26662 Federal Register / Vol. 63, No. 92 /Wednesday, May 13, 1998 / Notices

3As for the elimination of the requirement to

disclose counsel’s affiliation to the issuer, in

Amendment No. 1, the NYSE stressed that in most

cases issuers no longer would have to furnish the

opinion of counsel. The Exchange notes that if it

needed to request, review, and/or rely on an

opinion, the NYSE could then inquire about the

opinion’s source and any relevant affiliations. See

Amendment No. 1.

4 17 CFR 200.30–3(a)(12).

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

2 17 CFR 240.19b–4.

3See Letter from Michael D. Pierson, Senior

Attorney, Regulatory Policy PCX to David

Sieradzki, Attorney, Division of Market Regulation

(‘‘Division’’), SEC dated March 27, 1998

(‘‘Amendment No. 2’’).

4Securities Exchange Act Release No. 39532 (Jan.

9, 1998), 63 FR 2711 (Jan. 16, 1998).

5The 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.

6Orders 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 (Jan. 18, 1990), 55 FR 2466 (Jan.

24 1990) (‘‘POETS Approval Order’’).

The Exchange has rarely used or

relied upon the opinion’s description of

regulatory proceedings. Its deletion

would sacrifice little, while serving to

simplify the opinion. In addition, the

Exchange believes that the listingapplication signature of an authorized

officer of the issuer provides sufficient

assurance of the board’s authorization of

the issue and of listing the issue on the

Exchange.3

2. Statutory Basis

The basis under the Act for the

proposed rule change is the requirement

under Section 6(b)(5) that an exchange

have rules that are designed to prevent

fraudulent and manipulative acts and

practices, to promote just and equitable

principles of trade, to remove

impediments to and perfect the

mechanism of a free and open market

and national market system, and, in

general, to protect investors and the

public interest.

B. Self-Regulatory Organization’s

Statement on Burden on Competition

The proposed rule change does not

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

The Exchange has not solicited, and

does not intend to solicit, comments on

the proposed rule change. The Exchange

has not received any unsolicited written

comments from members or other

interested parties.

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 pro 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 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. 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 the NYSE. All

submissions should refer to the File No.

SR–NYSE–98–12 and should be

submitted by June 3, 1998.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.4

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98–12706 Filed 5–12–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–39970; File No. SR–PCX–

97–28]

Self-Regulatory Organizations; Pacific

Exchange, Inc.; Order Granting

Approval to Proposed Rule Change

and Notice of Filing and Order

Granting Accelerated Approval to

Amendment No. 2 to the Proposed

Rule Change Relating to ExchangeSponsored Hand-Held Terminals for

Options Floor Brokers

May 7, 1998.

I. Introduction

On July 3, 1997, and December 12,

1997, respectively, the Pacific Exchange,

Inc. (‘‘PCX’’ or ‘‘Exchange’’) submitted

to the Securities and Exchange

Commission (‘‘SEC’’ or ‘‘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 and Amendment

No. 1 thereto to adopt rules to allow the

use of Exchange-Sponsored Floor Broker

Hand-Held Terminals (‘‘ExchangeSponsored Terminals’’) on the floor of

the Exchange. The Exchange also

proposed an interpretation to Rule 6.67

which would not require members’

orders entered through ExchangeSponsored Terminals to be in writing.

Finally, the Exchange proposed Rule

6.88(b) to prohibit the use of a floor

broker hand-held terminal for market

making. On March 30, 1998, the

Exchange filed Amendment No. 2 to the

proposed rule change with the

Commission.3 In Amendment No. 2, the

Exchange amends Rule 6.67,

Commentary .02 to indicate that orders

sent through proprietary Terminals

would also be deemed to be written

orders for the purposes of Rule 6.67.

The proposed rule change, and

Amendment No. 1 thereto were

published for comment in the Federal

Register on January 16, 1998.4 No

comments were received on the

proposal. This order approves the

proposal as amended, including

Amendment No. 2 on an accelerated

basis.

II. Description of the Proposal

A. General Description

The Exchange’s Member Firm

Interface (‘‘MFI’’) 5 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).6

Under the proposal, member firms
Federal Register / Vol. 63, No. 92 /Wednesday, May 13, 1998 / Notices 26663

7 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.’’

8See note 16 infra and accompanying text.

9Accordingly, the Exchange stated that there will

be no appreciable delay in order entry due to the

transmission of orders through the Server. The

Exchange also stated 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.

10The Exchange will submit a separate rule filing

to the Commission to establish these fees. See note

19 infra and accompanying text.

11See, e.g., PCX Rules 5.1(e), 6.43–6.48 and

Options Floor Procedure Advices A–1—A–11 and

G–1—G12.

12See PCX Rule 6.69.

13The Commission notes that the Exchange

should consult with the Commission to determine

if any future changes in technology used on the

Exchange floor would be required to be submitted

to the Commission pursuant to Section 19(b) of the

Act. Moreover, any additional conditions or

limitations placed on the use of hand held

terminals should be submitted to the Commission

as a proposed rule change pursuant to Section 19(b)

of the Act. See Interactive Brokers LLC, Admin.

Proc. File No. 3–9237 (March 19, 1998) (opinion of

the Commission).

14See note 15 infra.

15The Commission 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).

16The 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 devise 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.

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 ExchangeSponsored Terminal located in the

trading crowd.7 The Commission notes

that the PCX’s proposal does not restrict

the use of other Hand-Held terminal

systems provided that they do not

interfere electronically with existing

Exchange systems.8

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

PCX’s system that stores and processes

all data for the Exchange-Sponsored

Terminals (‘‘Server’’).9 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.

The Exchange intends to furnish

Exchange-Sponsored 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

after the implementation of the floorwide program in Phase II.10

Exchange rules on order

representation and order execution will

be unchanged under the program.11

However, the Exchange is proposing to

modify one of 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.12

Under the proposal, initially, floor

brokers using Exchange-Sponsored

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 or 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

Exchange-Sponsored Terminals.13 The

order ticket requirement shall be the

same with Exchange-Sponsored

Terminals as it is for proprietary hand

held terminals,14 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.

Once an order has been executed, the

Exchange-Sponsored 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.

Order information sent through the

Exchange Sponsored 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 using the Exchange-Sponsored

Terminals, the audit trail information

will commence when the order is sent

from the booth. An audit trail of all

actions taken by the ExchangeSponsored 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

Exchange-Sponsored Terminal, they

will be time stamped upon receipt by

the Server. Accordingly, the Exchange

believes that the audit trail information

should be more accurate than current

information, which is recorded

manually on order tickets.

The Exchange will not prohibit floor

brokers from using proprietary handheld terminals 15 for order entry on the

Options Floor as long as they do not

interfere with any Exchange-Sponsored

Terminals, with POETS or with other

equipment on the floor.16

B. 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

Exchange-Sponsored 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
26664 Federal Register / Vol. 63, No. 92 /Wednesday, May 13, 1998 / Notices

17The Commission notes that a member would

have the right to appeal any decision to suspend a

member from using an Exchange-Sponsored

Terminal pursuant to Exchange Rule 11.7, Hearings

and Review of Committee Act.

18Factors 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.

19The 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, after Phase II is

implemented, the Exchange has represented that it

intends to impose a fee upon participants in the

program in an amount to be specified in a rule

change proposal to be filed with the Commission

under Section 19(b) of the Act.

20 15 U.S.C. 78f(b)(5).

21 15 U.S.C. 78f(b)(7).

22 15 U.S.C. 78f(d). Section 6(d) of the Act, among

other things, require that an exchange, in any

proceeding to determine whether a member should

be disciplined, bring specific charges, notify such

member of and provide him with an opportunity to

defend himself against such charges, and keep a

record.

23 15 U.S.C. 78f(b)(8).

24 15 U.S.C. 78k–1(a)(1)(C).

25 In approving these rules, the Commission has

considered the proposed rules’ impact on

efficiency, competition, and capital formation. 15

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

26Cf., Securities Exchange Act Release No. 25842

(June 23, 1988), 53 FR 24539 (approving certain

restrictions on the use of telephones on the floor of

the New York Stock Exchange), aff’d per curiam,

866 F.2d 47 (2d Cir. 1989).

from being sent through the Exchange’s

Member Firm Interface for such period

of time as the Exchange deems

appropriate.17

C. Implementation

The Exchange is proposing a twophase 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

Exchange-Sponsored 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 Exchange-Sponsored 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.18 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).

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.19

When Phase II is implemented, the

Exchange-Sponsored Terminals program

will be fully rolled out. ExchangeSponsored Terminals will be approved

for use in all trading crowds and will

allow floor brokers to transmit orders to

other floor brokers.

III. Discussion

Section 6(b)(5) of the Act 20 requires

that the rules of an exchange be

designed to prevent fraudulent and

manipulative acts and practices,

promote just and equitable principles of

trade, remove impediments to and

perfect the mechanism of a free and

open market, and in general to protect

investors and the public interest.

Section 6(b)(7) of the Act 21 requires that

the rules of an Exchange be in

accordance with Section 6(d) of the

Act,22 and in general that an Exchange

provide a fair procedure for the

disciplining of members and

determining whether to prohibit or limit

a person’s access to services offered by

the exchange. Section 6(b)(8) of the

Act 23 requires that the rules of an

exchange not impose any burden on

competition not necessary or

appropriate in furtherance of the

purposes of the Act. Section

11A(a)(1)(C)(ii) of the Act 24 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 Sections

6(b)(5), 6(b)(7), 6(b)(8), and 11A(a)(1)(C)

of the Act.25

The Commission believes that the

Exchange’s 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 members

can receive and execute options orders

on the floor of the Exchange. The

proposal also will promote fair

competition among brokers and dealers

and facilitate transactions in options on

the Exchange. Finally, for the reasons

described in more detail below, the

Commission believes that the market

making prohibition on the use of the

Exchange-Sponsored Terminals

adequately balances the potential

benefits to be derived from ExchangeSponsored Terminals with the

important regulatory issues that are

raised in connection with the potential

use of Exchange-Sponsored Terminals

for market making.

As described above, proposed Rule

6.88(b) provides that no Floor Broker

may knowingly use an ExchangeSponsored 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.

The Commission finds that the market

making restriction is consistent with the

Act for the following reasons. The

Commission believes that the PCX’s

restriction on market making through

the use of Exchange-Sponsored

Terminals has been effected in a clear

and reasonable manner that is not

ambiguous nor overbroad, and that takes

into account regulatory and market

impact concerns, including those

relating to quote competition and price

discovery.26 Notably, the Exchange’s

proposal does not bar all two-sided limit

orders. Instead it only restricts the

acceptance of two-sided limit orders

placed by the same beneficial holder in

the performance of a market making

function. The distinction between

market making and brokerage activity is

well established among market

participants. Moreover, the language of

proposed Rule 6.88(b) expressly restricts

a floor broker from, on a regular and

continuous basis, simultaneously

representing orders to buy and sell

options contracts in the same series for

the account of the same beneficial

holder, not the occasional entry of twosided limit orders. This definition of
Federal Register / Vol. 63, No. 92 /Wednesday, May 13, 1998 / Notices 26665

27 15 U.S.C. 78c(a)(38).

28See Securities Exchange Act Release No. 38054

(Dec. 16, 1996), 61 FR 67365 (Dec. 20, 1996) (order

approving SR–CBOE–95–48).

29While the Commission recognizes that there

may be ways to address the regulatory issues

presented by off-floor market making through the

use of floor broker hand-held terminals, the Act

does not dictate that any particular approach be

taken. The Commission believes that the manner in

which the Exchange has chosen to address the

regulatory issues presented by off-floor market

making reflects the considered judgment of the PCX

regarding the attributes of Exchange membership

and the organization of its trading floor, and is a

fair exercise of its powers as a national securities

exchange.

30See supra note 18.

31The 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, after Phase II is

implemented, 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.

32Telephone conversation between Michael D.

Pierson, Senior Attorney, Regulatory Policy PCX

and David Sieradzki, Attorney, Division, SEC on

April 22, 1998. The Commission notes that any

change to the required content of an order ticket

would have to be submitted to the Commission as

a proposed rule change under Section 19(b) of the

Act.

33The 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.

34The Exchange has represented that this policy

includes allowing Exchange members to interface

electronically with MFI, POETS or the limit order

book; provided that the proprietary system is

properly configured to interface with these systems.

Telephone conversation between Michael D.

Pierson, Senior Attorney, Regulatory Policy, PCX

and David Sieradzki, Attorney, Division, SEC on

April 6, 1998.

35See supra note 16.

36 15 U.S.C. 78f(b)(5) and 15 U.S.C. 78s(b).

market making activity is consistent

with the definition of market maker

under the Act which states that a market

maker ‘‘holds himself out as being

willing to buy and sell [a] security for

his own account on a regular or

continuous basis.’’ 27 Thus, the market

making restriction on ExchangeSponsored Terminal use for routing

limit orders it he minimum necessary

for the Exchange to bar Terminal use for

off-floor market making.

Further, as the Commission has

previously stated in approving market

making restrictions similar to that being

adopted by PCX, the Commission does

not believe it unreasonable for a market

to determine that the introduction of

unregulated market making through

floor brokerage hand held terminals may

undermine its market maker system and

potentially create disincentives for

market makers to remain on an

exchange trading floor.28 Accordingly,

any burden on competition that

arguably exists from PCX’s restriction

on using Exchange-Sponsored

Terminals for market making is, in the

Commission’s view, justified as

reasonable and appropriate to ensure

adequate regulation of the PCX

market.29

The Exchange represents that it

intends to implement the use of

Exchange-Sponsored Terminals through

the use of a two-phase approach. The

Commission believes that it is

consistent with the Act for the Exchange

to limit the introduction of ExchangeSponsored Terminals at this time given

the Exchange’s stated desire to identify

and correct any problems that may arise.

Further, the Exchange has stated that

participants in Phase I will be selected

on the basis of certain objective

criteria.30 The Commission notes that

after the completion of Phase I, which

the Exchange represents should last

approximately four months, Phase II

will begin, allowing any qualified Floor

Member or off-floor member who

wishes to participate in the program to

do so.31 As noted by the Exchange, all

floor brokers that have 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 will be eligible to

participate in the Exchange-Sponsored

Terminals program. The Commission

expects the Exchange to allow any floor

broker that meets the above

requirements to participate in the

program.

In addition, the Commission believes

that the proposed interpretation to Rule

6.67, under which the transmission of

an order that is received by means of an

Exchange-Sponsored Terminal or

proprietary hand-held terminal will be

deemed to constitute a written order for

the purposes of Rule 6.67, in general,

protects investors and the public

interest. The Commission believes the

proposed commentary to Rule 6.67 will

provide a more efficient means of

communicating orders on the floor. The

Commission notes that while this

proposed Commentary effects the format

of the order ticket, the Exchange has

represented and the Commission

expects that the required content of the

order ticket would not be altered.32

Finally, regarding the use of

proprietary hand-held terminal systems

on the floor of the Exchange; the

Exchange has represented that it intends

to allow the use of proprietary handheld terminal systems on the floor of the

Exchange provided that they do not

electronically interfere 33 with existing

Exchange systems.34 As discussed

above, the Exchange notes that if, for

example, the use of a proprietary devise

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 orderrouting system, then the device causing

the interference could not be used on

the floor until it was rendered

compatible with the other electronic

systems in use. The Commission finds

that this restriction is reasonable given

that it is limited to electronic

interference with other exchange

systems and that an interfering system

would be permitted to return to the floor

once it is made compatible with other

exchange systems. The Commission

notes that any implementation of this

provision to restrict competition or the

introduction of new technology onto the

floor of the Exchange would be

inconsistent with the Exchange’s rules

and with the Act. In summary, the

Commission emphasizes and finds it

very important that approval of the

PCX’s Exchange-Sponsored Terminals

proposal will not restrict members from

using their own proprietary terminal

systems provided that they do not

electronically interfere with existing

Exchange systems.35

The Commission finds good cause for

approving Amendment No. 2 to the

proposed rule change prior to the

thirtieth day after the date of

publication of notice of filing thereof in

the Federal Register. Amendment No. 2

amends the language in proposed

Commentary .02 to Rule 6.67 to indicate

that orders received through proprietary

hand held terminals will be considered

to be in writing for the purposes of Rule

6.67. Commentary .02, as originally

proposed, applied only to ExchangeSponsored Terminals. Amendment No.

2 ensures that all systems, whether

Exchange sponsored or not will have the

same regulatory requirements. As a

result, the Commission does not believe

that Amendment No. 2 raises any new

regulatory issues. Further, the

Commission notes that the original

proposal was published for the full 21-

day comment period and no comments

were received by the Commission.

Accordingly, the Commission believes

there is good cause, consistent with

Sections 6(b)(5) and 19(b) 36 of the Act,

to approve Amendment No. 2 to the
26666 Federal Register / Vol. 63, No. 92 /Wednesday, May 13, 1998 / Notices

37 15 U.S.C. 78s(b)(2).

38 17 CFR 200.30–3(a)(12).

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

Exchange’s proposal on an accelerated

basis.

IV. Solicitation of Comments

Interested persons are invited to

submit written data, views and

arguments concerning Amendment No.

2 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, DC 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 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 abovementioned self-regulatory organization.

All submissions should refer to File No.

SR–PCX–97–28 and should be

submitted by June 3, 1998.

V. Conclusion

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act,37 that the

proposed rule change (SR–PCX–97–28)

is approved as amended.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.38

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98–12702 Filed 5–12–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–39972; File No. SR–PHLX–

98–20]

Self-Regulatory Organizations; Notice

of Filing and Immediate Effectiveness

of Proposed Rule Change By the

Philadelphia Stock Exchange, Inc. To

Adopt, on a Pilot Basis, a System

Enhancement to the X-Station

Electronic Book

May 7, 1998.

Pursuant to Section 19(b)(1) of the

Securities Exchange Act of 1934 (‘‘Act),1

notice is hereby given that on April 24,

1998, the Philadelphia Stock Exchange,

Inc. (‘‘Phlx’’ 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 Exchange.

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 Exchange, pursuant to Rule 19b–

4 under the Act, proposes, as a six

month pilot, to adopt a system

enhancement to the X-Station electronic

book on the options floor which

matches incoming Automatic Execution

System (‘‘AUTO–X’’) orders with orders

residing on the specialist’s book.

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

Phlx 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 Phlx 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

As described in Phlx Rule 1080,

Comment .02, the electronic order book

is an automated mechanism for

specialists to hold and display orders

based on price/time priority. The

Exchange is currently preparing floorwide deployment of the new X-Station

electronic book on the options floor.

The new X-Station provides certain

improvements such as expedited nonAUTO–X order execution as well as

expedited cancel replacement

processing.

AUTO–X is the automatic execution

feature of the Automated Options

Market (‘‘AUTOM’’) System, the

electronic order delivery and routing

system for options orders. Currently,

AUTO–X orders are executed against a

‘‘shadow account’’ for which the

specialist is ultimately responsible. The

execution is immediately reported back

to the sending firm, and then, the

specialist must manually input the

contra-side interest representing the

booked order that becomes due as a

result of the AUTO–X trade.

At this time, the Phlx proposes to

adopt, as a six month pilot, a system

enhancement to the electronic book that

matches incoming AUTO–X orders with

booked orders. The proposed matching

ability would allow the specialist to

match these two participants directly,

without the specialist participating in

the trade, by dropping the order to

manual status. The match would not be

automatic, as the specialist must ensure

that crowd participation under current

parity/priority rules is not due before

executing the trade; thus, the specialist

must ‘‘select’’ the orders to execute the

trade. Since the AUTO–X order has

dropped to manual, the sending firm

will not receive an execution report

until the specialist selects and executes

the trade.

The proposed enhancement affords

specialists relief from the manual

burden of inserting trade participant

and clearing information by writing an

order ticket for the booked order.

Without the X-Station itself, the booked

order appears on an actual order ticket,

which the specialist submits for key

punch entry. Thus, implementing the XStation without the matching feature is

more burdensome than the process

required without the X-Station itself

because it requires more ticket-writing.

The proposed enhancement should

reduce the amount of paper processed

on the options floor. This in turn should

reduce handling and processing time,

including the likelihood of errors,

thereby facilitating more prompt and

accurate trade reporting.

For these reasons, the proposed rule

change is consistent with Section 6 of

the Act in general, and in particular,

with Section 6(b)(5), in that it is

designed to foster cooperation and

coordination with persons engaged in

regulating, clearing, settling, processing

information with respect to, and

facilitating transactions in securities, to

remove impediments to and perfect the

mechanism of a free and open market

and a national market system, as well as

to protect investors and the public

interest by enhancing efficiency through

automation in the market.

B. Self-Regulatory Organization’s

Statement on Burden on Competition

The Phlx does not believe that the

proposed rule change will impose any

inappropriate burden on competition.