[Federal Register Volume 70, Number 79 (Tuesday, April 26, 2005)]
[Notices]
[Pages 21488-21491]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-1964]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51576; File No. SR-PCX-2005-35]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Pacific Exchange, Inc. 
Relating to the SizeQuote Mechanism for the Execution of Large-Sized 
Orders in Open Outcry

April 19, 2005.
    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 7, 2005, the Pacific Exchange, Inc. (``PCX'' or ``Exchange'') 
filed with 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 Exchange. The PCX filed the proposal pursuant 
to section 19(b)(3)(A) under the Act,\3\ and Rule 19b-4(f)(6) 
thereunder,\4\ which renders the proposal effective upon filing with 
the Commission.\5\ 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.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6).
    \5\ The PCX has asked the Commission to waive the 30-day 
operative delay. See Rule 19b-4(f)(6)(iii), 17 CFR 240.19b-
4(f)(6)(iii).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to add PCX Rule 6.47(g) to adopt, on a pilot 
basis through February 15, 2006, a SizeQuote Mechanism for the 
execution of large-sized orders in open outcry. The text of the 
proposed rule change is below. Proposed new language is in italics.

Rules of the Pacific Exchange, Inc.

Rule 6
    Rule 6.47(a)-(f)--No Change.
    Rule 6.47(g)--Open Outcry ``SizeQuote'' Mechanism.
    (i) SizeQuotes Generally. The SizeQuote Mechanism is a process by 
which a Floor Broker (``FB'') may execute and facilitate large-sized 
orders in open outcry. Floor brokers must be willing to facilitate the 
entire size of the order for which they request SizeQuotes (the 
``SizeQuote Order''). The Exchange shall determine the classes in which 
the SizeQuote Mechanism will apply. The SizeQuote Mechanism will 
operate as a pilot program which expires February 15, 2006.
    (A) Eligible Order Size: The Exchange shall establish the eligible 
order size however such size shall not be less than 250 contracts.
    (B) Trading Crowd: The term ``Trading Crowd'' shall be as defined 
in PCX Rule 6.1(b)(30) and for purposes of this rule only shall also 
include any Floor Broker who is present at the trading post.
    (C) Public Customer Priority: Public customer orders in the 
Consolidated Book have priority to trade with a SizeQuote Order over 
any member of the Trading Crowd providing a SizeQuote response at the 
same price as the order in the Consolidated Book.
    (D) LMM Participation Rights: The LMM participation entitlement 
shall not apply to SizeQuote transactions.
    (E) FBs may not execute a SizeQuote Order at a price inferior to 
the national best bid or offer (``NBBO''). Unless a SizeQuote request 
is properly canceled in accordance with paragraph (iv), an FB is 
obligated to execute the entire SizeQuote Order at a price that is not 
inferior to the NBBO in situations where there are no SizeQuote 
responses received or where such responses are inferior to the NBBO.
    (ii) SizeQuote Procedure: Upon request from an FB for a SizeQuote, 
members of the Trading Crowd may respond with indications of the price 
and size at which they would be willing to trade with a SizeQuote 
Order. After the conclusion of time during which interested Trading 
Crowd members have been given the opportunity to provide their 
indications, the FB must execute the SizeQuote Order with the members 
of the Trading Crowd and/or with a firm facilitation order in 
accordance with the following procedures:
    (A) Executing the Order at the Trading Crowd's Best Price: Members 
of the Trading Crowd that provide SizeQuote responses at the highest 
bid or lowest offer (``best price'') have priority to trade with the 
SizeQuote Order at that best price. Allocation of the order among 
members of the Trading Crowd shall be pro rata, up to the size of each 
member's SizeQuote response. The FB must trade at the best price any 
contracts remaining in the original SizeQuote Order that were not 
executed by the members of the Trading Crowd providing SizeQuote 
responses.
    (B) Executing the Order at a Price that Improves upon the Trading 
Crowd's Price by One Minimum Increment: Members of the Trading Crowd 
that provide SizeQuote responses at the best price (``Eligible Trading 
Crowd Members'') have priority to trade with the SizeQuote Order at a 
price equal to one trading increment better than the best price 
(``improved best price''). Allocation of the order among Eligible 
Trading Crowd Members at the improved best price shall be pro rata, up 
to the size of each eligible Trading Crowd Member's SizeQuote response. 
The FB must trade at the improved best price any contracts remaining in 
the original SizeQuote Order that were not executed by Eligible Trading 
Crowd Members.
    (C) Trading at a Price that Improves upon the Trading Crowd's Price 
by more than One Minimum Increment: An FB may execute the entire 
SizeQuote Order at a price two trading increments better than the best 
price communicated by the Trading Crowd members in their responses to 
the SizeQuote request.
    (iii) Definition of Trading Increments: Permissible trading 
increments are $0.05 for options quoted below $3.00 and $0.10 for all 
others. In classes in which bid-ask relief is granted pursuant to Rule 
6.37(b)(1)(F), the permissible trading increments shall also increase 
by the corresponding amount. For example, if a series trading above 
$3.00 has double-width bid-ask relief, the permissible trading 
increment for purposes of this rule shall be $0.20.
    (iv) It will be a violation of the FB's duty of best execution to 
its customer if it were to cancel a SizeQuote Order to avoid execution 
of the order at a better price. The availability of the SizeQuote 
Mechanism does not alter an FB's best execution duty to get the best 
price for its customer. A SizeQuote request can be canceled prior to 
the receipt by the FB of responses to the SizeQuote request. Once the 
FB receives a response to the SizeQuote request, if he/she were to 
cancel the order and then subsequently attempt to execute the order at 
an inferior price to the previous SizeQuote response, there would be a 
presumption that the FB did so to avoid execution of its customer order 
in whole or in part by the others at the better price.
* * * * *

[[Page 21489]]

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 PCX 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
    PCX rules impose several obligations upon Floor Brokers (``FBs'') 
including the requirement in paragraph (a) of PCX Rule 6.46, 
``Responsibilities of Floor Brokers,'' that a FB handling an order use 
due diligence to execute the order at the best price or prices 
available. PCX Rule 6.46, Commentary .01, supplements this requirement 
by requiring FBs to ascertain whether a better price than is being 
displayed at that time is being quoted by another FB or a Market Maker. 
In order to assist FBs in their exercise of due diligence, the Exchange 
believes it would be beneficial to adopt new procedures governing the 
execution of certain large-sized orders, which by virtue of their large 
size often require specialized handling. The purpose of this rule 
filing, therefore, is to adopt, on a pilot basis through February 15, 
2006, a trading procedure mechanism called the SizeQuote Mechanism for 
use by FBs in their respective representation of large-sized orders in 
open outcry.
    The SizeQuote Mechanism is a process by which a FB, in his/her 
exercise of due diligence to execute orders at the best price(s), may 
execute and facilitate large-sized orders in open outcry. For purposes 
of this rule, the minimum qualifying order size is 250 contracts\6\ and 
FBs must stand ready to facilitate the entire size of the order for 
which they request SizeQuotes (the ``SizeQuote Order''). The SizeQuote 
procedure works as follows:
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    \6\ The Exchange will determine the classes in which SizeQuote 
operates and may vary the minimum qualifying order size, provided 
such number may not be less than 250 contracts.
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    A FB holding an order for at least 250 contracts must specifically 
request a SizeQuote from the Trading Crowd.\7\ Upon such a request by a 
FB, any member of the Trading Crowd may respond with indications of the 
price and size at which they would be willing to trade with a SizeQuote 
Order. A member of the Trading Crowd may respond with any size and 
price they desire (subject to the rules governing the current market 
maker obligation requirements) and as such are not obligated to respond 
with a size of at least 250 contracts. The proposal provides that FBs 
may not execute a SizeQuote Order at a price inferior to the National 
Best Bid or Offer (``NBBO''). Proposed paragraph (g)(i)(E) clarifies 
that unless a SizeQuote request is properly canceled in accordance with 
paragraph (iv), a FB is obligated to execute the entire SizeQuote Order 
at a price that is not inferior to the NBBO in situations where there 
are no SizeQuote responses received or where such responses are 
inferior to the NBBO.
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    \7\ See paragraph (b)(3) of PCX Rule 6.1, ``Applicability, 
Definitions and References.'' For purposes of the proposed rule 
only, the definition of ``Trading Crowd'' shall also include Floor 
Brokers who are present at the trading post.
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    After the conclusion of time during which interested Trading Crowd 
members have been given the opportunity to provide their indications, 
the FB will execute the SizeQuote Order he is holding with a Trading 
Crowd member(s) or with a facilitation order, or both, in accordance 
with the following procedure:\8\
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    \8\ The FB will execute the SizeQuote Order either with Trading 
Crowd members or with a firm facilitation order, or both, in 
accordance with the requirements of proposed PCX Rule 6.7(g)(ii).
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    Executing the SizeQuote Order at the Trading Crowd's best price: 
The Trading Crowd member(s) that provided SizeQuote responses at the 
highest bid or lowest offer (``best price'') have priority to trade 
with the SizeQuote Order at that best price. For example, assume a FB 
requests a SizeQuote and a Trading Crowd member(s) responds with a 
market quote of $1.00-$1.20 for 1,000 contracts. This quote constitutes 
the ``best price'' and those Trading Crowd members that responded have 
priority at those prices.\9\ If the FB chooses to trade at either of 
those prices, the SizeQuote Order will be allocated pro-rata to those 
Trading Crowd members that responded with a quote at the best price, up 
to the size of their respective quotes.\10\ If in the above example the 
SizeQuote Order is for more than 1,000 contracts, the FB must trade the 
balance with a facilitation order at the best price. Trading Crowd 
members that did not respond to the SizeQuote request would not be 
eligible to participate in the allocation of this trade.
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    \9\ Public customers in the Consolidated Book have priority to 
trade with a SizeQuote Order over any Trading Crowd member providing 
a SizeQuote response at the same price as the order in the 
Consolidated Book. See proposed PCX Rule 6.47(g)(i)(C). This example 
assumes there are no public customer orders at the SizeQuote 
response price.
    \10\ There will be no Lead Market Maker (``LMM'') participation 
entitlement in SizeQuote trades, even if the LMM is among the 
Trading Crowd members quoting at the best price.
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    Executing the order at a price that improves upon the Trading 
Crowd's price by one minimum increment: Trading Crowd members that 
provide SizeQuote responses at the best price (``Eligible Trading Crowd 
Members'') have priority to trade with the SizeQuote Order at a price 
equal to one minimum increment better than the best price (``Improved 
Best Price''). Accordingly, using the example above, Eligible Trading 
Crowd Members, if they desire, have priority at prices of $1.05 and 
$1.15 for up to 1,000 contracts.\11\ If the FB chooses to trade at 
either of those prices, the SizeQuote Order will be allocated pro-rata 
at the Improved Best Price to those Eligible Trading Crowd Members that 
responded with a quote at the best price, up to the size of their 
respective quotes. If the SizeQuote Order is for more than 1,000 
contracts, the FB must trade the balance with a facilitation order at 
the Improved Best Price. Trading Crowd members that did not respond to 
the SizeQuote request would not be eligible to participate in the 
allocation of this trade.
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    \11\ Obviously, there is no obligation requiring a Trading Crowd 
member to trade at a price that is better than his/her verbal quote.
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    Trading at a price that improves upon the Trading Crowd's price by 
more than one minimum increment: A FB may execute the entire SizeQuote 
Order with a facilitation order at a price two minimum increments 
better than the best price communicated by the Trading Crowd members in 
their responses to the SizeQuote request. Using the example above, a FB 
could trade the SizeQuote Order with a facilitation order at $1.10. 
Trading Crowd members would not be able to participate in the trade at 
that price.
    The Exchange also proposes to adopt new paragraph (iv) to 
explicitly state that it will be a violation of the FB's duty of best 
execution to its customer if it were to cancel a SizeQuote Order to 
avoid execution of the order at a better price. The availability of the 
SizeQuote Mechanism does not alter a FB's best execution duty to get 
the best price for its customer. A SizeQuote request can

[[Page 21490]]

be cancelled prior to the receipt by the FB of responses to the 
SizeQuote request. Once the FB receives a response to the SizeQuote 
request, if he/she were to cancel the order and then subsequently 
attempt to execute the order at an inferior price to the previous 
SizeQuote response, there would be a presumption that the FB did so to 
avoid execution of its customer order in whole or in part by others at 
the better price.
    The Exchange represents that it will provide the Commission at the 
end of the pilot period a report summarizing the effectiveness of the 
SizeQuote program. Pending a report that indicates that the SizeQuote 
program has been successful, the Exchange anticipates submitting a rule 
filing that either requests extension of the SizeQuote program or 
permanent approval of the pilot.
    The Exchange believes that the SizeQuote proposal provides a well 
balanced mechanism that enhances the Trading Crowd's ability to quote 
competitively and participate in open outcry trades while at the same 
time creating a process that gives greater certainty to FBs in the 
execution of large orders. Under the proposal, Trading Crowd members 
not only will have priority at the price of the quote they give in 
response to a SizeQuote request, but they also will have priority, if 
they want it, at a price that is one trading increment better than 
their quote. FBs will now have more certainty in that Trading Crowd 
members will have one opportunity to respond with a quote response and 
if they do not, they will not participate in the trade. Moreover, once 
a Trading Crowd member gives his/her best price (i.e., SizeQuote 
response), he/she may not subsequently change the terms of that 
response after the FB announces its intention to trade, although the 
Trading Crowd member will have priority at a price that is one trading 
increment better than his/her quote. This further enhances a Trading 
Crowd member's incentives to quote competitively.
    The Exchange also believes that the proposal enhances a Trading 
Crowd member's incentive to quote competitively by giving complete 
priority at not only his/her price but also at one trading increment 
better than his/her SizeQuote response.
2. Basis
    For the above reasons, the Exchange believes that the proposed rule 
change would enhance competition. The Exchange believes that the 
proposed rule change is consistent with section 6(b) \12\ of the Act, 
in general, and furthers the objectives of section 6(b)(5),\13\ in 
particular, in that it is designed to facilitate transactions in 
securities, to promote just and equitable principles of trade and to 
protect investors and the public interest.
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    \12\ 15 U.S.C. 78f(b).
    \13\ 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

    The Exchange has filed the proposed rule change pursuant to section 
19(b)(3)(A) of the Act \14\ and subparagraph (f)(6) of Rule 19b-4 
thereunder.\15\ Because the foregoing proposed rule change: (1) Does 
not significantly affect the protection of investors or the public 
interest; (2) does not impose any significant burden on competition; 
and (3) does not become operative for 30 days from the date on which it 
was filed, or such shorter time as the Commission may designate if 
consistent with the protection of investors and the public interest, 
the proposed rule change has become effective pursuant to section 
19(b)(3)(A) of the Act and Rule 19b-4(f)(6) thereunder. As required 
under Rule 19b-4(f)(6)(iii), the PCX provided the Commission with 
written notice of its intent to file the proposed rule change at least 
five business days prior to the filing of the proposal with the 
Commission or such shorter period as designated by the Commission.
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    \14\ 15 U.S.C. 78s(b)(3)(A).
    \15\ 17 CFR 240.19b-4(f)(6).
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    A proposed rule change filed under Rule 19b-4(f)(6) generally does 
not become operative prior to 30 days after the date of filing. 
However, Rule 19b-4(f)(6)(iii) permits the Commission to designate a 
shorter time if such action is consistent with the protection of 
investors and the public interest. The PCX has requested that the 
Commission waive the 30-day operative delay specified in Rule 19b-
4(f)(6) because the PCX's proposal is similar to the SizeQuote 
Mechanism provided under the rules of the Chicago Board Options 
Exchange, Incorporated (``CBOE'').\16\ Accordingly, the PCX believes 
that the proposal will allow for a more efficient and effective market 
operation and is necessary for competitive purposes.
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    \16\ See CBOE Rule 6.74(f) and Securities Exchange Act Release 
No. 51205 (February 15, 2005) 70 FR 8647 (February 22, 2005) (order 
approving File No. SR-CBOE-2004-72) (``CBOE Order'').
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    The Commission believes that waiving the 30-day operative delay is 
consistent with the protection of investors and the public interest 
because the proposed rule change is substantially similar to a rule 
adopted previously by the CBOE.\17\ The CBOE's proposed rule was 
published for comment and the Commission received no comments regarding 
the CBOE's proposal. The Commission believes that the PCX's proposal 
raises no new issues or regulatory concerns that the Commission did not 
consider in approving the CBOE's proposal. For this reason, the 
Commission believes that waving the 30-day operative delay is 
consistent with the protections of investors and the public interest, 
and the Commission designates the proposal to be operative immediately 
on a pilot basis through February 15, 2006.
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    \17\ See CBOE Rule 6.74(f) and CBOE Order, supra note 16. For 
purposes of waiving the 30-day operative delay, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
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    At any time within 60 days of the filing of such proposed rule 
change, the Commission may summarily abrogate such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.

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-2005-35 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary,

[[Page 21491]]

Securities and Exchange Commission, 450 Fifth Street, NW., Washington, 
DC 20549-0609.
    All submissions should refer to File Number SR-PCX-2005-35. 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. 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-2005-35 and should be submitted on or before May 17, 
2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-1964 Filed 4-25-05; 8:45 am]
BILLING CODE 8010-01-P