[Federal Register: August 7, 2003 (Volume 68, Number 152)]
[Notices]
[Page 47124-47131]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07au03-112]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-48264; File No. SR-PCX-2002-57]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Pacific Exchange, Inc., Relating to the Implementation of
a New Order Audit Trail System
July 31, 2003.
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 August 9, 2002, the Pacific Exchange, Inc. (``PCX'' or ``Exchange'')
filed with the Securities and Exchange Commission (``Commission'' or
``SEC'') the proposed rule change as described in Items I, II and III
below, which Items have been prepared by the self-regulatory
organization. On July 28, 2003, the Exchange filed Amendment No. 1 to
the proposed rule change.\3\ On July 30, 2003, the Exchange filed
Amendment No. 2 to the proposed rule change.\4\ The Commission is
publishing the proposed rule change, as amended, to solicit comment 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\ Amendment No. 1 replaces and supersedes the original filing
in its entirety.
\4\ See letter from Tania J. Cho, Staff Attorney, PCX, to
Jennifer Colihan, Special Counsel, Division of Market Regulation,
(``Division''), Commission, dated July 30, 2003 (``Amendment No.
2''). In Amendment No. 2, the Exchange clarified that it will not
conduct an issue-by-issue roll out of the Electronic Order Capture
System as originally proposed.
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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 adopt new rules relating to the
creation of an order audit trail system called Electronic Order Capture
System (``EOC''). The proposal will require that every member or member
organization that receives an order for execution on the Exchange must
immediately record the details of the order (including any modification
of the terms of the order or cancellation of the order) into EOC,
unless such order has been entered into the Exchange's other electronic
order processing facilities.
The text of the proposed rule change is below. Additions are in
italics; deletions are in brackets.
* * * * *
Rule 6--Options Trading Applicability, Definitions and References
Rule 6.1(a)-No change.
(b) Definitions. The following terms as used in Rule 6 shall,
unless the context otherwise indicates, have meanings herein specified:
(1)-(38)--No change.
(39) The term ``Electronic Order Capture System'' (``EOC'') means
the Exchange's electronic audit trail and order tracking system that
provides a time-sequenced record of all orders and transactions on the
Exchange. EOC records the receipt of an order and documents the life of
the order through the process of execution, partial execution, or
cancellation. This system includes the electronic communications
interface between EOC booth terminals and the Floor Broker Hand Held
applications. Each member's EOC booth terminal and each Floor Broker
Hand Held Terminal contains an electronic order entry screen that
displays the terms and conditions of each order received by that
member.
(c)-(e)--No change.
* * * * *
Admission to and Conduct on the Options Trading Floor
Rule 6.2(a)-(g)--No change.
(h)(1)-(2)--No change.
(3) Requirements and Conditions.
(A)--No change.
(B) Orders transmitted by registered Exchange Market Makers may be
entered directly to the trading posts. All other orders may be entered
directly to the trading posts only during outgoing telephone calls that
are initiated at the option posts. Pursuant to Rule 6.67(c), all such
orders must be immediately recorded into the EOC unless there is a
disruption or malfunction to the EOC, in which case the EOC Contingency
Procedures will be in effect in accordance with Rule 6.67(d)(1).
(C)--No change.
(4)--No change.
(5) Floor Brokers.
(A)-(B)--No change.
(C) Ticket to Follow. In the event of a disruption or malfunction
of EOC, pursuant to Rule 6.67(d), a [A] Floor Broker in a trading crowd
may represent immediately in the trading crowd a telephonic order
received from a Member or Member Firm representative located in a firm
member booth [who receives a telephonic an order from a Member or
Member Firm representative located on the Trading Floor may represent
that order immediately in the trading crowd], provided (a) that an
order ticket for the order must be prepared and time stamped in the
member firm booth before the order is transmitted telephonically to the
Floor Broker in the trading crowd; and (b) that the written, time-
stamped order ticket
[[Page 47125]]
for the order must be taken to the Floor Broker in the trading crowd
immediately after it has been prepared.
(D)--No change.
(6)-(10)--No change.
Commentary
.01-.02--No change.
.03 While on the Trading Floor, clerks must [shall] display at all
times the badge(s) supplied to them by the Exchange. [Any Market-Maker
clerk who writes up an option order on the Options Floor must give his
employer a copy of that order before it is delivered; the employer must
retain the copy on his person until it is executed.] A clerk receiving
a phone order must immediately record the details of the order into EOC
pursuant to Rule 6.67(c). [must initial, must mark as opening or
closing and must time-stamp the order.]
.04 For orders excepted from EOC, pursuant to Rule 6.67(d), a
Market-Maker clerk who writes up an option order on the Options Floor
must give his employer a copy of that order before it is delivered; the
employer must retain the copy on his person until it is executed. A
clerk receiving a phone order must initial, must mark as opening or
closing and must time-stamp the order.
.05[.04]--No change.
* * * * *
Fast Markets and Unusual Market Conditions
Rule 6.28(a)--No change.
(b)(1)--No change.
(2) For orders excepted from EOC, pursuant to Rule 6.67(d), [T]the
OBO may temporarily move less active issues to another post if the Book
is extremely active. [Books left at the post may be separated and order
shoes provided for the most active series to facilitate order flow. A
special time stamp will be placed behind the Book to stamp incoming
transactions before they go to Price Reporting.]
(3)-(6)--No change.
(c)-(d)--No change.
* * * * *
Appointment of Market Makers
Rule 6.35--No change.
Commentary
.01-.03--No change.
.04 For the purposes of this rule, temporarily undertaking the
obligations of a Primary Appointment with respect to non-Primary
Appointment classes of option contracts at the request of an Options
Floor Trading Committee member shall not be deemed trading in non-
Primary Appointment classes. In addition, a Market Makers' trades
effected through a floor broker do not count for nor against the Market
Maker's 75% requirement, regardless of whether the trades are in issues
within or without his Primary Appointment. Also, Market Makers who are
solicited on an order on behalf of an account other than that of
another Market Maker may accommodate such orders, provided that the
orders are clearly announced in the trading crowd as solicited, and
such transactions shall not count for nor against the 75% requirement.
Such orders [trades] must [shall] be designated by the Market Maker
with an ``S'' in the ``[o]Optional Data'' field [section] of the
electronic order entry screen or, for orders excepted from EOC pursuant
to Rule 6.67(d), in the ``Optional Data'' section of the trade ticket.
.05--No change.
* * * * *
``Crossing'' Orders and Stock/Option Orders
Rule 6.47(a)--No change.
(b) Crossing of Facilitation Orders. A Floor Broker who holds an
order for a public customer of a member organization and a facilitation
order may cross such orders provided that he proceeds in the following
manner:
(1)--No change.
(2) [The option order tickets for both the [f]Facilitation orders
and [the] customer orders must be entered into EOC and [display] all of
the terms of such orders, including any contingencies involving, and
all related transactions in, either options or underlying or related
securities, must be displayed on the electronic order screen. If
facilitation orders and customer orders are excepted from EOC, pursuant
to Rule 6.67(d), then order tickets must display this same information.
The Floor Broker must disclose all securities that are components of
the customer order.
(3)-(6)--No change.
(c)--No change.
(1)-(3)--No change.
(4) ``Solicited'' must [shall] be entered [written] in the
``Optional Data'' field of the electronic order entry screen or, for
orders excepted from EOC pursuant to Rule 6.67(d), written in the
``Optional Data'' section of the trade ticket. [area on the order
ticket of the solicited order. If the solicited order is for a market
maker account, the order ticket shall be personally initialed by the
solicited market maker, who must have in his possession a copy of such
order ticket at all times such order is active.]
(5)--No change.
(d)-(e)--No change.
(f) Stock/Option Orders. When a stock/option order is taken to a
crowd for execution, the stock transaction must be effected prior to
the option transaction pursuant to Rule 6.47, Commentary .04. The
following procedure applies to all executions of stock/option orders:
[A]after an agreement with other members of the crowd has been reached
as to the terms of the transaction, the option order must be entered
into EOC or, for orders excepted from EOC, pursuant to Rule 6.67(d),
written on tickets [must be written up] and time stamped. However, the
option transaction will [order tickets should] not be reported to
Options Price Reporting Authority (``OPRA'') by EOC or, for orders
excepted from EOC, pursuant to Rule 6.67(d), turned in to the Order
Book Official at this time. The members will [shall] attempt to
immediately effect the transaction in the underlying or related
security. If the stock transaction cannot be executed immediately or is
effected at a price other than an [the] agreed-upon price, the members
will [shall] not be held to the option transaction. If the stock
transaction is effected at an [the] agreed-upon price, then all the
members who participated in the option transaction will [shall] be held
to their agreed-upon price. At the time the stock transaction is
effected, the option transaction must be immediately entered into EOC
and reported to OPRA or, for orders excepted from EOC, pursuant to Rule
6.67(d), trade tickets must [should] be given to the Order Book
Official.
Commentary
.01-.06--No change.
* * * * *
Discretionary Transactions
Rule 6.48.(a)-(b)--No change.
(c) A Market Maker shall not exercise discretion in an account
unless he has a direct interest in such account. Market Makers may not
exercise discretion over any account other than: a joint account
approved pursuant to Rule 6.39, or an account in which the Market Maker
has a direct interest. For purposes of this Rule, the term ``direct
interest'' in an account is limited in its meaning to include only a
participation in the profits and losses in such account, or in the case
of a partnership or corporation, a representative of such partnership
or corporation who has a supervisory responsibility over such account.
Only persons registered as Market Makers and subject to the performance
obligations set forth in Rule 6.37, may exercise discretion over an
account.
(1) A Market Maker wishing to effect such discretionary
transactions for
[[Page 47126]]
accounts other than the Market Maker's personal account or a joint
account must enter the order with a Floor Broker and the procedures set
forth in Rule 6.85. The identification of the order as a discretionary
order is required pursuant to [PCX ] Rule 6.68(a)(5). [(7), ``Record of
Orders.'']
(A) The clearing acronym [name] of the Market Maker for whom the
transaction is being executed must be [printed at the bottom of the
ticket (B-6-1(c)),] entered into EOC or, for orders excepted from EOC,
pursuant to Rule 6.67(d), written on the ticket along with the clearing
acronym [badge number] of the Market Maker exercising discretion
[(i.e.e.g., Joe Trader/MO7)]; and
(B) A ``D'' must be placed after the Market Maker's clearing
acronym [number,] for whose account the trade is executed[, in the firm
box (e.g., MO5 D)].
Solicited Transactions
Rule 6.49(a)-(b)--No change.
(c) ``Solicited'' must [shall] be entered [written] in the
``Optional Data'' field of the electronic order entry screen for [area
on the order ticket of] the Solicited order. For orders excepted from
EOC, pursuant to Rule 6.67(d), ``Solicited'' must be written in the
``Optional Data'' section on the order ticket of the Solicited order.
* * * * *
ORDER BOOK OFFICIALS
Order Book Official Defined
Obligations for Orders
Rule 6.52(a)-(d)--No change.
Commentary
.01.--.03--No change.
.04 For purposes of this Section, orders excepted from EOC,
pursuant to Rule 6.67(d), will be within the custody of Order Book
Officials only when they have been deposited, properly time-stamped and
marked, in the proper receptacle.
.05--No change.
* * * * *
Certain Types of Orders Defined
Rule 6.62(a)-(b)--No change.
(c) A contingency order is a limit or market order to buy or sell
that is contingent upon a condition being satisfied. [while the order
is at the Post.]
(d)--No change.
(e) Not held order. A not held order is an order that provides a
broker with discretion as to price or time in executing the order. A
``not held'' order must be designated as such in the ``Optional Data''
field of the electronic order entry screen. For orders excepted from
EOC, pursuant to Rule 6.67(d), a [A] not held order [is an order that]
is marked ``not held'', ``NH'', ``take time'' or marked with some [that
bears any] qualifying notation giving discretion as to the price or
time at which such order is to be executed. The ``not held''
designation must appear in the ``special instructions'' portion of the
order ticket. Orders that merely include a ``not held'' designation as
part of the time stamp will not be deemed to be ``not held'' orders.
(f)-(j)--No change.
* * * * *
Order Format and System Entry Requirements
[Orders Required To Be in Written Form]
Rule 6.67(a). Transmitted to the Floor. Each order transmitted to
the Floor must be recorded legibly in a format [written form] that has
been approved by the Exchange, and the member receiving such order must
record the time of its receipt on the Floor. Each such order must be in
a legible format [written form] when transmitted [taken] to the post
for attempted execution. Orders sent electronically through the
Exchange's Member Firm Interface or orders entered into the Exchange's
EOC are [deemed to be written] approved formats for transmitting orders
for purposes of Rule 6.67.
(b) Order Format Requirements. Orders sent to the Exchange for
execution must comply with the order format requirements established by
the Exchange relating to, among other things, option symbol, expiration
month, exercise price, type of option (call or put), quantity of option
contracts, clearing member organization, whether the order is to buy or
sell, and whether the order is market or limit.
[(b) Cancellations and changes. Each cancellation of, or change to,
an order that has been transmitted to the Floor must be recorded
legibly in a written form that has been approved by the Exchange, and
the member receiving such cancellation or change must record the time
of its receipt on the Floor.]
(c) EOC Entry Requirement. Every member or member organization that
receives an order for execution on the Exchange must immediately record
the details of the order (including any modification of the terms of
the order or cancellation of the order) into EOC, unless such order has
been entered into the Exchange's other electronic order processing
facilities (e.g., orders sent electronically through the Exchange's
Member Firm Interface). The details of each order required to be
recorded upon receipt must include the data elements prescribed in Rule
6.68(a)(1) through (9), and such other information as may be required
by the Exchange from time to time.
[(c) Executions. A member transmitting from the Floor a report of
the execution of an order must record the time at which a report of
such execution is received by such member.]
(d) Exceptions to EOC Entry Requirement. The EOC entry requirement
provision of subsection (c) will not apply during any disruption or
malfunction of EOC or any Exchange system relied on by a Floor member
to record the details of an order.
[(d) A Floor Broker may represent a telephonic order, with the
ticket to follow, as provided in Rule 6.2(h)(4)(C).]
(1) EOC Contingency Procedures. In the event of an EOC system
disruption or malfunction, the EOC entry requirement will be suspended
upon approval by two Floor Officials. At this time, member firms shall
use a backup supply of tickets to record the details of all orders
received through non-electronic means. All order events (i.e., receipt,
changes, execution, partial execution, cancellation, or nothing done)
must be immediately time stamped (a time stamp synchronized with the
atomic clock will be available at all trading posts). During such
circumstances, existing rules on manual processing of order tickets are
applicable. Once the disruption or malfunction to the EOC system has
been corrected, as determined by two Floor Officials, all member firms
must input all orders into an EOC device via the ``as-of'' field,
noting the times of events of the orders. Any member firm who fails to
follow such procedures will be subject to disciplinary action pursuant
to Rule 10.
(e) Hand Signals. The following regulations govern the proper use
of hand signals on the Options Trading Floor: [(1)] Hand signals may
always be used to request and to relay information regarding current
quotations and market size. Hand signals may also be used to increase
or decrease the size of an order, to change the order's limit, to
cancel an order or to activate a market order.
(1) EOC Eligible Orders. Any cancellation of or change to an order
relayed to a Floor Broker through the use of hand signals must be
entered into EOC [also must be relayed to the Floor Broker in a time
stamped, written form immediately thereafter]. All cancellations and
changes of orders held by the Order Book Official must be immediately
submitted electronically. [in written form. Executing brokers who
[[Page 47127]]
receive such communications must have a written order in their
possession with all of the following information on the ticket:]
(2) Orders Excepted from EOC Pursuant to Rule 6.67(d). Executing
brokers who receive any cancellation of or change to an order relayed
to a Floor Broker through the use of hand signals must be relayed to
the Floor Broker in a time stamped, written form immediately
thereafter. All cancellations and changes of orders held by the Order
Book Official must be in written form. Executing brokers who receive
such communications must have a written order in their possession with
all of the following information on the ticket:
Underlying security ticker symbol
Expiration month
Striking price
Volume
Purchase or Sale Notation
Whether Market or Limit Order
(A)[(2)] Cancellation of orders held by the Floor Broker must be in
written form in accordance with current practice. A Floor Broker may
cancel an order through the use of hand signals if it is followed
immediately by written cancellation.
(B)[(3)] Any change to an order must be documented in writing
outside of the crowd and the ticket time-stamped, before the revised
order may be represented.
[(f) Any member desiring to use an order form in a format other
than that provided by the Exchange must submit such form to the Options
Floor Trading Committee and obtain its approval prior to using such
form on the Floor.]
(f) The system entry requirement prescribed in subsection (c),
above, will be operative on or before August 29, 2003.
* * * * *
Record of Orders
Rule 6.68(a). Every member organization must [shall] maintain and
preserve for the period specified under SEC Rule 17a-4, a [written]
record of every order and of any other instruction given or received
for the purchase or sale of option contracts. Such record must [shall]
show the terms and conditions (market order, limit order, etc.) of the
order or instruction and of any modification or cancellation thereof,
and in addition must [shall] include:
[(1) The account designation for which such order is to be
executed;
(2) the date and time stamp indicating the time the order was
entered and executed or cancelled;
(3) the type of option and the underlying stock;
(4) the expiration month, the exercise price, the number of option
contracts and the execution price (premium);
(5) whether the order is a purchase or a sale (writing) and whether
the order is an opening or a closing transaction;
(6) whether the order is solicited or unsolicited; and
(7) whether the order is discretionary.]
(1) Clearing member organization;
(2) Option symbol, expiration month, exercise price, and type of
option (call or put);
(3) Side of market (buy or sell);
(4) Quantity of option contracts;
(5) Any limit price, stop price, or special conditions;
(6) Opening or closing transaction;
(7) Time in force;
(8) Account origin code;
(9) Solicited or unsolicited;
(10) Order identification number;
(11) Order entry date and time, or the date and time of any
modification of the terms of the order or cancellation of the order;
(12) Order execution time and price;
(13) Identity of the executing broker and the other party to the
transaction; and
(14) Such other information as may be required by the Exchange.
(b) EOC Record Retention. Members and member organizations will
comply with their record keeping obligations under this Rule by
immediately entering orders upon receipt (including any modifications
and cancellations) into EOC or the Member Firm Interface and retaining
the record of such orders.
(c) Record Retention for Orders Excepted from EOC Pursuant to Rule
6.67(d). In addition to the white (control) copy, and/or hard copy,
which must be kept for the entire amount of time specified in
Securities Exchange Act Rule 17a-4, the green (commission) copy must
also be retained for a minimum of 48 hours from the trade date. In the
case of those orders executed by independent Floor Brokers, it is their
responsibility to retain the green (commission) copy, and the executing
member firm must retain the white or hard copy. Also, all such records
must be readily available for use on the trading floor for the
resolution of any problems relating to the execution of these orders.
* * * * *
Reporting Duties
Rule 6.69(a)-(e)--No change.
Commentary
.01 EOC Reporting Procedure. The Options Floor Trading Committee
has established the following procedure for reporting of transactions
pursuant to Rule 6.69. For each transaction on the Exchange in which a
member [he] participates as seller, that [a floor] member will [shall]
immediately record into EOC, [on a card or ticket in a form acceptable
to the Committee his] its assigned broker initial code, the symbol of
the underlying security, the type, expiration month and exercise price
of the option contract sold, the transaction price, the number of
contract units comprising the transaction, the name of the contra
clearing member, and the assigned broker initial code of the contra
member. Members must report any [shall identify price reporting tickets
which represent the] partial execution of a larger order into EOC [the
manner prescribed by the Exchange. The card or ticket for a] Any agency
order must [shall] also include the account origin code[,]. [as set
forth in Commentary .02 below. This reporting card or ticket shall
immediately be time-stamped at the station where option contracts of
the class involved are traded and attached to the appropriate ``buy''
ticket. The card or ticket shall then be placed in the price reporting
card box provided at the station. Before placing the tickets in the
box, the member shall use his best efforts to make sure that the Order
Book Official with respect to option contracts of the class involved,
or the Order Book Official clerk, is aware of the transaction and its
price. In transactions when the buyer accepts tickets from the
seller(s), it shall be the buyer's responsibility to time-stamp the
tickets, use best efforts at securing the Order Book Staff's attention
to the transaction, and submit the tickets into the box.] Any floor
member failing to immediately report a transaction in accordance with
Rule 6.69 will [shall] be subject to [being fined] disciplinary action
pursuant to Rule 10. [by the Options Floor Trading Committee.]
.02 Reporting Procedures for Orders Excepted from EOC Pursuant to
Rule 6.67(d). The Options Floor Trading Committee has established the
following procedure for reporting of transactions pursuant to Rule
6.69. For each transaction on the Exchange in which a member
participates as seller, that floor member will immediately record, on a
card or ticket in a form acceptable to the Committee, its assigned
broker initial code, the symbol of the underlying security, the type,
expiration month and exercise price of the option contract sold, the
transaction price, the number of contract units comprising the
transaction, the name of the contra
[[Page 47128]]
clearing member, and the assigned broker initial code of the contra
member. Members must identify price reporting tickets that represent
the partial execution of a larger order in the manner prescribed by the
Exchange. The card or ticket for any agency order must also include the
account origin code, as set forth in Commentary .03 below. This
reporting card or ticket shall immediately be time-stamped at the
station where option contracts of the class involved are traded and
attached to the appropriate ``buy'' ticket. The card or ticket shall
then be placed in the price reporting card box provided at the station.
Before placing the tickets in the box, the member shall use his best
efforts to make sure that the Order Book Official with respect to
option contracts of the class involved, or the Order Book Official
clerk, is aware of the transaction and its price. In transactions when
the buyer accepts tickets from the seller(s), it shall be the buyer's
responsibility to time-stamp the tickets, use best efforts at securing
the Order Book Staff's attention to the transaction, and submit the
tickets into the box. Any floor member failing to immediately report a
transaction in accordance with Rule 6.69 will be subject to
disciplinary action pursuant to Rule 10.
[.02 Reporting of Trade Information. The responsibility for time
stamping and reporting of trades to the Order Book is as follows:
(a) One buyer, multiple sellers--responsibility is with the buyer
(b) one seller, multiple buyers--responsibility is with the seller
(c) one buyer, one seller--responsibility is with the seller]
.03 Origin Codes for Orders Excepted from EOC Pursuant to Rule
6.67(d). For purposes of Rule 6.69(d), trade information includes the
proper account origin codes, which are as follows: ``C'' for non-
broker-dealer customer accounts; ``F'' for firm proprietary accounts;
``M'' for member Market Maker accounts; and ``B/D'' for firm orders of
non-member broker-dealer accounts, stock specialist accounts, or
customer account trades of the broker-dealer or non-member broker-
dealer. In addition, Market Maker clearing firms are directed to
instruct their respective trading desks to identify Market Maker orders
that are entered from off the floor and not entitled to Market Maker
margin treatment by placing a ``C'' after the Market Maker's number in
the ``firm'' box on the ticket. Floor Brokers, when accepting an order
by phone from a Market Maker, are similarly directed to identify that
order in the same manner.
.04--No change.
* * * * *
Priority and Order Allocation Procedures
Rule 6.75(a)-(h)--No change.
Commentary
.01-.03--No change.
.04 Combination, Spread and Straddle Orders. Following are the
proper trading procedures for combination, spread and straddle orders:
(a) Announcing the Order. Any member holding a combination, spread,
or straddle order must [write it on one ticket and must] bid or offer
for each series in the order. For orders excepted from EOC, pursuant to
Rule 6.67(d), such orders must be written on a ticket. The member may
express the order as it applies to each separate series or may express
the order at its total or net debit/credit alone, so long as it is
clear that the member is attempting to execute both series as a
combination, spread, or straddle. The executing member must ensure that
the trading crowd is aware of the request for a market and has an
opportunity to participate in the transaction.
(b)-(g)--No change.
* * * * *
Joint Accounts
Rule 6.84(a)-(h)--No change.
Commentary
.01-.02--No change.
.03 Transactions on the Floor will be presumed to be for the
proprietary account of the individual members unless the executing
member enters the joint account symbol into EOC. For orders excepted
from EOC, pursuant to Rule 6.67(d), transactions on the Floor will be
presumed to be for the proprietary account of the individual members
unless the joint account symbol is given up and used on the trade
ticket to represent the joint account as the executing member.
.04 Any order of a joint account participant[,] that [which] is
executed by a Floor Broker, must [shall] be in accordance with the
procedures set forth in Rule 6.85, except that the joint account
trading number with its alpha identification must be entered into EOC,
or, for order excepted from EOC, pursuant to Rule 6.67(d), the joint
account trading number with its alpha identification must [should]
appear in the ``executing firm'' area. Additionally, a joint account
may not bid, offer, purchase, sell, or enter orders in an option series
in which a Floor Broker holds an order on behalf of the joint account
or for the proprietary account of another participant in the joint
account. Orders of joint account participants in a particular option
series may not be concurrently represented[,] by one or more Floor
Brokers.
.05-07--No change.
* * * * *
Market Maker Orders Executed By Floor Brokers
Rule 6.85(a)-(c)--No change.
Commentary
.01-.02--No change.
.03 Orders Excepted from EOC Pursuant to Rule 6.67(d). Market Maker
order tickets should be prepared by the Market Maker, when possible.
All orders must [shall] be recorded and time-stamped, pursuant to Rule
6.67. Order tickets must [shall] include the acronym of the Market
Maker entering the order in the area marked ``buying firm/selling
firm,'' with the Market Maker's name printed at the bottom of the
ticket. Order tickets must be marked to indicate whether the order is
``GTC'' or day only. The acronym of the executing Floor Broker must
[shall] be written in the area marked ``executing member.'' When
utilizing a ``partial order'' ticket to facilitate the completion of an
order, the control number of the original order ticket must be written
on the partial order ticket.
Except as provided in Rule 6.2(h)(5)[(4)](C) (Ticket to Follow
Rule), when a Floor Broker receives a verbal order from a Market Maker,
or when a Floor Broker is requested by a Market Maker to alter an order
in his possession in any way, the Floor Broker must [shall] immediately
prepare an order ticket from outside the trading crowd and timestamp
it.
* * * * *
Floor Broker Hand-Held Terminals
Rule 6.89(a)--No change.
(b) Proprietary Brokerage Order Routing Terminals:
(1)-(3)--No change.
(4)(A)--No change.
(B) Orders Excepted from EOC Pursuant to Rule 6.67(d). When a
Member executes an order that was received over a Terminal, the Member
must fill out and immediately time stamp a trading ticket [within one
minute of the execution]. Exchange rules on record keeping and trade
reporting are unchanged.
(C)-(D)--No change.
(5)-(7)--No change.
* * * * *
[[Page 47129]]
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
Background
The Exchange is proposing to effect rule changes to support the
implementation of its new audit trail system known as Electronic Order
Capture System (``EOC'').\5\ EOC is intended to fulfill one of the
undertakings contained in the Commission's Order Instituting Public
Administrative Proceedings Pursuant to Section 19(h)(1) of the
Securities Exchange Act of 1934, Making Findings and Imposing Remedial
Sanctions. (``Order'').\6\ Specifically, this rule filing is intended
to respond to Section IV.B.e.(v) of the Order, which requires, among
other things, that the PCX incorporate into its audit trail all non-
electronic orders such that the audit trail provides an accurate, time-
sequenced record of electronic and other orders, quotations and
transactions, beginning with the receipt of the order and documenting
the life of the order through the process of execution, partial
execution, or cancellation.\7\
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\5\ PCX is currently working with the other options exchanges
through the Intermarket Surveillance Group (``ISG'') in the design
and implementation of the Consolidated Options Audit Trail System
(``COATS''). Upon its completion, COATS is expected to be a fully
integrated intermarket audit trail using quote and trade data from
all the options exchanges. EOC is a project specific to PCX and it
will contain certain trade information for inclusion into COATS.
\6\ See Securities Exchange Act Release No. 43268 (September 11,
2000) and Administrative Proceeding File No. 3-10282.
\7\ Id. at 13-14.
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Currently, the PCX operates an electronic order routing and
execution system called Pacific Options Exchange Trading System
(``POETS''),\8\ and several other peripheral systems including the
Pacific Options Processing System (``POPS'') \9\ and the Floor Broker
Hand Held trading system,\10\ in conjunction with traditional open
outcry trading with Floor Brokers and competing Market Makers. The
Exchange's Member Firm Interface (``MFI'') enables Member Firms to send
orders electronically to the Exchange for delivery to either POETS, a
Floor Broker Hand Held Terminal, or to a Member Firm's default
destination.\11\ While all executions using POETS and electronic hand-
held devices carry immediately assigned system times, orders that are
routed to the Floor by telephone or sent to Member Firm printers
located on the Floor generally require manual trade ticket processing.
Under the proposal, EOC will eliminate the manual processing of order
tickets and will further facilitate the creation and development of a
comprehensive audit trail and automated surveillance systems.
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\8\ POETS is the Exchange's automated trading system comprised
of an options order routing system, an automatic execution system
(``Auto-Ex''), an on-line limit order book system (``Auto-Book''),
and an automatic market quote update system (``Auto-Quote'').
\9\ POPS is the Exchange's automated system that compares trade
information entered by Member Firms and submits trades to the
Options Clearing Corporation for clearance and settlement.
\10\ The Floor Broker Hand Held interface is an automated order
delivery system that enables Floor Brokers to receive and execute
orders electronically, and to report trade executions to the tape
via the Options Price Reporting Authority (``OPRA'') and to POPS for
clearing. See PCX Rule 6.89.
\11\ A Member Firms'' default destination may be either a
particular firm booth or a remote entry site, to which orders that
fail to meet the eligibility criteria necessary for Auto-Ex or Auto-
Book will be delivered.
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Summary of Proposed Rule Changes
The Exchange is proposing to adopt a number of changes to its rules
regarding the record of orders (principally PCX Rules 6.67 and 6.68) to
enhance the Exchange's audit trail and self-regulatory capabilities.
The proposed changes to the text of the PCX rules are summarized below.
(1) Electronic Order Capture System (``EOC'')
EOC is the Exchange's proposed electronic audit trail and order
tracking system that will provide a time-sequenced record of all orders
and transactions on the Exchange.\12\ EOC will record the receipt of an
order and will document the life of the order through the process of
execution, partial execution, or cancellation. This system includes the
electronic communications interface between EOC booth terminals and the
Floor Broker Hand Held Terminal applications. Each Member's EOC booth
terminal and each Floor Broker Hand Held Terminal will contain an
electronic order entry screen that displays the terms and conditions of
each order received by that Member.
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\12\ See proposed PCX Rule 6.1(b)(39) (definition of
``Electronic Order Capture System'').
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The Exchange is proposing to adopt new PCX Rule 6.67(c),\13\ which
requires that every Member or Member Organization that receives an
order for execution on the Exchange must immediately \14\ record the
details of the order (including any modification of the terms of the
order or cancellation of the order) into EOC, unless such order has
been entered into the Exchange's other electronic order processing
facilities \15\ (e.g., orders sent electronically through the
Exchange's MFI).\16\ The details of each order that will be required to
be recorded upon receipt include the following:\17\ (1) Clearing member
organization; (2) Option symbol, expiration month, exercise price, and
type of option (call or put); (3) Side of market (buy or sell); (4)
Quantity of option contracts; (5) Any limit price, stop price, or
special conditions; (6) Opening or closing transaction; (7) Time in
force; (8) Account origin code; and (9) Solicited or unsolicited.\18\
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\13\ Former PCX Rules 6.67(b), (c) and (d) are being deleted as
they are redundant and superfluous provisions pursuant to proposed
PCX Rules 6.67(c), 6.67(d) and 6.67(d)(1).
\14\ The Exchange commits that it will implement proactive and
effective surveillance procedures for violations of Exchange rules
and federal securities laws, including, but not limited to, rules
prohibiting trading ahead and front running, related to the entry of
customer orders into the EOC system.
\15\ The EOC entry requirement will also apply to PCX Plus.
\16\ The systemic entry requirement would not be applicable to
transactions initiated on the Floor and executed by a registered
Market Maker or a Lead Market Maker for their own account, as such
trades that may be initiated on the Floor and that are already
reported to POETS via proprietary hand-held devices.
\17\ The Exchange notes that the order entry time and
identification number are automatically assigned upon entry into
EOC. Further, the Exchange notes that certain data elements tied to
execution, such as executing broker, contra broker, execution time
and price are not available at the time that order details are
entered into EOC. This information will be captured automatically by
EOC at the time of execution of an order. Telephone call between
Peter D. Bloom and Tania J. Cho, Attorneys, PCX, and Jennifer
Colihan, Special Counsel, Division, Commission, on July 29, 2003.
\18\ The proposed rule also includes a provision that would
require Member Firms to record such other information as may be
required by the Exchange from time to time.
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Member Firms may comply with the proposed rule in one of three
ways: (1) Required order details may be transmitted via the Exchange's
other electronic order processing facilities that electronically assign
the time of receipt on the Exchange; (2) Order details may be routed to
the Member
[[Page 47130]]
Firm booth by telephone or be sent to the Member Firm's printer located
on the Floor, and immediately entered into the EOC booth device, which
will electronically assign the time of receipt on the Exchange; or (3)
Orders may be received during outgoing telephone calls that are
initiated at the option post, and then immediately entered into the EOC
booth device, which will electronically assign the time of receipt on
the Exchange pursuant to PCX Rule 6.2(h)(3)(B).\19\ The EOC booth
device that is used to record the details of the order upon receipt on
the Floor is an Exchange provided system.\20\ The EOC booth device and
the enhancements to the existing Floor Broker Hand Held Terminal
applications will support the entry of all order types (including
contingency and complex orders, i.e., multiple-leg option and stock/
option orders) and all required information, as well as provide quick
entry templates to speed data entry. Once a Member Firm's booth clerk
records the details of an order into EOC or in the case when a Floor
Broker receives an order pursuant to PCX Rule 6.2(h)(3)(B), the order
is routed electronically to a Floor Broker Hand Held Terminal for
representation in the trading crowd.\21\ Member Firms will have the
capability to track and display all orders that are submitted through
the EOC booth device, as all orders will be assigned an unique
identifier that will be used throughout the life of the order.
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\19\ The Exchange's order processing systems have been designed
so that the clocking mechanisms do not deviate by more than three
seconds from the Naval Observatory atomic clock in Washington, D.C.
\20\ The EOC will not initially support the use of a Member
Firm's proprietary system to comply with the proposed order entry
requirements.
\21\ Orders sent via the EOC interface to a Floor Broker in the
trading crowd may subsequently be transmitted electronically to
another Floor Broker on the Floor. When an order is transmitted from
one Member to another, the EOC will capture each phase of processing
as the order moves from entry to execution.
---------------------------------------------------------------------------
Once an order has been executed, the Floor Broker Hand Held
Terminal system will route trade information to POETS (via the EOC
interface), which will then route the information to POPS for trade
match and clearing purposes. At the same time, the Exchange will send a
report to the Member Firm that entered the order and will transmit
trade information to OPRA.
The Exchange believes that the implementation of EOC, as described
above, will improve order information management features resulting in
operational efficiencies for Member Firms.
(2) Order Format Requirements
The Exchange's current rules governing the order format
requirements in transmitting orders to the Exchange are set forth in
PCX Rule 6.67(a). The Exchange is proposing to add interpretive
language to make it clear that EOC is an approved format for
transmitting orders for purposes of this Rule. In addition, proposed
PCX Rule 6.67(b) requires that orders sent to the Exchange for
execution must comply with the order format requirements established by
the Exchange relating to, among other things, option symbol, expiration
month, exercise price, type of option (call or put), quantity of option
contracts, clearing member organization, whether the order is to buy or
sell, and whether the order is market or limit.
(3) Exceptions to EOC Entry Requirement
An exception to the requirement for recording order information
into EOC is contained in proposed PCX Rule 6.67(d). Under this proposed
rule, if a disruption or malfunction to EOC or any other Exchange
electronic order processing system occurs, the EOC entry requirement
will be suspended upon the approval of two Floor Officials, and the EOC
Contingency Procedures will be in effect pursuant to PCX Rule
6.67(d)(1).\22\ If the Exchange is still able to process and
disseminate quotes accurately, then any orders received by the Exchange
will be processed manually through the use of paper tickets. In such
circumstances, all other Exchange rules governing options trading will
remain in effect. Accordingly, the Exchange intends to retain its
existing rules that are applicable to the manual processing of order
tickets. Minor changes have been made throughout the existing options
trading rules to allow for manual processing of trade tickets when
necessary.
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\22\ Under the proposed rule, member firms must use a backup
supply of tickets to record the details of the order received
through non-electronic means and time stamp the order of events.
Once the disruption or malfunction has been corrected, as determined
by two Floor Officials, member firms must input all orders into an
EOC device using the ``as-of'' field.
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(4) Record of Orders
Current PCX Rule 6.68(a) requires Member Organizations to maintain
and preserve certain information items relating to the terms of each
option order. The Exchange is proposing to make minor technical changes
to the text by renaming and renumbering certain information items
enumerated in the Rule for clarity. The proposed rule change does not
replace existing requirements for recording orders contained in this
Rule.
The Exchange is also proposing to add new PCX Rule 6.68(b) to make
it clear that Members and Member Organizations must comply with their
record keeping obligations under this Rule by immediately entering
orders upon receipt (including any modifications and cancellations)
into EOC or the MFI and retaining the record of such orders.\23\
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\23\ Former PCX Rule 6.68(b) is being renumbered as new Rule
6.68(c).
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(5) Reporting of Trade Information
The Exchange proposes to rescind current PCX Rule 6.69, Commentary
.02, which relates to the trade reporting requirements of Members. The
Exchange believes that this rule is superfluous and that it is
inconsistent with PCX Rule 6.69(b), which already requires that the
Member representing the sell side of a transaction is responsible for
reporting the transaction to the Exchange in a form and manner
prescribed by the Exchange. Therefore, because current PCX Rule 6.69(b)
accurately reflects the PCX's existing trade reporting requirements,
the Exchange is proposing to eliminate Commentary .02 of this rule for
clarity.
Proposed new PCX Rule 6.69, Commentary .02 specifies the reporting
procedures for orders that are manually processed when there is a
disruption or malfunction with the EOC pursuant to PCX Rule 6.67(d).
This proposed new rule was adapted from current PCX Rule 6.67,
Commentary .01.
(6) Implementation Date
The system entry requirement proposed in this rule change will be
operative on or before August 29, 2003.\24\ This date is consistent
with the extension deadline provided by the Commission to the PCX (and
other respondent exchanges) for compliance with Section IV.B.e.(v) of
the SEC Order to incorporate into the audit trail all non-electronic
orders.\25\
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\24\ See proposed PCX Rule 6.67(f).
\25\ See Letter from Annette L. Nazareth, Director, Division of
Market Regulation, Stephen M. Cutler, Director, Division of
Enforcement, and Lori A. Richards, Director of Office of Compliance
Inspections and Examinations, Securities and Exchange Commission to
Kathryn L. Beck, Pacific Exchange, Inc., dated June 10, 2003.
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(7) Miscellaneous Changes
The Exchange proposes to make several minor, non-substantive
changes to the text of several existing PCX Rules to correct stylistic,
grammatical and typographical errors and to conform the
[[Page 47131]]
proposed rules to the new EOC requirements.\26\
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\26\ See e.g., proposed PCX Rules 6.48 and 6.62(e).
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2. Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b) \27\ of the Act, in general, and further the
objectives of Section 6(b)(5),\28\ 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 and perfect the
mechanisms of a free and open market and to protect investors and the
public interest. In addition, the Exchange believes that the proposed
rule change is consistent with provisions of Section 11A(a)(1)(B) of
the Act,\29\ which states that the new data processing and
communications techniques create the opportunity for more efficient and
effective market operations.
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\27\ 15 U.S.C. 78f(b).
\28\ 15 U.S.C. 78f(b)(5).
\29\ 15 U.S.C. 78k-1(a)(1)(B).
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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
Written comments on the proposed rule change were neither solicited
nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the 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, 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-2002-57 and should be submitted by August 28, 2003.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\30\
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\30\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-20131 Filed 8-6-03; 8:45 am]
BILLING CODE 8010-01-P