Federal Register / Vol. 66, No. 88 / Monday, May 7, 2001 / Notices 23059

increased 131 percent over the par value of these

transactions in 1999.

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

2 17 CFR 240.19b–4.

securities in GSCC’s auction takedown

service would provide GSCC and its

members that trade these securities with

all the benefits described above.

In order to meet the February

deadline, it is necessary for GSCC to

apply its current auction takedown

procedures without any material

alteration to the Freddie Mac auctions.

Only minor changes to GSCC’s rules are

necessary. Such changes include the

following:

The Department of the Treasury

utilizes the Federal Reserve Banks, its

fiscal agents, to furnish details of its

auction awards to GSCC. GSCC

therefore designated both the Treasury

Department and the Federal Reserve

Banks as locked-in trade sources when

it instituted the auction takedown

service. GSCC will now add Freddie

Mac as a locked-in trade source. The

Commission has already given GSCC

permission to designate locked-in trade

sources on an as-needed basis. It should

be noted that Freddie Mac will furnish

details of its auction awards directly to

GSCC without the involvement of its

fiscal agent, the Federal Reserve Bank of

New York.

Various definitions will be expanded

to include Freddie Mac and its

securities in the rules referencing the

auction takedown service.

Freddie Mac has indicated that,

unlike the Department of the Treasury,

it desires that awards made to nonnetting members also be handled by

GSCC to the extent possible. GSCC thus

will make changes to its existing rules,

which already allow for secondary

market trades executed by non-members

to be submitted by members for the net,

to specify that it will process auction

purchases made by its netting members

for their customers as well as for their

proprietary accounts. The netting

members will remain liable to GSCC as

principals with respect to all auction

purchase awarded to them whether the

purchase is for their own accounts or for

customers.

Unlike the Treasury Department,

Freddie Mac does not require the

clearing banks to effectively guarantee

payment in advance for any newly

issued securities. thus, there will be no

need for the execution of autocharge

agreements by the clearing banks.

Freddie Mac retains the right to

cancel auctions. GSCC has made it clear

in its rules what has always been

implicit for an issuer of auction awards

that GSCC will have no obligation with

respect to any when-issued trades if

securities are not ultimately issued by

Freddie Mac. GSCC has also added the

right to delete or modify trade data with

respect to when-issued trades if any

event occurs that gives rise to the

obligation to substitute securities under

guidelines published by The Bond

Market Association.

The Department of the Treasury is not

a member of GSCC and is therefore not

required to make any clearing fund

deposits or funds settlement payments

to GSCC. Since Freddie Mac is a GSCC

netting member and would otherwise be

responsible for these deposits and

payments, GSCC has exempted Freddie

Mac from these requirements but only

in connection with its auction

deliveries.

The proposed rule change is

consistent with the requirements of

Section 17A of the Act and the rules and

regulations thereunder because it will

enhance GSCC’s auction takedown

service by making it more responsive to

the needs of GSCC’s members.

(B) Self-Regulatory Organization’s

Statement on Burden on Competition

GSCC does not believe that the

proposed rule change will have an

impact or impose a burden on

competition.

(C) Self-Regulatory Organization’s

Statement on Comments on the

Proposed Rule Change Received From

Members, Participants or Others

Written comments relating to the

proposed rule change have not yet been

solicited or received. Members will be

notified of the rule change filing and

comments will be solicited by an

Important Notice. GSCC will notify the

Commission of any written comments

received by GSCC.

III. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Action

The foregoing rule change has become

effective pursuant to Section 19(b)(3) of

the Act and Rule 19b–4(f)(4) thereunder,

because the proposed rule is effecting a

change in an existing service that does

not adversely affect the safeguarding of

securities or funds in the custody or

control of the clearing agency and does

not significantly affect the respective

rights or obligations of the clearing

agency or person using the service. At

any time within 60 days of the filing of

such 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 Securities Exchange Act

of 1934.

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

Section, 450 Fifth Street, NW.,

Washington, DC 20549. Copies of such

filing also will be available for

inspection and copying at the principal

office of GSCC. All submissions should

refer to File No. SR–GSCC–2001–02 and

should be submitted by May 29, 2001.

For the Commission by the Division of

Market Regulation, pursuant to delegated

authority.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 01–11338 Filed 5–4–01; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–44234; File No. SR–PCX–

00–03]

Self-Regulatory Organizations Notice

of Filing of Proposed Rule Change by

the Pacific Exchange, Inc.

Implementing a One-Year Pilot

Program Relating to Its Automatic

Executive System

April 30, 2001.

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 February

15, 2000, the Pacific Exchange, Inc.

(‘‘PCX’’ 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

23060 Federal Register / Vol. 66, No. 88 / Monday, May 7, 2001 / Notices

3The rules applicable to the Limit Order Book are

set forth in PCX Rules 6.51–6.58.

4Pacific Options Exchange Trading System. See

Securities Exchange Act Release No. 28633 (January

18, 2990), 55 FR 2466 (January 24, 1990).

5See PCX Rule 6.87.

6 If there were no orders in the Book to buy at $5,

and a bid of $5 was being disseminated by the PCX,

then an incoming market order to sell (or a limit

order to sell at $5) would be automatically executed

by the Auto-Ex feature of POETS, with PCX market

makers as the contra side to the trade. See note 14,

infra.

7Floor members include market makers and floor

brokers. Only members and Exchange employees

who have been approved to perform a floor function

may consummate transactions on the trading floor.

See PCX Rule 6.2, Commentary .01.

8See generally PCX Rules 6.51–6.58 (rules

relating to Order Book Officials (‘‘OBOs’’)). The

Exchange notes that currently, all OBOs are

employed by the PCX. However, the Commission

recently approved an Exchange proposal to permit

LMMs to use their own employees to operate the

Book, which would include performing the

function of the OBO. See Securities Exchange Act

Release No. 41595 (July 2, 1999), 64 FR 38064 (July

14, 1999) (order approving SR–PCX–98–02).

Therefore, the term ‘‘OBO’’ as used in this proposal

includes OBOs currently employed by the Exchange

and any employees of LMMs who are performing

the function of the OBO.

9Floor members must trade against orders in the

Book ahead of orders then being manually

represented in the trading crowd at the same price,

because orders in the Book have priority over orders

in the trading crowd. See PCX Rule 6.75(a)–(b).

10A limit order to buy is marketable when the

order’s limit price is equal to or greater than the

current offering price and a limit order to sell is

marketable when the order’s limit price is equal to

or less than the current bid price. At the PCX, when

the market on the screen on the trading floor is

locked or crossed, the prices in the affected series

are displayed in the purple, which alerts the

members on the floor that there are buyers and

sellers who are ready and willing to trade.

11A similar result would occur if a market maker

in the trading crowd offered to sell options at 5, or

a floor broker in the crowd representing an order

made an offer to sell at 5, while concurrently there

was an existing bid in the Book at the same price,

i.e., in theory, there would be a locked market. In

practice, however, the market maker or floor broker

willing to sell at 5 would vocalize an acceptance of

the bid in the Book to trade at 5. If the size of the

market maker’s or floor broker’s offer was greater

than the size of the order in the Book, the offer at

5 would continue in effect until it was satisfied or

withdrawn.

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 proposes to amend its

rules to allow automatic executions of

orders in its Limit Order Book (‘‘Limit

Order Book’’ or ‘‘Book’’) when those

orders become marketable. Below is the

text of the proposed rule change.

Proposed new language is italicized.

* * * * *

¶5231 Automatic Execution System

Rule 6.87(a)–(k)—No change.

(1) Auto-Ex Book Function

(A) The Auto-Ex Book function of

POETS will permit orders in the Limit

Order Book to be executed via the AutoEx system when those orders become

marketable, subject to the following

procedures:

(i) When one or more orders in the

Limit Order Book become marketable,

as indicated by a locked or crossed

market being displayed on the trading

floor, the LMM may direct the OBO to

initiate the Auto-Ex Book function,

which will cause marketable orders in

the Limit Order Book to be

automatically executed against the

accounts of market makers who are

participating on the Auto-Ex system at

the time.

(B) The Auto-Ex Book function is

subject to a one-year pilot program

which is set to expire [insert date one

year from date of SEC approval].

* * * * *

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 its 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

1. Purpose

At the PCX, limit orders of public

customers may be placed in the

Exchange’s Options Limit Order Book 3

either electronically (via POETS 4) or

manually, by an options floor broker. At

this time, only limit orders of ‘‘public

customers’’ are eligible to be placed in

the Limit Order Book.5 Orders not

eligible to be placed in the Limit Order

Book must be manually represented by

a floor broker at the trading post.

Currently, orders in the Limit Order

Book can be executed in two ways.

First, they can be executed

electronically against incoming market

or limit orders that a member firm has

entered through POETS. For example, if

a customer order to buy 20 option

contracts at $5 is being represented in

the Book, an incoming market order to

sell 20 contracts (or limit order to sell

20 contracts at $5) entered electronically

will execute against that order in the

Book.6

Second, orders in the Book can be

executed manually. To execute an order

in the Book manually, a floor member 7

must vocalize a bid or offer for the

option contracts being represented in

the Book. This requires that the floor

member gain the attention of the Order

Book Official (‘‘OBO’’ 8) and make an

appropriate vocalization, e.g., ‘‘sell 20

XYZ calls to the Book at $5.’’ 9 To

consummate the trade, the OBO must

perform the following actions: (1) call

up the appropriate page for that

particular option on the class display;

(2) highlight the appropriate series (e.g.,

March 30 calls); (3) enter either the buy

key or the sell key; (4) enter either the

put key or the call key; (5) type in the

number of contracts to be purchased or

sold; (6) enter the floor member’s

acronym (e.g., MO1) and; (7) press the

‘‘enter’’ key to execute at the limit price

or, alternatively, to improve the limit

price, enter the better price (e.g., 47⁄8)

and press the ‘‘enter’’ key.

The current manual process for

executing orders in the Book is used

when an order in the Book becomes

marketable and a trade occurs.10 For

example, assume that the PCX market is

5 bid, 51⁄8 asked, with 20 contracts in

the Book to buy at 5. Next, assume that

the underlying stock ticks down 1⁄8 of a

point, and the new market in the option

becomes 47⁄8 bid, 5 asked. As long as the

order to buy at 5 remains in the Book,

the market will be locked at 5 bid, 5

asked.11 To unlock the market, the order

in the Book, which is now marketable,

must be traded—but to do so will

require a member of the trading crowd

to obtain the OBO’s attention, vocalize

an offer for some or all of the contracts

available at 5, and wait for the OBO to

type in the information on the trade.

The Exchange believes that the

current manual process for executing

orders in the Book is inefficient. During

times of heavy trading, it can be difficult

for the OBO to type in specific trade

details when that OBO may be involved

in trades in other option series or other

option issues. The inefficiencies of the

current process have also become

exacerbated due to rapid swings in

prices that have been occurring recently

in the marketplace, particularly in

options overlying so-called ‘‘internet

stocks.’’

Accordingly, the Exchange is

proposing to effect a system change that

will cause orders in the Book to be

executed more efficiently when they

become marketable. Specifically,

Federal Register / Vol. 66, No. 88 / Monday, May 7, 2001 / Notices 23061

12As noted above, this offer may be generated

automatically by Auto-Quote, as a result of a change

in the market in the underlying stock, or it may be

generated manually by a member of the crowd

vocalizing an offer, which is entered into POETS by

the Market Quote Terminal Operator and

subsequently disseminated. 13The Auto-Ex feature of POETS permit eligible

market or marketable limit orders sent from member

firms to be executed automatically at the displayed

bid or offering price. Participating market makers

are designated as the contra side to each Auto-Ex

order. Participating market makers are assigned by

Auto-Ex on a rotating basis, with the first market

maker selected at random from the list of signedon market makers. Auto-Ex preserves book priority

in all options. See PCX Rule 6.87; see also

Securities Exchange Act Release No. 41823

(September 1, 1999), 64 FR 49265 (September 10,

1999) (order approving PXC proposal to increase

the size of orders that may be automatically

executed via Auto-Ex). The Auto-Ex system is also

used to execute any imbalance of orders that there

may be at the opening via the Automated Opening

Rotation System. See Note 14, infra.

14See Securities Exchange Act Release No. 43187

(August 21, 2000), 65 FR 54264 (August 29, 2000)

(order approving one year extension of pilot

program).

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

16 15 U.S.C. 78f(b)(5). 17 17 CFR 200.30–3(a)(12).

marketable orders in the Book will be

executed via the Auto-Ex system when

the Lead Market Maker (‘‘LMM’’) directs

the OBO to operate the Auto-Ex Book

Function. For example, if there are 30

contracts in the Book to buy at $5 and

the trading crowd’s offer to sell changes

to a price of $5,12 rather than locking the

market (5 bid, 5 asked), the system will,

upon the instruction of the LMM,

execute the orders in the Book via the

Auto-Ex System.13 The 30 contracts to

buy in the Book at $5 will then be

executed against the accounts of market

makers who are logged on to Auto-Ex at

that time.

The function will also permit orders

in the Book at various prices to be

executed almost simultaneously. For

example, assume that there are multiple

orders in the Book, including orders to

buy 50 contracts at $5, 50 contracts to

buy at 43⁄4 and 50 contracts to buy at

41⁄2. If the underlying stock price moves

significantly, resulting in the PCX

offering price of the overlying option

price moving from 51⁄4 down to 4;1⁄2, the

LMM may direct the OBO to initiate the

Auto-Ex Book feature so that all of the

buy orders in the Book referred to above

will be automatically executed at their

limit prices. This result simply speeds

up the process for what currently may

occur manually, with individual

members of the trading crowd selling

options against the buy orders in the

book at their limit prices. Alternatively,

however, the LMM or members of the

trading crowd may determine to provide

price improvement to the customer

orders in the book, and may direct that

all of those buy orders in the example

(including those with limit prices of $5,

43⁄4 and 41⁄2) be filled at 41⁄2. In this

instance, of course, the Auto-Ex Book

feature would not be used.

The Exchange is proposing to

implement the use of the Auto-Ex Book

function on a one-year pilot program

basis. This will allow the Exchange to

study the operation of the system and to

report back to the Commission at least

sixty days prior to seeking permanent

approval of the system change.

The Exchange notes that the proposed

Auto-Ex Book feature will operate in a

manner that is similar to the Exchange’s

Automated Opening Rotation (‘‘AOR’’)

system, which automates the execution

of orders in the Book at the opening of

trading.14 Specifically, the AOR system

permits the OBO to establish a single

price opening for executing market and

marketable limit orders in the POETS

system. It executes any imbalance of

orders that existed at the opening at a

single price, against the accounts of

market makers who are participating on

the Auto-Ex System at the time. The

Exchange believes that approval of the

Auto-Ex Book proposal, like the

Commission’s approval of the AOR

system, will facilitate execution of

orders in POETS, eliminate problems

and inefficiencies associated with

manual trading, eliminate backlogs of

unexecuted orders, promote fair

participation in trading against orders in

the Book by all participants, and in

general, improve market efficiency on

the PCX.

In conclusion, the Exchange believes

that use of the proposed feature will

help to assure that customers’ orders in

the Book are filled more promptly. It

will also help to prevent delays in

trading and prompt resolution of

problems in the crowd, because OBO’s

will not have to take as much time to

respond to requests to execute

marketable orders in the Book.

2. Basis

The Exchange believes that this

proposal is consistent with Section 6(b)

of the Act,15 in general, and furthers the

objectives of Section 6(b)(5)16 in

particular, in that it is designed to

facilitate transactions in securities,

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 Exchange 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.

20549–0609. 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 the PCX. All

submissions should refer to File No.

SR–PCX–00–03 and should be

submitted by [May 29, 2001.]

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.17

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 01–11337 Filed 5–4–01; 8:45 am]

BILLING CODE 8010–01–M