterated the requirements of PCX Rule 6.76 pertaining to 
priority on split price transactions.

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.\8\ In 
particular, the Commission finds that the proposed rule change is 
consistent with the requirements of Section 6(b)(5 of the Act,\9\ 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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    \8\ In approving this proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
    \9\ 15 U.S.C. 78f(b)(5).
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a. OFPAs

    The Commission believes that the proposed rule change should foster 
efficiency in the implementation and enforcement of the Exchange's 
rules. Currently, members must refer to both the Exchange's rules and 
the Exchange's OFPAs to ensure that they are complying with all of the 
applicable requirements of the Exchange's rules. By combining the OFPAs 
with the applicable Exchange rules, the Commission believes that it 
should be easier for Exchange members to locate pertinent rule language 
and to comply with applicable Exchange rules.

b. Trading Rotations

    The Commission finds that the proposed changes to the procedures 
relating to trading rotations are consistent with the Act because they 
should foster just and equitable principles of trade by expediting the 
trading rotation process. Specifically, the Exchange proposed to permit 
two floor officials to direct that a trading rotation be employed 
instead of the full OFTC, which should result in faster implementation 
of trading rotations. Faster implementation of trading rotations should 
permit the reopening of affected options contracts and, thus, a 
resumption of normal trading, in a more timely fashion.
    The Exchange also proposed to implement a new notification 
procedure in the event a closing rotation is necessary. Specifically, 
the Exchange proposed that the book staff notify floor brokers by 12:50 
p.m. Pacific time, that a closing rotation may be necessary, and to 
require that only orders entered by 1:02 p.m. Pacific time will be 
eligible for execution during the trading rotation. The Commission 
believes that these new closing rotation procedures should foster 
efficiency on the floor of the Exchange. The proposal should provide 
floor brokers with sufficient notice that a closing rotation may be 
employed and should provide them with ample time to ensure that their 
orders are entered by 1:02 p.m. Pacific time so that they may be 
executed during the closing rotation. The Commission believes that 
providing express procedures for orders entered at or near the close of 
trading should result in more efficient executions.

c. Reporting Duties

    The Exchange proposed to require market making clearing firms to 
instruct their respective trading desks to identify market maker orders 
that are entered from off the Exchange floor and not entitled to market 
maker margin treatment with a ``C'' identifier. Floor brokers will also 
be required to use this identifier when accepting orders by phone from 
market makers. The Commission believes that the use of this new 
identifier should ensure that Exchange members properly handle market 
maker orders.

d. Erroneous Bids and Offers

    The Exchange proposed to amend PCX Rule 6.70, Commentary .01 to 
direct that reasonable care should also be exercised prior to effecting 
transactions based on bids or offers that differ from previous bids or 
offers such that the difference may give rise to the probability that a 
print or market may be erroneous. The Commission believes that this 
should foster just and equitable principles of trade by potentially 
reducing the number of transactions executed based on erroneous market 
information.

e. OBO Awareness of Quotes and Transactions

    The Exchange proposed to eliminate the requirement that OBOs be 
aware of all quotes and transactions that occur at his or her assigned 
post. While the Commission appreciates that it may be impracticable for 
the OBO to keep track of all bids and offers and transactions occurring 
at a particular post, the Commissions believes that the OBO must be 
aware of a significant amount of quotes and transactions such that he 
or she can maintain a fair, orderly and competitive market at the post. 
Thus, the Commission believes that it is appropriate to eliminate the 
current requirement because it is impracticable but expects that each 
OBO will continue to be sufficiently aware of the market at his or her 
post to be able to fulfill his or her responsibilities and obligations. 
Further, the Commission expects that the Exchange will monitor its 
floor to ensure that each OBO continues to fulfill his or her 
responsibilities and that the elimination of this requirement does not 
negatively impact the efficiency and integrity of each market at each 
post.

IV. Conclusion

    It Is Therefore Ordered, pursuant to Section 19(b)(2) of the 
Act,\10\ that the proposed rule change (SR-PCX-99-44), as amended, is 
approved.
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    \10\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Divistion of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-538 Filed 1-8-01; 8:45 am]
BILLING CODE 8010-01-M