[Federal Register Volume 68, Number 152 (Thursday, August 7, 2003)]
[Notices]
[Pages 47124-47131]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-20131]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48264; File No. SR-PCX-2002-57]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Pacific Exchange, Inc., Relating to the Implementation of 
a New Order Audit Trail System

July 31, 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 August 9, 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. On July 28, 2003, the Exchange filed Amendment No. 1 to 
the proposed rule change.\3\ On July 30, 2003, the Exchange filed 
Amendment No. 2 to the proposed rule change.\4\ The Commission is 
publishing the proposed rule change, as amended, to solicit comment on 
the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 replaces and supersedes the original filing 
in its entirety.
    \4\ See letter from Tania J. Cho, Staff Attorney, PCX, to 
Jennifer Colihan, Special Counsel, Division of Market Regulation, 
(``Division''), Commission, dated July 30, 2003 (``Amendment No. 
2''). In Amendment No. 2, the Exchange clarified that it will not 
conduct an issue-by-issue roll out of the Electronic Order Capture 
System as originally proposed.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange is proposing to adopt new rules relating to the 
creation of an order audit trail system called Electronic Order Capture 
System (``EOC''). The proposal will require that every member or member 
organization that receives an order for execution on the Exchange must 
immediately record the details of the order (including any modification 
of the terms of the order or cancellation of the order) into EOC, 
unless such order has been entered into the Exchange's other electronic 
order processing facilities.
    The text of the proposed rule change is below. Additions are in 
italics; deletions are in brackets.
* * * * *
Rule 6--Options Trading Applicability, Definitions and References
    Rule 6.1(a)-No change.
    (b) Definitions. The following terms as used in Rule 6 shall, 
unless the context otherwise indicates, have meanings herein specified:
    (1)-(38)--No change.
    (39) The term ``Electronic Order Capture System'' (``EOC'') means 
the Exchange's electronic audit trail and order tracking system that 
provides a time-sequenced record of all orders and transactions on the 
Exchange. EOC records the receipt of an order and documents the life of 
the order through the process of execution, partial execution, or 
cancellation. This system includes the electronic communications 
interface between EOC booth terminals and the Floor Broker Hand Held 
applications. Each member's EOC booth terminal and each Floor Broker 
Hand Held Terminal contains an electronic order entry screen that 
displays the terms and conditions of each order received by that 
member.
    (c)-(e)--No change.
* * * * *
Admission to and Conduct on the Options Trading Floor
    Rule 6.2(a)-(g)--No change.
    (h)(1)-(2)--No change.
    (3) Requirements and Conditions.
    (A)--No change.
    (B) Orders transmitted by registered Exchange Market Makers may be 
entered directly to the trading posts. All other orders may be entered 
directly to the trading posts only during outgoing telephone calls that 
are initiated at the option posts. Pursuant to Rule 6.67(c), all such 
orders must be immediately recorded into the EOC unless there is a 
disruption or malfunction to the EOC, in which case the EOC Contingency 
Procedures will be in effect in accordance with Rule 6.67(d)(1).
    (C)--No change.
    (4)--No change.
    (5) Floor Brokers.
    (A)-(B)--No change.
    (C) Ticket to Follow. In the event of a disruption or malfunction 
of EOC, pursuant to Rule 6.67(d), a [A] Floor Broker in a trading crowd 
may represent immediately in the trading crowd a telephonic order 
received from a Member or Member Firm representative located in a firm 
member booth [who receives a telephonic an order from a Member or 
Member Firm representative located on the Trading Floor may represent 
that order immediately in the trading crowd], provided (a) that an 
order ticket for the order must be prepared and time stamped in the 
member firm booth before the order is transmitted telephonically to the 
Floor Broker in the trading crowd; and (b) that the written, time-
stamped order ticket

[[Page 47125]]

for the order must be taken to the Floor Broker in the trading crowd 
immediately after it has been prepared.
    (D)--No change.
    (6)-(10)--No change.
Commentary
    .01-.02--No change.
    .03 While on the Trading Floor, clerks must [shall] display at all 
times the badge(s) supplied to them by the Exchange. [Any Market-Maker 
clerk who writes up an option order on the Options Floor must give his 
employer a copy of that order before it is delivered; the employer must 
retain the copy on his person until it is executed.] A clerk receiving 
a phone order must immediately record the details of the order into EOC 
pursuant to Rule 6.67(c). [must initial, must mark as opening or 
closing and must time-stamp the order.]
    .04 For orders excepted from EOC, pursuant to Rule 6.67(d), a 
Market-Maker clerk who writes up an option order on the Options Floor 
must give his employer a copy of that order before it is delivered; the 
employer must retain the copy on his person until it is executed. A 
clerk receiving a phone order must initial, must mark as opening or 
closing and must time-stamp the order.
    .05[.04]--No change.
* * * * *
Fast Markets and Unusual Market Conditions
    Rule 6.28(a)--No change.
    (b)(1)--No change.
    (2) For orders excepted from EOC, pursuant to Rule 6.67(d), [T]the 
OBO may temporarily move less active issues to another post if the Book 
is extremely active. [Books left at the post may be separated and order 
shoes provided for the most active series to facilitate order flow. A 
special time stamp will be placed behind the Book to stamp incoming 
transactions before they go to Price Reporting.]
    (3)-(6)--No change.
    (c)-(d)--No change.
* * * * *
Appointment of Market Makers
    Rule 6.35--No change.
Commentary
    .01-.03--No change.
    .04 For the purposes of this rule, temporarily undertaking the 
obligations of a Primary Appointment with respect to non-Primary 
Appointment classes of option contracts at the request of an Options 
Floor Trading Committee member shall not be deemed trading in non-
Primary Appointment classes. In addition, a Market Makers' trades 
effected through a floor broker do not count for nor against the Market 
Maker's 75% requirement, regardless of whether the trades are in issues 
within or without his Primary Appointment. Also, Market Makers who are 
solicited on an order on behalf of an account other than that of 
another Market Maker may accommodate such orders, provided that the 
orders are clearly announced in the trading crowd as solicited, and 
such transactions shall not count for nor against the 75% requirement. 
Such orders [trades] must [shall] be designated by the Market Maker 
with an ``S'' in the ``[o]Optional Data'' field [section] of the 
electronic order entry screen or, for orders excepted from EOC pursuant 
to Rule 6.67(d), in the ``Optional Data'' section of the trade ticket.
    .05--No change.
* * * * *
``Crossing'' Orders and Stock/Option Orders
    Rule 6.47(a)--No change.
    (b) Crossing of Facilitation Orders. A Floor Broker who holds an 
order for a public customer of a member organization and a facilitation 
order may cross such orders provided that he proceeds in the following 
manner:
    (1)--No change.
    (2) [The option order tickets for both the [f]Facilitation orders 
and [the] customer orders must be entered into EOC and [display] all of 
the terms of such orders, including any contingencies involving, and 
all related transactions in, either options or underlying or related 
securities, must be displayed on the electronic order screen. If 
facilitation orders and customer orders are excepted from EOC, pursuant 
to Rule 6.67(d), then order tickets must display this same information. 
The Floor Broker must disclose all securities that are components of 
the customer order.
    (3)-(6)--No change.
    (c)--No change.
    (1)-(3)--No change.
    (4) ``Solicited'' must [shall] be entered [written] in the 
``Optional Data'' field of the electronic order entry screen or, for 
orders excepted from EOC pursuant to Rule 6.67(d), written in the 
``Optional Data'' section of the trade ticket. [area on the order 
ticket of the solicited order. If the solicited order is for a market 
maker account, the order ticket shall be personally initialed by the 
solicited market maker, who must have in his possession a copy of such 
order ticket at all times such order is active.]
    (5)--No change.
    (d)-(e)--No change.
    (f) Stock/Option Orders. When a stock/option order is taken to a 
crowd for execution, the stock transaction must be effected prior to 
the option transaction pursuant to Rule 6.47, Commentary .04. The 
following procedure applies to all executions of stock/option orders: 
[A]after an agreement with other members of the crowd has been reached 
as to the terms of the transaction, the option order must be entered 
into EOC or, for orders excepted from EOC, pursuant to Rule 6.67(d), 
written on tickets [must be written up] and time stamped. However, the 
option transaction will [order tickets should] not be reported to 
Options Price Reporting Authority (``OPRA'') by EOC or, for orders 
excepted from EOC, pursuant to Rule 6.67(d), turned in to the Order 
Book Official at this time. The members will [shall] attempt to 
immediately effect the transaction in the underlying or related 
security. If the stock transaction cannot be executed immediately or is 
effected at a price other than an [the] agreed-upon price, the members 
will [shall] not be held to the option transaction. If the stock 
transaction is effected at an [the] agreed-upon price, then all the 
members who participated in the option transaction will [shall] be held 
to their agreed-upon price. At the time the stock transaction is 
effected, the option transaction must be immediately entered into EOC 
and reported to OPRA or, for orders excepted from EOC, pursuant to Rule 
6.67(d), trade tickets must [should] be given to the Order Book 
Official.
Commentary
    .01-.06--No change.
* * * * *
Discretionary Transactions
    Rule 6.48.(a)-(b)--No change.
    (c) A Market Maker shall not exercise discretion in an account 
unless he has a direct interest in such account. Market Makers may not 
exercise discretion over any account other than: a joint account 
approved pursuant to Rule 6.39, or an account in which the Market Maker 
has a direct interest. For purposes of this Rule, the term ``direct 
interest'' in an account is limited in its meaning to include only a 
participation in the profits and losses in such account, or in the case 
of a partnership or corporation, a representative of such partnership 
or corporation who has a supervisory responsibility over such account. 
Only persons registered as Market Makers and subject to the performance 
obligations set forth in Rule 6.37, may exercise discretion over an 
account.
    (1) A Market Maker wishing to effect such discretionary 
transactions for

[[Page 47126]]

accounts other than the Market Maker's personal account or a joint 
account must enter the order with a Floor Broker and the procedures set 
forth in Rule 6.85. The identification of the order as a discretionary 
order is required pursuant to [PCX ] Rule 6.68(a)(5). [(7), ``Record of 
Orders.'']
    (A) The clearing acronym [name] of the Market Maker for whom the 
transaction is being executed must be [printed at the bottom of the 
ticket (B-6-1(c)),] entered into EOC or, for orders excepted from EOC, 
pursuant to Rule 6.67(d), written on the ticket along with the clearing 
acronym [badge number] of the Market Maker exercising discretion 
[(i.e.e.g., Joe Trader/MO7)]; and
    (B) A ``D'' must be placed after the Market Maker's clearing 
acronym [number,] for whose account the trade is executed[, in the firm 
box (e.g., MO5 D)].
Solicited Transactions
    Rule 6.49(a)-(b)--No change.
    (c) ``Solicited'' must [shall] be entered [written] in the 
``Optional Data'' field of the electronic order entry screen for [area 
on the order ticket of] the Solicited order. For orders excepted from 
EOC, pursuant to Rule 6.67(d), ``Solicited'' must be written in the 
``Optional Data'' section on the order ticket of the Solicited order.
* * * * *
ORDER BOOK OFFICIALS
Order Book Official Defined
Obligations for Orders
    Rule 6.52(a)-(d)--No change.
Commentary
    .01.--.03--No change.
    .04 For purposes of this Section, orders excepted from EOC, 
pursuant to Rule 6.67(d), will be within the custody of Order Book 
Officials only when they have been deposited, properly time-stamped and 
marked, in the proper receptacle.
    .05--No change.
* * * * *
Certain Types of Orders Defined
    Rule 6.62(a)-(b)--No change.
    (c) A contingency order is a limit or market order to buy or sell 
that is contingent upon a condition being satisfied. [while the order 
is at the Post.]
    (d)--No change.
    (e) Not held order. A not held order is an order that provides a 
broker with discretion as to price or time in executing the order. A 
``not held'' order must be designated as such in the ``Optional Data'' 
field of the electronic order entry screen. For orders excepted from 
EOC, pursuant to Rule 6.67(d), a [A] not held order [is an order that] 
is marked ``not held'', ``NH'', ``take time'' or marked with some [that 
bears any] qualifying notation giving discretion as to the price or 
time at which such order is to be executed. The ``not held'' 
designation must appear in the ``special instructions'' portion of the 
order ticket. Orders that merely include a ``not held'' designation as 
part of the time stamp will not be deemed to be ``not held'' orders.
    (f)-(j)--No change.
* * * * *

Order Format and System Entry Requirements

[Orders Required To Be in Written Form]
    Rule 6.67(a). Transmitted to the Floor. Each order transmitted to 
the Floor must be recorded legibly in a format [written form] that has 
been approved by the Exchange, and the member receiving such order must 
record the time of its receipt on the Floor. Each such order must be in 
a legible format [written form] when transmitted [taken] to the post 
for attempted execution. Orders sent electronically through the 
Exchange's Member Firm Interface or orders entered into the Exchange's 
EOC are [deemed to be written] approved formats for transmitting orders 
for purposes of Rule 6.67.
    (b) Order Format Requirements. Orders sent to the Exchange for 
execution must comply with the order format requirements established by 
the Exchange relating to, among other things, option symbol, expiration 
month, exercise price, type of option (call or put), quantity of option 
contracts, clearing member organization, whether the order is to buy or 
sell, and whether the order is market or limit.
    [(b) Cancellations and changes. Each cancellation of, or change to, 
an order that has been transmitted to the Floor must be recorded 
legibly in a written form that has been approved by the Exchange, and 
the member receiving such cancellation or change must record the time 
of its receipt on the Floor.]
    (c) EOC Entry Requirement. Every member or member organization that 
receives an order for execution on the Exchange must immediately record 
the details of the order (including any modification of the terms of 
the order or cancellation of the order) into EOC, unless such order has 
been entered into the Exchange's other electronic order processing 
facilities (e.g., orders sent electronically through the Exchange's 
Member Firm Interface). The details of each order required to be 
recorded upon receipt must include the data elements prescribed in Rule 
6.68(a)(1) through (9), and such other information as may be required 
by the Exchange from time to time.
    [(c) Executions. A member transmitting from the Floor a report of 
the execution of an order must record the time at which a report of 
such execution is received by such member.]
    (d) Exceptions to EOC Entry Requirement. The EOC entry requirement 
provision of subsection (c) will not apply during any disruption or 
malfunction of EOC or any Exchange system relied on by a Floor member 
to record the details of an order.
    [(d) A Floor Broker may represent a telephonic order, with the 
ticket to follow, as provided in Rule 6.2(h)(4)(C).]
    (1) EOC Contingency Procedures. In the event of an EOC system 
disruption or malfunction, the EOC entry requirement will be suspended 
upon approval by two Floor Officials. At this time, member firms shall 
use a backup supply of tickets to record the details of all orders 
received through non-electronic means. All order events (i.e., receipt, 
changes, execution, partial execution, cancellation, or nothing done) 
must be immediately time stamped (a time stamp synchronized with the 
atomic clock will be available at all trading posts). During such 
circumstances, existing rules on manual processing of order tickets are 
applicable. Once the disruption or malfunction to the EOC system has 
been corrected, as determined by two Floor Officials, all member firms 
must input all orders into an EOC device via the ``as-of'' field, 
noting the times of events of the orders. Any member firm who fails to 
follow such procedures will be subject to disciplinary action pursuant 
to Rule 10.
    (e) Hand Signals. The following regulations govern the proper use 
of hand signals on the Options Trading Floor: [(1)] Hand signals may 
always be used to request and to relay information regarding current 
quotations and market size. Hand signals may also be used to increase 
or decrease the size of an order, to change the order's limit, to 
cancel an order or to activate a market order.
    (1) EOC Eligible Orders. Any cancellation of or change to an order 
relayed to a Floor Broker through the use of hand signals must be 
entered into EOC [also must be relayed to the Floor Broker in a time 
stamped, written form immediately thereafter]. All cancellations and 
changes of orders held by the Order Book Official must be immediately 
submitted electronically. [in written form. Executing brokers who

[[Page 47127]]

receive such communications must have a written order in their 
possession with all of the following information on the ticket:]
    (2) Orders Excepted from EOC Pursuant to Rule 6.67(d). Executing 
brokers who receive any cancellation of or change to an order relayed 
to a Floor Broker through the use of hand signals must be relayed to 
the Floor Broker in a time stamped, written form immediately 
thereafter. All cancellations and changes of orders held by the Order 
Book Official must be in written form. Executing brokers who receive 
such communications must have a written order in their possession with 
all of the following information on the ticket:

Underlying security ticker symbol
Expiration month
Striking price
Volume
Purchase or Sale Notation
    Whether Market or Limit Order
    (A)[(2)] Cancellation of orders held by the Floor Broker must be in 
written form in accordance with current practice. A Floor Broker may 
cancel an order through the use of hand signals if it is followed 
immediately by written cancellation.
    (B)[(3)] Any change to an order must be documented in writing 
outside of the crowd and the ticket time-stamped, before the revised 
order may be represented.
    [(f) Any member desiring to use an order form in a format other 
than that provided by the Exchange must submit such form to the Options 
Floor Trading Committee and obtain its approval prior to using such 
form on the Floor.]
    (f) The system entry requirement prescribed in subsection (c), 
above, will be operative on or before August 29, 2003.
* * * * *
Record of Orders
    Rule 6.68(a). Every member organization must [shall] maintain and 
preserve for the period specified under SEC Rule 17a-4, a [written] 
record of every order and of any other instruction given or received 
for the purchase or sale of option contracts. Such record must [shall] 
show the terms and conditions (market order, limit order, etc.) of the 
order or instruction and of any modification or cancellation thereof, 
and in addition must [shall] include:
    [(1) The account designation for which such order is to be 
executed;
    (2) the date and time stamp indicating the time the order was 
entered and executed or cancelled;
    (3) the type of option and the underlying stock;
    (4) the expiration month, the exercise price, the number of option 
contracts and the execution price (premium);
    (5) whether the order is a purchase or a sale (writing) and whether 
the order is an opening or a closing transaction;
    (6) whether the order is solicited or unsolicited; and
    (7) whether the order is discretionary.]
    (1) Clearing member organization;
    (2) Option symbol, expiration month, exercise price, and type of 
option (call or put);
    (3) Side of market (buy or sell);
    (4) Quantity of option contracts;
    (5) Any limit price, stop price, or special conditions;
    (6) Opening or closing transaction;
    (7) Time in force;
    (8) Account origin code;
    (9) Solicited or unsolicited;
    (10) Order identification number;
    (11) Order entry date and time, or the date and time of any 
modification of the terms of the order or cancellation of the order;
    (12) Order execution time and price;
    (13) Identity of the executing broker and the other party to the 
transaction; and
    (14) Such other information as may be required by the Exchange.
    (b) EOC Record Retention. Members and member organizations will 
comply with their record keeping obligations under this Rule by 
immediately entering orders upon receipt (including any modifications 
and cancellations) into EOC or the Member Firm Interface and retaining 
the record of such orders.
    (c) Record Retention for Orders Excepted from EOC Pursuant to Rule 
6.67(d). In addition to the white (control) copy, and/or hard copy, 
which must be kept for the entire amount of time specified in 
Securities Exchange Act Rule 17a-4, the green (commission) copy must 
also be retained for a minimum of 48 hours from the trade date. In the 
case of those orders executed by independent Floor Brokers, it is their 
responsibility to retain the green (commission) copy, and the executing 
member firm must retain the white or hard copy. Also, all such records 
must be readily available for use on the trading floor for the 
resolution of any problems relating to the execution of these orders.
* * * * *
Reporting Duties
    Rule 6.69(a)-(e)--No change.
Commentary
    .01 EOC Reporting Procedure. The Options Floor Trading Committee 
has established the following procedure for reporting of transactions 
pursuant to Rule 6.69. For each transaction on the Exchange in which a 
member [he] participates as seller, that [a floor] member will [shall] 
immediately record into EOC, [on a card or ticket in a form acceptable 
to the Committee his] its assigned broker initial code, the symbol of 
the underlying security, the type, expiration month and exercise price 
of the option contract sold, the transaction price, the number of 
contract units comprising the transaction, the name of the contra 
clearing member, and the assigned broker initial code of the contra 
member. Members must report any [shall identify price reporting tickets 
which represent the] partial execution of a larger order into EOC [the 
manner prescribed by the Exchange. The card or ticket for a] Any agency 
order must [shall] also include the account origin code[,]. [as set 
forth in Commentary .02 below. This reporting card or ticket shall 
immediately be time-stamped at the station where option contracts of 
the class involved are traded and attached to the appropriate ``buy'' 
ticket. The card or ticket shall then be placed in the price reporting 
card box provided at the station. Before placing the tickets in the 
box, the member shall use his best efforts to make sure that the Order 
Book Official with respect to option contracts of the class involved, 
or the Order Book Official clerk, is aware of the transaction and its 
price. In transactions when the buyer accepts tickets from the 
seller(s), it shall be the buyer's responsibility to time-stamp the 
tickets, use best efforts at securing the Order Book Staff's attention 
to the transaction, and submit the tickets into the box.] Any floor 
member failing to immediately report a transaction in accordance with 
Rule 6.69 will [shall] be subject to [being fined] disciplinary action 
pursuant to Rule 10. [by the Options Floor Trading Committee.]
    .02 Reporting Procedures for Orders Excepted from EOC Pursuant to 
Rule 6.67(d). The Options Floor Trading Committee has established the 
following procedure for reporting of transactions pursuant to Rule 
6.69. For each transaction on the Exchange in which a member 
participates as seller, that floor member will immediately record, on a 
card or ticket in a form acceptable to the Committee, its assigned 
broker initial code, the symbol of the underlying security, the type, 
expiration month and exercise price of the option contract sold, the 
transaction price, the number of contract units comprising the 
transaction, the name of the contra

[[Page 47128]]

clearing member, and the assigned broker initial code of the contra 
member. Members must identify price reporting tickets that represent 
the partial execution of a larger order in the manner prescribed by the 
Exchange. The card or ticket for any agency order must also include the 
account origin code, as set forth in Commentary .03 below. This 
reporting card or ticket shall immediately be time-stamped at the 
station where option contracts of the class involved are traded and 
attached to the appropriate ``buy'' ticket. The card or ticket shall 
then be placed in the price reporting card box provided at the station. 
Before placing the tickets in the box, the member shall use his best 
efforts to make sure that the Order Book Official with respect to 
option contracts of the class involved, or the Order Book Official 
clerk, is aware of the transaction and its price. In transactions when 
the buyer accepts tickets from the seller(s), it shall be the buyer's 
responsibility to time-stamp the tickets, use best efforts at securing 
the Order Book Staff's attention to the transaction, and submit the 
tickets into the box. Any floor member failing to immediately report a 
transaction in accordance with Rule 6.69 will be subject to 
disciplinary action pursuant to Rule 10.
    [.02 Reporting of Trade Information. The responsibility for time 
stamping and reporting of trades to the Order Book is as follows:
    (a) One buyer, multiple sellers--responsibility is with the buyer
    (b) one seller, multiple buyers--responsibility is with the seller
    (c) one buyer, one seller--responsibility is with the seller]
    .03 Origin Codes for Orders Excepted from EOC Pursuant to Rule 
6.67(d). For purposes of Rule 6.69(d), trade information includes the 
proper account origin codes, which are as follows: ``C'' for non-
broker-dealer customer accounts; ``F'' for firm proprietary accounts; 
``M'' for member Market Maker accounts; and ``B/D'' for firm orders of 
non-member broker-dealer accounts, stock specialist accounts, or 
customer account trades of the broker-dealer or non-member broker-
dealer. In addition, Market Maker clearing firms are directed to 
instruct their respective trading desks to identify Market Maker orders 
that are entered from off the floor and not entitled to Market Maker 
margin treatment by placing a ``C'' after the Market Maker's number in 
the ``firm'' box on the ticket. Floor Brokers, when accepting an order 
by phone from a Market Maker, are similarly directed to identify that 
order in the same manner.
    .04--No change.
* * * * *
Priority and Order Allocation Procedures
    Rule 6.75(a)-(h)--No change.
Commentary
    .01-.03--No change.
    .04 Combination, Spread and Straddle Orders. Following are the 
proper trading procedures for combination, spread and straddle orders:
    (a) Announcing the Order. Any member holding a combination, spread, 
or straddle order must [write it on one ticket and must] bid or offer 
for each series in the order. For orders excepted from EOC, pursuant to 
Rule 6.67(d), such orders must be written on a ticket. The member may 
express the order as it applies to each separate series or may express 
the order at its total or net debit/credit alone, so long as it is 
clear that the member is attempting to execute both series as a 
combination, spread, or straddle. The executing member must ensure that 
the trading crowd is aware of the request for a market and has an 
opportunity to participate in the transaction.
    (b)-(g)--No change.
* * * * *
Joint Accounts
    Rule 6.84(a)-(h)--No change.
Commentary
    .01-.02--No change.
    .03 Transactions on the Floor will be presumed to be for the 
proprietary account of the individual members unless the executing 
member enters the joint account symbol into EOC. For orders excepted 
from EOC, pursuant to Rule 6.67(d), transactions on the Floor will be 
presumed to be for the proprietary account of the individual members 
unless the joint account symbol is given up and used on the trade 
ticket to represent the joint account as the executing member.
    .04 Any order of a joint account participant[,] that [which] is 
executed by a Floor Broker, must [shall] be in accordance with the 
procedures set forth in Rule 6.85, except that the joint account 
trading number with its alpha identification must be entered into EOC, 
or, for order excepted from EOC, pursuant to Rule 6.67(d), the joint 
account trading number with its alpha identification must [should] 
appear in the ``executing firm'' area. Additionally, a joint account 
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.
    .05-07--No change.
* * * * *
Market Maker Orders Executed By Floor Brokers
    Rule 6.85(a)-(c)--No change.
Commentary
    .01-.02--No change.
    .03 Orders Excepted from EOC Pursuant to Rule 6.67(d). Market Maker 
order tickets should be prepared by the Market Maker, when possible. 
All orders must [shall] be recorded and time-stamped, pursuant to Rule 
6.67. Order tickets must [shall] include the acronym of the Market 
Maker entering the order in the area marked ``buying firm/selling 
firm,'' with the Market Maker's name printed at the bottom of the 
ticket. Order tickets must be marked to indicate whether the order is 
``GTC'' or day only. The acronym of the executing Floor Broker must 
[shall] be written in the area marked ``executing member.'' When 
utilizing a ``partial order'' ticket to facilitate the completion of an 
order, the control number of the original order ticket must be written 
on the partial order ticket.
    Except as provided in Rule 6.2(h)(5)[(4)](C) (Ticket to Follow 
Rule), when a Floor Broker receives a verbal order from a Market Maker, 
or when a Floor Broker is requested by a Market Maker to alter an order 
in his possession in any way, the Floor Broker must [shall] immediately 
prepare an order ticket from outside the trading crowd and timestamp 
it.
* * * * *
Floor Broker Hand-Held Terminals
    Rule 6.89(a)--No change.
    (b) Proprietary Brokerage Order Routing Terminals:
    (1)-(3)--No change.
    (4)(A)--No change.
    (B) Orders Excepted from EOC Pursuant to Rule 6.67(d). When a 
Member executes an order that was received over a Terminal, the Member 
must fill out and immediately time stamp a trading ticket [within one 
minute of the execution]. Exchange rules on record keeping and trade 
reporting are unchanged.
    (C)-(D)--No change.
    (5)-(7)--No change.
* * * * *

[[Page 47129]]

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 Exchange 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
Background
    The Exchange is proposing to effect rule changes to support the 
implementation of its new audit trail system known as Electronic Order 
Capture System (``EOC'').\5\ EOC is intended to fulfill one of the 
undertakings contained in the Commission's Order Instituting Public 
Administrative Proceedings Pursuant to Section 19(h)(1) of the 
Securities Exchange Act of 1934, Making Findings and Imposing Remedial 
Sanctions. (``Order'').\6\ Specifically, this rule filing is intended 
to respond to Section IV.B.e.(v) of the Order, which requires, among 
other things, that the PCX incorporate into its audit trail all non-
electronic orders such that the audit trail provides an accurate, time-
sequenced record of electronic and other orders, quotations and 
transactions, beginning with the receipt of the order and documenting 
the life of the order through the process of execution, partial 
execution, or cancellation.\7\
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    \5\ PCX is currently working with the other options exchanges 
through the Intermarket Surveillance Group (``ISG'') in the design 
and implementation of the Consolidated Options Audit Trail System 
(``COATS''). Upon its completion, COATS is expected to be a fully 
integrated intermarket audit trail using quote and trade data from 
all the options exchanges. EOC is a project specific to PCX and it 
will contain certain trade information for inclusion into COATS.
    \6\ See Securities Exchange Act Release No. 43268 (September 11, 
2000) and Administrative Proceeding File No. 3-10282.
    \7\ Id. at 13-14.
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    Currently, the PCX operates an electronic order routing and 
execution system called Pacific Options Exchange Trading System 
(``POETS''),\8\ and several other peripheral systems including the 
Pacific Options Processing System (``POPS'') \9\ and the Floor Broker 
Hand Held trading system,\10\ in conjunction with traditional open 
outcry trading with Floor Brokers and competing Market Makers. The 
Exchange's Member Firm Interface (``MFI'') enables Member Firms to send 
orders electronically to the Exchange for delivery to either POETS, a 
Floor Broker Hand Held Terminal, or to a Member Firm's default 
destination.\11\ While all executions using POETS and electronic hand-
held devices carry immediately assigned system times, orders that are 
routed to the Floor by telephone or sent to Member Firm printers 
located on the Floor generally require manual trade ticket processing. 
Under the proposal, EOC will eliminate the manual processing of order 
tickets and will further facilitate the creation and development of a 
comprehensive audit trail and automated surveillance systems.
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    \8\ POETS is the Exchange's automated trading system comprised 
of an options order routing system, an automatic execution system 
(``Auto-Ex''), an on-line limit order book system (``Auto-Book''), 
and an automatic market quote update system (``Auto-Quote'').
    \9\ POPS is the Exchange's automated system that compares trade 
information entered by Member Firms and submits trades to the 
Options Clearing Corporation for clearance and settlement.
    \10\ The Floor Broker Hand Held interface is an automated order 
delivery system that enables Floor Brokers to receive and execute 
orders electronically, and to report trade executions to the tape 
via the Options Price Reporting Authority (``OPRA'') and to POPS for 
clearing. See PCX Rule 6.89.
    \11\ A Member Firms'' default destination may be either a 
particular firm booth or a remote entry site, to which orders that 
fail to meet the eligibility criteria necessary for Auto-Ex or Auto-
Book will be delivered.
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Summary of Proposed Rule Changes
    The Exchange is proposing to adopt a number of changes to its rules 
regarding the record of orders (principally PCX Rules 6.67 and 6.68) to 
enhance the Exchange's audit trail and self-regulatory capabilities. 
The proposed changes to the text of the PCX rules are summarized below.

(1) Electronic Order Capture System (``EOC'')

    EOC is the Exchange's proposed electronic audit trail and order 
tracking system that will provide a time-sequenced record of all orders 
and transactions on the Exchange.\12\ EOC will record the receipt of an 
order and will document the life of the order through the process of 
execution, partial execution, or cancellation. This system includes the 
electronic communications interface between EOC booth terminals and the 
Floor Broker Hand Held Terminal applications. Each Member's EOC booth 
terminal and each Floor Broker Hand Held Terminal will contain an 
electronic order entry screen that displays the terms and conditions of 
each order received by that Member.
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    \12\ See proposed PCX Rule 6.1(b)(39) (definition of 
``Electronic Order Capture System'').
---------------------------------------------------------------------------

    The Exchange is proposing to adopt new PCX Rule 6.67(c),\13\ which 
requires that every Member or Member Organization that receives an 
order for execution on the Exchange must immediately \14\ record the 
details of the order (including any modification of the terms of the 
order or cancellation of the order) into EOC, unless such order has 
been entered into the Exchange's other electronic order processing 
facilities \15\ (e.g., orders sent electronically through the 
Exchange's MFI).\16\ The details of each order that will be required to 
be recorded upon receipt include the following:\17\ (1) Clearing member 
organization; (2) Option symbol, expiration month, exercise price, and 
type of option (call or put); (3) Side of market (buy or sell); (4) 
Quantity of option contracts; (5) Any limit price, stop price, or 
special conditions; (6) Opening or closing transaction; (7) Time in 
force; (8) Account origin code; and (9) Solicited or unsolicited.\18\
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    \13\ Former PCX Rules 6.67(b), (c) and (d) are being deleted as 
they are redundant and superfluous provisions pursuant to proposed 
PCX Rules 6.67(c), 6.67(d) and 6.67(d)(1).
    \14\ The Exchange commits that it will implement proactive and 
effective surveillance procedures for violations of Exchange rules 
and federal securities laws, including, but not limited to, rules 
prohibiting trading ahead and front running, related to the entry of 
customer orders into the EOC system.
    \15\ The EOC entry requirement will also apply to PCX Plus.
    \16\ The systemic entry requirement would not be applicable to 
transactions initiated on the Floor and executed by a registered 
Market Maker or a Lead Market Maker for their own account, as such 
trades that may be initiated on the Floor and that are already 
reported to POETS via proprietary hand-held devices.
    \17\ The Exchange notes that the order entry time and 
identification number are automatically assigned upon entry into 
EOC. Further, the Exchange notes that certain data elements tied to 
execution, such as executing broker, contra broker, execution time 
and price are not available at the time that order details are 
entered into EOC. This information will be captured automatically by 
EOC at the time of execution of an order. Telephone call between 
Peter D. Bloom and Tania J. Cho, Attorneys, PCX, and Jennifer 
Colihan, Special Counsel, Division, Commission, on July 29, 2003.
    \18\ The proposed rule also includes a provision that would 
require Member Firms to record such other information as may be 
required by the Exchange from time to time.
---------------------------------------------------------------------------

    Member Firms may comply with the proposed rule in one of three 
ways: (1) Required order details may be transmitted via the Exchange's 
other electronic order processing facilities that electronically assign 
the time of receipt on the Exchange; (2) Order details may be routed to 
the Member

[[Page 47130]]

Firm booth by telephone or be sent to the Member Firm's printer located 
on the Floor, and immediately entered into the EOC booth device, which 
will electronically assign the time of receipt on the Exchange; or (3) 
Orders may be received during outgoing telephone calls that are 
initiated at the option post, and then immediately entered into the EOC 
booth device, which will electronically assign the time of receipt on 
the Exchange pursuant to PCX Rule 6.2(h)(3)(B).\19\ The EOC booth 
device that is used to record the details of the order upon receipt on 
the Floor is an Exchange provided system.\20\ The EOC booth device and 
the enhancements to the existing Floor Broker Hand Held Terminal 
applications will support the entry of all order types (including 
contingency and complex orders, i.e., multiple-leg option and stock/
option orders) and all required information, as well as provide quick 
entry templates to speed data entry. Once a Member Firm's booth clerk 
records the details of an order into EOC or in the case when a Floor 
Broker receives an order pursuant to PCX Rule 6.2(h)(3)(B), the order 
is routed electronically to a Floor Broker Hand Held Terminal for 
representation in the trading crowd.\21\ Member Firms will have the 
capability to track and display all orders that are submitted through 
the EOC booth device, as all orders will be assigned an unique 
identifier that will be used throughout the life of the order.
---------------------------------------------------------------------------

    \19\ The Exchange's order processing systems have been designed 
so that the clocking mechanisms do not deviate by more than three 
seconds from the Naval Observatory atomic clock in Washington, D.C.
    \20\ The EOC will not initially support the use of a Member 
Firm's proprietary system to comply with the proposed order entry 
requirements.
    \21\ Orders sent via the EOC interface to a Floor Broker in the 
trading crowd may subsequently be transmitted electronically to 
another Floor Broker on the Floor. When an order is transmitted from 
one Member to another, the EOC will capture each phase of processing 
as the order moves from entry to execution.
---------------------------------------------------------------------------

    Once an order has been executed, the Floor Broker Hand Held 
Terminal system will route trade information to POETS (via the EOC 
interface), which will then route the information to POPS for trade 
match and clearing purposes. At the same time, the Exchange will send a 
report to the Member Firm that entered the order and will transmit 
trade information to OPRA.
    The Exchange believes that the implementation of EOC, as described 
above, will improve order information management features resulting in 
operational efficiencies for Member Firms.

(2) Order Format Requirements

    The Exchange's current rules governing the order format 
requirements in transmitting orders to the Exchange are set forth in 
PCX Rule 6.67(a). The Exchange is proposing to add interpretive 
language to make it clear that EOC is an approved format for 
transmitting orders for purposes of this Rule. In addition, proposed 
PCX Rule 6.67(b) requires that orders sent to the Exchange for 
execution must comply with the order format requirements established by 
the Exchange relating to, among other things, option symbol, expiration 
month, exercise price, type of option (call or put), quantity of option 
contracts, clearing member organization, whether the order is to buy or 
sell, and whether the order is market or limit.

(3) Exceptions to EOC Entry Requirement

    An exception to the requirement for recording order information 
into EOC is contained in proposed PCX Rule 6.67(d). Under this proposed 
rule, if a disruption or malfunction to EOC or any other Exchange 
electronic order processing system occurs, the EOC entry requirement 
will be suspended upon the approval of two Floor Officials, and the EOC 
Contingency Procedures will be in effect pursuant to PCX Rule 
6.67(d)(1).\22\ If the Exchange is still able to process and 
disseminate quotes accurately, then any orders received by the Exchange 
will be processed manually through the use of paper tickets. In such 
circumstances, all other Exchange rules governing options trading will 
remain in effect. Accordingly, the Exchange intends to retain its 
existing rules that are applicable to the manual processing of order 
tickets. Minor changes have been made throughout the existing options 
trading rules to allow for manual processing of trade tickets when 
necessary.
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    \22\ Under the proposed rule, member firms must use a backup 
supply of tickets to record the details of the order received 
through non-electronic means and time stamp the order of events. 
Once the disruption or malfunction has been corrected, as determined 
by two Floor Officials, member firms must input all orders into an 
EOC device using the ``as-of'' field.
---------------------------------------------------------------------------

(4) Record of Orders

    Current PCX Rule 6.68(a) requires Member Organizations to maintain 
and preserve certain information items relating to the terms of each 
option order. The Exchange is proposing to make minor technical changes 
to the text by renaming and renumbering certain information items 
enumerated in the Rule for clarity. The proposed rule change does not 
replace existing requirements for recording orders contained in this 
Rule.
    The Exchange is also proposing to add new PCX Rule 6.68(b) to make 
it clear that Members and Member Organizations must comply with their 
record keeping obligations under this Rule by immediately entering 
orders upon receipt (including any modifications and cancellations) 
into EOC or the MFI and retaining the record of such orders.\23\
---------------------------------------------------------------------------

    \23\ Former PCX Rule 6.68(b) is being renumbered as new Rule 
6.68(c).
---------------------------------------------------------------------------

(5) Reporting of Trade Information

    The Exchange proposes to rescind current PCX Rule 6.69, Commentary 
.02, which relates to the trade reporting requirements of Members. The 
Exchange believes that this rule is superfluous and that it is 
inconsistent with PCX Rule 6.69(b), which already requires that the 
Member representing the sell side of a transaction is responsible for 
reporting the transaction to the Exchange in a form and manner 
prescribed by the Exchange. Therefore, because current PCX Rule 6.69(b) 
accurately reflects the PCX's existing trade reporting requirements, 
the Exchange is proposing to eliminate Commentary .02 of this rule for 
clarity.
    Proposed new PCX Rule 6.69, Commentary .02 specifies the reporting 
procedures for orders that are manually processed when there is a 
disruption or malfunction with the EOC pursuant to PCX Rule 6.67(d). 
This proposed new rule was adapted from current PCX Rule 6.67, 
Commentary .01.

(6) Implementation Date

    The system entry requirement proposed in this rule change will be 
operative on or before August 29, 2003.\24\ This date is consistent 
with the extension deadline provided by the Commission to the PCX (and 
other respondent exchanges) for compliance with Section IV.B.e.(v) of 
the SEC Order to incorporate into the audit trail all non-electronic 
orders.\25\
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    \24\ See proposed PCX Rule 6.67(f).
    \25\ See Letter from Annette L. Nazareth, Director, Division of 
Market Regulation, Stephen M. Cutler, Director, Division of 
Enforcement, and Lori A. Richards, Director of Office of Compliance 
Inspections and Examinations, Securities and Exchange Commission to 
Kathryn L. Beck, Pacific Exchange, Inc., dated June 10, 2003.
---------------------------------------------------------------------------

(7) Miscellaneous Changes

    The Exchange proposes to make several minor, non-substantive 
changes to the text of several existing PCX Rules to correct stylistic, 
grammatical and typographical errors and to conform the

[[Page 47131]]

proposed rules to the new EOC requirements.\26\
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    \26\ See e.g., proposed PCX Rules 6.48 and 6.62(e).
---------------------------------------------------------------------------

2. Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) \27\ of the Act, in general, and further the 
objectives of Section 6(b)(5),\28\ in particular, because it is 
designed 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 and perfect the 
mechanisms of a free and open market and to protect investors and the 
public interest. In addition, the Exchange believes that the proposed 
rule change is consistent with provisions of Section 11A(a)(1)(B) of 
the Act,\29\ which states that the new data processing and 
communications techniques create the opportunity for more efficient and 
effective market operations.
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    \27\ 15 U.S.C. 78f(b).
    \28\ 15 U.S.C. 78f(b)(5).
    \29\ 15 U.S.C. 78k-1(a)(1)(B).
---------------------------------------------------------------------------

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 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 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-2002-57 and should be submitted by August 28, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\30\
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    \30\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-20131 Filed 8-6-03; 8:45 am]
BILLING CODE 8010-01-P