[Federal Register Volume 67, Number 188 (Friday, September 27, 2002)]
[Notices]
[Pages 61182-61184]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-24609]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46517; File No. SR-PCX-2002-50]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change and Amendment No. 1 Thereto by 
the Pacific Exchange, Inc. Relating to the Automatic Execution of 
Broker-Dealer Orders in Designated Option Issues

September 20, 2002.
    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 July 29, 2002, 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 PCX. PCX filed Amendment No. 1 to the 
proposed rule change on August 26, 2002.\3\ The Exchange filed the 
proposed rule change as a ``non-controversial'' rule change pursuant to 
Section 19(b)(3)(A) of the Act \4\ and Rule 19b-4(f)(6) thereunder,\5\ 
which renders the proposal effective upon filing with the Commission. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change, as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, the Exchange added a clarifying phrase 
to its proposed rule text in order to define the ``top 120'' most 
actively traded option issues. See letter from Mai S. Shiver, Senior 
Attorney, Regulatory Policy, PCX, to Nancy J. Sanow, Assistant 
Director, Division of Market Regulation (``Division''), Commission, 
dated August 23, 2002 (``Amendment No. 1'').
    \4\ 15 U.S.C. 78s(b)(3)(A).
    \5\ 17 CFR 240.19b-4(f)(6).

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[[Page 61183]]

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

    PCX is proposing to amend its rules to permit certain broker-dealer 
orders to be eligible for automatic execution on the Exchange's 
Automatic Execution System (``Auto-Ex''). Specifically, the proposed 
rule change would cover broker-dealer orders for the lesser of five 
contracts or the Exchange's disseminated size in option issues that are 
ranked in the 120 most actively traded options. The text of the 
proposed rule change is below. Proposed new language is italicized; 
deletions are in brackets.
* * * * *

Automatic Execution System

    Rule 6.87(a)--No change.
    (b) Eligible Orders
    (1)--No change
    (2) Notwithstanding subsection (1), above, broker-dealer orders for 
the lesser of five contracts or the Exchange's disseminated size are 
eligible for automatic execution on the Exchange's Auto-Ex System in 
option issues that are ranked in the 120 most actively traded equity 
options based on the total number of contracts traded nationally as 
reported by the Options Clearing Corporation. For each current month, 
the Exchange's determination of whether an equity option ranks in the 
top 120 most active issues will be based on volume statistics for the 
one month of trading activity that occurred two months prior to the 
current month.
    (3) [(2)] If [the OFTC permits] broker-dealer orders are eligible 
to be automatically executed in an issue pursuant to this Rule, then 
the OFTC [it] may also permit the following with respect to such 
orders:
    (A)-(C)--No change.
    (4)-(7) [(3)-(6)]--No change.
    (c)-(e)--No change.

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
    On November 6, 2001, the Commission approved an Exchange proposal 
to permit broker-dealer orders to be automatically executed on Auto-
Ex.\6\ Pursuant to that rule change, broker-dealer orders are eligible 
for automatic execution in particular option issues, subject to the 
approval of the Options Floor Trading Committee (``OFTC'').\7\ Order 
size eligibility and other execution parameters for broker-dealer 
orders are also subject to OFTC approval.\8\
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    \6\ See Securities Exchange Act Release No. 45032 (November 6, 
2001), 66 FR 57145 (November 14, 2001).
    \7\ Id.
    \8\ Id.
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    The Exchange is now proposing to adopt a new rule that would make 
broker-dealer orders eligible for automatic execution if: (a) They are 
for five contracts or the Exchange's disseminated size (whichever 
amount is less); \9\ and (b) they are designated to purchase or sell 
options that are ranked in the 120 most actively traded equity options 
based on the total number of contracts traded nationally for a 
specified month based on volume as reported by the Options Clearing 
Corporation (``OCC'').
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    \9\ For example, when an incoming broker-dealer order is for 
five contracts and the Exchange's disseminated size is three 
contracts, the entire broker-dealer order will be kicked out into 
the trading crowd for manual handling and will not be executed on 
Auto-Ex. On the other hand, when an incoming broker-dealer order is 
for three contracts and the Exchange's disseminated size is five 
contracts, the entire broker-dealer order will be executed on Auto-
Ex. Telephone conversation among Mai S. Shiver, Senior Attorney, 
Regulatory Policy, PCX; Michael Pierson, Vice President, Regulatory 
Policy, PCX; Gordon Fuller, Counsel to Assistant Director, Division, 
Commission; and Jennifer Lewis, Attorney, Division, Commission; on 
September 12, 2002.
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    While the size parameter in the proposed rule would establish a 
maximum number of contracts that are eligible for automatic execution 
on Auto-Ex pursuant to this rule change, the size parameter could be 
increased to a number greater than five (but no greater than 250) 
pursuant to current PCX Rule 6.87(b)(5), which grants the OFTC the 
authority to establish the order size parameter for Auto-Ex on an 
issue-by-issue basis.\10\
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    \10\ See also current PCX Rule 6.87(b)(2)(A), which permits the 
OFTC to set an Auto-Ex size parameter for broker-dealer orders that 
is less than the size parameter for non-broker-dealer customer 
orders in the same issue.
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    The Exchange's determination of whether an equity option ranks in 
the top 120 most active, nationally-traded issues will be based on 
volume statistics reported by the OCC.\11\ The list of designated 
issues for each current month will be based on volume statistics for 
the one month of trading activity that occurred two months prior to the 
current month. For example, February's list of top 120 issues will be 
based on December's volume, March's list of top 120 issues will be 
based on January's volume, and so forth. Thereafter, the Exchange will 
continue to designate the top 120 issues based on a two-month lag time. 
The Exchange intends to notify its members of the issues that are 
designated to be in the top 120 via a regulatory bulletin that will be 
published at the beginning of each month.
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    \11\ The Exchange notes that it intends to use the same 
procedure for designating the top 120 most actively traded issues 
that it currently uses in designating such issues for purposes of 
its ``shortfall fee.'' See Securities Exchange Act Release No. 45351 
(January 29, 2002), 67 FR 5631 (February 6, 2002).
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    The Exchange believes that implementation of the proposal will 
enhance its ability to compete with other options exchanges for order 
flow.
2. Statutory Basis
    The Exchange believes that the proposal is consistent with Section 
6(b)(5) of the Act \12\ in that it is designed to promote just and 
equitable principles of trade, to remove impediments and to perfect the 
mechanism of a free and open market and a national market system, and 
in general, to protect investors and the public interest.
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    \12\ 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.

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 PCX has designated the foregoing as a proposed rule change 
that: (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 for 30 days from the 
date of filing, or such shorter date as the

[[Page 61184]]

Commission may designate, if consistent with the protection of 
investors and the public interest. Rule 19b-4(f)(6)(iii) under the Act 
\13\ requires that the self-regulatory organization give the Commission 
written notice of its intent to file the proposed rule change, along 
with a brief description and text of the proposed rule change, at least 
five business days prior to the filing date. The PCX has complied with 
this requirement \14\. Therefore, the proposed rule change has become 
effective pursuant to Section 19(b)(3)(A) of the Act \15\ and Rule 19b-
4(f)(6) \16\ thereunder.
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    \13\ 17 CFR 240.19b-4(f)(6)(iii).
    \14\ See letter from Michael D. Pierson, Vice President, 
Regulatory Policy, PCX, to Nancy J. Sanow, Assistant Director, 
Division of Market Regulation, dated July 17, 2002.
    \15\ 15 U.S.C. 78s(b)(3)(A).
    \16\ 17 CFR 240.19b-4(f)(6).
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    A proposed rule change filed under Rule 19b-4(f)(6) \17\ does not 
become operative prior to 30 days after the date of filing or such 
shorter time as the Commission may designate if such action is 
consistent with the protection of investors and the public interest. 
The PCX has requested, in order to permit the Exchange to maintain 
competition and efficiency, that the Commission accelerate the 
operative date of the proposed rule change so that it may take effect 
immediately. The Commission believes that waiving the 30-day operative 
delay is consistent with the protection of investors and the public 
interest. For these reasons, the Commission designates the proposal to 
be effective and operative upon filing with the Commission.\18\ 
Accordingly, the proposed rule change became effective on August 26, 
2002, the date on which Amendment No. 1 was filed with the Commission.
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    \17\ Id.
    \18\ For purposes of accelerating the operative date of the 
proposed rule change only, the Commission notes that it has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
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    At any time within 60 days of August 26, 2002, 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.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, 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-2002-50 and should be submitted by October 18, 2002.

    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. 02-24609 Filed 9-26-02; 8:45 am]
BILLING CODE 8010-01-P