Self-Regulatory Organizations; Pacific Exchange, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to Split Price Priority, 12257-12260 [E5-1020]
Download as PDF
<![CDATA[
Federal Register / Vol. 70, No. 47 / Friday, March 11, 2005 / Notices
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–51324; File No. SR–NASD–
2004–042]
Self-Regulatory Organizations; Order
Approving Proposed Rule Change by
National Association of Securities
Dealers, Inc. Relating to Foreign
Hearing Locations
March 7, 2005.
I. Introduction
On March 9, 2004, National
Association of Securities Dealers, Inc.
(‘‘NASD’’), through its wholly owned
subsidiary, NASD Dispute Resolution,
Inc. (‘‘Dispute Resolution’’), filed with
the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Act’’),1 and
Rule 19b–4 thereunder,2 a proposed rule
change (1) to amend NASD Rule 10315
to permit arbitrations to occur in a
foreign hearing location, and (2) to
amend IM–10104 to allow the Director
of Arbitration to authorize a higher or
additional honorarium for the use of a
foreign hearing location. NASD
amended the proposal on September 29,
2004,3 and November 23, 2004.4 Notice
of the proposed rule change was
published for comment in the Federal
Register on February 3, 2005.5 The
Commission did not receive any
comment letters on the proposal. This
order approves the proposed rule
change.
II. Description of Proposed Rule Change
The proposed rule change amends
NASD Rule 10315 to permit arbitrations
to occur in a foreign hearing location in
order to accommodate parties who
desire to conduct their arbitrations
abroad. Under the proposal, the foreign
hearing location process will be strictly
voluntary. According to NASD, once
Dispute Resolution has determined that
an arbitration can be handled using a
foreign hearing location, Dispute
Resolution will inform claimants about
the availability and the additional costs
of the appropriate foreign hearing
location, as well as seek the agreement
of the respondents if a claimant wishes
to use a foreign hearing location. Under
the proposal, parties will pay an
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 Letter from Mignon McLemore, Counsel, NASD,
to Katherine A. England, Assistant Director,
Division of Market Regulation, Commission, dated
September 29, 2004.
4 Form 19b–4 dated November 23, 2004.
5 Securities Exchange Act Release No. 51082
(February 3, 2005), 70 FR 5713 (‘‘Notice’’).
2 17
VerDate jul<14>2003
16:40 Mar 10, 2005
Jkt 205001
additional surcharge for use of the
foreign hearing location. Also, under the
proposal, all foreign arbitrators selected
by NASD to conduct arbitrations in
foreign hearing locations must: (1) Meet
NASD background qualifications for
arbitrators; (2) receive training on NASD
arbitration rules and procedures; and (3)
satisfy at least the same training and
testing requirements as those arbitrators
who serve in U.S. locations of NASD. In
addition, the proposed rule change
amends IM–10104 to allow the Director
to authorize a higher or additional
honorarium for the use of a foreign
hearing location to cover the additional
daily cost for the foreign arbitrators’
service in that location. Under the
proposal, this surcharge will initially be
apportioned equally among the parties,
unless they agree otherwise, but the
foreign arbitrators will retain the
authority to apportion the surcharge as
provided for in NASD Rules 10205 and
10332.
According to NASD, the NASD
Dispute Resolution Business
Development staff, with the cooperation
of the administrative staff of the groups
providing the foreign arbitrators, will
administer all cases designated for
hearing in a foreign location. Also,
according to NASD, the first foreign
hearing location for NASD arbitrations
will be in London. NASD represented
that Dispute Resolution has formed a
relationship with the Chartered Institute
of Arbitrators (‘‘CIArb’’), which is based
in London and maintains a worldwide
roster of neutrals. NASD believes that a
partnership between CIArb and NASD
will provide its international
constituents with access to a local roster
of experienced neutrals, as well as the
convenience and cost efficiency of
conducting hearing sessions within a
reasonable distance from their place of
business or residence.
III. Discussion
The Commission finds that the
proposed rule change is consistent with
the requirements of the Act and the
rules and regulations thereunder
applicable to a national securities
association.6 Specifically, the
Commission finds that the proposal is
consistent with Section 15A(b)(6) of the
Act,7 which requires, among other
things, that NASD’s rules be designed to
prevent fraudulent and manipulative
acts and practices, to promote just and
equitable principles of trade, and, in
general, to protect investors and the
approving this proposal, the Commission has
considered the proposed rule’s impact on
efficiency, competition, and capital formation. 15
U.S.C. 78c(f).
7 15 U.S.C. 78o–3(b)(6).
PO 00000
6 In
Frm 00087
Fmt 4703
Sfmt 4703
12257
public interest. The Commission
believes that the proposed rule change
should improve NASD’s ability to
conduct arbitrations because it will
provide those parties residing in foreign
locations with the option of holding
their arbitration hearings closer to
home, using local arbitrators, and saving
the expense of traveling to the United
States to resolve their disputes. At the
same time, the Commission notes that
the voluntary aspect of the proposed
rule change will allow these parties to
decide in each matter whether a foreign
hearing location or U.S. hearing location
is preferable for them.
IV. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,8 that the
proposed rule change (File No. SR–
NASD–2004–042) be, and it hereby is,
approved.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.9
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5–1022 Filed 3–10–05; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–51318; File No. SR–PCX–
2005–25]
Self-Regulatory Organizations; Pacific
Exchange, Inc.; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change Relating to Split Price
Priority
March 4, 2005.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that on March 1,
2005, the Pacific Exchange, Inc. (‘‘PCX’’
or ‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by PCX. The Exchange filed the
proposal pursuant to Section 19(b)(3)(A)
of the Act,3 and Rule 19b–4(f)(6)
thereunder,4 which renders the proposal
effective upon filing with the
Commission. The Commission is
publishing this notice to solicit
8 15
U.S.C. 78s(b)(2).
CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A).
4 17 CFR 240.19b–4(f)(6).
9 17
E:\FR\FM\11MRN1.SGM
11MRN1
12258
Federal Register / Vol. 70, No. 47 / Friday, March 11, 2005 / Notices
or offer (bid) as the earlier purchase or
purchases (sale or sales). The Exchange
may increase the ‘‘minimum qualifying
I. Self-Regulatory Organization’s
order size’’ above 100 contracts for all
Statement of the Terms of Substance of
products. Announcements regarding
the Proposed Rule Change
changes to the minimum qualifying
PCX proposes to amend PCX Rule
order size shall be made via an
6.75 relating to split price transactions.
Exchange Bulletin. This paragraph only
The text of the proposed rule change is
applies to transactions effected in open
set forth below.5 Proposed new language outcry.
is in italics; proposed deletions are in
(3) No Change.
[brackets].
(4) Except for the provisions set forth
in Rule 6.75(h)(2), [T]the priority
*
*
*
*
*
Rule 6.75(h) Priority on Split Price
afforded by this rule is effective only
Transactions Occurring in Open Outcry. insofar as it does not conflict with
(1) Purchase or sale priority. If an OTP orders on the book of the Order Book
Holder or OTP Firm purchases (sells)
Official as provided in Rule 6.75. Such
one or more option contracts of a
orders on the book of the Order Book
particular series at a particular price or
Official have precedence over OTP
prices, the OTP Holder or OTP Firm
Holders and OTP Firms’ orders at a
must, at the next lower (higher) price at
particular price; orders on the book also
which another OTP Holder or OTP Firm have precedence over OTP Holder or
bids (offers), have priority in purchasing OTP Firms’ orders that are not superior
(selling) up to the equivalent number of
in price by at least the MPV.
option contracts of the same series that
(5) Floor Brokers are able to achieve
the OTP Holder or OTP Firm purchased split price priority in accordance with
(sold) at the higher (lower) price or
paragraphs (1) and (2) above. Provided
prices, provided that the OTP Holder or however, that a floor broker who bids
OTP Firm’s bid (offer) is made promptly (offers) on behalf of a non-market-maker
and continuously and that the purchase PCX broker-dealer (‘‘PCX BD’’) must
(sale) so effected represents the opposite ensure that the PCX BD qualifies for an
side of a transaction with the same order exemption from Section 11(a)(1) of the
or offer (bid) as the earlier purchase or
Exchange Act or that the transaction
purchases (sale or sales). This
satisfies the requirements of Exchange
paragraph only applies to transactions
Act Rule 11a2–2(T), otherwise the floor
effected in open outcry.
broker must yield priority to orders for
(2) [Sale priority. If an OTP Holder or
the accounts of non-OTP Holders or
OTP Firm sells one or more option
non-OTP Firms.
contracts of a particular series at a
*
*
*
*
particular price or prices, he shall, at the *
next higher price at which another OTP II. Self-Regulatory Organization’s
Holder or OTP Firm offers, have priority Statement of the Purpose of, and
in selling up to the equivalent number
Statutory Basis for, the Proposed Rule
of option contracts of the same series
Change
that he sold at the lower price or prices,
In its filing with the Commission, the
provided that his offer is made promptly Exchange included statements
and that the sale so effected represents
concerning the purpose of and basis for
the opposite side of a transaction with
the proposed rule change and discussed
the same order or bid as the earlier sale
any comments it received on the
or sales.] If an OTP Holder or OTP Firm proposed rule change. The text of these
purchases (sells) fifty or more option
statements may be examined at the
contracts of a particular series at a
places specified in Item IV below. The
particular price or prices, he/she shall,
Exchange has prepared summaries, set
at the next lower (higher) price have
forth in Sections A, B, and C below, of
priority in purchasing (selling) up to the the most significant aspects of such
equivalent number of option contracts
statements.
of the same series that he/she purchased
A. Self-Regulatory Organization’s
(sold) at the higher (lower) price or
Statement of the Purpose of, and
prices, but only if his/her bid (offer) is
Statutory Basis for, the Proposed Rule
made promptly and the purchase (sale)
Change
so effected represents the opposite side
of the transaction with the same order
1. Purpose
comments on the proposed rule change
from interested persons.
5 Based on a conversation with PCX, the
Commission staff made two grammatical
corrections to the proposed rule text. Telephone
conference on March 3, 2005 between Steven
Matlin, Senior Counsel, PCX and Ann Leddy,
Special Counsel, Division of Market Regulation,
Commission.
VerDate jul<14>2003
16:40 Mar 10, 2005
Jkt 205001
PCX Rule 6.75(h) establishes priority
for split-price transactions. Generally,
an OTP Holder or OTP Firm buying
(selling) at a particular price shall have
priority over other OTP Holders or OTP
Firms purchasing (selling) up to an
PO 00000
Frm 00088
Fmt 4703
Sfmt 4703
equivalent number of contracts of the
same order at the next lower (higher)
price. Awarding split price priority
serves as an inducement to OTP Holders
and OTP Firms to bid (offer) more
aggressively for an order that may
require a split-price execution by giving
them priority at the next lower (higher)
price point. For example, assume the
market is $1.00–$1.20, 300 up when a
floor broker (‘‘FB’’) receives instructions
from a customer that it would like to
buy 500 options at a price or prices no
higher than $1.20. The FB could attempt
to execute the order in open outcry at
a price better than the displayed market
of $1.20. Assume a market maker
(‘‘MM’’) in the crowd is willing to sell
250 contracts at $1.15 provided he can
also sell the remaining 250 contracts at
$1.20. Under current PCX rules, that
MM could offer $1.15 for 250 contracts
and then, by virtue of the split price
priority rule, he/she would have priority
for the balance of the order (up to 250
contracts) over other crowd members. If
executed, the resulting net price of
$1.175 is better than the current
displayed market of $1.20, which results
in a better fill for the customer.6
One limitation on the ability of crowd
participants to use the split price
priority rule is the rule’s requirement
that orders in the limit order book
(‘‘Book’’) have priority over the OTP
Holder or OTP Firm attempting to fill
the balance of the order at the split
price. Using the example above, if the
$1.20 price represented orders in the
Book, those orders would have priority
over the MM at $1.20. This means that
a MM who is willing to trade at $1.15
and $1.20 may be completely unwilling
to trade at the better price of $1.15 if he/
she cannot trade the balance of the order
at $1.20 because of the requirement to
yield to existing customer interest in the
Book. This jeopardizes the FB’s ability
to execute the first part of the order at
a price of $1.15, thereby potentially
making it difficult to achieve price
improvement for the customer at the
PCX. Instead, the order may trade at
another exchange that has no
impediments, i.e., no customer interest
at those price levels. Accordingly, the
purpose of this proposal is to adopt a
limited exception to the existing priority
requirement.
Under newly proposed paragraph (2)
of Rule 6.75, an OTP Holder or OTP
Firm with an order for at least 100
contracts who buys (sells) at least 50
contracts at a particular price would
have price priority over all others in
6 If successful, two trades will be reported at
$1.15 and $1.20 and the net price result to the
customer will be $1.175.
E:\FR\FM\11MRN1.SGM
11MRN1
Federal Register / Vol. 70, No. 47 / Friday, March 11, 2005 / Notices
purchasing (selling) up to an equivalent
number of contracts of the same order
at the next lower (higher) price.7 Using
the above example, the MM trading at
$1.15 would have priority over OTP
Holders and OTP Firms and orders in
the Book at $1.20 to trade at $1.20 with
the balance of the order in the trading
crowd. The Exchange believes the
proposal will lead to more aggressive
quoting by MMs, which in turn could
lead to better executions. As indicated
above, a MM may be willing to trade at
a better price for a portion of an order
if he/she is assured of trading with the
balance of the order at the next pricing
increment. As a result, FBs representing
orders in the trading crowd may receive
better-priced executions. As proposed,
the Exchange will have the ability to
increase the minimum qualifying order
size to a number larger than 100
contracts. Any changes, which would
have to apply to all products, would be
announced to the OTP Holders and OTP
Firms via an Exchange Bulletin.
The Exchange believes that it is
reasonable to make a limited exception
to the customer priority rule to allow
split price trading. In this regard, the
proposed exception would be similar in
operation to the limited priority
exception that exists for Combination,
Spread, Ratio and Straddle orders
(contained in Rule 6.75, Commentary
.04). This priority exception generally
provides that a crowd member affecting
a qualifying order may trade ahead of
the Book on one side of the order
provided the other side of the order
betters the Book. This exception was
intended to facilitate the trading of
Combination, Spread, Ratio and
Straddle orders, which by virtue of their
multi-legged composition could be more
difficult to trade without a limited
exception to the priority rule for one of
the legs. The purpose behind the
proposed split-price priority exception
is the same—to facilitate the execution
of large orders, which by virtue of their
size and the need to execute them at
multiple prices may be difficult to
execute without a limited exception to
the priority rules. The proposed
exception would operate in the same
manner as the Combination, Spread,
Ratio and Straddle order exception by
allowing an OTP Holder or OTP Firm
affecting a trade that betters the market
to have priority on the balance of that
trade at the next pricing increment even
7 Orders for less than 100 contracts would be
unaffected by this proposal. The Exchange also
takes the opportunity to consolidate current
paragraphs (1) and (2) of Rule 6.75(h) into one
paragraph (paragraph (1)). This consolidation
would not effect the operation of the rule in any
way; it simply would make the rule shorter.
VerDate jul<14>2003
16:40 Mar 10, 2005
Jkt 205001
if there are orders in the Book at the
same price.
To address potential concerns
regarding Section 11(a) of the Act,8 the
Exchange proposes to adopt Rule
6.75(h)(5). Section 11(a) generally
prohibits members of national securities
exchanges from effecting transactions
for the member’s own account, absent
an exemption. With respect to the
proposal, there could be situations
where because of the limited exception
to customer priority, orders on behalf of
members could trade ahead of orders of
nonmembers in violation of Section
11(a).9 The proposed Commentary
makes clear that FBs may avail
themselves of the split-price priority
rule but that they will be obligated to
ensure compliance with Section 11(a).
In this regard, a FB that bids (offers) on
behalf of a non-market maker PCX OTP
Holder or OTP Firm (‘‘PCX BD’’) must
ensure that the PCX BD qualifies for an
exemption from Section 11(a)(1) of the
Act or that the transaction satisfies the
requirements of Rule 11a2–2(T).
Otherwise, the FB would be required to
yield priority to orders for the accounts
of non-OTP Holders or non-OTP Firms.
2. Statutory Basis
For the above reasons, the Exchange
believes that the proposed rule change
would enhance competition. The
Exchange believes that the proposed
rule change is consistent with Section
6(b) 10 of the Act, in general, and
furthers the objectives of Section
6(b)(5),11 in particular, in that it is
designed to facilitate transactions in
securities, to promote just and equitable
principles of trade, to foster competition
and to protect investors and the public
interest.
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
Because the foregoing proposed rule
change does not:
(i) Significantly affect the protection
of investors or the public interest;
(ii) Impose any significant burden on
competition; and
(iii) Become operative for 30 days
from the date on which it was filed, or
such shorter time as the Commission
may designate if consistent with the
protection of investors and the public
interest, it has become effective
pursuant to Section 19(b)(3)(A) of the
Act,12 and Rule 19b–4(f)(6)
thereunder.13 At any time within 60
days of the filing of the proposed rule
change the Commission may summarily
abrogate such rule change if it appears
to the Commission that such action is
necessary or appropriate in the public
interest, for the protection of investors,
or otherwise in furtherance of the
purposes of the Act.
A proposed rule change filed under
Rule 19b-4(f)(6) 14 normally does not
become operative prior to 30 days after
the date of filing. However, pursuant to
Rule 19b–4(f)(6)(iii), the Commission
may designate a shorter time if such
action is consistent with the protection
of investors and the public interest. PCX
has requested that the Commission
waive the thirty-day operative date
specified in Rule 19b–4(f)(6)(iii) 15 in
order to conform its rules pertaining to
split price priority with those of other
options exchanges.
The Commission believes that
waiving the thirty-day operative delay is
consistent with the protection of
investors and the public interest 16
because it will allow PCX to implement
immediately rules similar to ones
already in place at another options
exchange and should encourage more
12 15
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f)(6). The Commission notes
that the Exchange provided written notice of its
intent to file the proposed rule change, along with
a brief description and text of the proposed rule
change, at least five business days prior to the date
of filing of the proposed rule change.
14 17 CFR 240.19b–4(f)(6).
15 17 CFR 240.19b–4(f)(6)(iii).
16 For purposes only of accelerating the operative
date of this proposal, the Commission has
considered the proposed rule’s impact on
efficiency, competition, and capital formation. 15
U.S.C. 78c(f).
13 17
U.S.C. 78k(a).
example, assume FB A walks into the
trading crowd attempting to find a crowd member
willing to effect a split-price transaction. FB B, who
is representing either a proprietary or member BD
order, expresses interest. In this instance, Section
11(a) could be implicated, absent an exemption.
10 15 U.S.C. 78f(b).
11 15 U.S.C. 78f(b)(5).
PO 00000
8 15
9 For
Frm 00089
Fmt 4703
Sfmt 4703
12259
E:\FR\FM\11MRN1.SGM
11MRN1
12260
Federal Register / Vol. 70, No. 47 / Friday, March 11, 2005 / Notices
aggressive quoting by market makers in
competition for large-sized orders, and,
in turn, better-priced executions. For
these reasons, the Commission waives
the 30-day pre-operative period.
IV. Solicitation of Comments
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.17
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5–1020 Filed 3–10–05; 8:45 am]
BILLING CODE 8010–01–P
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number SR–PCX–2005–25 on the
subject line.
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–51322; File No. SR–Phlx–
2005–17]
Self-Regulatory Organizations;
Philadelphia Stock Exchange, Inc.;
Notice of Filing and Immediate
Effectiveness of Proposed Rule
Change and Amendment No. 1 Thereto
Relating to Position Limits and
Exercise Limits
March 4, 2005.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2
Paper Comments
notice is hereby given that on March 3,
2005, the Philadelphia Stock Exchange,
• Send paper comments in triplicate
Inc. (‘‘Phlx’’ or ‘‘Exchange’’) filed with
to Jonathan G. Katz, Secretary,
the Securities and Exchange
Securities and Exchange Commission,
Commission (‘‘Commission’’) the
450 Fifth Street, NW., Washington, DC
proposed rule change as described in
20549–0609. All submissions should
Items I and II below, which Items have
refer to File Number SR–PCX–2005–25.
been prepared by the Phlx. On March 3,
This file number should be included on 2005 the Phlx filed Amendment No. 1
the subject line if e-mail is used. To help to the proposed rule change.3 The
the Commission process and review
Exchange has filed the proposal as a
your comments more efficiently, please
‘‘non-controversial’’ rule change
use only one method. The Commission
pursuant to Section 19(b)(3)(A) of the
will post all comments on the
Act 4 and Rule 19b–4(f)(6) thereunder,5
which renders it effective upon filing
Commission’s Internet Web site (https://
www.sec.gov/rules/sro.shtml). Copies of with the Commission. The Commission
is publishing this notice to solicit
the submission, all subsequent
comments on the proposed rule change,
amendments, all written statements
as amended, from interested persons.
with respect to the proposed rule
change that are filed with the
I. Self-Regulatory Organization’s
Commission, and all written
Statement of the Terms of Substance of
communications relating to the
the Proposed Rule Change
proposed rule change between the
The Phlx proposes to amend
Commission and any person, other than Exchange Rule 1001 to increase the
those that may be withheld from the
standard position and exercise limits for
public in accordance with the
equity options contracts and options on
provisions of 5 U.S.C. 552, will be
the Nasdaq-100 Index Tracking Stock
available for inspection and copying in
(‘‘QQQQ’’) on a six month pilot basis
the Commission’s Public Reference
beginning on the effective date of the
Section. Copies of such filing also will
proposed rule change. The text of the
be available for inspection and copying
proposed rule change is available on the
Phlx’s Web site (https://www.phlx.com),
at the principal office of the Exchange.
at the Phlx’s Office of the Secretary, and
All comments received will be posted
at the Commission’s Public Reference
without change; the Commission does
Room.
not edit personal identifying
information from submissions. You
17 17 CFR 200.30–3(a)(12).
should submit only information that
1 15 U.S.C. 78s(b)(1).
you wish to make available publicly. All
2 17 CFR 240.19b–4.
submissions should refer to File
3 Amendment No. 1 made certain technical
Number SR–PCX–2005–25 and should
changes to Exhibit 5 to the filing.
4 15 U.S.C. 78s(b)(3)(A).
be submitted on or before April 1, 2005.
5 17
VerDate jul<14>2003
16:40 Mar 10, 2005
Jkt 205001
PO 00000
CFR 240.19b–4(f)(6).
Frm 00090
Fmt 4703
Sfmt 4703
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
Phlx 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 Phlx has prepared
summaries, set forth in Sections A, B,
and C below, of the most significant
aspects of such statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The purpose of the proposed rule
change is to amend Exchange Rule 1001,
Position Limits, to establish increased
position and exercise limits for equity
options and options overlying QQQQ,
on a six-month pilot basis. Position
limits impose a ceiling on the number
of option contracts in each class on the
same side of the market relating to the
same underlying security that can be
held or written by an investor or group
of investors acting in concert. Exchange
Rule 1002 (not proposed to be amended
herein) establishes corresponding
exercise limits.6 Exercise limits prohibit
an investor or group of investors acting
in concert from exercising more than a
specified number of puts or calls in a
particular class within five consecutive
business days.
Exchange Rule 1001 subjects equity
options to one of five different position
limits depending on the trading volume
and outstanding shares of the
underlying security. Exchange Rule
1002 establishes exercise limits for the
corresponding options at the same
levels as the corresponding security’s
position limits.7
6 As clarified by the Phlx, although the proposed
rule change would not amend the text of Exchange
Rule 1002 itself, the proposed amendment to
Exchange Rule 1001 would have the effect of
increasing the exercise limits established in
Exchange Rule 1002 for the same six-month pilot
period. Telephone conversation between Richard S.
Rudolph, Vice President and Counsel, Phlx, and Ira
L. Brandriss, Assistant Director, Division of Market
Regulation, Commission, on March 4, 2005. See
also infra, note 7 and accompanying text.
7 Exchange Rule 1002 states, in relevant part,
‘‘* * * no member of member organization shall
exercise, for any account in which such member or
member organization has an interest of for the
account of any partner, officer, director or employee
thereof or for the account of any customer, a long
position in any option contract of a class of options
dealt in on the Exchange (or, respecting an option
not dealt in on the Exchange, another exchange if
the member or member organization is not a
E:\FR\FM\11MRN1.SGM
11MRN1
]]>Agencies
[Federal Register Volume 70, Number 47 (Friday, March 11, 2005)]
[Notices]
[Pages 12257-12260]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E5-1020]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-51318; File No. SR-PCX-2005-25]
Self-Regulatory Organizations; Pacific Exchange, Inc.; Notice of
Filing and Immediate Effectiveness of Proposed Rule Change Relating to
Split Price Priority
March 4, 2005.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on March 1, 2005, the Pacific Exchange, Inc. (``PCX'' or ``Exchange'')
filed with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I and II below, which Items
have been prepared by PCX. The Exchange filed the proposal pursuant to
Section 19(b)(3)(A) of the Act,\3\ and Rule 19b-4(f)(6) thereunder,\4\
which renders the proposal effective upon filing with the Commission.
The Commission is publishing this notice to solicit
[[Page 12258]]
comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 15 U.S.C. 78s(b)(3)(A).
\4\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
PCX proposes to amend PCX Rule 6.75 relating to split price
transactions. The text of the proposed rule change is set forth
below.\5\ Proposed new language is in italics; proposed deletions are
in [brackets].
---------------------------------------------------------------------------
\5\ Based on a conversation with PCX, the Commission staff made
two grammatical corrections to the proposed rule text. Telephone
conference on March 3, 2005 between Steven Matlin, Senior Counsel,
PCX and Ann Leddy, Special Counsel, Division of Market Regulation,
Commission.
---------------------------------------------------------------------------
* * * * *
Rule 6.75(h) Priority on Split Price Transactions Occurring in Open
Outcry.
(1) Purchase or sale priority. If an OTP Holder or OTP Firm
purchases (sells) one or more option contracts of a particular series
at a particular price or prices, the OTP Holder or OTP Firm must, at
the next lower (higher) price at which another OTP Holder or OTP Firm
bids (offers), have priority in purchasing (selling) up to the
equivalent number of option contracts of the same series that the OTP
Holder or OTP Firm purchased (sold) at the higher (lower) price or
prices, provided that the OTP Holder or OTP Firm's bid (offer) is made
promptly and continuously and that the purchase (sale) so effected
represents the opposite side of a transaction with the same order or
offer (bid) as the earlier purchase or purchases (sale or sales). This
paragraph only applies to transactions effected in open outcry.
(2) [Sale priority. If an OTP Holder or OTP Firm sells one or more
option contracts of a particular series at a particular price or
prices, he shall, at the next higher price at which another OTP Holder
or OTP Firm offers, have priority in selling up to the equivalent
number of option contracts of the same series that he sold at the lower
price or prices, provided that his offer is made promptly and that the
sale so effected represents the opposite side of a transaction with the
same order or bid as the earlier sale or sales.] If an OTP Holder or
OTP Firm purchases (sells) fifty or more option contracts of a
particular series at a particular price or prices, he/she shall, at the
next lower (higher) price have priority in purchasing (selling) up to
the equivalent number of option contracts of the same series that he/
she purchased (sold) at the higher (lower) price or prices, but only if
his/her bid (offer) is made promptly and the purchase (sale) so
effected represents the opposite side of the transaction with the same
order or offer (bid) as the earlier purchase or purchases (sale or
sales). The Exchange may increase the ``minimum qualifying order size''
above 100 contracts for all products. Announcements regarding changes
to the minimum qualifying order size shall be made via an Exchange
Bulletin. This paragraph only applies to transactions effected in open
outcry.
(3) No Change.
(4) Except for the provisions set forth in Rule 6.75(h)(2), [T]the
priority afforded by this rule is effective only insofar as it does not
conflict with orders on the book of the Order Book Official as provided
in Rule 6.75. Such orders on the book of the Order Book Official have
precedence over OTP Holders and OTP Firms' orders at a particular
price; orders on the book also have precedence over OTP Holder or OTP
Firms' orders that are not superior in price by at least the MPV.
(5) Floor Brokers are able to achieve split price priority in
accordance with paragraphs (1) and (2) above. Provided however, that a
floor broker who bids (offers) on behalf of a non-market-maker PCX
broker-dealer (``PCX BD'') must ensure that the PCX BD qualifies for an
exemption from Section 11(a)(1) of the Exchange Act or that the
transaction satisfies the requirements of Exchange Act Rule 11a2-2(T),
otherwise the floor broker must yield priority to orders for the
accounts of non-OTP Holders or non-OTP Firms.
* * * * *
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
PCX Rule 6.75(h) establishes priority for split-price transactions.
Generally, an OTP Holder or OTP Firm buying (selling) at a particular
price shall have priority over other OTP Holders or OTP Firms
purchasing (selling) up to an equivalent number of contracts of the
same order at the next lower (higher) price. Awarding split price
priority serves as an inducement to OTP Holders and OTP Firms to bid
(offer) more aggressively for an order that may require a split-price
execution by giving them priority at the next lower (higher) price
point. For example, assume the market is $1.00-$1.20, 300 up when a
floor broker (``FB'') receives instructions from a customer that it
would like to buy 500 options at a price or prices no higher than
$1.20. The FB could attempt to execute the order in open outcry at a
price better than the displayed market of $1.20. Assume a market maker
(``MM'') in the crowd is willing to sell 250 contracts at $1.15
provided he can also sell the remaining 250 contracts at $1.20. Under
current PCX rules, that MM could offer $1.15 for 250 contracts and
then, by virtue of the split price priority rule, he/she would have
priority for the balance of the order (up to 250 contracts) over other
crowd members. If executed, the resulting net price of $1.175 is better
than the current displayed market of $1.20, which results in a better
fill for the customer.\6\
---------------------------------------------------------------------------
\6\ If successful, two trades will be reported at $1.15 and
$1.20 and the net price result to the customer will be $1.175.
---------------------------------------------------------------------------
One limitation on the ability of crowd participants to use the
split price priority rule is the rule's requirement that orders in the
limit order book (``Book'') have priority over the OTP Holder or OTP
Firm attempting to fill the balance of the order at the split price.
Using the example above, if the $1.20 price represented orders in the
Book, those orders would have priority over the MM at $1.20. This means
that a MM who is willing to trade at $1.15 and $1.20 may be completely
unwilling to trade at the better price of $1.15 if he/she cannot trade
the balance of the order at $1.20 because of the requirement to yield
to existing customer interest in the Book. This jeopardizes the FB's
ability to execute the first part of the order at a price of $1.15,
thereby potentially making it difficult to achieve price improvement
for the customer at the PCX. Instead, the order may trade at another
exchange that has no impediments, i.e., no customer interest at those
price levels. Accordingly, the purpose of this proposal is to adopt a
limited exception to the existing priority requirement.
Under newly proposed paragraph (2) of Rule 6.75, an OTP Holder or
OTP Firm with an order for at least 100 contracts who buys (sells) at
least 50 contracts at a particular price would have price priority over
all others in
[[Page 12259]]
purchasing (selling) up to an equivalent number of contracts of the
same order at the next lower (higher) price.\7\ Using the above
example, the MM trading at $1.15 would have priority over OTP Holders
and OTP Firms and orders in the Book at $1.20 to trade at $1.20 with
the balance of the order in the trading crowd. The Exchange believes
the proposal will lead to more aggressive quoting by MMs, which in turn
could lead to better executions. As indicated above, a MM may be
willing to trade at a better price for a portion of an order if he/she
is assured of trading with the balance of the order at the next pricing
increment. As a result, FBs representing orders in the trading crowd
may receive better-priced executions. As proposed, the Exchange will
have the ability to increase the minimum qualifying order size to a
number larger than 100 contracts. Any changes, which would have to
apply to all products, would be announced to the OTP Holders and OTP
Firms via an Exchange Bulletin.
---------------------------------------------------------------------------
\7\ Orders for less than 100 contracts would be unaffected by
this proposal. The Exchange also takes the opportunity to
consolidate current paragraphs (1) and (2) of Rule 6.75(h) into one
paragraph (paragraph (1)). This consolidation would not effect the
operation of the rule in any way; it simply would make the rule
shorter.
---------------------------------------------------------------------------
The Exchange believes that it is reasonable to make a limited
exception to the customer priority rule to allow split price trading.
In this regard, the proposed exception would be similar in operation to
the limited priority exception that exists for Combination, Spread,
Ratio and Straddle orders (contained in Rule 6.75, Commentary .04).
This priority exception generally provides that a crowd member
affecting a qualifying order may trade ahead of the Book on one side of
the order provided the other side of the order betters the Book. This
exception was intended to facilitate the trading of Combination,
Spread, Ratio and Straddle orders, which by virtue of their multi-
legged composition could be more difficult to trade without a limited
exception to the priority rule for one of the legs. The purpose behind
the proposed split-price priority exception is the same--to facilitate
the execution of large orders, which by virtue of their size and the
need to execute them at multiple prices may be difficult to execute
without a limited exception to the priority rules. The proposed
exception would operate in the same manner as the Combination, Spread,
Ratio and Straddle order exception by allowing an OTP Holder or OTP
Firm affecting a trade that betters the market to have priority on the
balance of that trade at the next pricing increment even if there are
orders in the Book at the same price.
To address potential concerns regarding Section 11(a) of the
Act,\8\ the Exchange proposes to adopt Rule 6.75(h)(5). Section 11(a)
generally prohibits members of national securities exchanges from
effecting transactions for the member's own account, absent an
exemption. With respect to the proposal, there could be situations
where because of the limited exception to customer priority, orders on
behalf of members could trade ahead of orders of nonmembers in
violation of Section 11(a).\9\ The proposed Commentary makes clear that
FBs may avail themselves of the split-price priority rule but that they
will be obligated to ensure compliance with Section 11(a). In this
regard, a FB that bids (offers) on behalf of a non-market maker PCX OTP
Holder or OTP Firm (``PCX BD'') must ensure that the PCX BD qualifies
for an exemption from Section 11(a)(1) of the Act or that the
transaction satisfies the requirements of Rule 11a2-2(T). Otherwise,
the FB would be required to yield priority to orders for the accounts
of non-OTP Holders or non-OTP Firms.
---------------------------------------------------------------------------
\8\ 15 U.S.C. 78k(a).
\9\ For example, assume FB A walks into the trading crowd
attempting to find a crowd member willing to effect a split-price
transaction. FB B, who is representing either a proprietary or
member BD order, expresses interest. In this instance, Section 11(a)
could be implicated, absent an exemption.
---------------------------------------------------------------------------
2. Statutory Basis
For the above reasons, the Exchange believes that the proposed rule
change would enhance competition. The Exchange believes that the
proposed rule change is consistent with Section 6(b) \10\ of the Act,
in general, and furthers the objectives of Section 6(b)(5),\11\ in
particular, in that it is designed to facilitate transactions in
securities, to promote just and equitable principles of trade, to
foster competition and to protect investors and the public interest.
---------------------------------------------------------------------------
\10\ 15 U.S.C. 78f(b).
\11\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
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
Because the foregoing proposed rule change does not:
(i) Significantly affect the protection of investors or the public
interest;
(ii) Impose any significant burden on competition; and
(iii) Become operative for 30 days from the date on which it was
filed, or such shorter time as the Commission may designate if
consistent with the protection of investors and the public interest, it
has become effective pursuant to Section 19(b)(3)(A) of the Act,\12\
and Rule 19b-4(f)(6) thereunder.\13\ At any time within 60 days of the
filing of the proposed rule change the Commission may summarily
abrogate such rule change if it appears to the Commission that such
action is necessary or appropriate in the public interest, for the
protection of investors, or otherwise in furtherance of the purposes of
the Act.
---------------------------------------------------------------------------
\12\ 15 U.S.C. 78s(b)(3)(A).
\13\ 17 CFR 240.19b-4(f)(6). The Commission notes that the
Exchange provided written notice of its intent to file the proposed
rule change, along with a brief description and text of the proposed
rule change, at least five business days prior to the date of filing
of the proposed rule change.
---------------------------------------------------------------------------
A proposed rule change filed under Rule 19b-4(f)(6) \14\ normally
does not become operative prior to 30 days after the date of filing.
However, pursuant to Rule 19b-4(f)(6)(iii), the Commission may
designate a shorter time if such action is consistent with the
protection of investors and the public interest. PCX has requested that
the Commission waive the thirty-day operative date specified in Rule
19b-4(f)(6)(iii) \15\ in order to conform its rules pertaining to split
price priority with those of other options exchanges.
---------------------------------------------------------------------------
\14\ 17 CFR 240.19b-4(f)(6).
\15\ 17 CFR 240.19b-4(f)(6)(iii).
---------------------------------------------------------------------------
The Commission believes that waiving the thirty-day operative delay
is consistent with the protection of investors and the public interest
\16\ because it will allow PCX to implement immediately rules similar
to ones already in place at another options exchange and should
encourage more
[[Page 12260]]
aggressive quoting by market makers in competition for large-sized
orders, and, in turn, better-priced executions. For these reasons, the
Commission waives the 30-day pre-operative period.
---------------------------------------------------------------------------
\16\ For purposes only of accelerating the operative date of
this proposal, the Commission has considered the proposed rule's
impact on efficiency, competition, and capital formation. 15 U.S.C.
78c(f).
---------------------------------------------------------------------------
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://
www.sec.gov/rules/sro.shtml); or
Send an e-mail to rule-comments@sec.gov. Please include
File Number SR-PCX-2005-25 on the subject line.
Paper Comments
Send paper comments in triplicate to Jonathan G. Katz,
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW.,
Washington, DC 20549-0609. All submissions should refer to File Number
SR-PCX-2005-25. 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 (https://
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 Section. Copies of such filing also will be available for
inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-PCX-2005-25 and should be
submitted on or before April 1, 2005.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\17\
---------------------------------------------------------------------------
\17\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-1020 Filed 3-10-05; 8:45 am]
BILLING CODE 8010-01-P
