[Federal Register: December 22, 2004 (Volume 69, Number 245)]
[Notices]
[Page 76808-76815]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr22de04-107]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-50854; File No. SR-PCX-2004-122]
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
December 14, 2004.
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 December 14, 2004, 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. The Commission is publishing this notice to
solicit comment on the proposed rule change from interested persons.
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\1\ U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend its rules relating to the
systematization of orders in connection the requirement to design and
implement a consolidated options audit trail system (``COATS''). The
text of the proposed rule change appears below. Additions are
italicized; deletions are in brackets.
* * * * *
Rule 6
Options Trading
Applicability, Definitions and References
Rule 6.1(a)--No change.
(b) Definitions. The following items 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 an accurate time-sequenced record of all orders and
transactions on the Exchange pursuant to Section IV.B.e.(v) of 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. 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 then Floor Broker Hand Held applications. Each OTP Holder
or OTP Firm'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 OTP Holder or OTP
Firm. OTP Holders and OTP Firms may record the details of the order
directly into the EOC system as described herein, or, in the
alternative, into the Electronic Tablet described in subsection (b)(40)
below.
(40) The term ``Electronic Tablet'' means the Exchange's electronic
method of recording orders that are hand written and transmitted to a
Floor Broker's workstation for representation in order to create an
accurate time-sequenced record of orders on the Exchange. The
Electronic Tablet will automatically timestamp the receipt of an order
when such order is transmitted to a Floor Broker's workstation for
representation in the trading crowd and document the life of the order
through the process of execution, partial execution or cancellation.
This system includes the ability for a Floor Broker to hand write order
information and automatically timestamp the report and provides a
method to display report images at an OTP Holder or OTP Firm's
workstation to manually key the order information for clearing
purposes. Such clearing information will become part of the data
required pursuant to Section IV.B.e.(v) of 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. OTP Holders and OTP Firms may record the
details of the order directly into the EOC system (as
[[Page 76809]]
described above in subsection (b)(39)) or, in the alternative, into the
Electronic Tablet as described herein.
(c)-(e)--No change.
* * * * *
Admission to and Conduct on the Options Trading Floor
Rule 6.29a)-(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 b e 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 or the Electronic
Tablet unless the exception set forth in Rule 6.67(d)(1)(A) applies, in
which case the EOC/Electronic Tablet Contingency Reporting Procedures
will be in effect in accordance with Rule 6.67(d)(2).
(C)--No change.
(4)--No change.
(5) Floor Brokers.
(A)-(B)--No change.
(C) EOC or Electronic Tablet Ticket to Follow Procedures Pursuant
to Rule 6.67(d)(1)(A). A Floor Broker in a trading crowd who receives a
telephonic [a] order from an OTP Holder or OTP 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 OTP Holder or OTP Firm booth before
the order is transmitted telephonically to the Floor Broker and
represented in the trading crowd; and (b) that the written, time-
stamped order ticket 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
or the Electronic Tablet pursuant to Rule 6.67(c), except as otherwise
provided in Rule 6.67(d)(1)(A). [must initial, must mark as opening or
closing and must time-stamp the order.]
.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 or the Electronic Tablet, pursuant
to Rule 6.67(d)(1)(A), [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 Exchange
OTP Holder or OTP Firm 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 designed by the Market Maker with
an ``S'' in the ``[o]Optional Data'' field [section] of [the] EOC or
the Electronic Tablet or, for orders excepted from EOC or the
Electronic Tablet pursuant to Rule 6.67(d)(1)(A), 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 or a broker-dealer (``customer order'') and
an order for the proprietary account of an OTP Holder OTP Firm that is
representing that customer (the ``facilitation order'') may cross such
orders only if the following procedures are followed.
(1)--No change. (2) The option order tickets for both the
[f]Facilitation orders and [the] customer orders must be entered into
EOC or the Electronic Tablet 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 EOC or the Electronic Tablet. If facilitation
orders and customer orders are excepted from EOC or the Electronic
Tablet, pursuant to Rule 6.67(d)(1)(A), 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 EOC or the Electronic Tablet or, for
orders excepted from EOC or the Electronic Tablet pursuant to Rule
6.67(d)(1)(A), 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)(1) Stock/Option and SSF/Option Orders. When a stock/option
order is taken to a crowd for execution, the stock transaction or SSF
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 and SSF/option orders: [A]after an agreement
with other OTP Holders or OTP Firms of the crowd has been reached as to
the terms of the transaction, the option order must be entered into EOC
or the Electronic Tablet or, for orders excepted from EOC or the
Electronic Tablet, pursuant to Rule 6.67(d)(1)(A), 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 Electronic Tablet or, for orders
excepted from EOC or the Electronic Tablet, pursuant to Rule
6.67(d)(1)(A), turned in to the Order Book Official at this time. The
OTP Holders or OTP
[[Page 76810]]
Firms 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 OTP Holders or OTP Firms will [shall] not be
held to the option transaction. If the stock transaction is effected at
an [the] agreed-upon price, then all the OTP Holders or OTP Firms 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 or the
Electronic Tablet and reported to OPRA or, for orders excepted from EOC
or the Electronic tablet, pursuant to Rule 6.67(d)(1)(A), trade tickets
must [should] be given to the Order Book Official.
(f)(2)--No change.
Commentary:
.01-.06--No change.
* * * * *
Discretionary Transactions
Rule 6.48.(a)-(b)--No change.
(c) A Market Marker 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 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 the Electronic Tablet, for
orders excepted from EOC or the Electronic Tablet, pursuant to Rule
6.67(d)(1)(A), 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 EOC or the Electronic Tablet for [area on
the order ticket of] the Solicited order. For orders excepted from EOC
or the Electronic Tablet, pursuant to Rule 6.67(d)(1)(A), ``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 or the
Electronic Tablet, pursuant to Rule 6.67(d)(1)(A), 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 EOC or the Electronic Tablet. For orders excepted from EOC
or the Electronic Tablet, pursuant to Rule 6.67(d)(1)(A), a [A] not
held order [is an order that] is market ``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)-(k)--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 OTP Holder 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 or the Electronic Tablet are [deemed to be written] approved
formats (as described in subsection (b) below) 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 OTP Holder receiving such cancellation or change must record the
time of its receipt on the Floor.] (c) EOC or Electronic Tablet Entry
Requirement. Every OTP Holder or OTP Firm that receives an order for
execution on the Exchange must immediately, prior to representation in
the trading crowd, record the details of the order (including any
modification of the terms of the order or cancellation of the order)
into either the EOC or the Electronic Tablet, 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).
(1) EOC. 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. The remaining elements prescribed in Rule
6.68(a) shall be recorded as the events occur and/or during trade
reporting procedures.
[[Page 76811]]
(2) Electronic Tablet. The details of each order required to be
recorded upon receipt must include the data elements prescribed in Rule
6.68(a)(1) through (6), and such other information as may be required
by the Exchange from time to time. The remaining elements prescribed in
Rule 6.68(a) shall be recorded as the events occur and/or during trade
reporting procedures.
[(c) Executions. An OTP Holder 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 OTP Holder.]
(d)(1) Exceptions to EOC or Electronic Tablet Entry Requirements.
The EOC or Electronic Tablet entry requirement provision of subsection
(c) will not apply to the following:
(A) Any EOC or Electronic Tablet system disruption or malfunction
as confirmed by two Trading Officials or Exchange staff (as designated
by the Chief Regulatory Officer).
(2) EOC/Electronic Tablet Contingency Reporting Procedures. If the
exception set forth in subsection (d)(1)(A) applies, then the following
procedures must be followed.
(A) OTP Holders and OTP Firms shall use a backup supply of tickets
to record the details of all orders (the data elements of which are
prescribed in Rule 6.68(a)(1) through (9)), received through non-
electronic means. The order ticket must be processed in accordance with
Rule 6.2(h)(5)(C). 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 National Institute of
Standards and Technology Atomic Clock in Boulder Colorado ``NIST
Clock'' will be available at all OTP Holder and OTP Firm booths and
trading posts).
(B) During such circumstances, existing rules on manual processing
of order tickets are applicable.
(C) If there is an EOC or Electronic Tablet system disruption/
malfunction as set forth in subsection (1)(A), the EOC or Electronic
Tablet order entry requirements in Rule 6.67(c) will be reinstated once
the disruption/malfunction to the EOC or Electronic Tablet system has
been corrected as determined by one Trading Official or Exchange staff
(as the case may be). Once the disruption/malfunction to the EOC or
Electronic Tablet system has been corrected, all OPT Holders and OTP
Firms affected by the system disruption/malfunction must input all
relevant orders into an EOC device via the ``as-of'' field, noting the
times of events of the orders. The required information must be entered
into EOC by such prescribed period of time, as determined by the
Exchange, following the trade, but no later than the end of the trading
day that such trade occurred (or on the day the order was received if
no trade was executed). Any OTP Holder or OTP Firm who fails to follow
such procedures will be subject to disciplinary action pursuant to Rule
10.
[(d) A Floor Broker may represent a telephonic order, with a ticket
to follow, as provided in Rule 6.2(h)(4)(C).]
[(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.
Any cancellation of or change to an order relayed to a Floor Broker
through the use of hand signals 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 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
(2) Cancellaiton 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. (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 OTP Holder
desiring to use an order form in a format other than that provided by
the Exchange must submit such form to the Exchange and obtain its
approval prior to using such form on the Floor.]
(e) The system entry requirement prescribed in subsection (c),
above, will be operative on or before January 10, 2005.
Commentary .01: FLEX and Cabinet Trades are exempt from the EOC and
Electronic Tablet Entry Requirements as set forth in Rule 6.67(c). Such
trades shall be processed using manual time stamped order tickets. The
PCX will maintain a separate record (i.e., spreadsheet) of quotes,
orders and transactions related to such trades in the same format
require pursuant to Section IV.B.e.(v) of 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.
* * * * *
Record of Orders
Rule 6.68(a). Every OTP Holder or OTP Firm 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. The Exchange shall
maintain and preserve all electronic orders on behalf of the OTP Holder
or OTP Firm. 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) CMTA Information and claring OTP Holder or Firm;
(2) Option symbol, expiration month, exercise price, and type of
option (call or put);
(3) Side of market (buy or sell) and order type (customer, firm,
firm market maker);
(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) Record Retention for Orders Excepted from EOC or the Electronic
[[Page 76812]]
Tablet Pursuant to Rule 6.67(d)(1)(A). 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 OTP Holder 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 or Electronic Tablet Reporting Procedure. The Exchange has
established the following procedure for reporting of transactions
pursuant to Rule 6.69. For each transaction on the Exchange in which an
OTP Holder [he] participates as seller, that [a floor] OTP Holder will
[shall] immediately record into EOC or the Electronic Tablet, [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 OTP Holder or OTP Firm. OTP Holders
or OTP Firms must report any [shall identify price reporting tickets
which represent the] partial execution of a larger order into EOC or
the Electronic Tablet [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 OTP Holder 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 OTP Holder 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 Exchange.]
.02--Reserved.
[.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 or the Electronic
Tablet Pursuant to Rule 6.67(d)(1)(A). 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 Market Maker accounts; and ``B/D''
for firm orders of non-OTP Holder or OTP Firm broker-dealer accounts,
stock specialist accounts, or customer account trades of the broker-
dealer or non-OTP Holder or OTP Firm 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 OTP Holder or OTP Firm 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 expected
from EOC or the Electronic Tablet, pursuant to Rule 6.67(d)(1)(A), such
orders must be written on a ticket in accordance with Rule
6.2(h)(5)(C). The OTP Holder or OTP Firm 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 OTP Holder
or OTP Firm is attempting to execute both series as a combination,
spread, or straddle. The executing OTP Holder or OTP Firm 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 OTP Holder or OTP Firm unless the
executing OTP Holder or OTP Firm enters the joint account symbol into
EOC or the Electronic Tablet. For orders excepted from EOC or the
Electronic Tablet, pursuant to Rule 6.67(d)(1)(A), transactions on the
Floor will be presumed to be for the proprietary account of the
individual OTP Holder or OTP Firm unless the joint account symbol is
given up and used on the trade ticket to represent the joint account as
the executing OTP Holder or OTP Firm.
.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 the Electronic Tablet, or, for order excepted from EOC or the
Electronic Tablet, pursuant to Rule 6.67(d)(1)(A), 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 or the Electronic Tablet Pursuant to
Rule 6.67(d)(1)(A). Market Maker order
[[Page 76813]]
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,'' within 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 are 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 or the Electronic Tablet Pursuant to
Rule 6.67(d)(1)(A). When an OTP Holder or OTP Firm executes an order
that was received over a Terminal, the OTP Holder or OTP Firm 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.
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 PCX has prepared summaries, set forth in Section s
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
a. Background. The Exchange is proposing this rule change to comply
with the requirement to implement COATS. In connection with the filing
of this proposed rule change, the PCX withdraws SR-PCX-2002-57, and
Amendment Nos. 1-4 thereto, which the Exchange previously filed to
comply with the requirement to implement COATS.\3\
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\3\ See Securities Exchange Act Release No. 48264 (July 31,
2003), 68 FR 47124 (August 7, 2003) (SR-PCX-2002-57).
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Specifically, 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''). The EOC is intended to
fulfill one of the undertakings contained in the Commission's Order
Instituting Public Administrative Proceedings Pursuant to Sections
19(h)(1) of the Securities Exchange Act of 1934, Making Findings and
Imposing Remedial Sanctions. (``Order'').\4\ 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.\5\
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\4\ See Securities Exchange Act Release No. 43268 (September 11,
2000) and Administrative Proceeding File No. 3-10282.
\5\ Id. at 13-14.
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Currently, the PCX operates two electronic order routing and
execution system called Pacific Options Exchange Trading System
(``POETS'') \6\ and PCX Plus,\7\ and other peripheral systems including
the Pacific Options Processing System (``POPS'') \8\ and the Floor
Broker Hand Held trading system,\9\ in conjunction with traditional
open outcry trading with Floor Brokers and competing Market Makers. The
Exchange's Member Firm Interface (``MFI'') enables OTP Holders and OTP
Firms to send orders electronically to the Exchange for delivery to
POETS, PCX Plus, a Floor Broker Hand Held Terminal, or to an OTP Holder
or OTP Firm's default destination.\10\ While all executions using
POETS, PCX Plus, and electronic hand-held devices carry immediately
assigned system times, orders that are routed to the trading floor of
the Exchange by telephone or sent to the OTP Holder or OTP Firm's
printers located on the trading floor generally require manual trade
ticket processing. Under the proposal, the 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 for these orders that are currently processed
manually.
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\6\ 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'').
\7\ See Securities Exchange Act Release No. 47838 (May 13,
2003), 68 FR 27129 (May 19, 2003) (Order approving PCX Plus).
\8\ POPS is the Exchange's automated system that compares trade
information entered by OTP Holders and Firms and submits trades to
the Options Clearing Corporation for clearance and settlement.
\9\ 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.
\10\ An OTP Holder or OTT Firm's 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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b. Summary of Proposed Rule Changes. The Exchange is proposing to
adopt 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. EOC/Electronic Tablet. The Exchange is proposing to adopt new
PCX Rule 6.67(c),\11\ which requires that every OTP holder or OTP Firm
that receives an order for execution of the Exchange must immediately
\12\ 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 \13\ (e.g., orders sent
[[Page 76814]]
electronically through the Exchange's MFI).\14\ OTP Holders and OTP
Firms will have two ways to record the details of an order into EOC
prior to representation in the trading crowd: (i) Direct entry into the
EOC system, or (ii) entry to an Electronic Tablet that enables the user
to hand-write the order information onto the tablet, which converts the
information into an electronic format. The information from the
Electronic Tablet is then transmitted to a Floor Broker's workstation
for representation with an automatic timestamp for order receipt. A
booth clerk will then key in the order information from the Electronic
Tablet into the EOC system for clearing purposes in order for it to
become part of the data required for COATS.
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\11\ Former Rules 6.67(b), (c) and (d) are being deleted as they
are redundant and superfluous provisions pursuant to proposed Rules
6.67(c), 6.67(d) and 6.67(d)(1).
\12\ 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.
\13\ The EOC entry requirement will also apply to PCX Plus.
\14\ 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 they are already
reported to POETS via proprietary hand-held devices.
---------------------------------------------------------------------------
The details of each order that will be required to be recorded upon
receipt if directly entered into the EOC system include the
following:\15\ (1) CMTA information/Clearing OTP Holder or Firm; (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.\16\
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\15\ The Exchange notes that certain data elements tied to
execution, such as executing broker, contra broker, execution time
and price are not required to be entered by this Rule, as they are
not available at the time that order details are entered into EOC.
The Exchange also notes that the order entry time and identification
number are automatically assigned upon entry into EOC.
\16\ The proposed rule also includes a provision that would
require OTP Holders and OTP Firms to record such other information
as may be required by the Exchange from time to time.
---------------------------------------------------------------------------
The details of each order that will be required to be recorded upon
receipt if entered into the Electronic Tablet include the following:
(1) CMTA information/Clearing OTP Holder or Firm; (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 kprice, stop price, or special conditions, and (6) Opening or
closing transaction.
Therefore, OTP Holders and OTP Firms may comply with proposed PCX
Rule 6.67(c) 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 OTP Holder or OTP Firm
booth by telephone or be sent to the OTP Holder or OTP Firm's printer
located on the Floor, and immediately entered into EOC (either directly
into EOC or via the Electronic Tablet), which will electronically
assign the time of receipt of 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 (either directly
into EOC or via the electronic Tablet), which will electronically
assign the time of receipt of the Exchange pursuant to PCX Rule
6.2(h)(3)(B).\17\
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\17\ 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, DC.
---------------------------------------------------------------------------
The EOC device that is used to record the details of the order upon
receipt on the Floor is an Exchange provided system.\18\ The EOC 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 an OTP Holder or OTP Firm's
booth clerk records the details of an order into EOC (or the Electronic
Tablet) 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.\19\
OTP Holders and OTP Firms will have the capability to track and display
all orders that are submitted through the EOC, as all orders will be
assigned a unique identifier that will be used throughout the life of
the order.
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\18\ The EOC will not initially support the use of a OTP Holder
or OTP Firm's proprietary system to comply with the proposed order
entry requirements.
\19\ 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 OTP Holder or OTP Firm to another, the EOC will capture each
phase of processing at the order moves from entry to execution.
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The Exchange believes that the implementation of EOC and the
Electronic Tablet, as described above, will improve order information
management features resulting in operational efficienies for OTP
Holders and OTP 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 and the
Electronic Tablet are approved formats 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 or the Electronic
Tablet is contained in proposed PCX Rule 6.67(d). Under this proposed
rule, if a disruption or malfunction to EOC or the Electronic Tablet or
any other Exchange electronic order processing system occurs, the EOC
or the Electronic Tablet entry reuqirement will be suspended upon the
approval of two Trading Officials, and the EOC/Electronic Tablet
Contingency Reporting Procedures will be in effect pursuant to PCX Rule
6.67(d)(1)(A).\20\ 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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\20\ Under the proposed rule, OTP Holders and OTP 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 one Floor Official, OTP Holders and OTP Firms must
input all orders into the EOC device using the ``as-of'' field.
---------------------------------------------------------------------------
4. Record of Orders. Current PCX Rule 6.68(a) requires OTP Holder
and OTP Firms 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
Exchange is also proposing language to specify that the Exchange shall
maintain
[[Page 76815]]
and preserve all electronic orders on behalf of OTP Holders and OTP
Firms. The proposed rule change does not replace existing requirements
for recording orders contained in this Rule.
The Exchange is also proposing to amend PCX Rule 6.68(b) to make it
clear that OTP Holders and OTP Firms must comply with their record
keeping obligations for order excepted from the EOC/Electronic Tablet
requirements.
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 OTP Holders and OTP Firms. The Exchange
believes that this rule is superfluous and that it is inconsistent with
PCX Rule 6.69(b), which already requires that the OTP Holder or OTP
Firm representing the sell side of a transaction is responsible for
reporting the transaction to the Exchange in a form and manner
presecribed 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 .03 specifies the reporting
procedures for orders that are manually processed when there is a
disruption or malfunction with the EOC pursuant to proposed new PCX
Rule 6.67(d)(A)(1). This proposed new rule was adopted from current PCX
Rule 6.67, Commentary .01.
6. Cabinet Trades and FLEX Options. The Exchange also proposes to
add a Commentary .01 to PCX Rule 6.67, which states that Cabinet Trades
\21\ and FLEX\22\ options are exempt from the EOC and Electronic Tablet
Entry Requirements as set forth in PCX Rule 6.67(c). However, such
trades will be processed using manual time stamped order tickets. The
PCX will maintain a separate record of quotes, orders and transactions
related to such trades in the same format as the COATS data and will
make such information available upon Commission request.
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\21\ See PCX Rule 6.80.
\22\ See PCX Rule 5.30(b)(4).
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7. Implementation Date. The system entry requirement proposed in
this rule change will become completely operative on January 10,
2005.\23\
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\23\ See proposed PCX Rule 6.67(f).
---------------------------------------------------------------------------
8. Miscellaneous Changes. The Exchanges 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 proposed rules to the new EOC and Electronic Table
requirements.
2. Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b) \24\ of the Act, in general, and further the
objectives of Section 6(b)(5),\25\ 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,\26\ which states that new data processing and communications
techniques create the opportunity for more efficient and effective
market operations.
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\24\ 15 U.S.C. 78f(b).
\25\ 15 U.S.C. 78f(b)(5).
\26\ 15 U.S.C. 78k-1(a)(i)(B).
---------------------------------------------------------------------------
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 is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment from (http://www.sec.gov/rules/sro.shtml.
); or Send an email to rules-comments@sec.gov. Please include
File No. SR-PCX-2004-122 on the subject line.
Paper Comments
Send paper comments in triplicate to Jonathon G. Katz,
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW.,
Washington, DC 20549-0609.
All submissions should refer to File No. SR-PCS-2004-122. 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, 450 Fifth Street,
NW., Washington, DC 20549. Copies of such filing will also be available
for inspection and copying at the principal office of the PCX. 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 No. SR-PCX-2004-122 and should be
submitted on or before January 6, 2005.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\27\
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\27\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 04-27941 Filed 12-21-04; 8:45 am]
BILLING CODE 8010-01-M