[Federal Register Volume 66, Number 72 (Friday, April 13, 2001)]
[Notices]
[Pages 19271-19273]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-9113]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44150; File No. SR-PCX-00-36]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Pacific Exchange, Inc. 
Relating to Solicited Options Transactions

April 4, 2001.

    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 January 26, 2001, the Pacific Exchange, Inc. (``PCX'' or 
``Exchange''), filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange.\3\ The 
proposed rule change has been filed by the PCX as a ``non-
controversial'' rule change under Rule 19b-4(f)(6)\4\ under the Act. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The PCX filed its submission of January 26, 2001, in the 
form of an amendment to an earlier version of the proposed rule 
change filed with the Commission on October 24, 2000. See Letter 
from Hassan Abedi, attorney, PCX, to Nancy J. Sanow, assistant 
director, Division of Market Regulation, the Commission, dated 
January 25, 2001. For purposes of Rule 19b4(f)(6) under the Act, the 
Commission deems the date of filing and effectiveness of the 
proposed rule change to be January 26, 2001.
    \4\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The PCX is proposing to add new PCX Rule 6.49 to allow members 
representing an options order to solicit a third party outside of the 
trading crowd. Below is the text of the proposed rule change. Proposed 
new language is in italics.
* * * * *

para.4995  Solicited Transactions

Rule 6.49

    (a) A member or member organization representing an order in 
options (``originating order'') may solicit another member, member 
organization or non-member broker/dealer outside the trading crowd 
(``solicited party'') to participate in the transaction on a 
proprietary basis provided the following criteria are met.
    (1) The member or member organization, upon entering the trading 
crowd to execute the transaction must announce to the trading crowd 
the same terms and conditions of the originating order that have 
been disclosed to the solicited party;
    (2) The member or member organization must bid at the price he 
is prepared to buy from the solicited party or offer at the price he 
is prepared to sell to the solicited party; and
    (3) The member or member organization must give the trading 
crowd a reasonable opportunity to accept the bid or offer.
    The members of the trading crowd will have priority over the 
solicited party order.
    (b) It will be considered conduct inconsistent with just and 
equitable principles of trade for any member, member organization or 
person associated with a member or member organization, who has 
knowledge of all material terms and conditions of an originating 
order, a solicited order, or a facilitation order, the execution of 
which are imminent, to enter, based on such knowledge, an order to 
buy or sell an option on the underlying securities of any option 
that is the subject of the order, or an order to buy or sell the 
security underlying any option that is the subject of the order, or 
any order to buy or sell any related instrument until either:
    (1) All the terms and conditions of the originating order and 
any changes in the terms or conditions of the order of which the 
member, member organization or person associated with the member or 
member

[[Page 19272]]

organization has knowledge are disclosed to the trading crowd, or
    (2) The trade can no longer reasonably be considered imminent in 
view of the passage of time since the order was received.
    For the proposes of this rule, an order to buy or sell a 
``related instrument'' means, in reference to an index option, an 
order to buy or sell securities comprising 10% or more of the 
component securities in the index or an order to buy or sell a 
futures contract on an economically equivalent index.
    (c) ``Solicited'' shall be written in the ``Optional Data'' area 
on the order ticket of the Solicited order.

para.4981  Responsibilities of Floor Brokers

Rule 6.46

    (a)-(c)-No change.
    Commentary:
    .01-.04-No change.
    .05 A Floor Broker's use of due diligence in handling an order 
shall include the immediate and continuous representation of market 
and marketable orders at the trading post where the option class 
represented by his order is designated for trading, except that a 
Floor Broker who is acting pursuant to Rule 6.49 need not represent 
such orders immediately at the designated trading post.
* * * * *

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 PCX 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 PCX 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
    The purpose of the proposed rule change is to allow a member that 
is representing an options order on the trading floor to solicit a 
third party outside of the trading crowd to participate in the 
transaction on a proprietary basis before representing the order in the 
trading crowd.\5\
---------------------------------------------------------------------------

    \5\ The proposed rule differs from current PCX Rule 6.47(c), 
which also allows for solicitation of options orders in specified 
circumstances. Under Rule 6.47(c), a member first represents an 
order to the trading crowd, and if the member cannot fill the order, 
then an attempt to solicit the other side may be made outside the 
crowd. Rule 6.47(c) requires the member to continue to represent the 
order in the trading crowd while he attempts to solicit the other 
side. However, once the other side is obtained from outside the 
trading crowd, the member is permitted to cross the two sides, with 
the solicited order receiving priority over the trading crowd. Under 
proposed Rule 6.49, a member is permitted to solicit the other side 
of an order before taking the order to the trading crowd. However, 
as discussed below, once the member obtains the other side, he must 
then take the order to the trading crowd, disclose the terms of the 
order, and allow the crowd to step up and match the terms or better 
them. If the trading does decide to step up, it receives priority 
over the solicited order.
---------------------------------------------------------------------------

    Currently, PCX Rule 6.46, Commentary .05, states that a Floor 
Broker's duty of due diligence in handling an order includes the 
immediate representation of market and marketable limit orders at the 
trading post where the options class represented by his order is 
designated for trading. The PCX has interpreted this to mean that a 
Floor Broker who receives an order must immediately represent it in the 
crowd before soliciting the other side of the trade.
    Under the proposed rule change a Floor Broker will now have the 
ability to solicit third parties outside the trading crowd before 
representing the order in the crowd. The Floor Broker, however, will 
still have a due diligence obligation to his customer when executing 
the transaction. The proposed rule change will allow option 
transactions to be solicited provided that the member, upon entering 
the trading crowd to execute the transaction, (1) announces to the 
crowd the same terms and conditions that were disclosed to the 
solicited party; (2) bids (offers) at the price that he is prepared to 
bid (offer) to the solicited party; and (3) gives the trading crowd a 
reasonable opportunity to accept the bid (offer). If a member in the 
trading crowd decides to match or better the terms of the transaction, 
the proposed rule grants the member in the trading crowd priority over 
the solicited party.
    Further, the proposed rule will prohibit the member who is 
representing the order to enter an order to buy or sell an option on 
the underlying securities of any option that is the subject of the 
order, or an order to buy or sell the security underlying any option 
that is the subject of the order, or any order to buy or sell any 
related instrument until the terms of the original order are disclosed 
or the trade can no longer be considered imminent in view of passage of 
time. This portion of the proposed rule change--which will also apply 
to orders facilitated under the provisions of PCX Rule 6.47--seek to 
prohibit anticipatory hedging that is based on inside information. The 
Commission has approved a similar rule change by the Chicago Board 
Options Exchange, Inc.\6\ The Exchange recognizes the importance of 
fully disclosing the orders that comprise a solicited transaction to 
the trading crowd and believes that the current proposal allows 
customer orders to receive full consideration by the trading crowd.
---------------------------------------------------------------------------

    \6\ See Securities Exchange Act Release No. 34959 (November 9, 
1994), 59 FR 59446 (November 17, 1994). See also Securities Exchange 
Act Release No. 42894 (June 2, 2000), 65 FR 36850 (June 12, 2000) 
(concerning a similar rule change by the American Stock Exchange 
LLC).
---------------------------------------------------------------------------

2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with section 6(b) \7\ of the Act, in general, and furthers the 
objectives of section 6(b)(5),\8\ in particular, in that it is designed 
to promote just and equitable principles of trade.
---------------------------------------------------------------------------

    \7\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

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.

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

    The foregoing proposed rule change has become effective pursuant to 
section 19(b)(3)(A) of the Act \9\ and Rule 19b-4(f)(6) thereunder \10\ 
because the proposed rule change (1) does not significantly affect the 
protection of investors or the public interest; (2) does not impose any 
significant burden on competition; and (3) does not become operative 
until more than 30 days from the date on which it was filed, and the 
PCX provided the Commission with written notice of its intent to file 
the proposed rule change at least five days prior to the filing date. 
At any time within 60 days of the filing of such proposed rule change, 
the Commission may summarily abrogate such rule change if it appears to 
the Commission that such action is necessary or appropriate in the 
public interest, for the protection of investors, or otherwise in 
furtherance of the purposes of the Act.
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78s(b)(3)(A).
    \10\ 17 CFR 240.19b-4(f)(6).

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

[[Page 19273]]

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether it 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 
submissions should refer to File No. SR-PCX-00-36, and should be 
submitted by May 4, 2001.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
---------------------------------------------------------------------------

    \11\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Jonathan G. Katz,
Secretary.
[FR Doc. 01-9113 Filed 4-12-01; 8:45 am]
BILLING CODE 8010-01-M