[Federal Register Volume 66, Number 107 (Monday, June 4, 2001)]
[Notices]
[Pages 30036-30037]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-13882]



[[Page 30036]]

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44355; File No. SR-PCX-2000-21]


Self-Regulatory Organizations; Order Approving a Proposed Rule 
Change by the Pacific Exchange, Inc. Concerning Financial Arrangements 
of Options Floor Members

May 25, 2001.

I. Introduction

    On July 12, 2000, pursuant to section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ the 
Pacific Exchange, Inc. (``PCX'' or ``Exchange'') filed with the 
Securities and Exchange Commission (``SEC'' or ``Commission'') a 
proposed rule change to eliminate PCX Rule 6.40, which pertains to 
financial arrangements of options floor members, and to adopt 
supplemental rules on options floor members who are trading for the 
same joint account.\3\ The PCX submitted Amendment No. 1 to the 
proposed rule change on November 29, 2000.\4\ The proposed rule change, 
as amended, was published for comment and appeared in the Federal 
Register on December 22, 2000.\5\ The Commission received no comments 
on the proposal. This order approves the PCX's proposed rule change, as 
amended.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The PCX subsequently submitted the text of the proposed rule 
change language properly formatted for publication in the Federal 
Register. The reformatted version did not contain any substantive 
changes to the proposed rule change language. See letter dated 
November 1, 2000, from Michael D. Pierson, PCX, to Kelly Riley, 
Division of Market Regulation, SEC.
    \4\ Letter dated November 29, 2000, from Michael D. Pierson, 
PCX, to Nancy J. Sanow, Assistant Director, Division of Market 
Regulation, SEC.
    \5\ Securities Exchange Act Release No. 43714 (December 12, 
2000), 65 FR 80970 (December 22, 2001).
---------------------------------------------------------------------------

II. Description of the Proposal

    The PCX proposes to eliminate PCX Rule 6.40, which currently 
prohibits options floor members with financial arrangements from 
trading in the same trading crowd unless they have received either a 
short-term or a long-term exemption from the Options Floor Trading 
Committee.
    The PCX proposes to replace PCX Rule 6.40 with PCX Rule 6.84(h), 
which governs options floor trading for joint accounts. Proposed 
subsection (h)(1) of PCX Rule 6.84 states that a joint account may be 
simultaneously represented in a trading crowd only by participants who 
are trading in person. It further provides that orders for a joint 
account may not be entered in a trading crowd in which a participant of 
the joint account is trading in person for the joint account. If no 
participant is trading in person in the trading crowd for the joint 
account, then a floor broker may represent orders in the trading crowd 
on behalf of the joint account as long as the same option series is not 
concurrently represented by more than one floor broker.
    Proposed subsection (h)(2) of PCX Rule 6.84 provides that market 
makers may alternate trading in-person between their individual and 
joint accounts while in the trading crowd. It further provides that 
market makers who alternate trading between accounts must ensure that 
while trading the joint account another participant does not enter 
orders through a floor broker for the joint account in the same trading 
crowd.
    Proposed subsection (h)(3) of PCX Rule 6.84 provides that before 
beginning trading on behalf of a joint account, participants in the 
joint account are responsible for determining whether any floor brokers 
are representing orders in the same trading crowd on behalf of the same 
joint account.\6\
---------------------------------------------------------------------------

    \6\ Cf. PCX Rule 6.85, Commentary .01 (similar requirement 
applicable to market makers).
---------------------------------------------------------------------------

    Proposed subsection (h)(4) of PCX Rule 6.84 provides that floor 
brokers may not represent a joint account of which they are a 
participant.
    Proposed subsection (h)(5) of PCX Rule 6.84 provides that market 
makers who are trading in person in a trading crowd may not enter 
orders with a floor broker either for joint accounts in which they are 
participants or for their individual accounts.
    Proposed subsection (h)(6) of PCX Rule 6.84 provides that the 
following trades are prohibited: (a) Trades between a joint account 
participant's individual account and a joint account in which that 
person is a participant; (b) trades between two joint accounts having 
common participants; and (c) trades in which the buyer and seller are 
representing the same joint account and are on opposite sides of the 
transaction.
    PCX Rule 6.85 currently provides that a market maker and a floor 
broker who represents orders on behalf of the market maker may not be 
represented at a trading post concurrently. This principle against dual 
representation of a market maker account has been extended to cover 
joint accounts, as currently provided in PCX Rule 6.84, Commentary 
.04.\7\ The Exchange is now proposing to adopt supplemental procedures 
that apply to situations where a joint account is being concurrently 
represented by more than one market maker representative, and to 
situations where a joint account is being represented by a floor 
broker.\8\
---------------------------------------------------------------------------

    \7\ Commentary .04 of PCX Rule 6.84 provides:
    Any order of a joint account participant, which is executed by a 
Floor Broker, shall be in accordance with procedures set forth in 
Rule 6.85, except that the joint account trading number with its 
alpha identification should appear in the `executing firm' area. 
Additionally, a joint account participant may not bid, offer, 
purchase, sell, or enter orders in an option series in which a Floor 
Broker holds an order on behalf of the joint account or for the 
proprietary account of another participant in the joint account. 
Orders of joint account participants in a particular option series 
may not be concurrently represented by one or more Floor Brokers.
    \8\ The Exchange believes that these procedures are 
substantially the same as those set forth in Regulatory Circular RG-
98-94 of the Chicago Board Options Exchange (Joint Account 
Participant Trading in Equity Options) (September 9, 1998), CCH 
para.5291.
---------------------------------------------------------------------------

    Finally, the Exchange is proposing to make technical changes to PCX 
Rule 4.18 and PCX Rule 6.84 by removing cross-references to PCX Rule 
6.40.

III. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules thereunder applicable to 
a national securities exchange, particularly section 6(b)(5) of the 
Act.\9\
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    PCX Rule 6.40 restricts PCX floor members who have financial 
arrangements with each other from trading in the same trading crowd at 
the same time in the absence of an exemption. The purpose of PCX Rule 
6.40 is to prevent market makers who have financial arrangements with 
each other from unfairly dominating the market in any option class or 
series.
    The Commission finds that it is appropriate for the PCX to 
eliminate PCX Rule 6.40 and to adopt new provisions under PCX Rule 6.84 
imposing trading restrictions on PCX members who trade on behalf of the 
same joint account. The revisions to PCX Rule 6.84 specify the 
circumstances when orders may be entered or represented in a trading 
crowd on behalf of a joint account, and also prohibit certain trades 
between joint accounts. Moreover, the new provisions of PCX Rule 6.84 
govern the practice of market makers alternating trading between their 
individual and joint accounts. Finally, as the PCX points out, PCX Rule 
6.37(c)(2) precludes market makers, individually or as a group, from 
dominating the market irrespective of whether the parties have a 
financial arrangement with each other.
    In view of the foregoing, the Commission believes that the

[[Page 30037]]

elimination of PCX Rule 6.40, in conjunction with the codification of 
new paragraph (h) of PCX Rule 6.84, should help assure an appropriate 
balance between the need to impose reasonable trading restrictions for 
joint account participants and the need to allow PCX members 
flexibility to participate in trading crowds. Accordingly, the 
Commission finds that the PCX's proposal is designed to promote just 
and equitable principles of trade, to facilitate transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market, and to protect investors and the public interest, 
as specified in section 6(b)(5) of the Act.\10\
---------------------------------------------------------------------------

    \10\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

IV. Conclusion

    It Is Therefore Ordered, pursuant to section 19(b)(2) of the 
Act,\11\ that the proposed rule change (File No. SR-PCX-00-21) is 
approved.\12\
---------------------------------------------------------------------------

    \11\ 15 U.S.C. 78s(b)(2).
    \12\ In approving the proposal, the Commission has considered 
the rule's impact on efficiency, competition, and capital formation. 
15 U.S.C. 78c(f). 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
---------------------------------------------------------------------------

    \13\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-13882 Filed 6-1-01; 8:45 am]
BILLING CODE 8010-01-M