[Federal Register Volume 66, Number 37 (Friday, February 23, 2001)]
[Notices]
[Pages 11344-11348]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-4497]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43971; File No. SR-PCX-00-05]


Self-Regulatory Organizations; Order Granting Partial Approval of 
Proposed Rule Change and Notice of Filing and Order Granting Partial 
Accelerated Approval of Amendments No. 2 and 3 to the Proposed Rule 
Change by the Pacific Exchange, Inc. Relating to Its Automatic 
Execution System

February 15, 2001.

I. Introduction

    On March 8, 2000, the Pacific Exchange, Inc. (``PCX'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC''), 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 to allow broker-dealer orders to 
be eligible for automatic execution through the Exchange's Automatic 
Execution system (``Auto-Ex'') on an issue-by-issue basis. The Exchange 
also proposed to adopt rules to establish means of improving compliance 
with rules pertaining to the use of Auto-Ex. On June 27, 2000, the PCX 
filed Amendment No. 1 to the proposed rule change.\3\ Notice of the 
proposed rule change, including Amendment No. 1, was published for 
comment in the Federal Register on July 25, 2000.\4\ The Commission 
received four comment letters with respect to the proposal.\5\ On 
January 18, 2001, the PCX filed Amendment No. 2 to the proposed rule 
change.\6\ On January 26, 2001, the

[[Page 11345]]

PCX filed Amendment No. 3 to the proposed rule change.\7\ This order 
approves the portions of the proposed rule change relating to 
provisions to establish means of improving compliance with the 
Exchange's Auto-Ex rules, as set forth below; grants accelerated 
approval to Amendments No. 2 and 3 to those portions of the proposed 
rule change; and solicits comments form interested persons on these 
amendments.\8\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Michael D. Pierson, Vice President, 
Regulatory Policy, PCX, to Gordon Fuller, Special Counsel, Division 
of Market Regulation (``Division''), Commission, dated June 26, 2000 
(``Amendment No. 1''). In Amendment No. 1, the PCX revised some of 
the text of the proposed rule change.
    \4\ Securities Exchange Act Release No. 43049 (July 18, 2000), 
65 FR 45810.
    \5\ See letters from David B. Bayless, Morrison & Foerster LLP 
(``Morrison & Foerster''), to Jonathan G. Katz, Secretary, 
Commission, dated August 14, 2000 (``Morrison & Foerster Letter''); 
David M. Battan, Vice President and General Counsel, Interactive 
Brokers LLC (``Interactive Brokers''), to Jonathan G. Katz, 
Secretary, Commission, dated August 15, 2000 (``Interactive Brokers 
Letter''); Mike Ianni, to Jonathan G. Katz, Secretary, Commission, 
dated August 9, 2000 (``Ianni E-Mail''); and William M. Thomas, 
Member of Congress, forwarding a letter from Austin Kalb, Chief 
Executive Officer, OutSource International Corporation (``OutSource 
International''), to Jonathan G. Katz, Secretary, Commission, dated 
August 14, 2000 (``OutSource International Letter'').
    \6\ See letter from Cindy Sink, Senior Attorney, Regulatory 
Policy, PCX, to Sapna Patel, Attorney, Division, Commission, dated 
January 17, 2001 (``Amendment No. 2''). In Amendment No. 2, the PCX 
further revised some of the proposed rule text. Specifically, the 
PCX added a safe harbor provision for orders entered more than 15 
seconds apart, eliminated provisions that would have permitted the 
PCX to nullify certain orders, incorporated a provision prohibiting 
the use of the Pacific Options Exchange Trading System (``POETS'') 
to perform a market making function, and made other minor technical 
changes. Revisions made by Amendment No. 2 are incorporated in the 
description of the proposal in Section II, infra.
    \7\ See letter from Cindy Sink, Senior Attorney, Regulatory 
Policy, PCX, to Sapna Patel, Attorney, Division, Commission, dated 
January 25, 2001 (``Amendment No. 3''). In Amendment No. 3, the PCX 
made some minor technical corrections to the proposed rule text.
    \8\ The Commission is not approving at this time the portion of 
the proposed rule change that would allow orders for the accounts of 
brokers-dealers, excluding those orders for Market Makers or 
Specialists on an exchange who are exempt from the provisions of 
Regulation T of the Federal Reserve Board pursuant to Section 
7(c)(2) of the Act, to be executed on Auto-Ex on an issue-by-issue 
basis.
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    Below is the final text of the approved portions of the proposed 
rule change, as amended. Proposed new language is italicized; proposed 
deletions are in brackets.
* * * * *

para. 5231  Automatic Execution System

    Rule 6.87(a). Definitions. For purposes of Rule 6:
    (1) The term ``Auto-Ex'' means the automated execution system 
feature of POETS that is owned and operated by the Exchange and that 
provides automated order execution and reporting services for 
options.
    (2) The term ``User'' means any person or firm that obtains 
electronic access to Auto-Ex through an Order Entry Firm.
    (3) The term ``Order Entry Firm'' means a member organization of 
the Exchange that is registered as an Order Entry Firm for purposes 
of sending orders to the Exchange for execution by Auto-Ex.
    (b) Eligible Orders.
    (1) [(a).] Only non-broker/dealer customer orders are eligible 
for execution on the Exchange's Auto-Ex System [Automatic Execution 
System (``Auto-Ex'')]. For purposes of this Rule, the term ``broker/
dealer'' includes foreign brokers/dealers.
    (2) [(b)] The Options Floor Trading Committee (``OFTC'') \9\ 
shall determine the size of orders that are eligible to be executed 
on Auto-Ex. Although the order size parameter may be changed on an 
issue-by-issue basis by the OFTC, the maximum order size for 
execution through Auto-Ex is as follows:
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    \9\ Minor technical changes were made to the proposed rule. In 
subparagraph (b)(2), the reference to ``The Options Floor Trading 
Committee (``OFTC'')'' was retained in full and not replaced with 
the ``OFTC.'' In addition, the first letter of the first word in 
each subsection under subparagraph (c) was capitalized to make the 
proposed rule text consistent with the rest of the rule text. 
Telephone conversation between Michael D. Pierson, Vice President, 
Regulatory Policy, PCX, and Sapna C. Patel, Attorney, Division, 
Commission, on February 21, 2001.
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    (A)[(1)] Equity Options: the maximum order size for execution 
through Auto-Ex for equity options is one hundred (100) 
contracts;\10\
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    \10\ See Securities Exchange Act Release No. 43887 (January 25, 
2001), 66 FR 8831 (February 2, 2001) (approval order increasing the 
maximum order size for execution through Auto-Ex from seventy-five 
contracts to one hundred contracts).
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    (B)[(2)] Index Options: the maximum order size for execution 
through Auto-Ex is one hundred (100) contracts for:
    (i)[(A)] the PSE Technology Index;
    (i)[(B)] the Wilshire Small Cap Index; and
    (iii)[(C)] the Morgan Stanley Emerging Growth Index.\11\
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    \11\ Id.
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    (3)[(c)] The [Options Floor Trading Committee] OFTC may increase 
the size of Auto-Ex eligible orders in one or more classes of 
multiply traded equity options to the extent that other exchanges 
permit such larger-size orders in multiply traded equity options of 
the same class or classes to be entered into their own automated 
execution systems. If the [Options Floor Trading Committee] OFTC 
intends to increase the Auto-Ex order size eligibility pursuant to 
this Rule, the Exchange will notify the Securities and Exchange 
Commission pursuant to Section 19(b)(3)(A) of the Exchange Act.
    (c) Order Entry Firm Registration Participation in Auto-Ex as an 
Order Entry Firm requires registration with the Exchange. Continued 
registration depends upon the Order Entry Firm's initial and 
continuing compliance with the following requirements:
    (1) Execution of an Auto-Ex Order Entry Firm Application 
Agreement with the Exchange;
    (2) Compliance with all applicable PCX options trading rules and 
procedures;
    (3) Written notice must be provided to all Users regarding the 
proper use of Auto-Ex; and 
    (4) Maintenance of adequate procedures and controls that will 
permit the Order Entry Firm of effectively monitor and supervise the 
entry of electronic orders by all Users. Order Entry Firms must 
monitor and supervise the entry of orders by Users to prevent the 
prohibited practices set forth in subsection (d).
    (d) Prohibited Practices. Prohibited practices include, but are 
not limited to, the following:
    (1) Entering an order for an account that is ineligible for 
execution on Auto-Ex pursuant to subsection (b), above.
    (2) Dividing an order involving a single investment decision 
into multiple smaller lots for the purpose of meeting the order size 
requirements for Auto-Ex eligibility.
    (A) Multiple orders to trade the same option issue that are on 
the same side of the market (whether short or long) and multiple 
orders to trade the same option series entered within any 15-second 
period for the account of the same beneficial owner will be presumed 
to be based on a single investment decision.
    (B) Multiple orders to trade the same option issue that are on 
the same side of the market (whether short or long) and multiple 
orders to trade the same option series entered outside of any 15-
second period for the account of the same beneficial owner will be 
deemed to be separate investment decisions; provided, however, that 
no Order Entry Firm may divide up to permit an existing order to be 
divided up to make its parts eligible for entry into Auto-Ex.
    (3) Entering orders via POETS to perform a market making 
function as provided in Rule 6.88(c).
    (4) Effecting transactions that constitute manipulation as 
provided in PCX Rule 4.6(a) and SEC Rule 10b.5.
    [(d)] Firms entering orders for execution on Auto-Ex may not 
divide them up in order to make their parts eligible for entry into 
Auto-Ex.]
    (e)-(k)--[(d)-(j)]-No change.
* * * * *

POETS

para.5231D  Pacific Options Exchange Trading System

    Rule 6.88 (a)-(b)-No change.
    (c) Entering orders via POETS to perform a market making 
function is prohibited. No member or person associated with a member 
may use POETS on a regular and continuous basis to simultaneously 
execute orders to buy and sell series for the account of the same 
beneficial holder. In making the determination of whether a member 
or person associated with a member is using the POETS system to 
perform a market making function, the Exchange will consider the 
following factors; the simultaneous or near-simultaneous entry of 
limit orders to buy and sell the same option; and the entry of 
multiple limit orders at different prices in the same option series.
* * * * *

II. Description of the Proposal

    In 1990, the Commission approved the Exchange's POETS system on a 
pilot program basis and, in 1993, POETS was approved permanently.\12\ 
POETS is

[[Page 11346]]

comprised of an options order routing system (``ORS''), an automatic 
and semi-automatic execution system (``Auto-Ex''), an on-line book 
system (``Auto-Book''), and an automatic market quote update system 
(``Auto-Quote'').
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    \12\ See Securities Exchange Act Release No. 27633 (January 18, 
1990), 55 FR 2466 (January 24, 1990) (approving POETS on a pilot 
basis); Securities Exchange Act Release No. 32703 (July 30, 1993), 
58 FR 42117 (August 6, 1993) (approving POETS on a permanent basis). 
The Auto-Ex system permits 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 signed-on 
market makers. Automatic executions through Auto-Ex are currently 
available for public customer orders of twenty contracts or less (or 
in certain issues, for one hundred contracts or less) in all series 
of options traded on the Options Floor of the Exchange.
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    The Exchange proposes several definitional changes to PCX Rule 6.87 
pertaining to Auto-Ex.\13\ Specifically, the Exchange proposes to add 
new PCX Rule 6.87(a) to codify the terms ``Auto-Ex,'' ``User,'' and 
``Order Entry Firm.'' First, the Exchange proposes to define the term 
``Auto-Ex'' to mean the automated execution system feature of POETS 
that is owned and operated by the Exchange and that provides automated 
order execution and reporting services for options. Second, the 
Exchange proposes to define the term ``User'' to mean any person or 
firm that obtains electronic access to Auto-Ex through an Order Entry 
Firm. Third, the Exchange proposes to define the term ``Order Entry 
Firm'' to mean a member organization of the Exchange that is registered 
as an Order Entry Firm for purposes of sending orders to the Exchange 
for execution by Auto-Ex. The Exchange represents that it is proposing 
to codify these terms in order to provide users of Auto-Ex with clear 
and precise definitions for terms used in PCX Rule 6.87.
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    \13\ The Exchange proposes to renumber PCX Rule 6.87(a) as PCX 
Rule 6.87(b)(1) and PCX Rules 6.87(b) and (c) as PCX Rules 
6.87(b)(2) and (3). The Exchange also proposes to renumber PCX Rules 
6.87(d) through (j) as PCX Rules 6.87(e) through (k).
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    In addition, the Exchange proposes to add new PCX Rule 6.87(c) to 
require Order Entry Firms, as defined in proposed PCX Rule 6.87(a), to 
register with the Exchange as a condition of having access to Auto-Ex. 
Such registration will require that an Order Entry Firm execute an 
Order Entry Firm Application Agreement with the Exchange; comply with 
all applicable PCX options trading rules and procedures; provide 
written notice to all Users regarding proper use of Auto-Ex; and 
maintain adequate procedures and controls that will permit the Order 
Entry Firm to effectively monitor and supervise the entry of electronic 
orders by all Users. The Exchange represents that it is proposing these 
rule changes to safeguard the use of Auto-Ex and to obligate Order 
Entry Firms to inform and supervise Users to ensure compliance with PCX 
rules and procedures. The Exchange also represents that these proposed 
changes will protect investors and the public from changes in options 
prices or markets caused by uses of Auto-Ex that the Exchange believes 
are prohibited.
    Furthermore, the Exchange proposes to add new PCX Rule 6.87(d) to 
codify certain practices that otherwise are prohibited on Auto-Ex. 
Proposed PCX Rule 6.87(d) lists four prohibited uses of Auto-Ex: (1) 
Entering an order for an account that is ineligible for execution on 
Auto-Ex; (2) dividing an order involving a single investment decision 
into multiple smaller lots for the purposes of meeting the order size 
requirements for Auto-Ex eligibility, which includes entering multiple 
orders to trade the same option issue that are on the same side of the 
market (whether short or long) and multiple orders to trade the same 
series for the account of the same beneficial owner within the same 
fifteen second period; (3) entering orders via POETS to perform a 
market making function; and (4) effecting transactions that constitute 
manipulation as provided in PCX Rule 4.6(a) \14\ and SEC Rule 10b-5 
\15\ under the Act. A detailed explanation of each prohibited practice 
follows.
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    \14\ PCX Rule 4.6 states that ``[n]o member, member firm or any 
participant therein shall effect or induce the purchase or sale or 
otherwise effect transactions in any security for the purpose of 
creating or inducing a false, misleading or artificial appearance of 
activity in such security, or for the purpose of unduly or 
improperly influencing the market price of such security, or for the 
purpose of making a price which does not reflect the true state of 
the market in such security''
    \15\ 17 CFR 240.10b-5.
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    First, with regard to the type of orders eligible for execution on 
Auto-Ex, the Exchange proposes that all orders not eligible under 
subsection (b) of proposed PCX Rule 6.87 be deemed ineligible orders. 
The Exchange represents that this proposed rule change will clarify 
what orders are eligible for execution on Auto-Ex.
    Second, the Exchange proposes to replace PCX Rule 6.87(d) with PCX 
Rule 6.87(d)(2). PCX Rule 6.87(d) states that ``firms entering orders 
for execution on Auto-Ex may not divide them up in order to make their 
parts eligible for entry into Auto-Ex.'' The Exchange proposes to 
replace PCX Rule 6.87(d) with new PCX Rule 6.87(d)(2), which prohibits 
dividing an order involving a single investment decision into multiple 
smaller lots for the purpose of meeting the order size requirements for 
Auto-Ex eligibility. Under proposed PCX Rule 6.87(d)(2), multiple 
orders to trade the same option issue that are on the same side of the 
market (whether short or long) and multiple orders to trade the same 
series entered within any fifteen second period for the account of the 
same beneficial owner will be presumed to be based on a single 
investment decision. Multiple orders to trade the same option issue 
that are on the same side of the market (whether short or long) and 
multiple orders to trade the same series entered outside any fifteen 
second period for the account of the same beneficial owner will be 
deemed to be separate investment decision; provided, however, that no 
Order Entry Firm may divide up or permit an existing order to be 
divided up to make its parts eligible for entry into Auto-Ex.
    Third, the Exchange proposes to add PCX Rule 6.88(c) to prohibit 
Users from using POETS to perform market making functions and to 
specify in rule 6.87(d) that entering such orders via POETS is a 
prohibited practice. PCX Rule 6.32 defines a Market Maker as an 
individual who is registered with the Exchange for the purpose of 
making transactions as dealer-specialist on the Floor of the Exchange. 
With regard to entering orders via POETS to perform a market making 
function, proposed PCX Rule 6.88(c) prohibits a member or associated 
person of a member from using POETS on a regular and continuous basis 
to simultaneously execute orders to buy and sell series for the account 
of the same beneficial holder. In making the determination of whether a 
member or person is using POETS to perform a market making function, 
the Exchange will consider the following factors: the simultaneous or 
near-simultaneous entry of limit orders to buy and sell the same 
option; and the entry of multiple limit orders at different prices in 
the same option series. The Exchange proposes this change to prohibit 
Users from acting as Market Makers through the use of POETS.\16\
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    \16\ Cf. PCX Rules 6.89(b) and 6.90(d)(3). PCX Rule 6.89(b) 
states that ``[n]o Floor Broker may knowingly use a Floor Broker 
Hand-Held Terminal, on a regular and continuous basis, to 
simultaneously represent orders to buy and sell option contracts in 
the same series for the account of the same beneficial holder. 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.''
    PCX Rule 6.90(d)(3) states that ``[t]erminals may be used to 
receive brokerage orders only. Terminals may not be used to perform 
a market making function. No Member may knowingly use a Terminal on 
a regular and continuous basis to simultaneously represent orders to 
buy and sell option contracts in the same series for the account of 
the same beneficial holder. 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. Any system used by 
a Member to operate a Terminal must be separate and distinct from 
any system that may be used by a Member or any person associated 
with a Member in connection with market making functions.''

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[[Page 11347]]

    Finally, the Exchange proposes to add PCX Rule 6.8(d)(4) to codify, 
as a prohibited practice, effecting transactions that constitute 
manipulation as provided in PCX Rule 4.6(a) and SEC Rule 10b-5 under 
the Act. The Exchange represents that this proposed change will prevent 
members or Users from using Auto-Ex to violate PCX and SEC anti-
manipulation rules and to protect investors and the public.

III. Summary of Comments

    The Commission received four comment letters regarding the proposed 
rule change with one commenter supporting, and three commenters 
opposing, the proposed rule change.\17\ These comments were submitted 
in response to the proposal as it appeared in the Federal Register 
notice.\18\ The PCX revised the proposed rule change in Amendments No. 
2 and 3 to address many of the commenters' concerns.
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    \17\ See Morrison & Foerster Letter supporting the proposed rule 
change, supra note 5. See also Interactive Brokers Letter, Ianni E-
Mail, and OutSource International Letter opposing the proposed rule 
change, Id.
    \18\ See supra note 4.
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    Morrison & Foerster stated that the proposal would ``protect 
investors and promote the public interest by prohibiting certain 
manipulative practices with respect of the use of * * * AutoEx * * * on 
the Pacific Exchange and [would] make the rules prohibiting such 
manipulative practices easier to enforce.'' \19\ The commenter 
suggested that allowing broker-dealer orders to be executed through 
Auto-Ex would make the PCX ``more competitive with other options 
exchanges, thereby promoting competition among option exchanges, which 
[would] inure to the benefit of investors generally.'' \20\ The 
commenter also indicated that the registration of Order Entry Firms and 
the list of prohibited practices under the proposed rule change would 
clarify and safeguard the use of Auto-Ex.\21\
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    \19\ See Morrison & Foerster Letter, supra note 5.
    \20\ Id.
    \21\ Id.
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    Interactive Brokers and OutSource International objected to the 
proposal because, in their view, it imposed restrictions on the 
customer's investment activities and attempted to determine the 
customer's subjective intent in placing certain orders. The commenters 
suggested that the PCX should instead implement an objective systems/
software change to Auto-Ex, similar to the SOES system of the National 
Association of Securities Dealers, Inc. (``NASD''). These software 
changes would automatically prevent a member from entering an order 
into Auto-Ex within fifteen seconds after receiving an Auto-Ex 
execution.\22\ Both commenters argued that the proposal focuses on the 
subjective intent of individual customers and that there is no way to 
accurately make a determination that certain multiple orders are based 
on a single investment decision.\23\ They further stated that the 
proposal makes a ``presumption'' that a single investment decision was 
made.\24\ Furthermore, these two commenters argued that the proposed 
rule change does not provide a safe-harbor rule for customers for 
multiple orders transmitted more than fifteen seconds apart, and that 
there were also no procedural protections or remedies for customers 
whose trades are cancelled or price-adjusted in error.\25\ They were 
concerned that the provision of the original proposed rule change 
allowing nullification of orders would allow exchange floor officials 
unlimited discretion to enforce the proposed rule and selectively 
cancel those trades that were unprofitable to market makers.\26\
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    \22\ See Interactive Brokers Letter and OutSource International 
Letter, supra note 5.
    \23\ Id.
    \24\ Id.
    \25\ Id.
    \26\ Id.
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    Interactive Brokers stated that the PCX should not be able to 
``reach past its members and regulate the manner in which customers 
themselves formulate and express their investment decisions.'' \27\ 
This commenter also argued that the proposed rule change did not 
adequately address or provide solutions for other problems faced by 
market makers who are exposed to multiple orders in rapid-fire 
succession.\28\ An individual commenter indicated that the proposal was 
overboard and should apply to orders for the same series and not the 
same class.\29\
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    \27\ See Interactive Brokers Letter, supra note 5.
    \28\ This commenter noted that the proposal does not prevent 
customers from placing several orders through different accounts 
with different broker-dealers to avoid the provisions of the 
proposed rule change; and that the proposal only addresses 
successive orders from the same customer, and not ``the same problem 
arising from rapid, successive orders from different customers.'' 
See id.
    \29\ See Ianni E-Mail, supra note 5.
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IV. Discussion

    After careful review, the Commission finds that the proposed rule 
change, as amended, except for the portion of the proposal relating to 
the execution of broker-dealer orders on Auto-Ex,\30\ is consistent 
with the Act and the rules and regulations promulgated thereunder 
applicable to a national securities exchange and, in particular, with 
the requirements of Section 6(b).\31\ Specifically, the Commission 
finds that approval of the proposed rule change, except for the portion 
of the proposed rule change relating to the entry of broker-dealer 
orders on Auto-Ex, is consistent with section 6(b)(5)\32\ of the Act in 
that it is designed to promote just and equitable principles of trade, 
to remove impediments 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.
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    \30\ See supra note 8.
    \31\ 15 U.S.C. 78f(b). In approving this proposal, the 
Commission has considered the proposed rule's impact on efficiency, 
competition and capital formation. 15 U.S.C. 78c(f).
    \32\ 15 U.S.C. 78f(b)(5).
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    The Commission finds that the Exchange's proposed provisions under 
PCX Rule 6.87(a), codifying and defining the terms ``Auto-Ex,'' 
``User,'' and ``Order Entry Firm,'' will help provide Auto-Ex 
participants with more clarity and guidance and a better understanding 
of the use of these terms as used in the PCX rules governing Auto-Ex.
    The Commission also finds that the Exchange's requirement of 
registration of all Order Entry Firms may provide safeguards on the use 
of Auto-Ex. Under proposed PCX Rule 6.87(c), Order Entry Firms must 
register by entering into an Auto-Ex Order Entry Firm Application 
Agreement with the Exchange; comply with all PCX options trading rules 
and procedures; provide written notice to all Users regarding the 
proper use of Auto-Ex; and maintain adequate procedures and controls to 
allow Order Entry Firms to monitor and supervise the entry of 
electronic orders by all Users to prohibit the practices specified in 
paragraph (d) of the rule.
    These prohibited practices are: (1) Entering in ineligible order; 
(2) dividing an order involving a single investment decision into 
multiple smaller lots for purposes of meeting the order size 
requirements; (3) entering orders via POETS to perform a market making 
function; and (4) effecting manipulative transactions. Commenters 
mainly raised concerns about the single investment decision presumption 
of the original proposal. The Exchange revised the proposal to provide 
an objective safe-harbor rule that would eliminate the subjective 
single investment decision presumption. Initially, the Exchange

[[Page 11348]]

proposed a fifteen second time period in which multiple orders may not 
be entered on the behalf of the same beneficial owner, but it reserved 
the right to conclude that multiple orders entered outside of the 
fifteen second time period could still be considered a single 
investment decision. The Exchange wanted to prevent the splitting of 
orders by or on behalf of the same beneficial owner to meet Auto-Ex 
eligibility, whether these orders were entered within or outside the 
fifteen second time period.
    In response to the commenters' concerns, however, the Exchange 
added an objective safe-harbor provision, PCX Rule 6.87(d)(2)(B), 
providing that all orders entered outside of any fifteen second time 
period for the account of the same beneficial owner will be deemed to 
be separate investment decisions, and therefore will not be presumed to 
be a part of a single investment decision.\33\ The Commission believes 
that this safe-harbor rule for multiple orders entered after the 
fifteen second time period is necessary to provide Users of Auto-Ex 
with guidance and comfort that their entry of orders after fifteen 
seconds will not be presumed a single investment decision.
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    \33\ See Amendment No. 2, supra note 6.
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    Furthermore, the Exchange responded to commenters' concerns by 
revising the proposed rule language to reflect that the proposal will 
only apply to multiple orders to trade the same option issue that are 
on the same side of the market (whether short or long) and multiple 
orders to trade the same option series. The Commission believes that 
this provision is appropriate and will allow Users of Auto-Ex more 
flexibility in placing their orders.
    The Exchange also made several other modifications to respond to 
the commenters' concerns. The Exchange eliminated its proposed 
provision relating to the nullification of orders, which would have 
allowed PCX floor officials to execute only the first of orders 
equaling or adding up to the Auto-Ex size requirement and nullifying 
any others orders.\34\ Furthermore, the Exchange revised its proposed 
rule text to clarify that it will preclude Order Entry Firms from 
dividing up or permitting an existing order from being divided up to 
make its parts eligible for entry into Auto-Ex.\35\ The Commission 
believes that, by eliminating the proposed provision relating to the 
nullification of orders and retaining the prohibition against the 
splitting of orders by Order Entry Firms, Users of Auto-Ex will be 
provided with greater assurance that their orders will be executed. The 
Commission therefore finds that these revisions to the proposal are 
consistent with the public interest and the protection of investors.
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    \34\ See Amendment No. 1, supra note 3.
    \35\ See Amendment No. 2, supra note 6.
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    Finally, the Commission recognizes that proposed PCX Rule 6.88(c), 
prohibiting the use of POETS to perform a market making function, is 
consistent with other rules adopted by other exchanges to preclude 
persons from performing a market making function unless they are 
registered as market makers.\36\
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    \36\ See Securities Exchange Act Release Nos. 43938 (February 7, 
2001), 66 FR 10539 (February 15, 2001) (File No. SR-Amex-01-03); 
42455 (February 24, 2000), 65 FR 11388 (March 2, 2000) (File No. 10-
127) (approving application of ISE for registration as a national 
securities exchange); and 43939 (February 7, 2001), 66 FR 10547 
(February 15, 2001) (File No. SR-Phlx-01-05).
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V. Accelerated Approval of Amendments No. 2 and 3

    The Commission finds good cause for approving Amendments No. 2 and 
3 to the proposed rule change, except for those portions relating to 
the execution of broker-dealer orders on Auto-Ex, prior to the 
thirtieth day after the amendments are published for comment in the 
Federal Register pursuant to section 19(b)(2) of the Act.\37\ Both 
Amendments No. 2 and 3 alter the proposed rule language to address many 
of the commenters' concerns. Specifically, Amendment No. 2 adds a safe 
harbor provision for orders entered more than fifteen seconds apart; 
eliminates provisions that would have permitted the Exchange to nullify 
certain orders; incorporates a provision prohibiting the use of POETS 
to perform a market making function; and makes other minor technical 
changes. Amendment No. 3 simply cleans up minor punctuation and spacing 
problems in the proposed rule text. Because these amendments address 
the concerns raised by the commenters, the Commission believes it is 
not necessary to separately solicit comment on these amendments prior 
to approving this proposal. Moreover, the Commission finds that these 
changes to the proposed rule language are necessary to accomplish the 
intended goals of the Exchange's proposal and therefore believes that 
acceleration of Amendments No. 2 and 3 is appropriate.

VI. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendments No. 2 and 3, 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 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-00-05 and should be submitted by March 16, 2001.
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    \37\ 15 U.S.C. 78s(b)(2).
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VII. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change, and Amendments No. 2 and 3 thereto, except for portions 
relating to the execution of broker-dealer orders on Auto-Ex, are 
consistent with the Act and the rules and regulations thereunder 
applicable to a national securities exchange, and, in particular, with 
section 6(b)(5).\38\
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    \38\ 15 U.S.C. 78f(b)(5).
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    It Is Therefore Ordered, pursuant to section 19(b)(2) of the 
Act,\39\ that the proposed rule change (SR-PCX-00-05) is approved, and 
Amendments No. 2 and 3 thereto are approved on an accelerated basis, 
except for portions relating to the entry of broker-dealer orders on 
Auto-Ex.
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    \39\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\40\
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    \40\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-4497 Filed 2-22-01; 8:45 am]
BILLING CODE 8010-01-M