[Federal Register Volume 70, Number 141 (Monday, July 25, 2005)]
[Notices]
[Pages 42610-42611]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-3946]


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SECURITIES AND EXCHANGE COMMISSION

Release No. 34-52060; File No. SR-PCX-2005-71]


Self-Regulatory Organizations; Pacific Exchange, Inc.; Order 
Granting Accelerated Approval to a Proposed Rule Change and Amendment 
No. 1 Relating to Complex Orders on the PCX Plus System

July 19, 2005.

I. Introduction

    On June 7, 2005, the Pacific Exchange, Inc. (``PCX'') 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 to create a Complex 
Trading Engine (``CTE'') to facilitate more automated handling of 
complex options orders. On June 14, 2005, the PCX submitted Amendment 
No. 1 to the proposed rule change.\3\ The proposed rule change and 
Amendment No. 1 were published for comment in the Federal Register on 
June 27, 2005.\4\ The Commission received no comments regarding the 
proposal. This order grants accelerated approval to the proposed rule 
change, as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, the PCX revised Exhibit 5 to the 
proposal to add underscoring that was inadvertently deleted from the 
text of proposed PCX Rule 6.91(b).
    \4\ See Securities Exchange Act Release No. 51885 (June 20, 
2005), 70 FR 36995.
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II. Description of the Proposed Rule Change

    Complex options orders involve multiple options transactions that 
are executed simultaneously as part of a single strategy. The PCX 
currently routes complex orders to the Electronic Order Capture System 
(``EOC''), which is a function of the Floor Broker Hand Held System. 
Orders on the trading floor are announced by a Floor Broker to the 
trading crowd and trade in open outcry. As an enhancement to the PCX 
Plus system, the Exchange intends to develop a CTE, which will 
facilitate more automated handling of complex orders. Additionally, the 
Exchange proposes to adopt a separate complex order rule applicable 
solely to the PCX Plus system.\5\
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    \5\ The following types of complex orders, as defined in PCX 
Rule 6.91(a), will be eligible for routing to the CTE: Spread 
orders; straddle orders; strangle orders; combination orders; ratio 
orders; butterfly spread orders; box/roll spread orders; and collar 
orders and risk reversals. Only complex orders with no more than 
four legs are eligible for the CTE. See PCX Rule 6.91(c)(4). 
Conversions and reversals will not be eligible for routing to the 
CTE. See PCX Rule 6.91, Commentary .01.
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    Complex Orders on PCX Plus will route either to the EOC or the CTE, 
as determined by the Exchange.\6\ Orders from public customers and 
registered broker-dealers are eligible to be routed to the CTE.\7\ The 
PCX will announce routing decisions to OTP Holders and OTP Firms via 
Regulatory Bulletin.\8\
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    \6\ See PCX Rule 6.91(c)(1).
    \7\ Id.
    \8\ Id.
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    When a complex order routes to the EOC, the Floor Broker will 
announce the order to the trading crowd, which may trade with the order 
at its limit price or offer price improvement. If the trading crowd 
chooses not to trade with the order, the order will reside on the EOC 
or be entered into the CTE, at the Floor Broker's discretion. Any 
complex order represented by a Floor Broker will be subject to PCX Rule 
6.46(a).\9\
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    \9\ PCX Rule 6.46(a) requires a Floor Broker handling an order 
to use due diligence to execute the order at the best price or 
prices available to him, in accordance with the rules of the PCX.
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    When an order is routed directly into the CTE, the order may trade 
in one of three ways. First, if individual orders or quotes in the 
Exchange's consolidated book ``line-up'' against the legs of the 
complex order, an automatic execution occurs, provided the complex 
order can be executed in full (or in a permissible ratio) by the orders 
in the consolidated book. Second, if a subsequent incoming complex 
order is marketable against a resting complex order in the CTE, it will 
automatically execute against the resting complex order in the CTE. 
Third, OTP Holders and OTP Firms will have the ability to view orders 
in the CTE and submit orders to trade against those orders.
    A complex order in the CTE will be allocated to market participants 
in accordance with the allocation procedures described in PCX Rule 
6.76(b). In addition, PCX Rule 6.76(c), which deals with crossing 
orders on PCX Plus, will apply to orders in the CTE.\10\
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    \10\ PCX Rule 6.76(c) prohibits an order entry firm from 
executing as principal against an order it represent as agent 
unless: (1) The agency order is first exposed on the Exchange for at 
least 30 seconds; (2) the PCX Broker utilizes the Crossing Mechanism 
pursuant to PCX Rule 6.76(c)(2); or (3) the PCX Broker executes the 
orders pursuant to PCX Rule 6.47.
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    Complex orders resting in the CTE may be executed without 
consideration to the prices of the same complex orders that might be 
available on other exchanges.\11\ Orders of public customers in the CTE 
will have priority over orders from non-public customers, and multiple 
public customer complex orders at the same price will be accorded 
priority based on time.\12\
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    \11\ See PCX Rule 6.91(c)(2). The Options Price Reporting 
Authority does not disseminate complex order prices. This provision 
of the PCX's proposal is similar to International Securities 
Exchange Rule 722(b)(3) and CBOE Rule 6.53C(c)(iii).
    \12\ See PCX Rule 6.76(a)(A).
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    PCX Rule 6.75(e) and PCX Rule 6.75, Commentary .04 generally allow 
a member holding a complex order to trade ahead of the book on one leg 
of the order, provided that the other leg of the order betters the 
corresponding bid (offer) in the consolidated order book. These rules 
will continue to apply to the trading of complex orders.

III. Discussion

    The Commission has carefully reviewed the proposed rule change and 
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.\13\ In particular, the 
Commission finds that the proposed rule change, as amended, is 
consistent with Section 6(b)(5) of the Act,\14\ which requires, among 
other things, that the rules of a national securities exchange be 
designed to promote just and equitable principles of trade, to remove 
impediments to and perfect the mechanism of a free and

[[Page 42611]]

open market, and, in general, to protect investors and the public 
interest.
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    \13\ 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).
    \14\ 15 U.S.C. 78f(b)(5).
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    A complex order sent to the PCX currently routes to and resides on 
the EOC until it trades in open outcry. Thus, a complex order currently 
cannot be executed on the PCX without manual intervention by a Floor 
Broker.
    The CTE will allow complex orders to trade electronically, without 
the intervention of a Floor Broker. OTP Holders and OTP Firms will use 
an electronic interface to the PCX to view complex orders resting in 
the CTE. As described more fully above, a complex order routed to the 
CTE may execute automatically against orders in the Exchange's 
consolidated book or against an order resting in the CTE. In addition, 
OTP Holders and OTP Firms may trade against orders resting in the CTE. 
Accordingly, the Commission believes that the CTE should increase the 
transparency of complex orders and could facilitate the execution of 
complex orders.
    Under the proposal, the Exchange will determine which options 
classes will route directly to the CTE and those that will route to the 
EOC. The Commission notes that PCX Rule 6.76(c) applies to complex 
orders on PCX Plus.\15\ Accordingly, an OTP Holder or OTP Firm seeking 
to trade with its customer's complex order, or to cross complex orders, 
would be required to comply with PCX Rule 6.76(c).
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    \15\ See note 10, supra.
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    In addition, the complex order priority provisions in PCX Rule 
6.75(e) and PCX Rule 6.75, Commentary .04, will continue to apply to 
complex orders. Accordingly, complex orders will be able to trade ahead 
of orders in the consolidated book only under the conditions specified 
in PCX Rule 6.75(e) and PCX Rule 6.75, Commentary .04. The Commission 
also notes that complex orders from public customers will have priority 
over complex orders from non-public customers.\16\
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    \16\ See PCX Rule 6.76(a)(A).
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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 
notice thereof in the Federal Register. The Commission notes that the 
proposal is similar to a Chicago Board Options Exchange, Inc. 
(``CBOE'') proposal that the Commission approved.\17\ Accelerated 
approval of the PCX's proposal may help the PCX to compete for complex 
orders. Accordingly, the Commission finds good cause, consistent with 
Sections 6(b)(5)and 19(b) of the Exchange Act, to approve the proposed 
rule change, as amended, on an accelerated basis.
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    \17\ See Securities Exchange Act Release No. 51271 (February 28, 
2005), 70 FR 10712 (March 4, 2005) (SR-CBOE-2004-45).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\18\ that the proposed rule change (SR-PCX-2005-71), as amended, is 
approved.
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    \18\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. E5-3946 Filed 7-22-05; 8:45 am]
BILLING CODE 8010-01-P