00-13532. Self-Regulatory Organizations; Pacific Exchange, Inc.; Order Approving Proposed Rule Change Permitting Floor Brokers To Represent Orders With a Ticket-to-Follow

May 23, 2000.

I. Introduction

On June 1, 1999, the Pacific Exchange, Inc. (“Exchange” or “PCX”) submitted to 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 change seeking to amend its rules on options trading to permit Floor Brokers to immediately represent intra-floor telephonic orders in the trading crowd, with a written order ticket immediately to follow. Amendment No. 1 to the proposal was submitted on November 12, 1999. ^[3] Notice of the proposed rule change, including Amendment No. 1, appeared in the Federal Register on December 8, 1999.^[4] The Commission received no comments on the proposal. This order approves the proposed rule change, as amended.

II. Description of the Proposal

Options Floor Brokers currently are not permitted to represent orders they receive over the telephone unless and until they have prepared, from outside the trading crowd, a written, time-stamped order ticket. ^[5] The Exchange now proposes to adopt new PCX Rule 6.2(h)(4)(C), which will permit a floor Broker in a trading crowd who receives an order from a Member or Member Firm representative located on the Trading Floor to represent that order immediately in the trading crowd, provided that: (i) an order ticket is prepared and time stamped in the member firm booth before the order is transmitted telephonically to the Floor Broker in the trading crowd; and (ii) a written, time-stamped order ticket for the order must be taken immediately to the Floor Broker in the trading crowd.^[6]

The Exchange also proposes to amend PCX Rule 6.2(h)(4)(B) to eliminate the requirement that Floor Brokers who receive telephonic orders while in the trading crowd must step outside of the trading crowd, write up an order ticket and time-stamp it before representing the order in the crowd. ^[7] In addition, the Exchange proposes to add new section (d) to PCX Rule 6.67, which provides that a Floor Broker may represent a telephonic order, with the ticket to follow, as provided in PCX Rule 6.2(h)(4)(C). Further, the Exchange proposes to modify PCX Rule 6.85 by providing that PCX Rule 6.2(h)(4)(C) is an exception to the general rule that when a Floor Broker receives a verbal order form a Market Maker, or when a Floor Broker is requested by a Market Maker to alter an order in his possession in any way, the Floor Broker shall immediately prepare an order ticket from outside the trading crowd and time-stamp it. Accordingly, Floor Brokers who receive intra-floor telephonic orders from Market Makers will be permitted to represent those orders immediately, with the ticket immediately to follow.^[8]

Under Options Floor Procedure Advice F-5 (“OFPA F-5”), hand signals may be used to increase or decrease the size of an order, to change the order's limit, to cancel an order or to activate a market order, as long as the cancellation or change to the order is “relayed to the Floor Broker in a time-stamped, written form immediately thereafter.” The Exchange is proposing, as a matter of consistency, to eliminate the requirement from OFPA F-5 that changes to an order must be documented in writing outside of the crowd and the ticket time-stamped, before the revised order may be represented.

III. Discussion

Section 6(b)(5) ^[9] of the Act requires that the rules of an exchange be designed to promote just and equitable principles of trade, prevent fraudulent and manipulative acts and practices, remove impediments to and perfect the mechanism of a free and open market and a national market system, and protect investors and the public interest.^[10] Section 11A(a)(1)(C)(i) ^[11] of the Act states that it is in the public interest and appropriate for the protection of investors and the maintenance of fair and orderly markets to assure the economically efficient execution of securities transactions. Section 11A(a)(1)(C)(ii) ^[12] states that it is in the public interest and appropriate for the protection of investors and the maintenance of fair and orderly markets to assure fair competition among brokers and dealers. For the reasons set forth below, 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, and, in particular, the requirements of Section 6(b)(5).^[13] Further, the Commission believes that the proposed rule change is consistent with the goals of Section 11A(a)(1)(C).^[14]

The Commission believes that the proposal should serve to remove impediments to and perfect the mechanism of a free and open market by reducing the amount of time before telephonic orders may be represented in the trading crowd without compromising the Exchange's audit trail. In this regard, the Commission notes that an order ticket must be prepared and time stamped in the member firm booth before the order is transmitted telephonically to the Floor Broker in the trading crowd. The Commission believes that requiring floor members to prepare a written, time-stamped order ticket before the order is transmitted to the crowd is consistent with the Exchange's audit trail requirements. Further, the Commission believes that this requirement should enable the Exchange to conduct adequate surveillance for market manipulation and other violations of Exchange rules and the Act.

The Commission believes that the proposal may expedite and make more efficient the process by which customer orders can be received and executed on the floor of the Exchange. The Commission also believes that the proposed rule change should increase the efficiency of transmitting orders from a member firm booth to Floor Brokers in the trading crowd by reducing the amount of time required before these orders may be represented in the crowd.

In determining to approve this proposal, the Commission notes that the Exchange represents the proposal is necessary to ensure that, as the number of option orders transmitted and represented electronically on the Exchange increases, manual orders represented by Floor Brokers are not placed at a competitive disadvantage. The Commission believes that the proposal should foster coordination with persons engaged in facilitating transactions in securities, remove impediments to and perfect the mechanism of a free and open market, and protect investors and the public interest by expediting and making more efficient the process by which orders can be received and executed on the floor of the Exchange. Accordingly, the Commission finds that the proposal is consistent with Section 6(b)(5) ^[15] of the Act.

IV. Conclusion

It is therefore ordered, pursuant to Section 19(b)(2) of the Act,^[16] that the proposed rule change (SR-PCX-99-17) is approved.

For the Commission, by the Division of Market Regulation, pursuant to delegated authority.^[17]

Margaret H. McFarland,

Deputy Secretary.

Footnotes

1.  15 U.S.C. 78s(b)(1).

2.  17 CFR 240.19b-4.

3.  See letter from Michael Pierson, Director, Regulatory Policy, PCX, to John Roeser, Attorney, Division of Market Regulation, Commission, dated November 10, 1999 (“Amendment No. 1”).

4.  See Securities Exchange Act Release No. 42188 (December 1, 1999), 64 FR 68714.

5.  See Securities Exchange Act Release No. 42557 (Mar. 21, 2000), 65 FR 16680 (Mar. 29, 2000) (SR-PCX-98-30) (order approving PCX Rule 6.2(h)(4)(B), “Floor Brokers who receive telephonic orders while in the trading crowd must step outside of the crowd, write up an order ticket and time stamp it before representing the order in the crowd”); See also PCX Rule 6.85, Com. .03 (“when a Floor Broker receives a verbal order from a Market Maker, or when a Floor Broker is requested by a Market Maker to alter an order in his possession in any way, the Floor Broker shall immediately prepare an order ticket from outside the trading crowd and time stamp it”).

6.  See Amendment No. 1, supra note 3.

7.  See supra note 5.

8.  Under PCX Rule 6.2(h)(4), Floor Brokers are not permitted to communicate directly with persons located off the Trading Floor. See supra note 5.

9.  15 U.S.C. 78f(b)(5).

10.  In approving this proposed rule change, the Commission has considered the proposal's impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).

11.  15 U.S.C. 78k-1(a)(1)(C)(i).

12.  15 U.S.C. 78k-1(a)(1)(C)(ii).

13.  15 U.S.C. 78f(b)(5).

14.  15 U.S.C. 78k-1(a)(1)(C)(i).

15.  15 U.S.C. 78f(b)(5).

16.  15 U.S.C. 78s(b)(2).

17.  17 CFR 200.30-3(a)(12).