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Notice

Self-Regulatory Organizations; Pacific Exchange, Inc.; Order Approving Proposed Rule Change and Notice of Filing and Order Granting Accelerated Approval of Amendment No. 1 to the Proposed Rule Change Relating to Order Book Officials

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Information about this document as published in the Federal Register.

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Start Preamble July 12, 2000.

I. Introduction

On October 8, 1999, the Pacific Exchange, Inc. (“PCX” or “Exchange”) submitted to the Securities and Exchange Commission (“SEC” or “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 its rules pertaining to the Exchange's order book officials (“OBOs”). The proposed rule change was published for comment in the Federal Register on November 4, 1999.[3] The Commission received on comments on the proposal. On May 25, 2000, the Exchange submitted Amendment No. 1 to the proposed rule change.[4] This order approves the proposal, as amended.

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II. Description of the Proposal

The Exchange proposes to amend PCX Rule 6 (“Options Trading—Rules Principally Applicable to Trading of Options Contracts”) by deleting certain Options Floor Procedure Advices (“OFPAs”) and incorporating their relevant language into the text of PCX Rule 6.

OFPA E-2 addresses market maker assignments and will be incorporated into PCX Rule 6.51(b). This proposed change will require that a list of market makers holding primary appointments in a particular issue be maintained by the OBO at each trading post where the issue is traded. This modifies the current rule by requiring the OBO to maintain the market maker appointment list, instead of the Options Floor Manager and the Options Appointment Committee, which currently maintain the lists.

OFPA A-4, which addresses the timeliness of entering orders in the limit order book, is proposed to become PCX Rule 6.52(c). In addition, the Exchange proposes to require OBOs to report to Floor Officials, instead of the Options Floor Trading Committee (“OFTC”), any instances that appear to violate a floor broker's obligation to ensure that the urgency of dealing with the book at any given moment is consistent with the maintenance of a fair and orderly book market. Floor brokers are required to enter orders into the book in a timely manner. In some instances, however, a floor broker's attempt to enter an order that is reasonably away from the market,[5] which therefore does not possess an immediate urgency, may be disruptive to the book market. In such instances, the OBO is currently required to report such disruptive behavior to the OFTC. The Exchange proposes to permit the OBO to report such violations to a Floor Official instead of the OFTC.[61]

In addition, the Exchange proposes to delete the last sentence of Commentary .01 to PCX Rule 6.52. This sentence currently states “(a)s of the effective date of these rules, the Committee has not designated any additional types of orders that may be accepted by the order book officials.”

Finally, OFPA B-7, which details when a call for market makers is issued, is proposed to become Commentary .01 to PCX Rule 6.53; and OFPA G-4, which defines the term “displayed” as used in PCX Rule 6.56, is proposed to be added to the text of PCX Rule 6.56. Neither of these two proposals contains any substantive amendments.

III. Discussion

The Commission finds that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange.[7] In particular, the Commission finds that the proposed rule change is consistent with the requirements of Section 6(b)(5) of the Act,[8] which requires, among other things, that the rules of an exchange be designed to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in securities, and in general, to protect investors and the public interest.

The Commission believes that the proposed rule change should foster efficiency in the implementation and enforcement of the Exchange's rules. Currently, members have to refer to both the Exchange's rules as well as the OFPAs to ensure that they are complying with the rules of the Exchange. The proposal combines selected OFPAs and Exchange rules that address the obligations of OBOs into one location. The Commission believes that this change should make it easier for Exchange members to locate pertinent rule language.

The proposed rule change also contains some amendments to the Exchange's current procedures. For example, OBOs will now be required to maintain market maker assignment lists at each trading post. Currently, the Options Floor Manager, along with the Options Appointment Committee maintain the market maker assignment list. The Commission believes that because the OBO will be able to provide market maker assignment information faster than the current procedure, this change should foster efficiency on the floor of the Exchange. In addition, this proposal should assist trading functions on the floor because market makers are more readily identifiable by OBOs.

The Commission also finds the proposal to amend the procedure for reporting violations by floor brokers of their obligation to deal with the book in a manner that is consistent with the maintenance of an orderly book market to be consistent with the Act. Currently, such violations by floor brokers must be reported to the entire OFTC. Upon approval of this order, OBOs will have to report such violations to a Floor Official. This should allow the Exchange to take more immediate action after a violation occurs because OBOs will only have to report disruptive action to a Floor Official instead of the entire OFTC.

The Exchange proposed to delete language in Commentary .01 to PCX Rule 6.52, which relates to the OFTC's authority to designate the types of orders that must be accepted by the OBOs. The Commission believes that the deleted language is redundant and, therefore, unnecessary when read in relation to the first sentence of the Commentary. The first sentence specifically states that OBOs are obligated to accept limit orders and such other orders as may be designated by the OFTC. The deleted language only states that no other orders have been so designated by the OFTC as of the date of the Rules. Thus, OBOs are still required to accept all orders designated by the OFTC.

Finally, the Commission finds good cause to accelerate approval of Amendment No. 1 to the proposed rule change prior to the thirtieth day after the date of publication of notice thereof in the Federal Register. In Amendment No. 1, the Exchange clarified how Floor Officials determine if an order is reasonably away from the book market for purposes of proposed PCX Rule 6.52(c). In addition, the Exchange stated that floor brokers will be subject to disciplinary action for violations of proposed PCX Rule 6.52(c). The commission believes that Amendment No. 1 provides only further clarification to the proposed rule change and does not change the substance of the proposed rule. Therefore, the Commission believes that good cause exists, consistent with Section 6(b)(5) [9] Start Printed Page 44561and Section 19(b) [10] of the Act, to accelerate approval of Amendment No. 1 to the proposed rule change.

IV. Conclusion

It is therefore ordered, pursuant to Section 19(b)(2) of the Act,[11] that the proposed rule change (SR-PCX-99-40), as amended, is approved.

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For the Commission, by the Division of Market Regulation, pursuant to delegated authority. [12]

Margaret H. McFarland,

Deputy Secretary.

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Footnotes

3.  Exchange Act Release No. 42068 (October 28, 1999), 64 FR 60259.

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4.  Letter from Robert P. Pacileo, Senior Attorney, Regulatory Policy, PCX, to Nancy J. Sanow, Senior Special Counsel, Division of Market Regulation, SEC, dated May 24, 2000 (“Amendment No. 1”). In Amendment No. 1, the Exchange clarified how the Exchange determines when an order is considered to be reasonably away from the book market, pursuant to PCX Rule 6.52(c). In addition, the Exchange stated that a floor broker that violates PCX Rule 6.52(c) may be subject to a Minor Rule Plan Violation under PCX Rule 10.13(h)(16) or may be found to be in violation of PCX Rule 6.2(c)(2).

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5.  According to the Exchange, floor officials determine on a case-by-case basis if an order is reasonably away from the book market by considering, among other things, market volatility, spreads, unusual market conditions, and the number of contracts traded in the issue. See Amendment No. 1.

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6.  A floor broker that attempts to enter an order that is reasonably away from the book market may be found in violation of Minor Rule Plan Violation Rule 10.13(h)(16) or may be found in violation of PCX Rule 6.2(c)(2) regarding standards of conduct on the floor. Upon a report by an OBO, the Floor Official will document the alleged violation and forward it to the Exchange's Enforcement Division for review. See Amendment No. 1.

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7.  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).

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[FR Doc. 00-18072 Filed 7-17-00; 8:45 am]

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