[Federal Register Volume 67, Number 248 (Thursday, December 26, 2002)]
[Notices]
[Pages 78843-78848]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-32530]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47026; File No. SR-PCX-2002-64]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Pacific Exchange, Inc. Relating to Exchange Rules for the 
Options Intermarket Linkage

December 18, 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 September 26, 2002, the Pacific Exchange, Inc. (``PCX'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') the proposed rule change as described in 
items I, II, and III below, which items have been prepared by the self-
regulatory organization.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.

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

    The PCX is proposing to adopt new rules relating to the operation 
of the Options Intermarket Linkage. The text of the proposed rule 
change is below; proposed new language is italicized.
* * * * *

Intermarket Linkage

Definitions

    Rule 6.92(a). The following terms have the meaning specified in 
this rule solely for the purposes of rules 6.92--6.95.
    (1) ``Aggrieved Party'' means a Member of a Participant Exchange 
whose bid or offer was traded-through.
    (2) ``Block Trade'' means a trade on a Participant Exchange that:
    (i) Involves 500 or more contracts and has a premium value of at 
least $150,000;
    (ii) Is effected at a price outside of the NBBO; and
    (iii) Involves either:
    (A) A cross (where a Member of the Participant Exchange represents 
all or a portion of both sides of the trade), or
    (B) Any other transaction (i.e., in which such Member represents an 
order of block size on one side of the transaction only) that is not 
the result of an execution at the current bid or offer on the 
Participant Exchange.
    Contemporaneous transactions at the same price on a Participant 
Exchange will be considered a single transaction for the purpose of 
this definition.
    (3) ``Broker/Dealer'' means an individual or organization 
registered with the United States Securities and Exchange Commission in 
accordance with section 15(b)(1) of the Exchange Act or a foreign 
broker or dealer exempt from such registration pursuant to rule 15a-6 
under the Exchange Act.
    (4) ``Complex Trade'' means the execution of an order in an option 
series in conjunction with the execution of one or more related orders 
in different option series in the same underlying security occurring at 
or near the same time for the equivalent number of contracts and for 
the purpose of executing a particular investment strategy.
    (5) ``Crossed Market'' means a quotation in which the Exchange 
disseminates a bid (or offer) in a series of an Eligible Option Class 
at a price that is greater than (or less than) the price of the offer 
(or bid) for the series then being displayed by another Participant 
Exchange.
    (6) ``Customer'' means an individual or organization that is not a 
Broker/Dealer. Used with reference to a Linkage Order, it means an 
order which, if executed, would result in the purchase or sale for an 
account in which no Broker/Dealer has an interest.
    (7) ``Eligible Market Maker,'' with respect to an Eligible Option 
Class, means a market maker that:
    (i) Is assigned to, and is providing two-sided quotations in, the 
Eligible Option Class;
    (ii) Is logged on to participate in Auto-Ex in such Eligible Option 
Class; and
    (iii) Is in compliance with the requirements of rule 6.95 (relating 
to limitation on principal order access).
    (8) ``Eligible Option Class'' means all option series overlying a 
security (as that term is defined in section 3(a)(10) of the Exchange 
Act) or group of securities, including both put options and call 
options, which class is traded on the Exchange and at least one other 
Participant Exchange.
    (9) ``Firm Customer Quote Size'' with respect to a P/A Order means 
the lesser of (a) the number of option contracts that the Participant 
Exchange sending a P/A Order guarantees it will automatically execute 
at its disseminated quotation in a series of an Eligible Option Class 
for Customer orders entered directly for execution in that market; or 
(b) the number of option contracts that the Participant Exchange 
receiving a P/A Order guarantees it will automatically execute at its 
disseminated quotation in a series of an Eligible Option Class for 
Customer orders entered directly for execution in that market. This 
number will be at least 10.
    (10) ``Firm Principal Quote Size'' means the number of option 
contracts that a Participant Exchange guarantees it will execute at its 
disseminated quotation for incoming Principal Orders in an Eligible 
Option Class. This number will be at least 10.
    (11) ``Linkage'' means the systems and data communications network 
that link electronically the Participant Exchanges for the purposes 
specified in the Plan.
    (12) ``Linkage Order'' means an order routed through the Linkage as 
permitted

[[Page 78844]]

under the Plan. There are three types of Linkage Orders:
    (i) ``Principal Acting as Agent (``P/A'') Order,'' which is an 
order for the principal account of a Lead Market Maker (or equivalent 
entity on another Participant Exchange that is authorized to represent 
Customer orders), reflecting the terms of a related unexecuted Customer 
order for which the Lead Market Maker is acting as agent;
    (ii) ``Principal Order,'' which is an order for the principal 
account of an Eligible Market Maker (or equivalent entity on another 
Participant Exchange) and is not a P/A Order; and
    (iii) ``Satisfaction Order,'' which is an order sent through the 
Linkage to notify a Participant Exchange of a Trade-Through and to seek 
satisfaction of the liability arising from that Trade-Through.
    (13) ``Locked Market'' means a quotation in which the Exchange 
disseminates a bid (or offer) in a series of an Eligible Option Class 
at a price that equals the price of the offer (or bid) for the series 
then being displayed from another Participant Exchange.
    (13A) ``Member'' has the meaning as set forth in section 
(3)(a)(3)(A) of the Exchange Act.
    (14) ``NBBO'' means the national best bid and offer in an option 
series as calculated by a Participant Exchange.
    (15) ``Non-Firm'' means, with respect to quotations, that Members 
of a Participant Exchange are relieved of their obligation to be firm 
for their quotations pursuant to Rule 11Ac1-1 under the Exchange Act.
    (16) ``Participant Exchange'' means a registered national 
securities exchange that is a party to the Plan.
    (17) ``Plan'' means the Plan for the Purpose of Creating and 
Operating an Intermarket Option Linkage, as such plan may be amended 
from time to time.
    (18) ``Reference Price'' means the limit price attached to a 
Linkage Order by the sending Participant Exchange. Except with respect 
to a Satisfaction Order, the Reference Price is equal to the bid 
disseminated by the receiving Participant Exchange at the time that the 
Linkage Order is transmitted in the case of a Linkage Order to sell and 
the offer disseminated by the receiving Participant Exchange at the 
time that the Linkage Order is transmitted in the case of a Linkage 
Order to buy. With respect to a Satisfaction Order, the Reference Price 
is the bid or offering price disseminated by the sending Participant 
Exchange that was traded-through, except in the case of a Trade-Through 
that is a Block Trade, in which case the Reference Price will be the 
price of the Block Trade that caused the Trade-Through.
    (19) ``Trade-Through'' means a transaction in an option series at a 
price that is inferior to the NBBO.
    (20) ``Third Participating Market Center Trade-Through'' means a 
Trade-Through in a series of an Eligible Option Class that is effected 
by executing a Linkage Order, and such execution results in a sale (or 
purchase) at a price that is inferior to the best bid (or offer) being 
disseminated by another Participant Exchange.
    (21) ``Verifiable Number of Customer Contracts'' means the number 
of Customer contracts in the book of a Participant Exchange.

Operation of the Linkage

    Rule 6.93 By subscribing to the Plan, the Exchange has agreed to 
comply with, and enforce compliance by its Members with, the Plan. In 
this regard, the following will apply:
    (a) Pricing. Members may send P/A Orders and Principal Orders 
through the Linkage only if such orders are priced at the NBBO.
    (b) P/A Orders.
    (1) Sending of P/A Orders for Sizes No Larger than the Firm 
Customer Quote Size. A Lead Market Maker may send through the Linkage a 
P/A Order for execution in the automatic execution system of a 
Participant Exchange if the size of such P/A Order is no larger than 
the Firm Customer Quote Size. Except as provided in subparagraph 
(b)(2)(ii) below, an LMM may not break up an order of a Customer that 
is larger than the Firm Customer Quote Size into multiple P/A Orders, 
one or more of which is equal to or smaller than the Firm Customer 
Quote Size, so that such orders could be represented as multiple P/A 
Orders through the Linkage.
    (2) Sending of P/A Orders for Sizes Larger than the Firm Customer 
Quote Size. If the size of a P/A Order is larger than the Firm Customer 
Quote Size, a Lead Market Maker may send through the Linkage such P/A 
Order in one of two ways:
    (i) The Lead Market Maker may send a P/A Order representing the 
entire Customer Order. If the receiving Participant Exchange's 
disseminated quotation is equal to or better than the Reference Price 
when the P/A Order arrives at that market, that exchange will execute 
the P/A Order at its disseminated quotation for at least the Firm 
Customer Quote Size. Within 15 seconds of receipt of such order, the 
receiving Participant Exchange will inform the Lead Market Maker of the 
amount of the order executed and the amount, if any, that was canceled.
    (ii) Alternatively, the Lead Market Maker may send an initial P/A 
Order for the Firm Customer Quote Size pursuant to subparagraph (b)(1) 
above. If the Participant Exchange executes the P/A Order and continues 
to disseminate the same quotation at the NBBO 15 seconds after 
reporting the execution of the initial P/A Order, the Lead Market Maker 
may send an additional P/A Order to the same Participant Exchange. If 
sent, such additional P/A Order must be for at least the lesser of 100 
contracts or the entire remainder of the Customer order.

In any situation where a receiving Participant Exchange does not 
execute a P/A Order in full, such exchange will be required to move its 
quotation to a price inferior to the Reference Price of the P/A Order.
    (c) Principal Orders.
    (1) Sending of an Initial Principal Order. An Eligible Market Maker 
may send a Principal Order through the Linkage at a price equal to the 
NBBO. If the Principal Order is not larger than the Firm Principal 
Quote Size, the receiving Participant Exchange will execute the order 
in its automatic execution system, if available, if its disseminated 
quotation is equal to or better than the price specified in the 
Principal Order when that order arrives at the receiving Participant 
Exchange. If the Principal Order is larger than the Firm Principal 
Quote Size, the receiving Participant Exchange will (a) execute the 
Principal Order at its disseminated quotation for at least the Firm 
Principal Quote Size and (b) within 15 seconds of receipt of such 
order, reply to the sending Participant Exchange, informing such 
Participant Exchange of the amount of the order that was executed and 
the amount, if any, that was canceled. If the receiving Participant 
Exchange does not execute the Principal Order in full, it will move its 
quote to a price inferior to the Reference Price of the Principal 
Order.
    (2) Receipt of Multiple Principal Orders Once the Exchange provides 
an automatic execution of a Principal Order in a series of an Eligible 
Option Class (the ``initial execution''), the Exchange may reject any 
Principal Order(s) in the same Eligible Option Class sent by the same 
Participant Exchange for 15 seconds after the initial execution unless: 
(a) there is a change of price in the Exchange's disseminated offer 
(bid) in the series of the Eligible Option Class in which there was the 
initial execution; and (b) such price continues to be the NBBO. After 
this 15 second period, and until the sooner of (y) one minute after the 
initial execution

[[Page 78845]]

or (z) a change in the Exchange's disseminated bid (offer), the 
Exchange is not obligated to provide an automatic execution for any 
Principal Orders in the same Eligible Option Class received from the 
Participant Exchange that sent the order resulting in the initial 
execution, and thus may treat any such Principal Orders as being 
greater than the Firm Principal Quote Size.
    (d) Responses to Linkage Orders.
    (1) Failure to Receive a Timely Response. A Member who does not 
receive a response to a P Order or a P/A Order within 20 seconds of 
sending the order may reject any response received thereafter 
purporting to report an execution of all or part of that order. The 
Member so rejecting the response will inform the Exchange Participant 
sending that response of the rejection within 15 seconds of receipt of 
the response.
    (2) Failure to Send a Timely Response. If a Member responds to a P 
Order or P/A Order more than 20 seconds after receipt of that order, 
and the Participant Exchange to whom the Member responded cancels such 
response, the Member will cancel any trade resulting from such order 
and will report the cancellation to OPRA.
    (e) Receipt of Linkage Orders. The Exchange will provide for the 
execution of P/A Orders and Principal Orders if its disseminated 
quotation is (i) equal to or better than the Reference Price, and (ii) 
equal to the then-current NBBO. Subject to paragraph (c), above, if the 
size of a P/A Order or Principal Order is not larger than the Firm 
Customer Quote Size or Firm Principal Quote size, respectively, the 
Exchange will provide for the execution of the entire order, and will 
execute such order in its automatic execution system if that system is 
available. If the size of a P/A Order or Principal Order is larger than 
the Firm Customer Quote Size or Firm Principal Quote Size, 
respectively, the Lead Market Maker must address the order within 15 
seconds to provide an execution for at least the Firm Customer Quote 
Size or Firm Principal Quote Size, respectively. If the order is not 
executed in full, the Exchange will move its disseminated quotation to 
a price inferior to the Reference Price.

Order Protection

    Rule 6.94 (a) Avoidance and Satisfaction of Trade-Throughs.
    (1) General Provisions. Absent reasonable justification and during 
normal market conditions, Members should not effect Trade-Throughs. 
Except as provided in paragraph (b) below, if a Member effects a Trade-
Through with respect to the bid or offer of a Participant Exchange in 
an Eligible Option Class and the Exchange receives a Satisfaction Order 
from an Aggrieved Party, either:
    (i) The Member who initiated the Trade-Through must satisfy, or 
cause to be satisfied, the Aggrieved Party by filling the Satisfaction 
Order in accordance with subsection (a)(2) below; or
    (ii) If the Member elects not to do so (and, in the case of Third 
Participating Market Center Trade-Through, the Member obtains the 
agreement of the contra party that received the Linkage Order that 
caused the Trade-Through), then the price of the transaction that 
constituted the Trade-Through will be corrected to a price at which a 
Trade-Through would not have occurred. If the price of the transaction 
is corrected, the Member correcting the price must report the corrected 
price to OPRA, notify the aggrieved party of the correction and cancel 
the Satisfaction Order.
    (2) Price and Size. The price and size at which the Satisfaction 
Order will be filled are as follows:
    (i) Price. A Satisfaction Order will be filled at the Reference 
Price. However, if the Reference Price is the price of an apparent 
Block Trade that caused the Trade-Through, and such trade was not, in 
fact, a Block Trade, then the Member may cancel the Satisfaction Order. 
In that case, the Member will inform the Aggrieved Party within three 
minutes of receipt of the Satisfaction Order of the reason for the 
cancellation. Within three minutes of receipt of such cancellation, the 
Aggrieved Party may resend the Satisfaction Order with a Reference 
Price of the bid or offer that was traded-through.
    (ii) Size. An Aggrieved Party may send a Satisfaction Order up to 
the size of the Verifiable Number of Customer Contracts that were 
included in the disseminated bid or offer that was traded through. 
Subject to subparagraph (2)(i) above and paragraph (b) below, a Member 
will fill in full all Satisfaction Orders it receives following a 
Trade-Through, subject to the following limitations:
    (A) If the number of contracts to be satisfied exceeds the size of 
the transaction that caused the Trade-Through, the size of the 
Satisfaction Order(s) that must be filled with respect to each 
Participant Exchange(s) will be limited to the size of the transaction 
that caused the Trade-Through, and the remainder of any Satisfaction 
Order(s) will be canceled;
    (B) If the transaction that caused the Trade-Through was for a size 
larger than the Firm Customer Quote Size with respect to any of the 
Participant Exchange(s) traded through, the total number of contracts 
to be filled, with respect to all Satisfaction Orders received, will 
not exceed the size of the transaction that caused the Trade-Through. 
In that case, the Member will fill the Satisfaction Orders pro rata 
based on the Verifiable Number of Customer Contracts traded through on 
each Participant Exchange, and will cancel the remainder of such 
Satisfaction Order(s); and
    (C) Notwithstanding paragraphs (A) and (B) above, if the 
transaction that caused the Trade-Through occurred during the five 
minutes prior to the regularly-scheduled close of trading in the 
principal market in which the underlying security is traded, the 
maximum number of contracts to be satisfied with respect to any one 
Participant Exchange is 10 contracts.
    (3) Rejection of Fills of Satisfaction Orders. Within 30 seconds of 
receipt of notification that another Participant Exchange has filled a 
Member's Satisfaction Order, the Member that sent the Satisfaction 
Order may reject such fill, but only to the extent that either: (i) The 
order(s) for the customer contracts underlying the Satisfaction Order 
already have been filled; or (2) the customer order(s) to buy (sell) 
the contracts underlying the Satisfaction Order were canceled.
    (4) Protection of Customers. Whenever subsection (a)(1) applies, if 
Customer orders (or P/A Orders representing Customer orders) 
constituted either or both sides of the transaction involved in the 
Trade-Through, each such Customer order (or P/A Order) will receive:
    (i) The price that caused the Trade-Through; or
    (ii) The price at which the bid or offer traded through was 
satisfied, if it was satisfied pursuant to subsection (a)(1)(i), or the 
adjusted price, if there was an adjustment, pursuant to subsection 
(a)(1)(ii),

Whichever price is most beneficial to the Customer order. Resulting 
differences in prices will be the responsibility of the Member who 
initiated the Trade-Through.
    (b) Exceptions to Trade-Through Liability. The provisions of 
subsection (a) pertaining to the satisfaction of Trade-Throughs will 
not apply under the following circumstances:
    (1) The Member who initiated the Trade-Through made every 
reasonable effort to avoid the Trade-Through, but was unable to do so 
because of a systems/equipment failure or malfunction;
    (2) The Member traded through the market of a Participant Exchange 
to

[[Page 78846]]

which such Member had sent a P/A Order or Principal Order, and within 
20 seconds of sending such order the receiving Participant Exchange had 
neither executed the order in full nor adjusted the quotation traded 
through to a price inferior to the Reference Price of the P/A Order or 
Principal Order;
    (3) The bid or offer traded through was being disseminated from a 
Participant Exchange whose quotes were Non-Firm with respect to such 
Eligible Option Class;
    (4) The Trade-Through was other than a Third Participating Market 
Center Trade-Through and occurred during a period when, with respect to 
the Eligible Option Class, the Exchange's quotes were Non-Firm; 
provided, however, that unless one of the other conditions of this 
subsection (b) applies, during any such period: (i) Members must make 
every reasonable effort to avoid trading through the firm quotes of 
another Participant Exchange; and (ii) it will not be considered an 
exception to paragraph (a) if a Member regularly trades through the 
firm quotes of another Participant Exchange during such period;
    (5) The bid or offer traded through was being disseminated by a 
Participant Exchange during a trading rotation in the Eligible Option 
Class;
    (6) The transaction that caused the Trade-Through occurred during a 
trading rotation;
    (7) The transaction that caused the Trade-Through was the execution 
of a Complex Trade;
    (8) In the case of a Trade-Through other than a Third Participating 
Market Center Trade-Through, a Satisfaction Order with respect to the 
Trade-Through was not received by the Exchange from the Aggrieved Party 
promptly following the Trade-Through and, in any event, (i) except in 
the final five minutes of trading, within three minutes from the time 
the report of the transaction(s) that constituted the Trade-Through was 
disseminated over OPRA, and (ii) in the final five minutes of trading, 
within one minute from the time the report of the transaction(s) that 
constituted the Trade-Through was disseminated over OPRA; or
    (9) In the case of a Third Participating Market Center Trade-
Through, a Satisfaction Order with respect to the Trade-Through was not 
received by the Exchange promptly following the Trade-Through. In 
applying this provision, the Aggrieved Party must send the Exchange a 
Satisfaction Order within three minutes from the time the report of the 
transaction that constituted the Trade-Through was disseminated over 
OPRA. To avoid liability for the Trade-Through, the Member receiving 
such Satisfaction Order must cancel the Satisfaction Order and inform 
the Aggrieved Party of the identity of the Participant Exchange that 
initiated the Trade-Through within three minutes of the receipt of such 
Satisfaction Order (within one minute in the final five minutes of 
trading). The Aggrieved Party then must send the Participant Exchange 
that initiated the Trade-Through a Satisfaction Order within three 
minutes of receipt of the cancellation of the initial Satisfaction 
Order (within one minute in the final five minutes of trading).
    (c) Responsibilities and Rights Following Receipt of Satisfaction 
Orders.
    (1) When a Member receives a Satisfaction Order, that Member must 
respond as promptly as practicable pursuant to Exchange procedures by 
either:
    (i) Specifying that one of the exceptions to Trade-Through 
liability specified in paragraph (b) above is applicable and 
identifying that particular exception; or
    (ii) Taking the appropriate corrective action pursuant to paragraph 
(a) above.
    (2) If the Member who initiated the Trade-Through fails to respond 
to a Satisfaction Order or otherwise fails to take the corrective 
action required under paragraph (a) within three minutes of receiving 
notice of a Satisfaction Order, and the Exchange determines that:
    (i) There was a Trade-Through; and
    (ii) None of the exceptions to Trade-Through liability specified in 
subsection (b) above were applicable;
Then, subject to the next paragraph, the Member who initiated the 
Trade-Through will be liable to the Aggrieved Party for the amount of 
the actual loss resulting from non-compliance with paragraph (a) and 
caused by the Trade-Through.
    If either (a) the Aggrieved Party does not establish the actual 
loss within 30 seconds from the time the Aggrieved Party received the 
response to its Satisfaction Order (or, in the event that it did not 
receive a response, within four minutes from the time the Aggrieved 
Party sent the Satisfaction Order) or (b) the Aggrieved Party does not 
notify the Exchange Participant that initiated the Trade-Through of the 
amount of such loss within one minute of establishing the loss, then 
the liability will be the lesser of the actual loss or the loss caused 
by the Trade-Through that the Aggrieved Party would have suffered had 
that party purchased or sold the option series subject to the Trade-
Through at the ``mitigation price.''
    The ``mitigation price'' is the highest reported bid (in the case 
where an offer was traded through) or the lowest reported offer (in the 
case where a bid was traded through), in the series in question 30 
seconds from the time the Aggrieved Party received the response to its 
Satisfaction Order (or, in the event that it did not receive a 
response, four minutes from the time the Aggrieved Party sent the 
Satisfaction Order). If the Participant Exchange receives a 
Satisfaction Order within the final four minutes of trading (on any day 
except the last day of trading prior to the expiration of the series 
which is the subject of the Trade-Through), then the mitigation price 
will be the price established at the opening of trading in that series 
on the Aggrieved Party's Participant Exchange on the next trading day. 
However, if the price of the opening transaction is below the opening 
bid or above the opening offer as established during the opening 
rotation, then the mitigation price will be the opening bid (in the 
case where an offer was traded through) or opening offer (in the case 
where a bid was traded through). If the Trade-Through involves a series 
that expires on the day following the day of the Trade-Through and the 
Satisfaction Order is received within the four minutes of trading, the 
``mitigation price'' will be the final bid (in the case where an offer 
was traded through) or offer (in the case where a bid was traded 
through) on the day of the trade that resulted in the Trade-Through.
    (3) A Member that is an Aggrieved Party under the rules of another 
Participant Exchange governing Trade-Through liability must take steps 
to establish and mitigate any loss such Member might incur as a result 
of the Trade-Through of the Member's bid or offer. In addition, the 
Member must give prompt notice to the other Participant Exchange of any 
such action in accordance with subsection (c)(2) above.
    (d) Limitations on Trade-Throughs. Members may not repeatedly trade 
through better prices available on other exchanges, whether or not the 
exchange or exchanges whose quotations are traded through are 
Participant Exchanges, unless one or more of the provisions of 
paragraph (b) above are applicable. In applying this provision:
    (1) The Exchange will consider there to have been a Trade-Through 
if a Member executes a trade at a price inferior to the NBBO even if 
the Exchange does not receive a Satisfaction Order from an Aggrieved 
Party pursuant to subparagraph (a)(1);
    (2) The Exchange will not consider there to have been a Trade-
Through if

[[Page 78847]]

a Member executes a Block Trade at a price inferior to the NBBO if such 
Member satisfied all Aggrieved Parties pursuant to subsection (a)(2) 
following the execution of the Block Trade; and
    (3) The Exchange will not consider there to have been a Trade-
Through if a Member executes a trade at a price inferior to the 
quotation being disseminated by an exchange that is not a Participant 
Exchange if the Member made a good faith effort to trade against the 
superior quotation of the non-Participant Exchange prior to trading 
through that quotation. A ``good faith effort'' to reach a non-
Participant Exchange's quotation requires that a Member at least had 
sent an order that day to the non-Participant Exchange in the class of 
options in which there is a Trade-Through, at a time at which such non-
Participant Exchange was not relieved of its obligation to be firm for 
its quotations pursuant to Rule 11Ac1-1 under the Exchange Act, and 
that the non-Participant Exchange neither executed that order nor moved 
its quotation to a price inferior to the price of the Member's order 
within 20 seconds of receipt of that order.

Locked and Crossed Markets

    Rule 6.95 (a) Eligible Market Maker Locking or Crossing a Market. 
An Eligible Market Maker that creates a Locked Market or a Crossed 
Market will unlock (uncross) that market or will direct a Principal 
Order through the Linkage to trade against the bid or offer that the 
Eligible Market Maker locked (crossed).
    (b) Members Other than an Eligible Market Maker Locking or Crossing 
a Market. A Member other than an Eligible Market Maker that creates a 
Locked Market or a Crossed Market will unlock (uncross) the market.

Limitation on Principal Order Access

    Rule 6.96 A Market Maker will not be permitted to send Principal 
Orders in an Eligible Option Class through the Linkage for a given 
calendar quarter if the Market Maker effected less than 80 percent of 
its volume in that Eligible Option Class on the Exchange in the 
previous calendar quarter (that is, the Market Maker effected 20 
percent or more of its volume by sending Principal Orders through the 
Linkage). This ``80/20'' is represented as follows:

                                    X
                              ____________
                                   X+Y
 

    ``X'' equals the total contract volume the Market Maker effects in 
an Eligible Option Class against orders of Customers on the Exchange 
during a calendar quarter (a) including contract volume effected by 
executing P/A Orders sent to the Exchange through the linkage, but (b) 
excluding contract volume effected by sending P/A Orders through the 
Linkage for execution on another Participant Exchange. ``Y'' equals the 
total contract volume the Market Maker effects in such Eligible Option 
Class by sending Principal Orders through the Linkage during that 
calendar quarter.
* * * * *

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 Exchange 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 July 28, 2000, the Commission approved a national market system 
plan for the purpose of creating and operating an intermarket options 
market linkage (``Linkage Plan'' or ``Plan'') proposed by the American 
Stock Exchange LLC, the Chicago Board Options Exchange, Inc. and the 
International Securities Exchange LLC.\3\ On November 16, 2000, the 
Commission approved an amendment to the Linkage Plan to add the PCX as 
a Participant Exchange \4\ and an amendment to the Linkage Plan to add 
the Philadelphia Stock Exchange, Inc. as a Participant Exchange.\5\ The 
Commission approved additional amendments to the Linkage Plan in June 
2001 that conformed the Linkage Plan to the requirements of Exchange 
Act rule 11Ac1-7\6\ and in May 2002 that addressed satisfaction of 
trade-throughs, how participants could withdraw from the Plan, 
establishment of a timetable for implementation of Linkage, and 
requirements that each Participant submit to the Commission a project 
plan for implementation and monthly status reports.\7\ The Exchange is 
now proposing to adopt new PCX rules that are intended to reflect 
certain provisions of the Linkage Plan.
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    \3\ See Securities Exchange Act Release No. 43086 (July 28, 
2000), 65 FR 48023 (August 4, 2000).
    \4\ See Securities Exchange Act Release No. 43574 (November 16, 
2000), 65 FR 70851 (November 28, 2000).
    \5\ See Securities Exchange Act Release No. 43573 (November 16, 
2000), 65 FR 70850 (November 28, 2000).
    \6\ See Securities Exchange Act Release No. 44482 (June 27, 
2001), 66 FR 35470 (July 5, 2001).
    \7\ See Securities Exchange Act Release No. 46001 (May 30, 
2002), 67 FR 38687 (June 5, 2002).
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    Specifically, the Exchange is proposing to adopt new PCX rule 6.92 
(``Definitions''), which includes definitions of the following terms 
for the purposes of PCX rules 6.92-6.96: Aggrieved Party, Block Trade, 
Broker/Dealer, Complex Trade, Crossed Market, Customer, Eligible Market 
Maker, Eligible Option Class, Firm Customer Quote Size, Firm Principal 
Quote Size, Linkage, Linkage Order, Principal Acting as Agent (``P/A'') 
Order, Principal Order, Satisfaction Order, Locked Market, Member, 
NBBO, Non-Firm, Participant Exchange, Plan, Reference Price, Trade-
Through, Third Participating Market Center Trade-Through and Verifiable 
Number of Customer Contracts.
    The Exchange is proposing to adopt new PCX rule 6.93 (``Operation 
of the Linkage''), which is intended to clarify the manner in which the 
Exchange will comply with, and enforce compliance by its members with, 
the Linkage Plan. More specifically, the proposed rule specifies 
pricing requirements applicable to orders sent through the Linkage; 
procedures for sending P/A orders under the Plan; procedures for 
sending Principal Orders under the Plan; procedures relating to 
responses to Linkage Orders; and procedures applicable to the receipt 
of Linkage Orders on the Exchange pursuant to the Linkage Plan.
    Proposed PCX rule 6.94 (``Order Protection'') sets forth various 
provisions on the avoidance and satisfaction of Trade-Throughs; 
exceptions to Trade-Through liability; responsibilities and rights 
following receipt of Satisfaction Orders; and limitations on Trade-
Throughs. Proposed PCX rule 6.95 sets forth rules relating to Locked 
and Crossed Markets. Finally, proposed PCX rule 6.96 establishes a 
limitation on Principal Order access.
2. Basis
    The Exchange believes that the proposal is consistent with section 
6(b) of the Act,\8\ in general, and section 6(b)(5),\9\ in particular, 
in that it is designed to promote just and equitable principles of 
trade, to foster cooperation and coordination with persons engaged

[[Page 78848]]

in regulating, clearing, settling, processing information with respect 
to, and facilitating transaction in securities, and, in general, to 
protect investors and the public interest.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 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 that is not necessary or appropriate 
in furtherance of the purposes of the Act.

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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve such rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposal 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-2002-64 and should be 
submitted by January 16, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-32530 Filed 12-24-02; 8:45 am]
BILLING CODE 8020-01-P