[Federal Register Volume 68, Number 218 (Wednesday, November 12, 2003)]
[Notices]
[Pages 64182-64184]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-28275]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48746; File No. SR-PCX-2003-32]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Pacific Exchange, Inc. Relating to the Exchange's Rules 
Under the Minor Rule Plan

November 4, 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 July 8, 2003, the Pacific Exchange, Inc. (``PCX'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II, and III below, which 
Items have been prepared by the Exchange. The Commission is publishing 
this notice to solicit comments 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.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The PCX is proposing to adopt new PCX Rules 10.13(h)(40)-(44) and 
10.13(k)(i)(40)-(44) in order to incorporate five existing PCX rules 
into the Minor Rule Plan (``MRP'') and Recommended Fine Schedule 
(``RFS''). The five PCX Rules include: (1) Failure to honor priority of 
bids and offers pursuant to PCX Rules 6.75 and 6.76; (2) failure to 
quote markets within the maximum quote spread differentials or failure 
to disseminate quotations accurately pursuant to PCX Rules

[[Page 64183]]

6.37(b)(1) and 6.82(c)(1); (3) trading either before the opening or 
after closing of market pursuant to PCX Rule 4.2; (4) entering two-
sided quotations in options issues that are not included in a Remote 
Market Maker's (``RMM'') primary appointment pursuant to PCX Rule 
6.37(h)(5); and (5) failure to maintain an accurate record of orders 
pursuant to PCX Rule 6.68. The Exchange is also proposing three minor 
amendments to the MRP and RFS. The text of the proposed rule change is 
below. Proposed new language is italicized; proposed deletions are in 
brackets.
* * * * *

Minor Rule Plan

    Rule 10.13(a)-(g)--No change.
    (h) Minor Rule Plan: Options Floor Decorum and Minor Trading Rule 
Violations
    (1)-(24)--No change.
    (25) Failure to meet 75% Primary Appointment [Zone] Requirement. 
(Rules 6.35, Com. .03 and 6.37(h)(5))
    (26)-(32)--No change.
    (33) Dividing up an order to make its parts eligible for entry into 
Auto-Ex or PCX Plus. (Rules 6.87)(2)[(c)] and 6.90(e)(1)).
    (34)-(39)--No change.
    (40) Member failed to honor the priority of bids and offers. (Rules 
6.75 and 6.76)
    (41) Market Maker failed to quote markets within the maximum quote 
spread differentials or failed to disseminate quotes accurately. (Rules 
6.37(b)(1) and 6.82(c)(1))
    (42) Member traded either before the opening or after the close of 
market. (Rule 4.2)
    (43) Remote Market Maker entered two-sided quotations in options 
issues that are not included in their primary appointments. (Rule 
6.37(h)(5))
    (44) Member failed to maintain an accurate record of orders. (Rule 
6.68)
    (i)--No change.
    (j)--No change.
    (k) Minor Rule Plan: Recommended Fine Schedule
    (i) Options Floor Decorum and Minor Trading Rule Violation
    1.-24.--No change.
    1. Failure to meet 75% Primary Appointment [Zone] Requirement. 
(Rules 6.35, Com. .03 and 6.37(h)(5))
    26-32.--No change.
    33. Dividing up an order to make its parts eligible for entry into 
Auto-Ex or PCX Plus. (Rules 6.87(d)(2)[(c)] and 6.90(e)(1))
    34.-38.--No change.
    1. Failure to meet 60% Quoting Requirement. (Rule 6.37(g)(2))
    1st Violation, $500.
    2nd Violation, $1,000.
    3rd Violation, $2,500.
    2. Member failed to honor the priority of bids and offers. (Rules 
6.75 and 6.76)
    1st Violation, $500.
    2nd Violation, $1,000.
    3rd Violation, $2,000.
    3. Market Maker failed to quote markets within the maximum quote 
spread differentials or failed to disseminate quotes accurately. (Rules 
6.37(b)(1) and 6.82(c)(1))
    1st Violation, $500.
    2nd Violation, $1,000.
    3rd Violation, $2,000.
    4. Member traded either before the opening of Market or after the 
close of market. (Rule 4.2)
    1st Violation, $1,000.
    2nd Violation, $2,500.
    3rd Violation. $3,500.
    43. Remote Market Maker entered two-sided quotations in options 
issues that are not included in their primary appointments. (Rule 
6.37(h)(5))
    1st Violation, $500.
    2nd Violation, $1,000.
    3rd Violation, $2,500.
    44. Member failed to maintain accurate record of orders. (Rule 
6.68)
    1st Violation, $500.
    2nd Violation, $1,000.
    3rd Violation, $2,500.
* * * * *

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

I. Purpose
    The Exchange proposes to adopt new PCX Rules 10.13(h)(40)-(44) and 
10.13(k)(i)(40)-(44) in order to incorporate existing PCX Rules 6.75 
and 6.76, 6.37(b)(1) and 6.82(c)(1), 4.2, 6.37(h)(5), and 6.68 into the 
MRP and RFS.
    First, the Exchange proposes to adopt new PCX Rules 10.13(h)(40) 
and 10.13(k)(i)(40) into the MRP and RFS for failure to honor the 
priority of bids and offers pursuant to PCX Rules 6.75 and 6.76.\3\ PCX 
Rule 6.75 states that the highest bid/offer shall have priority, but 
where two or more bids/offers for the same option contract represent 
the highest price and one bid/offer is displayed by the Order Book 
Official, such bid/offer shall have priority over any other bid/offer 
at the post. Similarly, under PCX Rule 6.76, multiple bids or offers 
are afforded priority based on account types and other principles. The 
proposed fines are $500 for a first violation, $1,000 for a second, and 
$2,000 for a third.
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    \3\ PCX Rule 6.76 is the priority rule applicable to PCX Plus.
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    Second, the Exchange proposes to adopt new PCX Rules 10.13(h)(41) 
and 10.13(k)(i)(41) into the MRP and RFS for failure to quote markets 
within the maximum quote spread differentials pursuant to PCX Rule 
6.37(b)(1) or failure to disseminate quotations accurately pursuant to 
6.82(c)(1). PCX Rule 6.37(b)(1) states that a Market Maker is expected 
to bid/offer so as to create differences of no more than: .25 between 
the bid and the offer for each option contract for which the bid is 
less than $2, no more than .40 where the bid is $2 or more but does not 
exceed $5, no more than .50 where the bid is more than $5 but does not 
exceed $10, no more than .80 where the bid is more than $10 but does 
not exceed $20, and, no more than $1 when the last bid is $20.10 or 
more, provided that the Options Floor Trading Committee may establish 
differences other than the above for one or more series or classes of 
options. PCX Rule 6.82(c)(1) states that Lead Market Makers are 
required to disseminate market quotations accurately. A member who 
fails to quote markets within the maximum quote spread differentials or 
fails to disseminate market quotations accurately will be subject to 
disciplinary action pursuant to PCX Rule 10.13(h)(41). The proposed 
fines are $500 for a first violation, $1,000 for a second, and $2,000 
for a third.
    Third, the Exchange proposes to adopt new PCX Rules 10.13(h)(42) 
and 10.13(k)(i)(42) for trading either before the opening or after the 
close of market pursuant to PCX Rule 4.2. PCX Rule 4.2 states that 
trading shall be limited to the hours during which the Exchange is open 
for the transaction of business. No member shall make any bid, offer or 
transaction upon the Floor before the official opening of the Exchange 
or after the closing of the market. Under the proposed rule, a member 
that trades either before the opening or after the close of market will 
be subject to disciplinary action pursuant to PCX

[[Page 64184]]

Rule 10.13(h)(42). The proposed fines are $1,000 for a first violation, 
$2,500 for a second, and $3,500 for a third.
    Fourth, the Exchange proposes to adopt new PCX Rules 10.13(h)(43) 
and 10.13(k)(i)(43) into the MRP and RFS for violation of the two-sided 
quotation restriction for RMMs. PCX Rule 6.37(h)(5) restricts RMMs from 
entering two-sided quotations in options issues that are not included 
in their primary appointments. RMMs are, however, permitted to enter 
single-sided quotes and multiple orders to buy and sell the same option 
issues. Under the proposed rule, a RMM that enters a two-sided 
quotation in options issues outside of their primary appointments will 
be subject to disciplinary action pursuant to PCX Rule 10.13(h)(43). 
The proposed fines are $500 for a first violation, $1,000 for a second, 
and $2,500 for a third.
    Fifth, the Exchange proposes to adopt new PCX Rules 10.13(h)(44) 
and 10.13(k)(i)(44) for failure to maintain an accurate record of 
orders. PCX Rule 6.68 requires members to maintain and preserve a 
written record of every order for a period of time specified by the 
Commission. The proposed fines are $500 for a first violation, $1,000 
for a second, and $2,500 for a third.
    The Exchange also proposes to amend PCX Rule 10.13(k)(i)(39) to 
include a fine schedule for RMMs' failure to meet the 60% quoting 
requirement. The proposed fine schedule for PCX Rule 10.13(h)(39) was 
inadvertently omitted in a previous rule filing,\4\ and it is 
consistent with the fines established for violations by a Market Maker 
involving the 75% primary appointment requirement and the 60% in-person 
trading requirement.\5\ In addition, the Exchange proposes to amend the 
text of current PCX Rules 10.13(h)(25) and 10.13(k)(i)(25) to include 
references to PCX Rule 6.37(h)(5) for purposes of clarifying the 
application of the fine schedule for violations by RMMs involving the 
75% primary appointment requirement.
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    \4\ See Securities Exchange Act Release No. 47838 (May 13, 
2003), 68 FR 27129 (May 19, 2003) (Order approving PCX Plus).
    \5\ See PCX Rules 10.13(k)(i)(25) and 10.13(k)(i)(26).
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    Finally, the Exchange proposes two amendments to PCX Rules 
10.13(h)(33) and 10.13(k)(i)(33) of the MRP and RFS. First, the 
corresponding rule number will be changed to reflect the correct rule 
number, which is ``Rule 6.87(d)(2)''. Second, the equivalent rule 
violation in PCX Plus, ``Rule 6.90(e)(1)'', will be added to this MRP 
and RFS.
    The Exchange believes that the proposed rule changes will serve to 
significantly strengthen the ability of the Exchange to carry out its 
oversight responsibilities as a self-regulatory organization (``SRO''). 
The rules should also aid the Exchange in carrying out its surveillance 
and enforcement functions. Under the proposed rules, the Enforcement 
Department would continue to exercise its discretion under PCX Rule 
10.13(f) and take cases out of the MRP to pursue them as formal 
disciplinary matters if the facts or circumstances warrant such 
action.\6\
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    \6\ The Commission notes that certain of the rules that PCX 
proposes to add to its MRP relate to market making obligations, and 
further notes that it previously has indicated that ``only the most 
technical and non-substantive violations'' of a market maker's 
obligations should be handled pursuant to a minor rule plan. 
Securities Exchange Act Release No. 27878 (April 14, 1990), 55 FR 
13345, [SR-NYSE-89-44].
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    In addition, two of the proposed rule adoptions (i.e., Proposed PCX 
Rules 10.13(h)(40)-(41) and 10.13(k)(i)(40)-(41)) correspond to those 
found in the Chicago Board Options Exchange (``CBOE'') and the American 
Stock Exchange (``Amex'') MRP, respectively.\7\ Thus, the Exchange is 
proposing to include such rules into the MRP to conform to those found 
in other SROs' MRPs.
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    \7\ See e.g., CBOE Rule 17.50(g)(5) and Amex Rule 590G.
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2. Statutory Basis
    The Exchange believes that the proposal is consistent with Section 
6(b) of the Act,\8\ in general, and Section 6(b)(5) of the Act,\9\ in 
particular, in that it will promote just and equitable principles of 
trade; facilitate transactions in securities, remove impediments to and 
perfect the mechanisms of a free and open market and a national market 
system; and protect investors and the public interest. The Exchange 
believes that the proposal is also consistent with Section 6(b)(6) of 
the Act,\10\ which requires that members and persons associated with 
members be appropriately disciplined for violations of Exchange rules.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
    \10\ 15 U.S.C. 78f(b)(6).
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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 Exchange 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 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 number SR-PCX-2003-32 and 
should be submitted by December 3, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).

Jill M. Peterson,
Assistant Secretary.
[FR Doc. 03-28275 Filed 11-10-03; 8:45 am]
BILLING CODE 8010-01-P