59486 Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Notices

10The Plan contemplates that the options

exchanges may wish to consider a pilot program for

one-cent minimum price variations for quoting in

a limited number of options (‘‘Penny Pilot’’) at some

point in the implementation process. The

Commission expects that, before implementing a

Penny Pilot, the options exchanges will carefully

coordinate on such issues as the selection and

number of options to be included in the pilot to

ensure the continued orderly operation of the

markets and clearing organizations. In particular,

the Commission expects that the options exchanges

will consult with the Commission regarding the

impact on market-wide capacity. Before

implementing a Penny Pilot, each options exchange

should also submit appropriate rule filings to the

Commission under Section 19(b) of the Exchange

Act.

11 15 U.S.C. 78f(b).

12 15 U.S.C. 78f(b)(5).

13The Exchange requested the Commission to

waive 5 day pre-filing notice requirement and the

30-day operative period.

14 15 U.S.C. 78s(b)(3)(A).

15 17 CFR 240.19–4(f)(6).

16For purposes only of accelerating the operative

date of this proposal, the Commission has

considered the proposed rule’s impact on

efficiency, competition, and capital formation. 15

U.S.C. 78c(f).

17 17 CFR 200.30–3(a)(12).

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b–4.

6.64, Commentary .03(c)–(d) to replace

fractional references with decimal

references. The Exchange is also

proposing to amend PCX Rule 6.47(a)(2)

and (b)(2), governing non-facilitation

crosses, to require floor brokers to bid

above the highest bid or below the

lowest offer by at least the MPV before

crossing orders.

Finally, the PCX proposes to adopt

new Rule 6.72 to explicitly state and

give effect to the minimum price

increments for options mandated by the

Plan. Thus, to the extent an option class

is pricing in decimals, the MPVs would

be as follows: For options quoting under

$3 a contract, the MPV would be $.05;

and for options quoted at $3 a contract

or greater, the MPV would be $.10.10

This rule would replace current Rule

6.72, which requires bids and offers

above $3 to be expressed in eighths of

the one dollar and bids and offers below

$3 to be expressed in sixteenths of one

dollar.

2. Statutory Basis

The PCX believes that the proposed

rule change is consistent with the

requirements of the Act and the rules

and regulations thereunder that are

applicable to national securities

exchange, and, in particular, with the

requirements of Section 6(b) of the

Act.11 In particular, the PCX believes

that the proposed rule change is

consistent with Section 6(b)(5) 12 in that

it is designed to promote just and

equitable principles of trade, to remove

impediments to and to perfect the

mechanism of a free and open market

and a national market system, and, in

general, to protect investors and the

public interest.

B. Self-Regulatory Organization’s

Statement on Burden on Competition

The PCX does not believe that the

proposed rule change will impose any

burden on competition 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

The Exchange did not solicit or

receive written comments on the

proposed rule change.

III. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Action

Because the foregoing proposed rule

change does not: (i) Significantly affect

the protection of investors or the public

interest; (ii) impose any significant

burden on competition; and (iii) become

operative for 30 days from the date on

which it was filed, or such shorter time

as the Commission may designate,13 it

has become effective pursuant to

Section 19(b)(3)(A) of the Act 14 and

Rule 19b–4(f)(6) 15 thereunder. At any

time within 60 days of the filing of the

proposed rule change, the Commission

may summarily abrogate such rule

change if it appears to the Commission

that such action is necessary or

appropriate in the public interest, for

the protection of investors, or otherwise

in furtherance of the purposes of the

Act.

The PCX has requested that the

Commission accelerate the operative

date. The Commission believes that it is

consistent with the protection of

investors and the public interest and

therefore finds good cause to designate

the proposal to become immediately

operative upon filing. Acceleration of

the operative date will ensure that the

PCX is able to operate in accordance

with the terms and conditions of the

Plan. For these reasons, the Commission

finds good cause to designate that the

proposal, as amended, become operative

immediately upon filing.16

IV. Solicitation of Comments

Interested persons are invited to

submit written data, views and

arguments concerning the foregoing,

including whether the proposed rule

change is consistent with the Act.

Persons making written submissions

should file six copies thereof with the

Secretary, Securities and Exchange

Commission, 450 Fifth Street, NW.,

Washington, DC 20549–0609. 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. Copies of such filing will also be

available for inspection and copying at

the principal office of PCX. All

submissions should refer to the File No.

SR–PCX–00–23 and should be

submitted by October 26, 2000.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.17

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–25592 Filed 10–4–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–43384; File No. SR–PCX–

00–31]

Self-Regulatory Organizations; Notice

of Filing and Immediate Effectiveness

of Proposed Rule Change by the

Pacific Exchange, Inc. Relating to

PACEX Reports for Options Order

Flow Providers

September 29, 2000.

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 August

18, 2000, the Pacific Exchange, Inc.

(‘‘PCX’’ or ‘‘Exchange’’) filed with the

Securities and Exchange Commission

(‘‘Commission’’) the proposed rule

change as described in Items I, II and III

below, which Items have been prepared

by the PCX. The Commission is

publishing this notice to solicit

comments on the proposed rule change

from interested persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The PCX proposes to begin furnishing

Pacific Exchange Customer Execution

(‘‘PACEX’’) Reports to its order flow

providers on a daily basis. PACEX

Reports are designed to provide

objective data on option order

executions so that PCX order flow

Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Notices 59487

3The PCX recently adopted a new fee on market

makers’ transactions in designated equity option

issues. The funds are made available to Lead Market

Makers, who may use the funds to pay order flow

providers for their options order flow. In publishing

the PCX’s proposed rule change, the Commission

stated its concerns that brokers who are paid to

send their customers’ orders to one exchange have

a conflict of interest that may reduce their

commitment to the duty they owe the customers to

obtain the best execution available. See Securities

Exchange Act Release No. 43290 (Sept. 13, 2000),

65 FR 57213 (Sept. 21, 2000).

4The Exchange notes that this procedure has

been in effect since the inception of POETS in 1989.

providers can assess the quality of the

executions they receive on the PCX. The

text of the proposed rule change is

available at the principal offices of the

PCX.

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

PCX 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 PCX has prepared

summaries, set forth in Sections A, B,

and C below, of the most significant

aspects of the statments.

A. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

The Exchange is adopting a new

procedure to provide PCX order flow

providers with objective data so that

they can assess the quality of the

executions they receive on their option

orders at the PCX.3 This rule filing is

intended to provide a description of the

data to be furnished and to provide a

general summary of the PCX’s electronic

systems involved in transmitting and

executing option orders.

1. Pacific Exchange Customer Execution

Reports

The PCX intends to begin furnishing

PACEX Reports to its order flow

providers on a daily basis. The PACEX

Reports will provide objective data on

the quality of execution that order flow

providers receive at the PCX.

Specifically, the Reports will include

statistical information on:

• Price Improvement—this shows the

number of trades and option contracts

receiving improved pricing on the PCX;

and

• Turnaround Time—this shows the

time it took to execute a given

customer’s order on the PCX.

PACEX Reports provide data on all

option orders routed to the PCX

electronically that remain in an

electronic environment. This includes

all orders sent through the member firm

interface and executed automatically via

an automatic execution system (‘‘AutoEx’’), as well as all option orders routed

to a floor broker hand-held terminal,

executed by open outcry, and reported

electronically.

The Exchange will provide PACEX

Reports to order flow providers on a

daily basis, whether electronically or in

‘‘hard’’ copy. Upon request, the

Exchange will also send the raw data

from the Reports to order flow providers

so that they may analyze the data in a

manner that suits their own

requirements.

a. Price Improvement Statistics.

PACEX Reports show the dollar amount

by which order flow providers

improved upon the PCX’s prevailing

best bid or offer (‘‘BBO’’) in executing

their orders at the PCX. Specifically,

PACEX Reports provide data on price

improvement for each of the following

four classifications: (1) Orders executed

via Auto-Ex; (2) orders executed by a

hand-held terminal; (3) market orders;

and (4) marketable limit orders. Within

each of these four categories, the PACEX

Reports show the percentage of trades

that were executed at prices: (1) where

the PCX improved the national best bid

or offer (‘‘NBBO’’); (2) where the PCX

set the NBBO; (3) where the PCX

matched the NBBO; (4) where the NBBO

was set by another market; and (5)

where the PCX was the BBO. With

regard to category (5), where the PCX

was the BBO, the Reports show the

amount by which an execution via a

hand-held terminal was less favorable

than the then-prevailing NBBO. The

Reports do not cover orders that were

executed during the opening rotation—

whether by automated opening rotation

or manually—or during a ‘‘fast market,’’

as described in PCX Rule 6.28.

PACEX Reports also provide summary

information with respect to: (1) Orders

executed via Auto-Ex; (2) orders

executed by a hand-held terminal; (3)

market orders; and (4) marketable limit

orders. The Report shows, for each

classification, the aggregate dollar

amount that the customer saved per

contract, the average trade size (in

numbers of option contracts), and the

average turnaround time during a

specific time period.

b. Details on Turnaround Time.

Turnaround time shows how quickly

orders were executed on the PCX. The

Report provides data on turnaround

time for each of the following four

classifications: (1) Orders executed via

Auto-Ex; (2) orders received and

reported by a hand-held terminal; (3)

market orders; and (4) marketable limit

orders. PACEX shows within each of

these four categories the percentage of

trades that were executed within: (a) 0

to 1 seconds; (b) 1 to 5 seconds; (c) 5

to 15 seconds; (d) 15 to 60 seconds; (e)

1 minute to 3 minutes; (f) 3 to 10

minutes; (g) 10 to 15 minutes; and (h)

15 to 30 minutes.

For each of these eight time frames,

PACEX Reports also show the

percentage of trades that were executed

during the regular session and the

percentage of trades that were executed

during the opening session, i.e., during

the opening rotation, which may

include executions during the

Automated Opening Rotation or during

a manual opening rotation.

2. PCX Electronic Trading System

a. POETS. The Pacific Options

Exchange Trading System (‘‘POETS’’) is

the PCX’s automated options trading

system, which includes an options

routing system, an automatic execution

system (‘‘Auto-Ex’’), an on-line limit

order book system, and an automatic

market quote update system. Option

orders may be sent to POETS via the

Exchange’s Member Firm Interface

(‘‘MFI’’). Market and marketable limit

orders that are sent through the MFI first

check the limit order book for an

eligible contra side.4 Any unfilled

portion of an inbound order will be

executed by Auto-Ex, subject to the

maximum Auto-Ex size parameters.

Non-marketable limit orders may be

directed to the limit order book either

electronically or manually, subject to

established order type and maximum

size parameters. Prior to the opening,

market orders may be directed to the

limit order book so that they may

participate in the Automated Opening

Rotation. Orders in the limit order book

executed in strict price/time priority

sequence.

b. Auto-Ex. Market and marketable

limit orders sent through the MFI will

be executed by Auto-Ex if they meet the

order type and size requirements

designated by the Exchange. Orders

executed on Auto-Ex receive the PCX’s

disseminated market price or better.

Pursuant to PCX Rule 6.87, Lead Market

Makers (‘‘LMMs’’) may set Auto-Ex to

provide automatic price improvement

when the national best bid or offer

(‘‘NBBO’’) is better than the PCX’s BBO

by one trading increment. In addition,

LMMs may set Auto-Ex to execute

inbound orders at the NBBO price

regardless of whether it is only one

trading increment better than the PCX’s

59488 Federal Register / Vol. 65, No. 194 / Thursday, October 5, 2000 / Notices

5 15 U.S.C. 78f(b)(5).

6 15 U.S.C. 78s(b)(3)(A)(i).

7 17 CFR 240.19b–4(f)(1).

8 17 CFR 200.30–3(a)(12).

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b–4.

BBO, i.e., orders may be executed at

prices that may be multiple trading

increments better than the PCX’s thenprevailing BBO. Furthermore, LMMs

may execute improved prices regardless

of whether the NBBO is locked or

crossed. Auto-Ex prevents inbound

orders from being executed at prices

inferior to the NBBO. Pursuant to PCX

Rule 6.87, only non-broker-dealer

customer orders are eligible to be

executed by Auto-Ex. The PCX

designates the eligible order size, which

may be between 20 and 50 option

contracts, on an issue-by-issue basis.

c. Hand-Held Terminals. Member

firms may electronically route orders to

the PCX via the floor broker hand-held

terminal system pursuant to PCX Rule

6.88. The system allows member firms

to route their orders directly to POETS,

to a member firm booth on the trading

floor, or to a floor broker who is

operating a hand-held terminal located

in a trading crowd (or elsewhere) on the

options floor. Accordingly, orders sent

through MFI may be transmitted to a

floor broker almost instantaneously for

immediate representation in the trading

crowd. In the event that option prices

have changed to make an order

immediately executable, the floor broker

can submit the order to POETS for

automatic execution (subject to the

Exchange’s order size requirements).

The Exchange notes that the Report uses

an extreme measurement standard—the

NBBO at the time an order reaches the

Exchange. Consequently, the Exchange

believes that the reporting process may

be subject to some positive or negative

price movement. This will occur, for

example, if there are changes in the

price of the underlying security or there

are other orders reaching the trading

crowd between the time the original

order reaches the trading floor and the

time it is executed.

d. AOR. Option orders executed at the

opening of trading are eligible for

execution via the Exchange’s Automated

Opening Rotation (‘‘AOR’’). The AOR

permits the Exchange to establish

electronically, for eligible option series,

a single price opening for executing

eligible market and marketable limit

orders in the POETS system. Under

AOR, various series in an option issue

may be opened simultaneously, so that

orders in POETS in that issue are

executed within seconds. Once the

market in an underlying stock has

opened, the PCX can open the market in

the overlying option almost

simultaneously. AOR also allows

automated openings when trading in an

issue has been halted and then

reopened.

The PCX represents that the PACEX

Reporting program is designed to

provide member firms with greater

assurance that they have acted in a

manner consistent with the fulfillment

of their duty of best execution when

they direct orders to the PCX.

Accordingly, the Exchange believes that

the proposed rule change is consistent

with and in furtherance of the objectives

of the Act, including specifically

Section 6(b)(5) thereof,5 which requires

that the rules of exchanges promote just

and equitable principles of trade,

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.

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

No written comments were solicited

or received with respect to the proposed

rule change.

III. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Action

Because the PCX has designated this

proposed rule change as constituting a

stated policy, practice, or interpretation

with respect to the meaning,

administration, or enforcement of

existing Exchange rules and procedures,

it has become effective pursuant to

Section 19(b)(3)(A)(i) of the Act6 and

Rule 19b–4(f)(1) thereunder. 7 At any

time within 60 days of the filing of this

proposed rule change, the Commission

may summarily abrogate the rule change

if it appears to the Commission that the

action is necessary or appropriate in the

public interest, for the protection of

investors, or otherwise in furtherance of

the purposes of the Act.

IV. Solicitation of Comments

Interested persons are invited to

submit written data, views, and

arguments concerning the foregoing,

including whether the proposed rule

change 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. 20549–0609. 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. Copies of the 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–00–31 and should be

submitted by October 26, 2000.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.8

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–25597 Filed 10–4–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–43376; File No. SR–Phlx–

00–79]

Self-Regulatory Organizations; Notice

of Filing and Immediate Effectiveness

of Proposed Rule Change by the

Philadelphia Stock Exchange, Inc.

Relating to the Prohibition on the Entry

of Certain Electronically Generated

Orders into the Exchange’s AUTOM

System

September 28, 2000.

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 15, 2000, the Philadelphia

Stock Exchange, Inc. (‘‘Phlx’’ or

‘‘Exchange’’) filed with the Securities

and Exchange Commission (‘‘SEC’’ or

‘‘Commission’’) the proposed rule

change 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 comment on the proposed rule

change.