[Federal Register Volume 68, Number 12 (Friday, January 17, 2003)]
[Notices]
[Pages 2612-2614]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-1103]



[[Page 2612]]

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47165; File No. SR-PCX-2002-09]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Pacific Exchange, Inc. To Transfer Responsibility for 
Certain Auto-Ex Determinations From the Options Floor Trading Committee 
to Two Floor Officials

January 10, 2003.
    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 February 11, 2002, the Pacific Exchange, Inc. (``PCX'') filed with 
the Securities and Exchange Commission the proposed rule change as 
described in items I, II and III below, which the PCX has prepared. On 
December 31, 2002, the PCX filed Amendment No. 1 to the proposed rule 
change, which replaced the original filing in its entirety. The 
Commission is publishing this notice to solicit comments from 
interested persons on the proposed rule change, as amended.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

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

    The PCX is proposing to amend PCX Rule 6.87 in order to give two 
PCX floor officials, rather than the PCX's Options Floor Trading 
Committee (``OFTC''), the authority to make day-to-day determinations 
with respect to the PCX's Automatic Execution System (``Auto-Ex''). The 
text of the proposed rule change is below. New text is italicized and 
deleted text is in brackets.

Automatic Execution System

    Rule 6.87(a)--No Change.
    (b) Eligible Orders.
    (1) Only non-broker/dealer customer orders are eligible for 
execution on the Exchange's Auto-Ex System, except that [the Options 
Floor Trading Committee (``OFTC'')] two Floor Officials may determine, 
on an issue-by-issue basis, to allow the following types of orders to 
be executed on Auto-Ex:
    (A) Broker-dealer orders; or
    (B) Broker-dealer orders that are not for the accounts of Market 
Makers or Specialists on an exchange who are exempt from the provisions 
of Regulation T of the Federal Reserve Board pursuant to section 
7(c)(2) of the Securities Exchange Act of 1934.
    Broker-dealer orders entered through the Exchange's Member Firm 
Interface (MFI) will not be automatically executed against orders in 
the limit order book. Broker-dealer orders may interact with orders in 
the limit order book only after being re-routed to a floor broker for 
representation in the trading crowd. Broker-dealer orders are not 
eligible to be placed in the limit order book pursuant to rule 6.52.
    (2) If [the OFTC] two Floor Officials permit[s] broker-dealer 
orders to be automatically executed in an issue pursuant to this rule, 
then [it] they may also permit the following with respect to such 
orders:
    (A) The maximum order size eligibility for broker-dealer orders may 
be less than the applicable order size eligibility for non-broker-
dealer customer orders.
    (B) Non-broker-dealer customer orders may be eligible for automatic 
execution at the NBBO pursuant to rule 6.87(i) while broker-dealer 
orders are not so eligible.
    (C) Broker-dealer orders may be re-routed for manual representation 
when the NBBO is crossed or locked pursuant to rule 6.87(j) while non-
broker-dealer customer orders would not be re-routed for manual 
handling in such circumstances.
    (3)--(4)--No change.
    (5) The Options Floor Trading Committee (``OFTC'') or its delegate 
consisting of two Floor Officials shall determine the size of orders 
that are eligible to be executed on Auto-Ex. The OFTC or its delegate, 
two Floor Officials, may approve requests of the Lead Market Makers to 
execute orders on Auto-Ex in sizes greater than 20 contracts. Although 
the order size parameter may be changed on an issue-by-issue basis by 
the OFTC or its delegate, two Floor Officials, the maximum order size 
for execution through Auto-Ex is as follows:
    (A) Equity Options: the maximum order size for execution through 
Auto-Ex for equity options is one hundred (100) contracts;
    (B) Index Options: the maximum order size for execution through 
Auto-Ex is one hundred (100) contracts for:
    (i)--(iii)--No change.
    (6) The OFTC or its delegate consisting of two Floor Officials may 
increase the size of Auto-Ex eligible orders in one or more classes of 
multiply traded equity options to the extent that other options 
exchanges permit such larger-size orders in multiply traded equity 
options of the same class or classes to be entered into their own 
automated execution systems. If the OFTC or its delegate, two Floor 
Officials intend[s] to increase the Auto-Ex order size eligibility 
pursuant to this subsection, the Exchange will notify the Securities 
and Exchange Commission pursuant to section 19(b)(3)(A) of the Exchange 
Act.
    (c)--(d)--No change.
    (e) Market Maker Requirements and Eligibility. Any Exchange Member 
who is registered as a Market Maker and who has obtained written 
authorization from a clearing member is eligible to participate on the 
Auto-Ex system, subject to the following conditions and requirements:
    (1)--No Change.
    (2) All Auto-Ex trades to which a Market Maker is a party will be 
assigned to and clear into that Market Maker's designated account. 
Market Makers may designate that their Auto-Ex trades be assigned to 
and clear into either an individual account or a joint account in which 
that Market Maker is a participant. Unless exempted by [the Options 
Floor Trading Committee] two Floor Officials, only one participant in a 
joint account may use the account for trading in a particular option 
issue at one time.
    (3)--(7)--No change.
    (f)--(h)--No change.
    (i) Auto-Ex NBBO. The Options Floor Trading Committee (``OFTC'') or 
its delegate, two Floor Officials may approve an LMM's request to 
designate electronic orders in an option issue to receive automatic 
executions at prices reflecting the national best bid or offer 
(``NBBO''), provided that the OFTC or its delegate, two Floor Officials 
may also designate, for an option issue, that an order will default for 
manual representation in the trading crowd [of] if the order would be 
executed at a price that is more than one trading increment away from 
the PCX market price. LMMs may determine the maximum size of orders 
that are eligible to receive executions at the national bid or offering 
price, provided that this determination is subject to the approval of 
the OFTC or its delegate, two Floor Officials.
    (j) Crossed or locked Markets. [The OFTC] Two Floor Officials may 
approve an LMM's request to designate, for an option issue, that an 
order will default for manual representation in the trading crowd [is] 
if the NBBO is crossed or locked.
    (k)-(p)--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

[[Page 2613]]

purpose of and basis for the proposed rule change and discussed any 
comments it had received. The text of the 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 the statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The OFTC conducts general supervision of the PCX options floor and 
recommends to the PCX's Board of Governors the rules that it believes 
are necessary for members to conduct fair and orderly transactions on 
the trading floor.\3\ Individual members of the OFTC serve as floor 
officials and routinely make certain ad hoc decisions on the trading 
floor pursuant to PCX rules.\4\ Under PCX rules, the OFTC maintains 
supervision over various issues that arise with respect to Auto-Ex and 
exercises its discretion in resolving those issues. Currently, PCX 
rules assign the responsibility over some Auto-Ex determinations to the 
entire OFTC and the responsibility for other Auto-Ex determinations to 
two floor officials. Consequently, the responsibility of making day-to-
day determinations with respect to Auto-Ex is sometimes exercised by 
the full OFTC and at other times by two floor officials. The PCX 
believes that this split of responsibility is inconsistent and not 
clearly defined in current PCX rule 6.87.
---------------------------------------------------------------------------

    \3\ See PCX Constitution article IV, section 8(a).
    \4\ Id at section 8(e); see, e.g., PCX rule 6.87(h) (two Floor 
Officials may declare a floor-wide ``fast market'' under certain 
circumstances).
---------------------------------------------------------------------------

    The PCX now proposes to amend PCX rule 6.87 in order to transfer 
the responsibility for making ad hoc decisions on more routine Auto-Ex 
matters from the OFTC to two floor officials. The OFTC currently meets 
semi-monthly to address system-wide Auto-Ex issues, and the PCX 
believes that it is impractical for the OFTC to convene on the trading 
floor to make ad hoc decisions or to grant exemptive relief on a case-
by-case basis. The PCX believes that referring the case-by-case 
decisions to two floor officials will prove to be efficient and 
effective, and more in line with the practical operations of the 
trading floor. Specifically, the PCX proposes to assign the 
responsibility from the OFTC to two floor officials with respect to the 
following matters:
    Rule 6.87(b)--Eligible orders: Under the proposed rule, two floor 
officials would be permitted to grant exemptions, on an issue-by-issue 
basis, allowing certain broker-dealer orders to be executed on Auto-Ex 
under specific circumstances.\5\ The proposed rule further permits the 
OFTC to delegate to two floor officials the power to approve case-by-
case requests of Lead Market Makers (``LMMs'') to execute Auto-Ex 
orders in sizes greater than the market maker's Auto-Ex size commitment 
and to increase the size of eligible orders in one or more classes of 
multiply traded options.\6\
---------------------------------------------------------------------------

    \5\ See PCX rule 6.87(b)(1) and (2).
    \6\ See PCX rule 6.87(b)(5) and (6).
---------------------------------------------------------------------------

    Rule 6.87(e)--Market Maker Requirements and Eligibility: Under the 
proposed rule, two floor officials may grant an exemption to the rule 
that only one participant in a joint account may use the account for 
trading in a particular option issue at one time.
    Rule 6.87(i) `` Auto-Ex NBBO: Under the proposed rule, the OFTC may 
delegate to two floor officials the power to approve an LMM's request 
to designate electronic orders in an option issue to receive automatic 
executions at prices reflecting the national best bid or offer 
(``NBBO'') under certain circumstances. The proposed rule further 
provides that LMMs may determine the maximum size of orders that are 
eligible to receive executions at the national bid or offering price, 
provided that this determination is subject to the approval of the OFTC 
or its delegate, two floor officials.
    Rule 6.87(j)--Crossed or Locked Markets: Under the proposed rules, 
two floor officials may approve an LMM's request to designate that an 
order will default for manual representation in the trading crowd if 
the NBBO is crossed or locked.
    The proposed rule continues to grant to the OFTC the responsibility 
to make broad-based decisions.\7\
---------------------------------------------------------------------------

    \7\ See, e.g., PCX rule 6.87(k) (assigning to the OFTC the 
responsibility to determine the manner in which orders entered 
through the Auto-Ex system will be assigned).
---------------------------------------------------------------------------

2. Statutory Basis
    The PCX believes that the proposed rule change is consistent with 
section 6(b) of the Act \8\ and furthers the objectives of section 
6(b)(5) of the Act \9\ in that it has been designed to facilitate 
transactions in securities, to promote just and equitable principles of 
trade, to foster cooperation and coordination with persons engaged in 
facilitating transactions in securities, and to remove impediments to 
and perfect the mechanism of a free and open market and a national 
market system.
---------------------------------------------------------------------------

    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    The PCX 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

    The PCX neither solicited nor received written comments on the 
proposed rule change.

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 PCX consents, the Commission will--
    (A) By order approve the proposed 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 the 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-2002-09 and should be 
submitted by February 7, 2003.


[[Page 2614]]


    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\10\
---------------------------------------------------------------------------

    \10\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-1103 Filed 1-16-03; 8:45 am]
BILLING CODE 8010-01-P