[Federal Register Volume 66, Number 39 (Tuesday, February 27, 2001)]
[Notices]
[Pages 12578-12579]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-4753]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43986; File No. SR-PCX-01-10]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Pacific Exchange, Inc. 
Relating to an Interim Intermarket Linkage Program

February 20, 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 6, 2001,\3,4\ the Pacific Exchange, Inc. (``PCX'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the PCX. PCX filed the 
proposal pursuant to section 19(b)(3)(A) of the Act,\5\ and Rule 19b-
4(f)(6) thereunder,\6\ which renders the proposal effective upon filing 
with the Commission.\7\ The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3-4\ On February 9, 2001, the Exchange submitted Amendment No. 
1 to the proposed rule change. See letter from Michael Pierson, Vice 
President, Regulatory Policy, PCX, to John Roeser, Attorney, 
Division of Market Regulation, Commission, dated February 8, 2001 
(``Amendment No. 1''). In Amendment No. 1, the PCX made technical 
changes to the proposed rule text.<ls-thn-eq>
    \5\ 15 U.S.C. 78s(b)(3)(A).
    \6\ 17 CFR 240.19b-4(f)(6).
    \7\ The Commission has agreed to waive the 5-day pre-filing 
notice requirement. See 17 CFT 240.19b-4(f)(6)(iii).
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The PCX is proposing to adopt a rule providing for the 
implementation of ``interim linkages'' with other option exchanges.\8\
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    \8\ On January 30, 2001, the Commission approved similar 
proposals submitted by the Chicago Board Options Exchange, Inc. 
(``CBOE'') and the International Securities Exchange LLC (``ISE''). 
See Securities Exchange Act Release No. 43904 (January 30, 2001), 66 
FR 9112 (February 6, 2001).
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II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the PCX included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The PCX has prepared summaries, set forth in Sections A, 
B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of this proposed rule change is to implement certain 
aspects of an intermarket options linkage on an ``interim'' basis.\9\ 
This interim linkage would utilize existing systems to facilitate the 
sending and receiving of order flow between PCX market makers and their 
counterparts on the other option exchanges as an interim step towards 
development of a ``permanent'' linkage.
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    \9\ Under the proposal, the interim linkage would be for a pilot 
period expiring on January 31, 2002.
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    The Commission has approved a linkage plan that now includes all 
five option exchanges.\10\ The option exchanges continue to work 
towards implementation of this linkage. However, because the 
implementation may take a significant amount of time, the option 
exchanges have discussed implementing an ``interim'' linkage. Such a 
linkage would use the existing market infrastructure to route orders 
between market makers on the participating exchanges in a more 
efficient manner.
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    \10\ See Securities Exchange Act Release Nos. 43086 (July 28, 
2000), 65 FR 48023 (August 4, 2000); 43573 (November 16, 2000), 65 
FR 70851 (November 28, 2000); and 43574 (November 16, 2000), 65 FR 
70850 (November 28, 2000).
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    The key component of the interim linkage would be for the 
participating exchanges to open their automated customer execution 
systems, on a limited basis, to market maker orders. Specifically, 
market makers would be able to designate certain orders as ``customer'' 
orders, and thus would receive automatic execution of those orders on 
participating exchanges.
    This proposed rule would authorize the PCX to implement bilateral 
or multilateral interim arrangements with the other exchanges to 
provide for equal access between market makers on our respective 
exchanges. The Exchange currently anticipates that the initial 
arrangements would allow PCX Designated Lead Market Makers (``LMMs'') 
and their equivalents on the other exchanges, when they are holding 
customer orders, to effectively send those orders to the other market 
for execution when the other market has a better quote. Such orders 
would be limited in size to the lesser of the size of the two markets' 
automatic execution size for customer orders.
    All interim linkage orders must be ``immediate or cancel'' (that 
is, they cannot be placed on an exchange's limit order book), and a 
market maker may send a linkage order only when the other (receiving) 
market is displaying the national best bid or offer and the sending 
market is displaying an inferior price. This will allow a market maker 
to access the better price for its customer. In addition, if the 
interim linkage includes principal orders, it would allow market makers 
to attempt to ``clear'' another market displaying a superior quote. Any 
exchange participating in the interim linkage will implement heightened 
surveillance procedures to help ensure that their market makers send 
only properly-qualified orders through the linkage.
    LMM participation in the interim linkage will be voluntary. Only 
when an LMM and its equivalent on another exchange believe that this 
form of mutual access would be advantageous will the exchanges employ 
the interim linkage procedures. The PCX believes that the interim 
linkage will benefit investors and will provide useful experience that 
will help the exchanges in implementing the full linkage.
2. Statutory Basis
    The PCX believes that the proposed rule change meets the 
requirement of section 6(b)(5) under the Act \11\ in that it is 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to foster cooperation 
and coordination with persons engaged in regulating, clearing, 
settling, processing information with respect to, and facilitating 
transaction in securities to remove impediments to and perfect the 
mechanism for a free and open market and a national market system, and, 
in

[[Page 12579]]

general, to protect investors and the public interest.
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    \11\ 15 U.S.C. 78f(b)(5).
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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.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received from Members, Participants, or Others

    No written comments were solicited or received with respect to the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    Because the 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 times as the Commission may designate, it has 
become effective pursuant to section 19(b)(3)(A) of the Act \12\ and 
Rule 19b-4(f)(6) thereunder.\13\ 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.\14\
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    \12\ 15 U.S.C. 78s(b)(3)(A).
    \13\ 17 CFR 240.19b-4(f)(6).
    \14\ The Commission has approved similar interim linkage 
proposals submitted by the CBOE and the ISE. See supra note 8.
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, 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 PCX. All submissions should refer to File No. 
SR-PCX-01-10 and should be submitted by March 20, 2001.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-4753 Filed 2-26-01; 8:45 am]
BILLING CODE 8010-01-M