[Federal Register Volume 69, Number 194 (Thursday, October 7, 2004)]
[Notices]
[Pages 60206-60208]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-2528]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50473; File No. SR-PCX-2003-64]


Self-Regulatory Organizations; Pacific Exchange, Inc.; Order 
Granting Approval of Proposed Rule Change and Amendments No. 1 and 2 
Thereto and Notice of Filing and Order Granting Accelerated Approval to 
Amendments No. 3, 4, and 5 Thereto Regarding Facilitation Crossing 
Procedures

September 29, 2004.

I. Introduction

    On November 20, 2003, the Pacific Exchange, Inc. (``PCX'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'')\1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to modify the Exchange's facilitation crossing 
procedures in several respects. On July 7, 2004, and July 15, 2004, 
respectively, the Exchange filed Amendments No. 1 and 2 to the proposed 
rule change.\3\ The proposed rule change as amended by Amendments No. 1 
and 2 was published for comment in the Federal Register on July 29, 
2004.\4\ The Commission received no comments on the proposal, as 
amended. On September 24, 2004, the Exchange submitted Amendment No. 3 
to the proposal.\5\ On September 29, 2004, the Exchange submitted 
Amendment No. 4 and Amendment No. 5 to the proposed rule change.\6\ 
This order approves the proposed rule change and Amendments No. 1 and 
2, grants accelerated approval of Amendments No. 3, 4, and 5, and 
solicits comments on Amendments No. 3 and 5.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letters from Mai S. Shiver, Acting Director/Senior 
Counsel, PCX, to Nancy J. Sanow, Assistant Director, Division of 
Market Regulation (``Division''), Commission, dated July 6, 2004, 
and July 14, 2004.
    \4\ See Securities Exchange Act Release No. 50064 (July 22, 
2004), 69 FR 45360 (``Notice'').
    \5\ See letter from Mai S. Shiver, Director/Senior Counsel, PCX, 
to Nancy J. Sanow, Assistant Director, Division, Commission, dated 
September 23, 2004 (``Amendment No. 3''). In Amendment No. 3, the 
Exchange expanded the types of orders eligible for crossing with a 
Customer Order to include orders for the proprietary account of an 
organization under common control with a Market Maker that is 
representing the customer. The version of this provision published 
in the Notice applied only to orders for the proprietary account of 
an organization under common control with a Lead Market Maker 
(``LMM'') that is representing the customer. Amendment No. 3 also 
clarified the rule with respect to allocation of the portion of the 
Customer Order remaining after the Floor Broker executes its 
guarantee in certain situations, and made technical and stylistic 
changes to the rule text.
    \6\ See letters from Mai S. Shiver, Director/Senior Counsel, 
PCX, to Nancy J. Sanow, Assistant Director, Division, Commission, 
dated September 28, 2004 (``Amendment No. 4'') and September 29, 
2004 (``Amendment No. 5''). Amendment No. 4 was a technical 
amendment correcting typographical errors in the proposed rule text, 
and is not required to be noticed for comment. In Amendment No. 5, 
the Exchange proposed to make the effective date of the proposal 
October 29, 2004 in order to allow the Exchange to provide proper 
notice and education to the Exchange OTP Holders and OTP Firms that 
are affected by the rule change.
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II. Discussion of the Proposed Rule Change

    Current PCX Rule 6.47(b), concerning the crossing of facilitation 
orders, permits a Floor Broker who holds an order for a customer and an 
order for the proprietary account of an OTP (Options Trading Permit) 
Holder or OTP Firm

[[Page 60207]]

that is representing that customer (``Facilitation Order'') to cross 
those orders, provided that specified procedures and requirements are 
met. Among other things, before executing the cross, the Floor Broker 
must request from the trading crowd bids and offers for all components 
of the customer order and clearly disclose his or her intention to 
execute a facilitation cross transaction. With respect to customer 
orders of 50 contracts or more, the current rule further provides that 
once a market has been established and all public customer orders 
represented in the trading crowd have been satisfied, the Floor Broker 
may cross either (i) 40% of any remaining contracts at a price between 
the trading crowd's quoted market, or (ii) 25% of the contracts at the 
trading crowd's best bid or offer.
    The proposed rule change would amend Rule 6.47(b), to be newly 
entitled ``Facilitation Procedure,'' in several ways. Whereas the 
current rule defines a ``customer order'' subject to facilitation to 
include orders of broker-dealers, under the proposal, the facilitation 
procedure would apply only to orders of public customers.\7\ The 
proposed rule change would add a requirement that in calling for the 
crowd's market, the Floor Broker must include the size of the order, 
but would eliminate the requirement that the Floor Broker disclose his 
intention to execute a facilitation cross. The proposal would also 
permit the Floor Broker to immediately consummate the facilitation 
cross in response to the trading crowd's quoted market if he or she 
immediately bids or offers a price on the customer order that is on or 
inside the quoted market (``Facilitation Price'') provided by the 
trading crowd. As revised by Amendment No. 3, the proposal would also 
expand the rule to allow a Floor Broker to cross a Customer Order with 
an order for the proprietary account of an organization under common 
control with a Market Maker that is representing that customer.\8\
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    \7\ See Notice at note 5 and accompanying text. Such orders 
would be defined in the rule as ``Customer Orders.''
    \8\ See supra note 5.
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    Further, the proposal would (a) increase to 40% the guaranteed 
percentage of a Customer Order that a Floor Broker is entitled to cross 
at the quoted market, and (b) obligate the Floor Broker to fill any 
portion of the customer order that remains unexecuted after the Floor 
Broker has provided the trading crowd an opportunity to execute the 
remainder of the order. Specifically, after first satisfying any orders 
for the account of persons who are not OTP Holders or OTP Firms pending 
at the Facilitation Price, the Floor Broker would be permitted to 
facilitate up to 40% of the remaining contracts in the Customer Order 
against the Facilitation Order at the Facilitation Price. The Floor 
Broker would be required to allow any other member of the trading crowd 
interested in trading at the Facilitation Price to execute the 
remaining 60% or more of the Customer Order.
    The remaining 60% would be allocated among the members interested 
in trading at the Facilitation Price on a size pro-rata basis or, in 
the case of identical offers or bids (where the Floor Broker's offer or 
bid improved the crowd's price in response to the request for a 
market), on an equal basis. If any portion of the Customer Order 
remains after providing the crowd reasonable time to execute the 
remaining 60%, the Floor Broker would be required to fill the remainder 
of the Customer Order by executing it against the Facilitation Order at 
the Facilitation Price.
    The Exchange also proposes to add new PCX Rule 6.47(b)(5), which 
states that if the trading crowd does not provide a bid and offer for 
all components of the Customer Order in response to the Floor Broker's 
request within a reasonable period of time, the ``market quote'' for 
the purpose of this rule will be either (i) the quoted market 
disseminated by the Exchange prior to the commencement of the 
Facilitation Procedure, or (ii) for orders for which there is no 
disseminated market, a quote that is determined by the disseminated 
quote for each leg of the transaction prior to the commencement of the 
Facilitation Procedure. As clarified in Amendment No. 3, the 60% of the 
Customer Order remaining after the Floor Broker executes the 40% 
guarantee in such a situation would be allocated on an equal basis 
among any members of the crowd interested in trading at the 
Facilitation Price.
    The proposal would renumber former PCX Rule 6.47(b)(5) as PCX Rule 
6.47(b)(6) and amend it to provide that if the facilitation trade 
occurs at the LMM's quoted bid or offer in its allocated issue and the 
Floor Broker takes less than 40% of the trade, then the LMM may elect 
either (i) to accept a guaranteed participation level of 40% minus the 
Floor Broker's allocation percentage, or (ii) to participate in the 
pro-rata allocation without a guaranteed participation level. If the 
trade occurs at a price other than the LMM's quoted bid or offer, the 
LMM would not be entitled to a guaranteed participation. A Floor Broker 
or LMM would not be prohibited from trading more than their guaranteed 
participation levels if the members of the trading crowd do not choose 
to trade the remaining portion of the order.
    The proposed rule change would revise Commentary .06 to PCX Rule 
6.47 to provide that it will be a violation of a Floor Broker's duty to 
use due diligence in representing its Customer Order if the Floor 
Broker does not employ the Facilitation Procedure on the PCX 
immediately upon receipt on the PCX of the order that the OTP Holder or 
OTP Firm wishes to have executed as a facilitation cross. The Exchange 
also proposes to add Commentary .07, which provides that it will be a 
violation of an OTP Holder's or OTP Firm's duty of best execution to 
its customer if it cancels a facilitation order for the purpose of 
avoiding execution of the order at a better price.
    Finally, the proposed rule change would clarify facilitation 
crossing procedures for orders of less than 50 contracts, which are not 
subject to the guarantees set forth in the rule. The proposal would 
establish that, when facilitating such orders, the Floor Broker must 
satisfy all orders in the book and all orders represented in the 
trading crowd (affording the trading crowd a reasonable period of time 
to respond to the Customer Order) before the Floor Broker may cross the 
Customer Order.

III. Commission Findings and Order Granting Approval

    After careful consideration, the Commission has determined to 
approve the proposed rule change, as amended.\9\ For the reasons 
discussed below, 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. Specifically, the Commission finds that the proposed rule 
change, as amended, is consistent with the requirements of Section 
6(b)(5) of the Act,\10\ which requires, among other things, that an 
exchange's rules 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, in general, to 
protect investors and the public interest.
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    \9\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \10\ 15 U.S.C. 78f(b)(5).
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    The proposed rule change sets forth a number of amendments to the 
procedures for the execution of facilitation crossing transactions on 
the Exchange, and would also increase the

[[Page 60208]]

guaranteed percentage to which a Floor Broker is entitled when 
facilitating a Customer Order at the quoted market. The Commission 
believes that these changes are generally consistent with rules in 
place variously at other exchanges or otherwise constitute reasonable 
modifications to the Exchange's procedures. In particular, the 
Commission notes that the increase in the percentage that the Floor 
Broker is entitled to facilitate at the quoted market would not exceed 
40% of an order. The Commission has previously found that participation 
guarantees of as much as 40% of an order in options trading are not 
inconsistent with statutory standards of competition and free and open 
markets.\11\
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    \11\ See, e.g., Securities Exchange Act Releases No. 42455 
(February 24, 2000), 65 FR 11388 (March 2, 2000) at 11398; and No. 
43100 (July 31, 2000), 65 FR 48778 (August 9, 2000) at notes 96-99 
and accompanying text.
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    The Commission further notes that the proposed rule change also 
would require a Floor Broker to fill the remainder of the Customer 
Order that is not filled by the trading crowd by executing it against 
the Facilitation Order, thus ensuring that the Customer Order will be 
executed at or between quoted markets.\12\ The proposed rule change 
also clarifies the Exchange's facilitation procedures by setting forth 
explicit provisions regarding the method for allocating the contracts 
remaining after the Floor Broker executes his or her guaranteed 
percentage. Finally, the new commentaries regarding Floor Brokers' 
duties of best execution and due diligence contribute to the clarity of 
the facilitation rules by expressly defining violative conduct.
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    \12\ The Exchange represents that any portion of a Customer 
Order executed pursuant to this rule would not be executed at a 
price inferior to the national best bid or offer. Telephone 
conversation between Mai S. Shiver, Director/Senior Counsel, PCX, 
and Ira L. Brandriss, Assistant Director, Division, Commission, 
September 29, 2004.
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    The Commission finds good cause for approving Amendments No. 3 and 
5 to the proposed rule change prior to the thirtieth day after the 
amendment is published in the Federal Register, pursuant to Section 
19(b)(2) of the Act.\13\ With respect to the types of orders that may 
be Facilitation Orders, Amendment No. 3 eliminated a distinction 
between orders for the proprietary accounts of organizations under 
common control with LMMs and orders for the proprietary accounts of 
organizations under common control with Market Makers, and thus 
enhanced the proposed rule change. Amendment No. 3 also strengthened 
the proposal by clarifying the method of allocation of the remaining 
60% of a Customer Order in a situation where the crowd had not provided 
a response to Floor Broker's request for a market. Finally, Amendment 
No. 3 made a few minor technical and stylistic changes to the proposed 
rule text. In Amendment No. 5, the Exchange proposed to make the 
effective date of the proposal October 29, 2004 in order to allow the 
Exchange to provide proper notice and education to the Exchange OTP 
Holders and OTP Firms that are affected by the rule change. 
Acceleration of Amendments No. 3 and 5 will permit the Exchange to 
implement the proposal in an expeditious manner. The Commission, 
therefore, believes that good cause exists, consistent with Section 
6(b)(5)\14\ and Section 19(b)\15\ of the Act, to accelerate approval of 
Amendment No 3.
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    \13\ 15 U.S.C. 78s(b)(2).
    \14\ 15 U.S.C. 78f(b)(5).
    \15\ 15 U.S.C. 78s(b).
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IV. Solicitation of Comments Concerning Amendment No. 3

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 3, including whether it 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-2003-64 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-2003-64. 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 Room. Copies of such 
filing also will be available for inspection and copying at the 
principal office of the Exchange. 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-2003-64 and should be submitted on or before October 
28, 2004.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\16\ that the proposed rule change (File No. SR-PCX-2003-64) and 
Amendments No. 1 and 2 thereto are approved, and that Amendments No. 3, 
4 and 5 thereto are approved on an accelerated basis.
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    \16\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E4-2528 Filed 10-6-04; 8:45 am]
BILLING CODE 8010-01-P