[Federal Register Volume 63, Number 11 (Friday, January 16, 1998)]
[Notices]
[Pages 2711-2713]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-1112]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-39532; File No. SR-PCX-97-28]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change and Amendment No. 1 Thereto by the Pacific Exchange, Inc.
Relating to Exchange-Sponsored Hand-Held Terminals for Options Floor
Brokers
January 9, 1998.
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 July 3, 1997 and December 12, 1997, respectively, the Pacific
Exchange, Inc. (``PCX'' or ``Exchange'') filed with the Securities and
Exchange Commission (``SEC'' or ``Commission'') the proposed rule
change and amendment No. 1 to the proposed rule change as described in
Items I, II, and III below, which Items have been prepared by the self-
regulatory organization. The Commission is publishing this notice to
solicit comments on the proposed rule change, as amended, from
interested persons.
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\1\ 15 U.S.C. Sec. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange is proposing to adopt a new program to allow floor
brokers on the Options Floor to use Exchange-sponsored hand-held
terminals to receive orders sent electronically by Member Firms located
off the floor. The proposal will also establish new procedures for
electronic order flow handling, routing, execution and trade reporting
under the program. The test of the proposed rule change is available at
the Office of the Secretary, the Exchange and at the Commission.
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 self-regulatory organization
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 test of these statements may be examined at
the places specified in Item IV below. The self-regulatory organization
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
General Description. The Exchange's Member Firm Interface (``MFI'')
\3\ currently permits Exchange Member Firms to use an electronic link
with the Exchange to send their option orders directly to the Exchange
for delivery to POETS (Pacific Option Exchange Trading System).\4\
Under the proposal, member firms would be able to use the MFI
connection to route orders directly to the member firm booth (not by
default) or to a floor broker's hand-held terminal located in the
trading crowd.\5\
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\3\ The MFI is an electronic order delivery and reporting system
that allows member firms to route orders for execution by the
automatic execution feature of POETS as well as to route limit
orders to the Options Public Limit Order Book. Orders that do not
reach those two destinations are defaulted to a member firm booth.
MFI also provides member firms with instant confirmation of
transactions to their systems. Member firms may access POETS by
establishing an MFI mainframe-to-mainframe connection.
\4\ Orders entered via MFI are delivered to one of three
destinations: (a) to Auto-Ex, where they are automatically executed
at the disseminated bid or offering price; (b) to Auto-Book which
maintains non-marketable limit orders based on limit price and time
of receipt; or (c) to a Member Firm's default destination--a
particular firm booth or remote entry site--if the order fails to
meet the eligibility criteria necessary for either Auto-Ex or Auto-
Book or if the Member Firm requests such default for its orders. See
generally Exchange Act Release No. 27633 (January 18, 1990), 55 FR
2466 (``POETS Approval Order'').
\5\ In that regard, the Exchange is proposing to add a new Rule
6.88(a), which provides: ``Members and Member Organizations may send
orders electronically through the Exchange's Member Firm Interface
and route them directly to POETS, to a Member Firm booth on the
Options Floor, to a Floor Broker Hand-Held Terminal located on the
Options Floor, or to any other location designated by the Exchange,
provided that the Member or Member Organization has been approved by
the Exchange to do so.''
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Under the program, Member Firms will be permitted to send their
orders electronically to the Exchange via MFI and route them to one of
three destinations on the trading floor: (a) To a floor broker standing
in the trading crowd; (b) to a Member Firm booth location on the
trading floor; or (c) to POETS, where they will be automatically
executed by Auto-Ex or maintained in Auto-Book. All orders so
transmitted will first be sent through the Server.\6\ Orders sent to a
Member Firm booth via the Server may be sent subsequently either to
POETS or to a floor broker in the trading crowd. Orders sent via the
Server to a floor broker in the trading crowd may subsequently be
transmitted to a Member Firm booth, to POETS, or to another floor
broker on the trading floor.
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\6\ The Exchange notes that there will be no appreciable delay
in order entry due to the transmission of orders through the Server.
The Exchange also notes that if a Member Firm routes an order to
POETS via MFI for automatic execution or maintenance in Auto-Book,
the order will not be sent through the Server. Only orders to be
transmitted through the Hand-Held Terminal system will be sent
through the Server.
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The Exchange intends to furnish hand-held terminals to be used by
floor brokers under the program. In addition, the Exchange will supply
booth devices that will have the capability to retrieve and display all
orders that were submitted through the device. The Exchange intends to
assess users a monthly rental fee for such use.\7\
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\7\ The Exchange will submit a separate rule filing to the
Commission to establish these fees.
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[[Page 2712]]
Exchange rules on order representation and order execution will
generally be unchanged under the program.\8\ However, the Exchange is
proposing to modify its rules on orders to provide that an order sent
electronically through MFI will be deemed to be a ``written order'' for
purposes of Rule 6.67. The order information that must be reported to
the Exchange in connection with each transaction that is executed on
the trading floor will be also unchanged under the program.\9\
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\8\ See, e.g., PCX Rules 5.1(e), 6.43-6.48 and Options Floor
Procedure Advices A-1-A-11 and G-1-G12.
\9\ See PCX Rule 6.69.
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Prohibition of Market Making Function. The Exchange is proposing to
adopt new Rule 6.88(b) providing that no Floor Broker may knowingly use
a Floor Broker Hand-Held Terminal, on a regular and continuous basis,
to simultaneously represent orders to buy and sell options contracts in
the same series for the account of the same beneficial holder. The rule
further provides that if the Exchange determines that a person or
entity has been sending, on a regular and continuous basis, orders to
simultaneously buy and sell option contracts in the same series for the
account of the same beneficial holder, the Exchange may prohibit orders
for the account of such person or entity from being sent through the
Exchange's Member Firm Interface for such period of time as the
Exchange deems appropriate.\10\
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\10\ The Exchange notes that the Commission has previously
approved rule change proposals that prohibit the use of floor-broker
hand-held terminals from performing a market maker function. See,
eg., Securities Exchange Act Release No. 38054 (Dec. 16, 1996), 61
FR 67365 (Dec. 20, 1996) (Order Approving SR-CBOE-95-48). The PCX
has filed a similar proposal, which is currently pending with the
Commission. See Securities Exchange Act Release No. 38270 (Feb. 11,
1997), 62 FR 7286 (Feb. 18, 1997) (Notice of filing of SR-PSE-97-
02).
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Implementation. The Exchange is proposing a two-phase approach to
integrating the new hand-held technology into the floor environment. In
Phase I, the Exchange will allow limited implementation of the program
to evaluate the use of hand-held terminals and to identify and correct
any problems that may arise. In this regard, the Exchange will select a
representative cross-section of floor members and off-floor members for
the execution of various types of order flow in both lightly-traded and
heavily-traded issues. Phase I will last for about four months. It will
involve approximately two off-floor Member Firms, two Member Firm booth
devices and 12 floor broker hand-held terminals. The Exchange, in
conjunction with its Options Floor Trading Committee, will select
Members and Member Firms to participate in Phase I on an objective
basis.\11\ During Phase I, floor brokers will not be permitted to
transmit orders to other floor brokers (they will be limited to
transmitting orders either to POETS or to a Member Firm booth).
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\11\ Factors will include the nature of order flow (retail or
institutional), the nature of the issue (lightly-traded or heavily-
traded), nature of the floor brokerage operation, time of
application, limitations in the number of participants who may
participate, and other such factors.
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In Phase II, the Exchange will roll out the program on a floor-wide
basis, allowing any qualified Floor Member or off-floor Member who
wishes to participate in the program to do so.\12\
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\12\ The term ``qualified Floor Member or off-floor Member''
refers to the requirement that all floor brokers and order flow
providers who participate in the program must be approved by the
Exchange to do so. Floor brokers are eligible to participate if they
are registered with the Exchange as floor brokers pursuant to Rule
6.44 and have arranged with a member firm to receive order flow
through the system. Member firms are eligible to participate in the
program if they have made arrangements with a floor broker for the
transmission and execution of orders. Moreover, program participants
will be required to pay the Exchange a fee in an amount to be
specified in a rule change proposal to be filed with the Commission.
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Order Tickets. Under the proposal, initially, floor brokers using
terminals will not need to write up order tickets because the trade-
related floor broker terminal information will be passed electronically
to POETS and then to POPS (Pacific Options Processing Information) for
clearing purposes. Yet the party on the other side of the trade, if it
is executed by a market maker of a floor broker not using a terminal,
will have to submit a paper order ticket to the Exchange for
processing. Later, when advancements in technology allow for it, no
paper tickets will be required because all market makers and floor
brokers will be able to interface with each other through hand-held
terminals--but that change will be the subject of another filing. With
regard to proprietary hand held terminals, the order ticket requirement
would be the same as with the Exchange-sponsored terminals, i.e., if
the trade information is not sent to the Exchange electronically, it
will have to be conveyed by means of a written order ticket.
Clearing and Trade Reporting. Once an order has been executed, the
Hand-Held Terminal system will route trade information to POETS, which,
in turn, will route the information to a computer for trade match and
clearing purposes. At the same time, the Exchange will send a trade
report to the Member Firm that entered the order. In addition, the
Exchange will transmit trade information to OCC, OPRA and certain
vendors.
Audit Trail. Order information sent through the Hand-Held Terminal
system will become audit trail information that is available to the
Exchange for regulatory purposes. However, if an order is routed to the
Member Firm booth by telephone or wire, and not through MFI, and the
order is then sent to POETS or to a floor broker in the crowd, the
audit trail information will commence when the order is sent from the
booth. An audit trail of all actions taken by the hand-held terminal
that result in an interaction with the Server will be maintained. Upon
receipt of an order in the Server from POETS or a booth device, the
order will be time stamped and retained in the Server's database. When
orders are executed at a hand-held device, they will be time stamped
upon receipt by the Server. The Exchange believes that the audit trail
information will be more accurate than current information, which is
recorded manually on order tickets.
System Capacity. The Exchange believes, based upon extensive
analysis and testing, that implementation of the program will not
adversely affect POETS system capacity or functionality.
Use of Other Hand-Held Terminal Devices. The Exchange will not
prohibit floor brokers from using proprietary hand-held terminals \13\
for order entry on the Options Floor as long as they do not interfere
with any Exchange-sponsored hand-held terminals, with POETS or with
other equipment on the floor.\14\
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\13\ The Exchange notes that a rule filing to permit Exchange
floor brokers to use proprietary order routing terminals on the
Options Trading Floor is currently pending before the Commission.
See Securities Exchange Act Release No. 38270 (Feb. 11, 1997), 62 FR
7286 (Feb. 18, 1997) (Notice of filing of SR-PSE-97-02).
\14\ The term ``interfere'' refers to electronic interference
that may occur between a member's proprietary device and another
electronic system or piece of equipment on the Trading Floor. For
example, if the use of a proprietary device on the floor caused the
POETS automatic execution to halt, or if it disrupted telephonic
communications on the floor, or if it prevented another member firm
from being able to receive electronic orders through another order-
routing system, then the device causing the interference could not
be used on the floor until it was rendered compatible with the order
electronic systems in use.
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2. Statutory Basis
The Exchange represents that the proposal is consistent with
Section 6(b) of the Act,\15\ in general, and Section 6(b)(5) of the
Act,\16\ in particular, is that it is designed to promote just and
equitable principles of trade; to foster
[[Page 2713]]
cooperation and coordination with persons engaged in regulating,
processing information with respect to, and facilitating transactions
in securities; to remove impediments to and perfect the mechanism of
free and open market and a national market system; to protect investors
and the public interest; and is not designed to permit unfair
discrimination between customer, issuers, brokers or dealers.
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\15\ 15 U.S.C. Sec. 78f(b).
\16\ 15 U.S.C. Sec. 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 inappropriate burden on competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the publication of this notice in the Federal
Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve the proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.
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. Sec. 552, will be available for inspection and copying at
the Commission's Public Reference Room. Copies of such filing will also
be available for inspection and copying at the principal office of the
Exchange. All submissions should refer to File No. SR-PCX-97-28 and
should be submitted by February 6, 1998.
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).
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Jonathan G. Katz,
Secretary.
[FR Doc. 98-1112 Filed 1-15-98; 8:45 am]
BILLING CODE 8010-01-M
