[Federal Register Volume 70, Number 18 (Friday, January 28, 2005)]
[Notices]
[Pages 4175-4178]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-327]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51061; File No. SR-PCX-00-15]


Self-Regulatory Organizations; Order Approving a Proposed Rule 
Change and Amendments No. 1 and 2 Thereto and Notice of Filing and 
Order Granting Accelerated Approval to Amendments No. 3, 4, 5, 6, and 7 
Thereto by the Pacific Exchange, Inc. To Require the Immediate Display 
of Customer Limit Orders

January 21, 2005.

I. Introduction

    On June 14, 2000, 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 amend PCX Rule 6.55 to require the immediate 
display of customer limit orders. PCX filed Amendments No. 1 and 2 to 
the proposed rule change on August 1, 2000,\3\ and October 17, 2000,\4\ 
respectively. The proposed rule change, as amended by Amendments No. 1 
and 2, was published for comment in the Federal Register on November 
21, 2000.\5\ No comments were received regarding the amended proposal.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Hassan Abedi, Attorney, Regulatory Policy, 
PCX, to Nancy Sanow, Assistant Director, Division of Market 
Regulation (``Division''), Commission, dated July 31, 2000 
(``Amendment No. 1'').
    \4\ See letter from Hassan Abedi, Attorney, Regulatory Policy, 
PCX, to Nancy Sanow, Assistant Director, Division, Commission, dated 
September 29, 2000 (``Amendment No. 2'').
    \5\ See Securities Exchange Act Release No. 43550 (November 13, 
2000), 65 FR 69979 (``Notice'').
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    PCX filed Amendments No. 3, 4, 5, 6, and 7 with the Commission on 
October 28, 2004,\6\ November 18, 2004,\7\ December 10, 2004,\8\ 
December 31, 2004,\9\ and January 7, 2005,\10\ respectively. This order 
approves the proposed rule change and Amendments No. 1 and 2 and grants 
accelerated approval to and solicits comment on Amendments No. 3, 4, 5, 
6 and 7.
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    \6\ On October 28, 2004, PCX filed a Form 19b-4, which replaced 
the original filing and Amendments No. 1 and 2 in their entirety 
(``Amendment No. 3''). In Amendment No. 3, PCX proposes to revise 
the proposal to reflect changes to PCX's systems (i.e., the approval 
and roll-out of PCX Plus) since the Notice was published for 
comment. Amendment No. 3 also added a number of exemptions to the 
Display Obligation, discussed in more detail below, which mirror 
exemptions proposed by the Chicago Board Options Exchange (``CBOE'') 
and American Stock Exchange (``Amex'') in recently-published 
proposals. See Securities Exchange Act Release Nos. 49916 (June 25, 
2004), 69 FR 40422 (July 2, 2004) (SR-CBOE-2004-35) (``CBOE 
Notice'') and 50188 (August 12, 2004), 69 FR 51495 (August 19, 2004) 
(SR-Amex-00-27) (``Amex Notice''), which we also approve today, see 
Securities Exchange Act Release Nos. 51063 (January 21, 2005) 
(``CBOE Approval'') and 51062 (January 21, 2005) (``Amex 
Approval'').
    \7\ See letter from Tania Blanford, Staff Attorney, Regulatory 
Policy, PCX, to Nancy Sanow, Assistant Director, Division, 
Commission, dated November 18, 2004 (``Amendment No. 4''). In 
Amendment No. 4, PCX proposes a minor modification to the exemptions 
to the Display Obligation.
    \8\ See Partial Amendment, dated December 10, 2004, submitted by 
Tania Blanford, Staff Attorney, PCX (``Amendment No. 5''). In 
Amendment No. 5, PCX proposes a minor modification to the exemptions 
to the Display Obligation.
    \9\ See Partial Amendment, dated December 31, 2004, submitted by 
Tania Blanford, Staff Attorney, PCX (``Amendment No. 6''). In 
Amendment No. 6, PCX proposes a minor modification to the exemptions 
to the Display Obligation.
    \10\ See Partial Amendment, dated January 7, 2005, submitted by 
Tania Blanford, Staff Attorney, PCX (``Amendment No. 7''). In 
Amendment No. 7, PCX proposes a minor modification to the exemptions 
to the Display Obligation.
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II. Description of Proposed Rule

    PCX proposes to amend PCX Rule 6.55 to codify an immediate display 
requirement with respect to eligible customer limit orders (``Display 
Obligation''). The text of the proposed rule change, as amended, 
follows. Additions are in italics. Deletions are in [brackets].
    Displaying Bids and Offers in the Book Rule 6.55. The limit orders 
in the custody of an Order Book Official [shall] constitute the [his] 
book. Each Order Book Official shall display immediately the full price 
and size of any customer limit order that improves the price or 
increases the size of the best disseminated PCX quote. [So far as 
practicable, an Order Book Official shall continuously display, in a 
visible manner, the highest bid and lowest offer along with an 
indication of the number of option contracts bid for at the highest bid 
and offered at the lowest offer in his book in each option contract for 
which

[[Page 4176]]

he is acting as Order Book Official.] For the purpose of this rule 
``immediately'' means as soon as practicable after receipt, which under 
normal market conditions means no later than 30 seconds after receipt. 
The term ``customer limit order'' means an order to buy or sell a 
listed option at a specified price that is not for the account of 
either a broker or dealer; provided, however, that the term customer 
limit order shall include an order transmitted by a broker or dealer on 
behalf of a customer. [provided, however, that where the highest bid or 
lowest offer is for more than twenty-five option contracts, or such 
other number of option contracts as may be prescribed from time to time 
by the Options Floor Trading Committee, the Order Book Official may 
display an indication that the bid or offer is for at least that number 
of option contracts. When required by market conditions, he may make 
such quotations available orally rather than by displaying them.] The 
following order types are exempt from the display obligation:
    (a) An order executed upon receipt;
    (b) An order where the customer who placed it requests that it not 
be displayed, and upon receipt of the order, the Floor Broker announces 
in public outcry the information concerning the order that would be 
displayed if the order were subject to being displayed;
    (c) An order the terms of which are delivered immediately upon 
receipt to another options exchange that is a participant in the 
Intermarket Options Linkage Plan;
    (d) Order types defined in PCX Rule 6.62(c)-(d), (f)-(h) and (j)-
(k);
    (e) Large-sized orders (orders for more than 100 contracts), unless 
the customer placing such order requests that the order be displayed;
    (f) Orders received before or during a trading rotation (once the 
trading rotation ends and regular trading begins, orders received 
before or during the trading rotation will be subject to the display 
requirement).
    Commentary:
    [.01 In displaying the highest bid or the lowest offer in his book 
for a particular option contract, an Order Book Official shall indicate 
the full size of such bid or offer if it is for 25 or fewer option 
contracts. If the highest bid or the lowest offer is for more than 25 
option contracts, the Order Book Official shall display a size 
indication of at least 25 units, and may indicate at his discretion, a 
larger number.]
    [.02] .01 Renumbered.
    [.03] .02 Renumbered.
    Currently, PCX Rule 6.55 provides that an Order Book Official 
(``OBO'') ``shall continuously display, in a visible manner, the 
highest bid and lowest offer along with an indication of the number of 
option contracts bid for at the highest bid and offered at the lowest 
offer in his book in each option contract for which he is acting as 
Order Book Official.'' The OBO may take custody of limit orders both 
manually and electronically. An order is entered manually into an OBO's 
custody when a Floor Broker places a written, time-stamped order ticket 
into the proper receptacle at the trading post.\11\ Alternatively, an 
order is entered electronically into the OBO's custody when an OTP 
Holder or OTP Firm sends it to the Pacific Options Exchange Trading 
System (``POETS'') or PCX Plus \12\ via the Exchange's Member Firm 
Interface and the order, not being marketable, is electronically 
entered into the Consolidated Book \13\ via the Auto-Ex Book \14\ 
function of POETS or via PCX Plus. Orders entered electronically into 
the Consolidated Book are immediately displayed on the overhead screens 
on the trading floor and disseminated to the public via the Options 
Price Reporting Authority (``OPRA''). Orders entered manually must be 
entered into POETS or PCX Plus before being displayed on the floor or 
disseminated via OPRA.
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    \11\ See PCX Rule 6.52, Commentary .04. A Floor Broker must use 
due diligence in handling an order that it represents as agent. See 
generally PCX Rule 6.46.
    \12\ See Securities Exchange Act Release No. 49718 (May 17, 
2004), 69 FR 29611 (May 24, 2004) (order approving PCX Plus).
    \13\ See PCX Rule 6.1(b)(37).
    \14\ See PCX Rule 6.87(1).
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    Under the proposal, OBOs would be required to display immediately 
the price and full size of any eligible customer limit order that 
improves the price or increases the size of the best disseminated PCX 
quote. PCX proposes to define ``immediately'' to mean, under normal 
market conditions, as soon as practicable but no later than 30 seconds 
after receipt by the OBO.\15\ PCX proposes to define the term 
``customer limit order'' as ``an order to buy or sell a listed option 
at a specified price that is not for the account of either a broker or 
dealer; provided, however, that the term customer limit order shall 
include an order transmitted by a broker or dealer on behalf of a 
customer.''
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    \15\ In its filing, PCX states that ``receipt by the OBO'' means 
receipt on POETS or the PCX Plus system, which is consistent with 
the firm quote definition of ``time of receipt.'' This means that 
the time of receipt is when the order is received on POETS or PCX 
Plus, even if the OBO does not happen to see it for several seconds.
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    PCX proposes to exempt, or partially exempt, certain order types 
from the Display Obligation. Specifically, PCX proposes to exempt 
orders executed upon receipt as well as any order where the customer 
who placed it requests that the order not be displayed, if upon receipt 
of the order, the Floor Broker announces via public outcry the 
information about the order that would be displayed if the order were 
subject to display.\16\ PCX further proposes to exempt from the Display 
Obligation a customer order the terms of which are delivered, 
immediately upon receipt, to another options exchange that participates 
in the options intermarket linkage plan.\17\
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    \16\ While the Exchange's proposed Display Obligation would be 
imposed on the OBO, the OBO, who does not hold customer orders, 
cannot take custody of a limit order that a customer has instructed 
not to be displayed. Under PCX Rule 6.46(a) and (f) and Commentaries 
.01 and .05 thereto, the Floor Broker, as the person holding the 
order, will have the obligation to vocalize the information 
concerning the order that would be displayed if the order were 
subject to being displayed. Telephone conversation between Tania 
Blanford, Staff Attorney, Regulatory Policy, PCX, and Nathan 
Saunders, Attorney, Division, Commission, November 9, 2004.
    \17\ See Securities Exchange Act Release No. 43086 (July 28, 
2000), 65 FR 48023 (August 4, 2000) (order approving the Plan for 
the Purpose of Creating and Operating an Intermarket Option 
Linkage). The Exchange represents that if such a related order that 
is delivered immediately upon receipt to another options exchange 
that is a particiipant in the intermarket options linkage plan were 
canceled, in whole or in part, by the other options exchange, then 
the OBO would be obligated to display immediately upon receipt of 
the cancellation notice the price and size of the customer order as 
set forth in proposed PCX Rule 6.55.
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    The Exchange also proposes to exempt, or partially exempt, from the 
Display Obligation the following types of orders set forth in PCX Rule 
6.62(c)-(d), (f)-(h) and (j)-(k):
    Contingency orders: Stop-limit orders (PCX Rule 6.62(c)(1)) and 
stop (stop-loss) orders (PCX Rule 6.62(c)(2))--These orders are not 
executable until the market reaches a specified ``trigger'' price, at 
which point a stop-limit order converts to a limit order and a stop 
order converts to a market order. As such, these orders are not 
available to trade and have no standing in the quoted markets until the 
specified price trigger is reached. However, the limit order resulting 
from a triggered stop-limit order is subject to the Display Obligation.
    Complex orders: Spread orders (PCX Rule 6.62(d)); straddle orders 
(PCX Rule 6.62(g)); combination orders (PCX Rule 6.62(h)); stock/option 
orders (PCX Rule 6.62(j)(1)); and ratio orders (PCX Rule 6.62(k))--
These orders specify instructions to trade more than one options series 
or product as a package,

[[Page 4177]]

typically at a specified net debit or credit as opposed to at a 
specific limit price for each leg involved. Therefore, there is no 
specified limit price for each leg of the order to display in the 
Exchange's disseminated quotes. Moreover, OPRA does not accept complex 
order quotes at net prices.
    One-cancels-the-other orders (PCX Rule 6.62(f))--A one-cancels-the-
other order consists of two or more orders treated as a unit. The 
execution of any one of the orders causes the others to be cancelled. 
If the Floor Broker cannot execute any of the orders upon receipt, then 
none can be displayed or booked as doing so could result in the 
approximately simultaneous execution of more than one component order, 
in direct contravention of the primary order condition.
    Large sized orders--The Commission's Display Rule, Rule 11Ac1-4 
under the Act,\18\ applicable to customer limit orders received in the 
equity market, provides a general exclusion for block size orders of at 
least 10,000 shares.\19\ PCX proposes to adopt a similar exemption for 
large sized orders. Accordingly, there would be no obligation to 
display orders for more than 100 contracts, unless the customer placing 
such order requests otherwise.
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    \18\ 17 CFR 240.11Ac1-4.
    \19\ See 17 CFR 240.11Ac1-4(c)(4).
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    Orders received during a trading rotation--Orders received before 
or during a trading rotation (as defined in PCX Rule 6.64) would be 
exempt from the 30-second standard. During a rotation, the PCX systems 
attempt to find the opening price and until the opening price is 
established, there is no disseminated market. Once the trading rotation 
ends and regular trading begins, orders received before or during the 
trading rotation would be subject to the Display Obligation.
    Finally, PCX proposes to delete language in PCX Rule 6.55, 
Commentary .01, referring to display obligations where the highest bid 
or lowest offer is for more than twenty-five option contracts as such 
language is no longer applicable.

III. Commission Findings and Order Granting Approval

    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 
\20\ and, in particular, the requirements of section 6(b)(5) of the 
Act,\21\ which requires, among other things, that the rules of an 
exchange be designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to foster 
cooperation and coordination with persons engaged in facilitating 
transactions in securities, 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. Specifically, 
the Commission believes that the immediate display of customer limit 
orders that improve the price or size of the best disseminated PCX 
quote should promote transparency and enhance the quality of executions 
of customer limit orders on PCX.
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    \20\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \21\ 15 U.S.C. 78f(b)(5).
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    The proposed amendments to PCX Rule 6.55 introduce requirements for 
customer limit order display that are comparable to the requirements of 
the Commission's Display Rule, which is applicable to customer limit 
orders received in the equity market. In addition, the Commission 
believes that the Exchange's proposal to exempt large sized orders from 
the Display Obligation is reasonable since a substantially similar 
exemption is set forth in the Commission's Display Rule.
    The Commission also believes that it is consistent with the Act for 
PCX to exempt from the Display Obligation under its rules stop-limit 
and stop or stop-loss orders. These orders are contingent orders that 
are subject to a particular triggering event and, thus, are not 
available for execution until the triggering event occurs. A stop-loss 
order becomes a market order when triggered and thus is not subject to 
the Display Obligation because such an order would then be immediately 
executable. A stop-limit order becomes a limit order when the 
triggering event occurs. This limit order would be subject to the 
Display Obligation. Spread, straddle, combination, stock/option, ratio 
and one-cancels-the-other orders are complex orders with more than one 
component and, thus, the Commission believes, are not suitable for 
display.
    During a trading rotation, PCX systems attempt to set an opening 
price for the series. Until that opening price is established, there is 
no disseminated market. Therefore, it is reasonable to exempt orders 
received before or during a trading rotation from the Display 
Obligation. The Commission notes, however, that once the trading 
rotation ends, any orders not executed would then be subject to the 
Display Obligation.
    Finally, the Exchange proposes to exempt from the Display 
Obligation customer orders the terms of which are delivered, 
immediately upon receipt, to another options exchange. The Commission 
believes it is reasonable to exempt such orders since they are subject 
to execution upon receipt at the other options exchange. Moreover, the 
Exchange represents that if the order delivered to the other options 
exchange were canceled, in whole or in part, by the other exchange, 
then the original customer order would be subject to the Display 
Obligation immediately upon receipt of the cancellation notice by the 
Exchange.
    The Commission finds good cause for approving Amendments No. 3, 4, 
5, 6, and 7 to the proposed rule change prior to the thirtieth day 
after their publication in the Federal Register, pursuant to section 
19(b)(2) of the Act.\22\ Amendment No. 3 would revise the proposal to 
reflect changes to PCX's systems since the Notice was published for 
comment. These revisions are necessary given recent changes to PCX's 
systems, such as the approval and implementation of the PCX Plus 
electronic trading platform, but do not alter the primary purpose of 
the proposal: to require immediate display of customer limit orders on 
the Exchange.
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    \22\ 15 U.S.C. 78s(b)(2).
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    In Amendment No. 3, PCX also proposes several exemptions to the 
Display Obligation. The Commission notes that these exemptions, 
discussed in detail in Part II above, are substantially identical to 
exemptions proposed by CBOE and Amex in their customer limit order 
display proposals, which were recently noticed for full 21-day comment 
periods.\23\ No comments were received on either the CBOE or Amex 
proposal. Amendments No. 4, 5, 6, and 7 proposed minor modifications to 
the proposed rule text, and thus are appropriate for accelerated 
approval.
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    \23\ See CBOE Notice and Amex Notice, supra note 6.
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    Accelerated approval of Amendments No. 3, 4, 5, 6, and 7 will 
permit the Exchange to implement the proposal in an expeditious manner, 
i.e., simultaneously with the implementation of similar proposals by 
CBOE, Amex and the Philadelphia Stock Exchange (``Phlx''), which we 
also approve today.\24\ The Commission,

[[Page 4178]]

therefore, believes that good cause exists, consistent with section 
6(b)(5) \25\ and section 19(b) \26\ of the Act, to accelerate approval 
of Amendments No. 3, 4, 5, 6, and 7.
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    \24\ See CBOE Approval, supra note 6; Amex Approval, supra note 
6; and Securities Exchange Act Release No. 51064 (January 21, 2005) 
(notice of filing and order granting accelerated approval to SR-
Phlx-2004-73).
    \25\ 15 U.S.C. 78f(b)(5).
    \26\ 15 U.S.C. 78s(b).
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IV. Solicitation of Comments Concerning Amendments No. 3, 4, 5, 6, and 
7

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendments No. 3, 4, 5, 6, and 7, including 
whether they are 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-00-15 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-00-15. 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-00-15 and should be submitted on or before February 
18, 2005.

V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\27\ that the proposed rule change (File No. SR-PCX-00-15), as 
amended, be approved, and that Amendments No. 3, 4, 5, 6, and 7 thereto 
be approved on an accelerated basis.
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    \27\ Id.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\28\
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    \28\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
 [FR Doc. E5-327 Filed 1-27-05; 8:45 am]
BILLING CODE 8010-01-P