[Federal Register Volume 69, Number 132 (Monday, July 12, 2004)]
[Notices]
[Pages 41871-41873]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-15687]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49967; File No. SR-PCX-2004-34]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval to a Proposed Rule Change and Amendment 
No. 1 Thereto by the Pacific Exchange, Inc. Relating to the Handling of 
Satisfaction Orders Pursuant to the Plan for the Purpose of Creating 
and Operating an Intermarket Option Linkage

July 2, 2004.
    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 April 15, 2004, the Pacific Exchange, Inc. (``PCX'' or ``Exchange'') 
submitted to the Securities and Exchange Commission (``Commission'') 
the proposed rule change as described in Items I and II below, which 
Items have been prepared by the PCX. The Exchange submitted Amendment 
No. 1 to the proposed rule change on June 3, 2004.\3\ The Commission is 
publishing this notice to solicit comments on the proposed rule change, 
as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Letter from Stephen B. Matlin, Senior Counsel, 
Regulatory Policy, PCX to Nancy J. Sanow, Assistant Director, 
Commission, dated June 2, 2004 (``Amendment No. 1''). In Amendment 
No. 1, the Exchange made technical corrections to the proposed rule 
text submitted to the Commission.
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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 amend the requirements regarding how its 
members handle Satisfaction Orders \4\ pursuant to the Linkage Plan.
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    \4\ A ``Satisfaction Order'' is defined as an order sent through 
the Options Intermarket Linkage (``Linkage'') to notify a 
Participant of a Trade-Through and to seek satisfaction of the 
liability arising from that Trade-Through. A ``Trade-Through'' is a 
transaction in an options series at a price that is inferior to the 
National Best Bid or Offer. See Sections 2(16)(c) and 2(29) of the 
Plan for the Purpose of Creating and Operating an Intermarket Option 
Linkage (the ``Linkage Plan''), respectively.

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[[Page 41872]]

    The text of the proposed rule change, as amended, is available at 
the Exchange and at the Commission.

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 had received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item III 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
    The purpose of this filing is to implement a proposed rule change 
related to proposed Joint Amendment No. 11 to the Linkage Plan.\5\ That 
amendment to the Linkage Plan, together with this proposed rule change, 
will enhance the manner in which the PCX processes Satisfaction Orders 
following a Trade-Through. If the displayed price that is traded 
through represents a customer order, the PCX Lead Market Maker 
(``LMM'') or a member of another participant in the Linkage Plan 
(``Participant'') \6\ can send a Satisfaction Order requiring the 
member on the exchange who caused the Trade-Through to satisfy the 
customer order.\7\ While the PCX believes that this process generally 
works well, the experience with the Linkage to date has led the options 
exchanges to agree to implement three changes to Satisfaction Order 
processing.
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    \5\ See Securities Exchange Act Release No. 49691 (May 12, 
2004), 69 FR 28954 (May 19, 2004) (File No. 4-429) (Notice of filing 
Joint Amendment No. 11 to the Linkage Plan).
    \6\ A ``Participant'' is defined as an Eligible Exchange whose 
participation in the Linkage Plan has become effective pursuant to 
Section 4(c) of the Linkage Plan. See Section 2(24) of the Linkage 
Plan. Currently, the Participants in the Linkage Plan are the 
International Securities Exchange, Inc., the American Stock Exchange 
LLC, the Chicago Board Options Exchange, Inc., the PCX, the 
Philadelphia Stock Exchange, Inc. and the Boston Stock Exchange, 
Inc.
    \7\ See Sections 7(a)(ii)(D) and 8(c)(ii) of the Linkage Plan.
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    First, Section 8(c)(ii)(C) of the Linkage Plan and PCX Rule 6.94 
(the ``Rule'') currently permit a LMM to send a Satisfaction Order for 
the full size of the customer order traded through, regardless of the 
size of the transaction that caused the Trade-Through (although the 
Participant receiving the Satisfaction Order that elects to execute it 
must limit its execution to the size of the Trade-Through). This 
proposed rule change would provide that the size of the Satisfaction 
Order be limited to the lesser of the size of the customer order traded 
through and the size of the transaction that caused the Trade-Through.
    Second, the Linkage Plan and the Rule currently permit a LMM to 
reject an execution (``fill'') of a Satisfaction Order if the customer 
order that underlies the Satisfaction Order either has been filled on 
the PCX or has been canceled while the Satisfaction Order is being 
processed. However, if the order is filled or canceled, there is no 
current requirement to cancel the pending Satisfaction Order, which 
leads to the rejection of Satisfaction Order fills that may have been 
avoided had the Satisfaction Order been canceled. To address this 
issue, the proposed rule change would require the LMM to cancel a 
pending Satisfaction Order as soon as practical if the underlying 
customer order is filled or canceled.
    Third, as noted above, a LMM can reject a Satisfaction Order fill 
if the underlying customer order is executed or canceled while the 
Satisfaction Order is pending. However, it is possible that the LMM 
itself could trade against the customer order before the LMM receives a 
notice that the Satisfaction Order has been filled. In this case, the 
PCX believes that it would be inappropriate to reject the fill. 
Accordingly, the proposed rule change would provide that the LMM must 
accept the fill of the Satisfaction Order in that scenario.
2. Statutory Basis
    The PCX believes that the proposed rule is consistent with section 
6(b) of the Act,\8\ in general, and furthers the objectives of section 
6(b)(5) \9\ in particular, because it is designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of change, 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.
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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 PCX does not believe that the proposed rule change, as amended, 
will impose any burden on competition 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

    No written comments were solicited or received with respect to the 
proposed rule change.

III. 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. Comments may be 
submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number SR-PCX-2004-34 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609.
    All submissions should refer to File Number SR-PCX-2004-34. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). 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 Section, 450 Fifth 
Street, NW., Washington, DC 20549. Copies of such filing also will be 
available for inspection and copying at the principal office of the 
PCX. All comments received will be posted without change;

[[Page 41873]]

the Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-PCX-
2004-34 and should be submitted on or before August 2, 2004.

IV. Commission's Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    The Commission finds that the proposed rule change, as amended, is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\10\ In particular, the Commission finds that the proposed 
rule change is consistent with the requirements of section 6(b)(5) of 
the Act \11\ which requires, among other things, that the rules of an 
exchange be designed to promote just and equitable principles of trade, 
to remove impediments to and perfect the mechanism of a free and open 
market, and a national market system, and to protect investors and the 
public interest. The Commission believes that the proposed rule change 
should facilitate the handling of Satisfaction Orders in an efficient 
and fair manner.
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    \10\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \11\ 15 U.S.C. 78f(b)(5).
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    The Commission finds good cause for approving the proposed rule 
change prior to the thirtieth day after the date of publication of the 
notice thereof in the Federal Register. As noted above, the proposed 
rule change incorporates changes into the PCX Rules that correspond to 
changes made to the Linkage Plan through Joint Amendment No. 11, which 
was published for public comment in the Federal Register on May 19, 
2004.\12\ The Commission received no comments in response to 
publication of Joint Amendment No. 11. The Commission believes that no 
new issues of regulatory concern are being raised by PCX's proposed 
rule change. The Commission believes, therefore, that granting 
accelerated approval of the proposed rule change, as amended, is 
appropriate and consistent with sections 6 and 19(b) of the Act.\13\
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    \12\ See supra note 5.
    \13\ 15 U.S.C. 78f and 78s(b).
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V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\14\ that the proposed rule change, as amended, (SR-PCX-2004-34) is 
approved on an accelerated basis.
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    \14\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-15687 Filed 7-9-04; 8:45 am]
BILLING CODE 8010-01-P