[Federal Register Volume 62, Number 32 (Tuesday, February 18, 1997)]
[Notices]
[Pages 7286-7288]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-3915]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38270; File No. SR-PSE-97-02]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Pacific Stock Exchange Incorporated Relating to
Proprietary Brokerage Order Routing Terminals
February 11, 1997.
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 January 17, 1996, the Pacific Stock Exchange Incorporated (``PSE''
or ``Exchange'') filed with the Securities and Exchange Commission
(``Commission'' or ``SEC'') 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 from interested persons.
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\1\ 15 U.S.C. 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 PSE is proposing to adopt a formal policy governing the use by
PSE Members and Member Organizations (``Members'') of any proprietary
brokerage order routing terminals (``Terminals'') on the Options Floor
of the Exchange. The text of the proposed policy 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 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 Exchange 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
The Exchange is proposing to adopt a policy governing proprietary
brokerage order routing terminals that Members may use on the Options
Floor of the Exchange. The Policy includes specific provisions on
Exchange approval of Terminals; Restrictions on Members' use of
Terminals; Exchange Inspection and Audit; Exchange Liability;
Termination of Exchange Approval; and pilot status of the program.
Exchange Approval
The proposed Policy specifies that Members must obtain prior
Exchange approval to use any proprietary brokerage order routing
terminals on the Options Floor. It states that the Exchange may grant
such approval for use on an issue-by-issue basis. To request such
approval, Members must submit a letter of application to the Exchange
specifying the make, model number, functions and intended use of the
equipment, and must also provide additional information upon the
request of the Exchange. The policy further provides that the format of
any orders to be transmitted over the Terminals must also be pre-
approved by the Exchange.
The Exchange believes that it should have the flexibility to permit
the use of Terminals on an issue-by-issue basis so that it will have an
opportunity to observe the use of Terminals in particular trading
crowds and to consider the benefits and any unforeseen problems that
may result before floor-wide implementation occurs.
Paragraph 2 of the Policy states that, in considering the approval
of an application, as well as whether a previously issued approval
should be withdrawn, the Exchange will take into
[[Page 7287]]
account such factors as the physical size of the Terminal; space
available at the post where the Terminal is to be used;
telecommunication, electrical and radio frequency requirements;
Terminal characteristics and capacity; and any factors that the
Exchange considers relevant in the interest of maintaining fair and
orderly markets, the orderly and efficient conduct of Exchange
business, the maintenance and enhancement of competition, the ability
of the Exchange to conduct surveillance of the use of the Terminal and
the business transmitted through it, the adequacy of applicable audit
trails, and the ability of the Terminal to interface with other
Exchange facilities.
Paragraph 3 of the Policy provides that Members must report to the
Exchange every proposed material change in functionality of a Terminal
and every proposed change in the use of a Terminal. It further provides
that Members must not implement any such proposed changes unless and
until they have been approved by the Exchange, and that Members must
also promptly file with the Exchange supplements to their applications
whenever the information currently on file becomes inaccurate or
incomplete for any reason.
Restrictions on Use of Terminals
Paragraph 4 sets forth four restrictions applicable to Members' use
of Terminals on the Options Floor. The first restriction is that
Members may receive brokerage orders in the trading crowd via
Terminals, but must represent such orders in the trading crowd by open
outcry in a manner that is consistent with Exchange rules.
The second restriction states that when a Member executes an order
that was received over a Terminal, the Member must fill out and time
stamp a trading ticket within one minute of the execution. Exchange
rules on record keeping and trade reporting are unchanged.
The third restriction states that Terminals may be used to receive
brokerage orders only, and that Terminals may not be used to perform a
market making function. It states that any system used by a Member to
operate a Terminal must be separate and distinct from any system that
may be used by a Member of any person associated with a Member in
connection with market making functions. It further states that, for
the purpose of this paragraph, orders initiated from off the floor of
the Exchange that are not counted as ``Market Maker transactions''
within the meaning of PSE Rule 6.32 and that do not create a pattern of
offering in the aggregate either to make two-sided markets or
simultaneously to represent opposite sides of the market in any class
of options shall not be deemed to be used to perform a market making
function.
The Exchange believes that if Terminals were permitted to be used
to perform market making functions from off the floor of the Exchange,
it may become undesirable for Exchange market makers to continue to
assume the costs and obligations associated with being a registered
market maker, which in turn could harm the liquidity and quality of the
Exchange's market. The Exchange is particularly concerned that off-
floor market making effectively would establish a market making
structure devoid of affirmative market making obligations that could
result in less deep and liquid markets during periods of market stress,
when off-floor Terminal market makers would not be required to continue
making markets. Moreover, the Exchange believes that surveillance of
market making through the Terminals currently would be particularly
difficult.
The Exchange intends to interpret the term ``market making'' in
accordance with its traditional definition as defined under the Act,
i.e., holding one's self out as being willing to buy and sell a
particular security on a regular or continuous basis.\3\ The definition
of market making would not capture parties who enter orders on one side
of the market; nor would it capture parties who enter two-sided limit
orders on occasion. A party would not be deemed to be engaging in
market making unless it regularly or continuously holds itself out as
willing to buy and sell securities.
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\3\ See. 15 U.S.C. 78c(a)(38).
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The fourth restriction in Paragraph 4 states that no Member or any
person associated with a Member may use for the benefit of such member
or any person associated with such Member any information contained in
any brokerage order in the Terminal system until that information has
been disclosed to the trading crowd. Accordingly, prior to placing an
order or making or changing a bid or offer on the Exchange or in any
other securities or futures market, a Member must disclose such
information to the trading crowd. The Exchange believes that this
restriction will help to ensure that Members using Terminals trade on
the same terms and conditions as other market participants and do not
receive any trading advantages to interact with orders transmitted
through the Terminals.
Inspection and Audit
Paragraph 5 of the proposed policy states that the operation and
use of all aspects of the Terminal and all orders entered through the
Terminal are subject to inspection and audit by the Exchange at any
time upon reasonable notice. It further provides that Members must
furnish to the Exchange such information concerning the Terminal as the
Exchange may from time to time request upon reasonable notice,
including without limitation an audit trail identifying transmission,
receipt, entry, execution and reporting of all orders. For the purpose
of this paragraph, a notice of at least twenty-four hours shall be
deemed to be reasonable (however, shorter periods may be provided in
appropriate circumstances).
Exchange Liability
Paragraph 6 states that neither the Exchange nor its directors,
officers, employees or agents shall be liable to a Member, a Member's
employees, a Member's customers or any other person for any loss,
damage, cost, expense or liability arising from the installation,
operation, relocation, use of, or inability to use a Terminal on the
floor of the Exchange (including any failure, malfunction, delay,
suspension, interruption or termination in connection therewith).
Termination of Approval
Paragraph 7 of the Policy provides that the Exchange may at any
time determine to terminate all approvals for the installation and use
by Members of Terminals on the floor of the Exchange or at particular
trading posts, in which event such approvals will be deemed terminated
on the 30th calendar day following the day on which the Exchange gives
notice to such Member(s) of such termination of approval. It further
provides that Members who incur costs in developing or implementing
proprietary systems do so at their own risk, due to the fact that the
Exchange intends to roll out its own brokerage order routing system for
Floor Brokers. It further provides that a Member's approval to use a
Terminal may also be summarily terminated by the Exchange, once notice
has been provided to the affected Member, if any statement by such
Member in its application or any supplement thereto is inaccurate or
incomplete, or if such Member has failed to comply with any provision
of this Policy, or if the operation of the Terminal is causing
operational difficulties on the floor of the Exchange, and the Member
has
[[Page 7288]]
failed to cure the same within seven calendar days following the giving
of notice (or such shorter period of time as the Exchange may deem
appropriate if it determines the circumstances have created a situation
requiring a shortened cure period). It states that Members must
immediately stop using their Terminals and must remove such Terminals
from the floor of the Exchange upon the termination of approval
pursuant to this paragraph, and that nothing in this paragraph shall be
construed as a waiver of or limitation upon whatever right Members may
otherwise have to seek appropriate relief pursuant to PSE Rule 11 in
the event the Exchange terminates approval of a Member's Terminal
pursuant to this paragraph.\4\
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\4\ PSE Rule 11.7 provides due process protections for persons
who have been aggrieved by Exchange action. It gives such persons an
opportunity to be heard and to have the complained of action
reviewed by the Exchange.
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Pilot Program
Finally, Paragraph 8 of the proposed policy states that the Pilot
Program expires six months after its implementation, but may be renewed
upon an Exchange filing with the Securities and Exchange Commission
pursuant to the Securities Exchange Act of 1934.
The Exchange notes that, except in certain minor respects, the
proposed Policy is consistent with an approved rule change of the
Chicago Board Options Exchange (``CBOE'') relating to the use of
proprietary brokerage order routing terminals on the CBOE floor.\5\
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\5\ See Exchange Act Release No. 38054 (December 16, 1996), 61
FR 67365 (December 20, 1996).
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Basis
The Exchange believes that proposal is consistent with Section 6(b)
of the Act, in general, and Section 6(b)(5) of the Act, in particular,
in that it is designed to facilitate transactions in securities; to
foster cooperation and coordination with persons engaged in regulating,
clearing, settling, and processing with respect to transactions in
securities; to promote just and equitable principles of trade; and to
protect investors and the public interest.
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
Within 35 days of the date of 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 such 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. 552, will be available for inspection and copying in the
Commission's Public Reference Room, 450 Fifth Street, N.W., Washington,
D.C. 20549. Copies of such filing will also be available for inspection
and copying at the principle office of the PSE. All submissions should
refer to File No. SR-PSE-97-02 and should be submitted by March 11,
1997.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\6\
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\6\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-3915 Filed 2-14-97; 8:45 am]
BILLING CODE 8010-01-M
