[Federal Register Volume 69, Number 160 (Thursday, August 19, 2004)]
[Notices]
[Pages 51504-51506]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-18982]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50191; File No. SR-PCX-2004-78]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Pacific Exchange, Inc. Relating to Priority and Order 
Allocation Procedures for PCX Plus

August 13, 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 August 10, 2004, 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 PCX. 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 proposes to amend PCX Rule 6.76 (Priority and Allocation 
Procedures of PCX Plus) to eliminate the requirement that inbound 
marketable Broker Dealer orders will route to Floor Broker Hand Held 
Terminals in some trading scenarios in lieu of receiving immediate 
electronic executions. The Exchange also proposes to eliminate 
Electronic Book Execution pursuant to PCX Rule 6.76(b)(4). Below is the 
text of the proposed rule change. Proposed new language is italicized; 
proposed deletions are in [brackets].
Rule 6
Options Trading
* * * * *
Priority and Order Allocation Procedures
    Rule 6.76. The rules of priority and order allocation procedures 
set forth in this Rule 6.76 will apply to option issues designated by 
the Exchange to be traded in PCX Plus. The maximum size of an inbound 
order that may be eligible for execution on PCX Plus pursuant to Rule 
6.76(b) (``the Maximum Order Size'') will be initially established by 
the LMM in the issue, subject to the approval of the Exchange. Any 
request by the LMM for changes to the Maximum Order Size must be 
accompanied by a verified statement indicating the business reason for 
the change and the estimated duration of such change. Such requests 
must be approved by two Floor Officials, whose approval must be further 
ratified by the Exchange. An LMM is prohibited from requesting changes 
to the Maximum Order Size in order to manipulate the operation of PCX 
Plus or for any anti-competitive purposes.
    (a)--No Change.
    (b) PCX Plus Executions. This subsection (b) addresses situations 
in which orders or Quotes with Size are executed through PCX Plus.
    (1) An inbound order that is marketable will be immediately 
executed against bids and offers in the Consolidated Book, unless [one 
of the following conditions applies:]
    [(A)] the size of the inbound order exceeds the Maximum Order Size 
established pursuant to Rule 6.76.[; or
    (B) the inbound order is for the account of a Firm or Non-OTP 
Holder or OTP Firm Market Maker and more than 50% of the aggregate 
trading interest in the Consolidated Book at the execution price is for 
the account (or accounts) of Public Customers.]
    If it does exceed the maximum order size, [the conditions specified 
in subsections (A) or (B) above apply,] the order will be represented 
in the trading crowd pursuant to Rule 6.76(d).
    (2) An inbound order will be either fully or partially executed as 
follows:
    (A) If more than 40% of the size in the Consolidated Book is 
comprised of a single Firm or Non-OTP Holder or OTP Firm Market Maker 
order at the price at which the inbound order would trade[, and such 
Firm or Non-OTP Holder or

[[Page 51505]]

OTP Firm Market Maker order was entered less than one minute before the 
inbound order,] then:
    (i) the inbound order will first be matched against all available 
Public Customer interest in the Consolidated Book;
    (ii) the inbound order, if not entirely filled, will then satisfy 
any available interest based on FIQ status and LMM guaranteed 
participation pursuant to Rule 6.76(a);
    (iii) the inbound order, if not entirely filled, will then match, 
on a size pro rata basis, with the interest of the Market Makers, Firms 
and Non-OTP Holder or OTP Firm Market Makers in the Consolidated Book; 
provided that the size pro rata share interest of each individual Firm 
and each Non-OTP Holder or OTP Firm Market Maker will be limited to 40% 
of the size of the remaining inbound order; and
    (iv) the balance of the order, if any, will then be routed to a 
Floor Broker Hand Held Terminal.
    (B) If the same conditions set forth in subsection (b)(2)(A) above 
apply but the Firm or Non-OTP Holder or OTP Firm Market Maker order was 
entered one minute or more before the inbound order, then:
    (i) the inbound order will first be matched against all available 
Public Customer interest in the Consolidated Book;
    (ii) the inbound order, if not entirely filled, will then satisfy 
any available interest based on FIQ status and LMM guaranteed 
participation pursuant to Rule 6.76(a);
    (iii) the inbound order, if not entirely filled, will then match, 
on a size pro rata basis, with the interest of the Market Makers, Firms 
and Non-OTP Holder or OTP Firm Market Makers in the Consolidated Book; 
provided that the size pro rata share interest of each individual Firm 
and each Non-OTP Holder or OTP Firm Market Maker will be limited to 40% 
of the size of the remaining inbound order;
    (iv) the inbound order, if not entirely filled, will then match, on 
a size pro rata basis, with all other remaining volume in the 
Consolidated Book of Firms and Non-OTP Holder or OTP Firm Market Makers 
who were previously limited to 40%;] and
    (iv) the balance of the order, if any, will then be either:
    (a) routed to a Floor Broker Hand Held Terminal in the case where 
the order locks or crosses the NBBO; or
    (b) executed at the next available price level based on split-price 
execution, as provided in subsection (b)(3), below.
    If neither of the conditions specified in subsections (a) or (b) 
apply, and the order is no longer marketable, then such order will be 
represented in the Consolidated Book.
    (b)(3)--No Change.
    (b)(4)--Reserved. [Electronic Book Execution. This subsection 
addresses situations in which Market Makers interact electronically 
with orders in the Consolidated Book. When a Quote with Size from a 
Market Maker initiates a trade with the Consolidated Book (the 
``initiating Quote with Size''), an Electronic Book Execution will 
occur as follows.
    (A) The initiating Quote with Size will immediately execute against 
the Consolidated Book if the percentage of the transaction involving 
Public Customer interest (as represented in the Consolidated Book) 
would comprise no more than 40% of the transaction (e.g., if the 
initiating Quote with Size is for 20 contracts and the size in the 
Consolidated Book at the execution price is 50 contracts, six contracts 
of which are the Public Customer interest (6/20=30%), then the 
initiating Quote with Size for 20 contracts will be executed in full).
    (B) If the initiating Quote with Size would effect a transaction 
against the Consolidated Book and the percentage of the transaction 
involving Public Customer interest would comprise more than 40% of the 
transaction, then the initiating Quote with Size will be processed as 
follows:
    (i) the Market Makers initiating Quote with Size will receive an 
execution comprising the greater of:
    (a) 40% of the Public Customer interest in the Consolidated Book at 
that price; or
    (b) the total size to which the inbound initiating Quote with Size 
would receive pursuant to a size pro rata allocation.
    (ii) the balance of the Consolidated Book at that price will be 
displayed for three seconds (via a System Alert Message--SAM) to all 
``Crowd Participants'' (as defined in Rule 6.1(b)(38)).
    (a) A Floor Broker holding an order for an account in which such 
broker has an interest, the account of an associated person, or an 
account with respect to which the Floor Broker or an associated person 
thereof exercises investment discretion, shall not be eligible for 
participation in Electronic Book Executions.
    (iii) the balance of the Public Customer interest in the 
Consolidated Book will then be allocated on size pro rata basis to all 
Crowd Participants, if any, who have entered bids or offers to trade at 
the execution price within the three seconds provided.
    (iv) after the Public Customer interest has been allocated, the 
initiating Quote with Size will match against all remaining interest in 
the Consolidated Book. If the initiating Quote with Size does not fill 
the Consolidated Book, then all Crowd Participants will be matched on a 
size pro rata basis with the remaining interest in the Consolidated 
Book at that price.
    (v) if the remaining Quotes with Size are executable at the next 
price level, they will be matched against the Consolidated Book on a 
size pro rata basis.] (b)(5)-(c)--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 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
    Currently, PCX Rule 6.76(b) addresses the situations in which 
orders or Quotes with Size \3\ are executed through PCX Plus. Today, 
when an inbound order is for the account of a Firm \4\ or Non-OTP 
Holder Market Maker \5\ and more than 50% of the aggregate trading 
interest in the Consolidated Book \6\ at the execution price is for the 
account (or accounts) of Public Customers \7\, the order is not 
eligible to be immediately executed on PCX Plus. Instead, such orders 
are routed to Floor Broker Hand Held terminals for manual 
representation in the trading crowd at which time they may receive full 
or partial execution based on the price and size disseminated at that 
time. According to the PCX, this, however, is not necessarily the price 
and size disseminated at the time of order entry because the price and 
size disseminated at the time the order is represented in

[[Page 51506]]

the trading crowd may have changed from the time the order was entered. 
As a result, a Firm or Non-OTP Holder Market Maker may not know whether 
its order has been fully or partially executed and at what price until 
seconds after it sends the order to the Exchange. The PCX believes that 
this lack of certainty creates a disincentive for a Firm or Non-OTP 
Holder Market Maker to send orders via PCX Plus. The PCX also believes 
that removing the impediment and allowing Firm and Non-OTP Market Maker 
orders to immediately execute on PCX Plus would enable the Exchange to 
execute orders faster and create greater efficiencies and price 
transparency in the marketplace. To further provide the Exchange with 
the ability to execute orders faster, the proposed rule change would 
remove the restrictions on an order entered by a Firm or Non-OTP Holder 
or OTP Firm Market Maker less than one minute before the inbound order. 
In addition, the proposed rule change would eliminate the 40% 
participation limitation currently placed on a Firm, Non-OTP Holder or 
OTP Firm Market Maker for an inbound order that is not entirely filled.
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    \3\ See PCX Rule 6.1(b)(33).
    \4\ See PCX Rule 6.1(b)(36).
    \5\ See PCX Rule 6.1(b)(35).
    \6\ See PCX Rule 6.1(b)(37).
    \7\ See PCX Rule 6.1(b)(29).
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    In conjunction with this proposed amendment to PCX Rule 6.76(b)(1) 
and (b)(2), the Exchange also proposes to eliminate the Electronic Book 
Execution rules set forth in PCX Rule 6.76(b)(4) that prevent PCX 
Market Makers from immediately executing orders against the 
Consolidated Book. The PCX believes that eliminating these rules would 
give PCX Market Makers the same access to the Consolidated Book that a 
Firm or Non-OTP Holder Market Maker would have under the proposed 
rules, thereby eliminating any potential biases that a PCX Market Maker 
might encounter when using PCX Plus. The PCX believes that allowing PCX 
Market Makers to immediately execute against the Consolidated Book 
would also improve the speed of executions at the PCX and would add 
liquidity to the PCX's markets and, as a result, benefit the investing 
public.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act \8\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act \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 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. 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-2004-78 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-2004-78. 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; 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-2004-78 and should be submitted on or before 
September 9, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-18982 Filed 8-18-04; 8:45 am]
BILLING CODE 8010-01-P