[Federal Register Volume 64, Number 33 (Friday, February 19, 1999)]
[Notices]
[Pages 8426-8429]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-4114]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-41051; File No. SR-PCX-98-41]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change and Amendment No. 1 Thereto by the Pacific Exchange, Inc.
Relating to Its Remote Trading Access Program for Specialists
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 September 4, 1998, the Pacific Exchange, Inc. (``PCX'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'' or ``SEC'') a proposed rule change and file an
amendment thereto on January 21, 1999,\3\ as described in Items I, II
and III below, which Items have been prepared by the Exchange. 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\ See letter, dated January 20, 1999, from Michael D. Pierson,
Senior Attorney, Regulatory Policy, PCX to S. Kevin An, Special
Counsel, Division of Market Regulation, Commission (``Amendment No.
1''). Among other things, Amendment No. 1 made several technical
corrections and also explained how the Exchange will conduct
surveillance of Remote Specialists. The substance of Amendment No. 1
is incorporated into this Notice.
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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 Remote Trading Access Program
for Specialists (``Program'') under which Registered PCX Specialists
will be permitted to conduct their regular trading activities from off
the Trading Floor, at a remote location. Below is the text of the
proposed rule, which is entirely new.
* * * * *
Remote Trading Access Program
Rule 5.38(a). The Remote Trading Access Program allows
Registered PCX Specialists to conduct their regular trading
activities from off the Trading Floor, at remote locations, subject
to the approval of the Equity Floor Trading Committee. Specialists
participating
[[Page 8427]]
in the program (``Remote Specialists'') will be linked to the
Trading Floors via a telecommunications network using private lines.
(b) Unless otherwise specified, all of the PCX Rules and
provisions of the PCX Constitution will apply to the activities of
Remote Specialists. In particular, Remote Specialists must meet all
of the obligations of Registered Specialists pursuant to PCX Rule 5
and the Equity Floor Procedure Advices, provided that the following
rules will not apply to Remote Specialists: EFPA 1-A, EFPA 1-B and
EFPA 1-C. In addition, Remote Specialists will not be required to
make their markets known in an audible tone pursuant to Rules 5.5(a)
and 5.30(a).
(c) Trading Floor Definition. For purposes of Rules 4.2, 5.1(e),
5.1(f), 5.6(d), 5.6(e), 5.8(a), 5.8(c), 5.8(e), 5.8(k), 5.10,
5.11(c), 5.12(b), 5.13(g), 5.13(h), 5.14(a), 5.14(b), 5.16(a), 5.20
Com. .01-.02, 5.21(a)(1), 5.23(a), 5.25(a), 5.29(d), 5.29(f),
5.29(g), 5.30(b), 5.30(c), 5.30(d), 5.31(a)-(b), 5.33(c), 5.51(b),
5.51(n), 5.51(o), 5.53(a)-(b), 5.53(e) and 5.53(g), the terms
``floor'' and ``trading floor'' will include both the physical
trading floors in San Francisco and Los Angeles, as well as the
electronic facilities of the Exchange at remote locations.
(d) Approval Process. Only Specialists who are registered with
the Exchange pursuant to Rule 5.27 will be eligible to participate
in the Program. The Equity Floor Trading Committee (``EFTC'') will
select from among the applicants and will determine which candidates
are best suited to participate in the Program. In making its
selections, the EFTC will consider the following factors: (1) past
experience of the applicant, including the length of time that the
applicant has served as a Specialist on the Exchange or on another
exchange, and the nature of the applicant's activities as a
Specialist on the Exchange or on another exchange; (2) recent
specialist performance ratings of the applicant (including all
available evaluation scores for the last eight quarters); (3) the
applicant's disciplinary history; and (4) any other relevant factors
that the EFTC may consider.
(e) Evaluation Process. Remote Specialists will be evaluated
pursuant to Rule 5.37.
(f) Pilot Program. The Remote Trading Access Program will be
implemented in three phases. In Phase I, four Specialists (two in
San Francisco and two in Los Angeles) will conduct their regular
trading activities at locations off the Trading Floor itself but in
close proximity within the building--for example, in a room adjacent
to the Trading Floor. Unless it is necessary, these specialists will
not engage in face-to-face interactions with other floor members
during this phase, so that the Exchange may identify and correct any
problems that may arise. Phase I will last for approximately one
month. In Phase II, which will last up to six months, the Exchange
will permit up to twenty Specialists to conduct their trading
activities from locations away from the Exchange's premises. These
locations may include a home or an office. In Phase III, the
Exchange will permit an unlimited expansion of the Program.
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
(a) Purpose.
The PCX currently has two Equities Trading Floors, one in San
Francisco and one in Los Angeles. There are generally two Specialists
continuously making markets during trading hours in each equity
security traded on the Exchange. Implementation of the Program will be
the first step of an expansion of the Exchange's two-floor system, to
permit electronic trading from multiple locations both on and off the
Trading Floors. Having operated two Equities Trading Floors since 1957,
the Exchange is well experienced in coordinating market quotations for
multiple specialists, in executing trades on behalf of parties located
in different cities, and in providing administrative support from one
city to members located in another city.
Under the Program, the Exchange will establish a telecommunications
network using private lines to link the Remote Specialists to the
Trading Floors. Remote Specialists will have the same access to the
Exchange's trading system (``P/COAST'') as Specialists located on the
Trading Floors. Remote Specialists will also have access to the
Intermarket Trading System (``ITS'') via the Regional Computer
Interface (``RCI'') feature of P/COAST. In addition, Remote Specialists
will routinely communicate with Exchange staff and persons on the
Trading Floors by telephone, e-mail and facsimile.
The Exchange believes that the rule change would significantly
expand the structure on which equities trading is based on the
Exchange. Accordingly, the Exchange is proposing to expand the meaning
of the term ``trading floor,'' as used in certain of the Rules on
Equities trading, so that it will include both the Trading Floors and
the electronic facilities of the Exchange at remote locations. For
example, Rule 5.1(e), which currently provides that non-members ``shall
not consummate transactions on the trading floor,'' would be expanded
to prohibit non-members from consummating transactions either on the
Trading Floor or through the electronic facilities of the Exchange.
1. Implementation: The Exchange is proposing to implement the
Program in three phases. In Phase I, four Specialists (two in San
Francisco and two in Los Angeles) will conduct their regular trading
activities at locations off the Trading Floor itself but in close
proximity within the building, for example, in a room adjacent to the
Trading Floor. Unless it is necessary, these Specialists will not
engage in face-to-face interactions with other floor members during
this phase, so that the Exchange may identify and correct any problems
that may arise. Phase I will last for approximately one month. In Phase
II, which will last up to six months, the Exchange will permit up to
twenty Specialists to conduct their trading activities from locations
away from the Exchange's premises. These locations may include a home
or an office. Finally, in Phase III, the Exchange will permit an
unlimited expansion of the Program.
2. Selection Process: Only Specialists who are registered with the
Exchange pursuant to Rule 5.27 will be eligible to participate in the
Program. The Equity Floor Trading Committee (``EFTC'') will select from
among the applicants and will determine which candidates are best
suited to participate in the Program. In making its selections, the
EFTC will consider the following factors: (a) Past experience of the
applicant, including the length of time that the applicant has served
as a Specialist on the Exchange or on another exchange, and the nature
of the applicant's activities as a Specialist on the Exchange or on
another exchange; (b) recent specialist performance ratings of the
applicant (including all available evaluation scores for the last eight
quarters; (c) the applicant's disciplinary history; and (d) any other
relevant factos that the EFTC may consider.
3. Order Execution: It is anticipated that the vast majority of
orders executed by a Remote Specialist will be orders entered
electronically through the Exchange's Member Firm Interface (``MFI'')
or through Floor Input.\4\ Remote Specialists will execute orders in
the same manner as Registered
[[Page 8428]]
Specialists. All orders entered through the MFI or Floor Input will be
entered into the Exchange's Consolidated Limited Order Book (``CLOB''),
which will ensure that they are afforded priority pursuant to Exchange
Rules. Incoming market and marketable limit orders are immediately
excecuted against orders in the CLOB based on price and time priority.
However, before any market or marketable limit order is executed, P/
COAST will display it for 15 seconds on the terminal of the Specialist
who is representing it , so that he or she will have an opportunity to
improve the execution price. Incoming orders other than market and
marketable limit orders will be maintained in the CLOB, but will be
represented by the Specialist designated to receive them. If a
Specialist manually executes a limit order that does not have priority,
P/COAST will generate a message that a priority violation has been
committed so that the Specialist can take corrective action
immediately. In addition, the Exchange's Surveillance Department will
receive a report of the priority violation.
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\4\ However, a relatively small number of orders will continue
to require interaction between a Floor Broker and all of the
Specialists in the issue.
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4. Remote Specialist Obligations: Except as otherwise provided,
Remote Specialist will be required to meet all of the obligations of a
PCX Registered Specialist, including the following:
Remote Specialist will be required to make continuous two-
sided markets during regular trading hours.
They must engage in a course of dealings for their own
accounts to assist in the maintenance, insofar as reasonably
practicable, of a fair and orderly market on the Exchange, and must
engage, to a reasonable degree under the existing circumstances, in
dealings for their own accounts in round-lots when lack of price
continuity or lack of depth in the round-lot market or temporary
disparity between supply and demand in either the round-lot or the odd-
lot market exists or is reasonable to be anticipated. (Rule 5.29(f))
They will be responsible for the execution of all orders
that they have accepted. (Rule 5.29(f))
They will be required to remain within the immediate
vicinity of their P/COAST terminals commencing 30 minutes before the
opening and throughout the trading day.\5\
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\5\ The Exchange notes that Remote Specialists who choose not to
remain within the immediate vicinity of their P/COAST terminals will
be subjecting themselves to significant market risk as a result of
executions against incoming orders and other orders in the CLOB.
They will also be subject themselves to poor performance ratings
pursuant to PCX Rule 5.37 if they fail to keep their markets
current.
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They may be required to remain one or more clerks at their
remote locations. (Rule 5.28(e))
They will be required to prepare trading tickets or other
appropriate records relating to orders. (Rules 5.13(c), 528(b) and
5.29(a))
They will perform their obligations as odd-lot dealers in
securities pursuant to Rule 5.34.
The performance of Remote Specialists will be evaluated
pursuant to PCX Rule 5.37 and they will be subject to all procedures
and restrictions that may be based on their overall evaluation ratings.
They will be required to meet the same capital
requirements and net capital requirements as Registered Specialists.
These include the requirements set forth in PCX Rule 2.2(a) and SEC
Rule 15c3-1.
They will be subject to all rules, policies and procedures
governing the ITS. (Rules 5.20-5.23)
5. Exemptions from PCX Rules: Remote Specialists are exempt from
complying with the following Rules that otherwise apply to Specialists
located on the Trading Floors:
They will be required to vocalize bids or offers. (Rule
5.5(a) and 5.30(a))
They will not be subject to the applicable rules on floor
decorum, floor conduct, badges, and visitors. (EFPA 1-A through 1-C).
6. Technical Support: The Exchange will provide Remote Specialists
with hardware and software maintenance and support through a third
party vendor. The vendor will provide routine service and repairs of
the Remote Specialists' equipment. PCX staff will also provide
informational support either over the telephone or by e-mail.
7. P/COAST Service Center: The P/COAST Service Center will provide
support in answering status inquiries from member firms, Specialist and
floor brokers, enters trading corrections; entering ``exception''
orders that would otherwise be defaulted from the MFI (e.g., order with
special settlements and orders for non-multiply-listed stocks); and
general assistance during fast markets.
8. ITS Staff Support: Remote Specialists will receive the same ITS
Staff support as Registered Specialists. Exchange staff will provide
support by telephone, fax or e-mail, including; responding to
complaints and facilitating problem resolution (e.g., where trade-
throughs are alleged); responding to general inquiries; performing ITS
trade corrections; coordinating with Securities Industry Automation
Corporation in response to system problems; processing trading halt
requests and instructions; and providing general support for P/COAST
ITS functions.
9. PCX Surveillance: The Exchange believes that its current
surveillance procedures and automated reports already cover the vast
majority of remote trading surveillance issues, including priority
violations, frontrunning, and other rule violations. Exchange staff
will communicate telephonically with the Remote Specialist during the
course of the trading day to conduct routine surveillance activities or
to convey ruling of Floor Officials or the EFTC affecting the Remote
Specialist. With regard to surveillance to assure that remote
specialists will be present throughout the trading day, the Exchange
believes that this can be conducted partly by confirming that the
Remote Specialist is maintaining two-sided markets.
The Exchange also expects to develop a report to identify instances
in which a Remote Specialist fails to input quotes, and to conduct
``spot'' checks by calling or visiting Remote Specialists at their
locations.
10. Communications with Floor Officials: Remote Specialists will
communicate by telephone with Floor Officials in particular rulings.
11. Post Cashiering: The Post Cashiering Department will maintain
telephonic and other communication with the Remote Specialist to verify
money settlement; to activate specialist lines of credit; to initiate
or re-transmit ``buy-ins'' for failed trades; to address issues
regarding specialist post capital requirements; and otherwise to
resolve question and problem on back office functions of trade
clearance and settlement.
12. PCX Administrative Information--Bulletins and Reports: The
Exchange will install an electronic mechanism to distribute routine
reports, bulletins and memoranda that are distributed by PCX staff.
Prior to the opening, and in some cases during the trading day, the
Exchange will disseminate the following reports to the Remote
Specialists: the Trade Blotter, Security Ledgers, Bulletins, MIS
Reports, SPE Reports, and other documents. Other PCX bulletins and
memoranda, as well as business and personal mail, will be forwarded to
the Remote Specialists as appropriate.
13. Disaster Recovery/Contingency: As noted previously in the
section on ``Technical Support,'' third party vendors will provide
Remote Specialists with routine service and repairs of hardware and
software. In addition, the remote operation will have a
[[Page 8429]]
configuration that includes backup capabilities and on-site resources
in the event of local system or telecommunication problem or disaster.
However, if a Remote Specialist's service is interrupted and cannot be
promptly restored, PCX staff will either re-route the Remote
Specialist's order flow to a Specialist who is affiliated with the
Remote Specialist or will provide sufficient support and assistance to
ensure that the Remote Specialist is adequately informed of the status
of market and marketable limit orders that are active, so that the
Remote Specialist can provide directions for their handling.
(b) Basis.
The Exchange believes the proposed rule change is consistent with
Section 6(b) \6\ of the Act, in general, and furthers the objectives of
Section 6(b)(5),\7\ in particular, in that it is designed to perfect
the mechanisms of a free and open market, to promote just and equitable
principles of trade, to facilitate transactions in securities, and in
general, to protect investors and the public interest. In addition, the
Exchange believes that the proposed rule change is consistent with
Section 11A(a)(1)(B) of the Act, which states that new data processing
and communications techniques create the opportunity for more efficient
and effective market operations.
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\6\ 15 U.S.C. 78f(b).
\7\ 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
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, including whether the proposal is
consistent with the Act. 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
submissions, 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. Copies of such filing will also be available for
inspection and copying at the principal office of the PCX. All
submissions should refer to File No. SR-PCX-98-41 and should be
submitted by March 12, 1999.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\8\
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\8\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-4114 Filed 2-18-99; 8:45 am]
BILLING CODE 8010-01-M
