11344 Federal Register / Vol. 66, No. 37 / Friday, February 23, 2001 / Notices

13 15 U.S.C. 78o–3(b)(5).

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

15 17 CFR 240.19b–4(f)(6).

16The 60-day abrogation period began February

8, 2001. See footnote 3, supra.

17For purposes only of accelerating the operative

date of this proposal, the Commission has

considered the proposed rule’s impact on

efficiency, competition, and capital formation. 15

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

18 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, 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.

4Securities Exchange Act Release No. 43049 (July

18, 2000), 65 FR 45810.

5See 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’’).

6See letter from Cindy Sink, Senior Attorney,

Regulatory Policy, PCX, to Sapna Patel, Attorney,

Division, Commission, dated January 17, 2001

and a national market system, and, in

general to protect investors and the

public interest. Nasdaq believes that the

proposed rule change is consistent with

the purposes of the Act in that it will

provide a cost effective and efficient

mechanism to report trades, and

therefore facilitate clearance and

settlement. Additionally, Nasdaq

believes the proposed rule change will

enhance the process by which members

engage in the comparison and clearing

of securities transactions.

Nasdaq believes that the proposed

rule change is consistent with the

provisions of Section 15A(b)(5) of the

Act,13 which requires that the

Association’s rules provide for the

equitable allocation of reasonable dues,

fees and other charges among members

and issuers and other persons using any

facility or system which Nasdaq

operates or controls.

B. Self-Regulatory Organization’s

Statement on Burden on Competition

Nasdaq does not believe that the

proposed rule change will result in any

burden on competition that is not

necessary or appropriate in furtherance

of the purposes of the Act, as amended.

C. Self-Regulatory Organization’s

Statement on Comments on the

Proposed Rule Change Received From

Members, Participants, or Others

Written comments were neither

solicited nor received.

III. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Action

Because the foregoing proposed rule

change does not:

(i) Significantly affect the protection

of investors or the public interest;

(ii) impose any significant burden on

competition; and

(iii) become operative for 30 days

from the date on which it was filed, or

such shorter time as the Commission

may designate, it has become effective

pursuant to Section 19(b)(3)(A) of the

Act 14 and Rule 19b–4(f)(6) 15

thereunder. At any time within 60 days

of the filing of the proposed rule change,

the Commission may summarily

abrogate such rule change if it appears

to the Commission that such action is

necessary or appropriate in the public

interest, for the protection of investors,

or otherwise in furtherance of the

purposes of the Act.16

Nasdaq has requested that the

Commission accelerate the operative

date. The Commission finds good cause

to designate the proposal to become

immediately operative upon filing,

because such designation is consistent

with the protection of investors and the

public interest. Acceleration of the

operative date will allow member firms

that wish to report trades to ACT via the

internet to access the service

immediately. The Commission finds no

reason to require NASD members to

wait 30 days before participating in a

service that is designed to be both

efficient and cost-effective. For these

reasons, the Commission finds good

cause to designate that the proposal

become operative upon filing.17

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, NW., Washington, DC

20549–0609. Copies of the submission,

all subsequent amendments, all written

statements with respect to the proposed

rule change that are filed with the

Commission, and all written

communications relating to the

proposed rule change between the

Commission and any person, other than

those that may be withheld from the

public in accordance with the

provisions of 5 U.S.C. 552, will be

available for inspection and copying in

the Commission’s Public Reference

Room. Copies of such filing will also be

available for inspection and copying at

the principal office of the NASD. All

submissions should refer to file number

SR–NASD–01–05 and should be

submitted by March 16, 2001.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.18

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 01–4427 Filed 2–22–01; 8:45 am]

BILLING CODE 8010–01–M

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 brokerdealer orders to be eligible for automatic

execution through the Exchange’s

Automatic Execution system (‘‘AutoEx’’) 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

Federal Register / Vol. 66, No. 37 / Friday, February 23, 2001 / Notices 11345

(‘‘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.

7See 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.

8The 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.

9Minor 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.

10See 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).

11 Id.

12See 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

Continued

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 AutoEx 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

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.

* * * * *

¶ 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 AutoEx 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-byissue basis by the OFTC, the maximum order

size for execution through Auto-Ex is as

follows:

(A)[(1)] Equity Options: the maximum

order size for execution through Auto-Ex for

equity options is one hundred (100)

contracts;10

(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

(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 AutoEx.]

(e)–(k)—[(d)–(j)]–No change.

* * * * *

POETS

¶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 nearsimultaneous 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

11346 Federal Register / Vol. 66, No. 37 / Friday, February 23, 2001 / Notices

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.

13The 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).

14PCX 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.

16Cf. 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

comprised of an options order routing

system (‘‘ORS’’), an automatic and semiautomatic execution system (‘‘AutoEx’’), an on-line book system (‘‘AutoBook’’), and an automatic market quote

update system (‘‘Auto-Quote’’).

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 ‘‘AutoEx,’’ ‘‘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.

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.

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

Federal Register / Vol. 66, No. 37 / Friday, February 23, 2001 / Notices 11347

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.’’

17See 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.

18See supra note 4.

19See Morrison & Foerster Letter, supra note 5.

20 Id.

21 Id.

22See Interactive Brokers Letter and OutSource

International Letter, supra note 5.

23 Id.

24 Id.

25 Id.

26 Id.

27See Interactive Brokers Letter, supra note 5.

28This commenter noted that the proposal does

not prevent customers from placing several orders

through different accounts with different brokerdealers 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.

29See Ianni E-Mail, supra note 5.

30See 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).

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.

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

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

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

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.

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 AutoEx; 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 safeharbor rule that would eliminate the

subjective single investment decision

presumption. Initially, the Exchange

11348 Federal Register / Vol. 66, No. 37 / Friday, February 23, 2001 / Notices

33See Amendment No. 2, supra note 6.

34See Amendment No. 1, supra note 3.

35See Amendment No. 2, supra note 6.

36See 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).

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

38 15 U.S.C. 78f(b)(5).

39 15 U.S.C. 78s(b)(2).

40 17 CFR 200.30–3(a)(12).

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.

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.

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

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.

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 brokerdealer 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

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.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.40

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 01–4497 Filed 2–22–01; 8:45 am]

BILLING CODE 8010–01–M

DEPARTMENT OF STATE

Office of Inspector General

[Public Notice 3580]

Notice of Information Collection Under

Emergency

REVIEW: Overseas Absentee Ballot

Questionnaire.