Document ID: SEC-2005-0417-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: Pacific Exchange, Inc.
Posted Date: 2005-12-21T05:00Z

[Federal Register: December 21, 2005 (Volume 70, Number 244)]
[Notices]               
[Page 75851-75853]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr21de05-101]                         

[[Page 75851]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52955; File No. SR-PCX-2005-102]

 
Self-Regulatory Organizations; Pacific Exchange, Inc.; Notice of 
Filing of a Proposed Rule Change Relating to the Elimination of 
Obsolete Rules Related to the Pacific Options Exchange Trading System

December 14, 2005.
    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 November 10, 2005, 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 PCX. PCX filed 
Amendment No. 1 to the proposed rule change on November 22, 2005.\3\ 
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\ See Partial Amendment, submitted by Glenn H. Gsell, Director 
of Regulation, PCX (``Amendment No. 1''). In Amendment No. 1, PCX 
corrected a typographical error in the rule text. Because Amendment 
No. 1 is a technical amendment, it is not subject to notice and 
comment.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange is proposing to amend various PCX Rules to eliminate 
obsolete rules related to the Pacific Options Exchange Trading System 
(``POETS'') and Order Book Officials (``OBOs''). The Exchange has also 
proposed to make a number of corresponding changes to rules related 
thereto.
    The text of the proposed rule change is available on the PCX's Web 
site (http://www.pacificex.com), at the PCX's principal office, and at 

the Commission's Public Reference Room.

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 it 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
    The Exchange proposes to modify the PCX Rules to eliminate obsolete 
rules with respect to POETS and OBOs and make corresponding changes to 
related rules. As of March 2005, the Exchange completed its rollout of 
the PCX Plus System.\4\ As such, options issues no longer trade on the 
POETS platform at the Exchange. Therefore, the Exchange proposes to 
eliminate rules related to POETS, including rules regarding OBOs, and 
to generally modify the rules as applicable in the current PCX Plus 
market structure.
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    \4\ See Securities Exchange Act Release No. 47838 (May 13, 
2003), 68 FR 27129 (May 19, 2003) (Order Approving Proposal for PCX 
Plus).
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a. Order Book Officials/Trading Officials

    The Exchange proposes to modify or delete PCX Rules 6.51 through 
6.59 to eliminate the term and general functionality of OBOs.
    Currently, PCX Rule 6.51 defines OBOs as Exchange employees who are 
responsible for maintaining the book with respect to the classes of 
options assigned to him, effecting proper executions of orders placed 
in the book, displaying bids and offers pursuant to PCX Rule 6.55, and 
monitoring the market for the classes of options assigned to him. Due 
to the elimination of the Order Book and full implementation of PCX 
Plus (and the fully electronic Consolidated Book), the order handling 
functionality of OBOs is no longer applicable. Also, many of the 
administrative duties of the OBO, such as tracking market maker 
appointments (as set forth in PCX Rule 6.51(b)) are now performed 
within the PCX Plus system. Certain PCX personnel, however, will 
continue to oversee trading crowds and otherwise assist in maintaining 
a fair and orderly market, similar to the current Trading Official and 
Exchange Official.\5\ Therefore, the Exchange proposes to eliminate the 
definitions of OBO (as set forth in PCX Rule 6.51(a)) and Exchange 
Official (as set forth in PCX Rule 6.1(b)(41)) and combine their 
remaining functionality of maintaining a fair and orderly market with 
the functionality of the Trading Official. The Exchange proposes to 
modify the definition of Trading Official in PCX Rule 6.1(b)(34) to 
provide that a Trading Official will be an Exchange employee or officer 
who is appointed by the Chief Executive Officer or its designee or by 
the Chief Regulatory Officer or its designee. OTP Holders will no 
longer be designated as Trading Officials or involved in making 
decisions on regulatory matters. The Exchange believes that by 
restricting these decisions to qualified Exchange employees, the 
potential for partiality or conflicts of interest is removed from the 
process. An Exchange employee or officer designated as a Trading 
Official will from time to time as provided in the rules have the 
ability to recommend and enforce rules and regulations relating to 
trading access, order, decorum, health, safety and welfare on the 
Options Trading Floor.
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    \5\ See PCX Rule 6.1(b)(34) and (41).
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    In addition, the Exchange proposes to delete PCX Rule 6.52 in its 
entirety. PCX Rule 6.52 sets forth the procedures for OBOs to accept 
and execute orders. This provision is obsolete as the OBOs no longer 
accept and execute orders on behalf of OTP Holders and OTP Firms on PCX 
Plus. PCX Rule 10.13(c)(2), which deals with the issuance of a summary 
sanction related to PCX Rule 6.52(a), will also be eliminated. The 
Exchange proposes to reserve PCX Rule number 6.52 for future use.
    Current PCX Rule 6.53 provides for the OBO's obligation to maintain 
a fair, orderly and competitive market. Specifically, the provision 
allows an OBO to call upon Market Makers appointed to act as such in a 
class of option contracts to make bids and/or offers if, in the OBO's 
opinion, the interests of a fair and orderly market would be best 
served by such action. The Exchange proposes to modify this provision 
to provide that a Trading Official could call upon Market Makers for 
bids and/or offers in such circumstances, as Trading Officials would 
retain the responsibility to maintain a fair and orderly market.
    The Exchange proposes to delete PCX Rules 6.54 through 6.59. These 
rules are related to an OBO's duty to report unusual conditions, an 
OBO's duty to display bids and offers in the book, transactions outside 
the OBO's last quoted range, the OBO's duty not to disclose orders, 
designation of OBOs by the Exchange, and the liability of the Exchange 
for actions of OBOs. The Exchange proposes to delete these rules 
because they are directly related to an OBO's order handling 
responsibilities (and implications of order handling responsibilities) 
and therefore they are obsolete in the current PCX Plus market 
structure.

[[Page 75852]]

b. Elimination of POETS and Auto-Ex Functions

    Current PCX Rule 6.87 sets forth the rules with respect to the 
Automated Execution System (``Auto-Ex'') feature of POETS. The Exchange 
proposes to delete PCX Rules 6.87(a)-(f) and (h)-(p) in order to delete 
the Auto-Ex provisions due to the elimination of POETS. All options 
issues are currently trading on the PCX Plus platform, therefore the 
POETS and Auto-Ex rules are obsolete.
    In addition, the Exchange proposes to retain PCX Rule 6.87(g), 
which relates to trade nullification and price adjustment procedures 
(``Obvious Error Rule''), and renumber the rule as PCX Rule 6.87(a). 
The Obvious Error Rule is an options industry-wide set of procedures 
that was put into place to handle trade nullifications and price 
adjustments in a fair and consistent manner. These procedures are 
applicable to all trades executed on PCX Plus. The Exchange also 
proposes to rename PCX Rule 6.87 ``Obvious Errors,'' as appropriate for 
the modified rule.

c. Modification of Fast Markets and Unusual Market Conditions

    The Exchange proposes to modify PCX Rule 6.28, Fast Markets and 
Unusual Market Conditions, as the procedures set forth therein with 
respect to ``fast markets'' are inapplicable in the PCX Plus market 
structure. The current rule sets forth specific procedures that are 
obsolete in the current trading structure. Prior to the introduction of 
the all-electronic PCX Plus trading system, when a market was declared 
``fast'' due to unusual market conditions certain modifications to 
standard trading practices were often needed in order to maintain a 
fair and orderly market. Both systemic and physical limitations that 
were commonplace in a non-automated trading environment are no longer 
applicable. Therefore the procedures presently in place to deal with 
these circumstances are no longer applicable (e.g., moving certain 
issues or series of options to other posts, or modifying the parameters 
of Auto-Ex). Market Makers will still be required to trade a minimum of 
one contract based on their quoted markets pursuant to PCX Rule 6.37, 
Commentary .05. With regard to the aforementioned changes, however, the 
Exchange believes it would be prudent to retain a level of basic and 
flexible procedures to be followed during unusual market conditions. 
Therefore, the Exchange proposes to modify the provision to enable the 
Exchange to respond to unusual market conditions. The proposed unusual 
market condition provisions are based on the rules of the International 
Securities Exchange (``ISE''),\6\ and provide for the Exchange to 
determine the existence of unusual market conditions. The proposed rule 
will also allow for the Exchange to employ trading rotations or take 
such other actions as are deemed in the interest of maintaining a fair 
and orderly market.
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    \6\ See ISE Rule 703(c).
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d. Modification of Trading Rotations

    The Exchange proposes to amend PCX Rule 6.64(a) and delete 
subsections (b)-(c) and Commentary .01 in order to delete references to 
opening rotations and automated opening rotations on POETS as these 
provisions are no longer applicable. Prior to the PCX Plus market 
structure a trading rotation was a time-consuming procedure, requiring 
manual processing by OBOs, Floor Brokers and LMMs. Trading rotations 
are now a fully automated process, overseen by a Trading Official. The 
PCX Plus Automated Opening Rotation provision set forth in PCX Rule 
6.64(d) will remain unchanged.
    The Exchange also proposes to modify the closing rotations rule as 
provided in PCX Rule 6.64(e)-(f). Currently, PCX Rule 6.64(e)-(f) sets 
forth time frames and parameters for conducting closing rotations. 
These procedures are antiquated and inapplicable in the current PCX 
Plus market structure. Therefore, the Exchange proposes to modify the 
closing rotations provisions to provide that closing rotations may be 
utilized when the Exchange concludes that such action is appropriate in 
the interest of a fair and orderly market. The factors that may be 
considered include, but are not limited to, whether there has been a 
recent opening or reopening of trading in the underlying security, a 
declaration of an unusual market condition pursuant to PCX Rule 6.28, 
or a need for a rotation in connection with expiring individual stock 
options or index options, an end of the year rotation, or the restart 
of a rotation which is already in progress.
    Finally, the Exchange proposes to modify PCX Rule 6.64(h) in order 
to eliminate the provision related to OBOs representing orders during 
rotations. Such procedures are no longer applicable in the current PCX 
Plus market structure.

e. Modification of Priority and Allocation

    Currently, PCX Rule 6.75 sets forth priority and order allocation 
procedures with respect to options issues designated for trading on 
POETS (including those that result in execution via open outcry). PCX 
Rule 6.76 sets forth priority and order allocation procedures with 
respect to options issues designated for trading on PCX Plus. Due to 
the elimination of the POETS system, the Exchange proposes to modify 
PCX Rule 6.75(a) and (e)-(f) to apply only to orders executed by open 
outcry. In making this modification, the Exchange proposes to delete 
PCX Rule 6.75(d) as it relates to opening rotations, which is no longer 
applicable in the PCX Plus market structure. The Exchange also proposes 
to delete Commentary .01-.03 as these commentaries relate to OBOs 
handling orders for purposes of priority and order allocation, which is 
no longer applicable.
    Finally, the Exchange proposes to modify PCX Rule 6.76 and retain 
its provisions regarding priority and allocation procedures for orders 
executed on PCX Plus only.

f. Maximum Order Size

    Currently, in addition to provisions regarding priority and 
allocation procedures, PCX Rule 6.76 states that a maximum size of an 
inbound order that may be eligible for execution on PCX Plus will be 
initially established by the Lead Market Maker (``LMM'') in the issue, 
subject to the approval of the Exchange. Further, the rule states that 
any request by the LMM for changes to the Maximum Order Size must be 
accompanied by a verified statement indicating the business reason for 
the change and the estimated duration of such change. In addition, PCX 
Rule 6.90 sets forth a prohibition against unbundling an order to 
circumvent the maximum order size requirement. PCX Rules 10.12(h)(33) 
and (k)(i)(33) establishes minor rule plan violations for such 
prohibited actions.
    In POETS, the Exchange was unable to disseminate the size 
associated with the quote. Therefore, the only way to limit the number 
of contracts executed electronically was to limit the size of the order 
for each options issue. As a result of the conversion to PCX Plus, the 
Market Makers (including LMMs) are able to disseminate a size that they 
are willing to trade on each individual series. Therefore, a maximum 
order size that covers an entire issue is no longer necessary in the 
current PCX Plus market structure. As such, the Exchange proposes to 
delete the requirement for a maximum order size in PCX Rule 6.76. In 
addition, the related provisions in PCX Rules 6.90 and 10.12 with 
respect to the prohibition on unbundling an order to circumvent the 
maximum order

[[Page 75853]]

size and the minor rule plan violation are ineffectual and should be 
deleted.

g. Miscellaneous

    The Exchange also proposes to make various corresponding 
modifications, including typographical and terminology changes, to its 
rules in order to update the rules applicable to the current PCX Plus 
market structure.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the provisions of Section 6 of the Act,\7\ in general, and with 
Section 6(b)(5) of the Act,\8\ in particular, because it is designed to 
promote just and equitable principles of trade, to foster cooperation 
and coordination with persons engaged in facilitating transactions in 
securities, and to remove impediments to and perfect the mechanism of a 
free and open market and a national market system and to protect 
investors and the public interest.
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    \7\ 15 U.S.C. 78f(b).
    \8\ 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 that is not necessary or appropriate 
in furtherance of the purposes of the Act.

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

    The Exchange neither solicited nor received any written comments on 
the proposed rule change.

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 self-regulatory organization consents, the Commission will:
    A. By order approve such proposed rule change; or
    B. Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or     Send an e-mail to rule-comments@sec.gov. Please include 

File Number SR-PCX-2005-102 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-9303.

All submissions should refer to File Number SR-PCX-2005-102. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). 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 also will be available for inspection and copying at the 
principal office of the Exchange. All comments received will be posted 
without change; the Commission does not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly. All submissions should refer to 
File Number SR-PCX-2005-102 and should be submitted on or before 
January 11, 2006.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
Jonathan G. Katz,
Secretary.
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    \9\ 17 CFR 200.30-3(a)(12).
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 [FR Doc. E5-7587 Filed 12-20-05; 8:45 am]

BILLING CODE 8010-01-P