Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”) and rule 19b-4 thereunder, notice is hereby given that on April 15, 2004, the Pacific Exchange, Inc. (“PCX” or “Exchange”) submitted to the Securities and Exchange Commission (“Commission”) the proposed rule change as described in Items I and II below, which Items have been prepared by the PCX. The Exchange submitted Amendment No. 1 to the proposed rule change on June 3, 2004. The Commission is publishing this notice to solicit comments on the proposed rule change, as amended, from interested persons.
17 CFR 240.19b-4.
See Letter from Stephen B. Matlin, Senior Counsel, Regulatory Policy, PCX to Nancy J. Sanow, Assistant Director, Commission, dated June 2, 2004 (“Amendment No. 1”). In Amendment No. 1, the Exchange made technical corrections to the proposed rule text submitted to the Commission.
I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change
The PCX is proposing to amend the requirements regarding how its members handle Satisfaction Orders pursuant to the Linkage Plan.
A “Satisfaction Order” is defined as an order sent through the Options Intermarket Linkage (“Linkage”) to notify a Participant of a Trade-Through and to seek satisfaction of the liability arising from that Trade-Through. A “Trade-Through” is a transaction in an options series at a price that is inferior to the National Best Bid or Offer. See Sections 2(16)(c) and 2(29) of the Plan for the Purpose of Creating and Operating an Intermarket Option Linkage (the “Linkage Plan”), respectively.
The text of the proposed rule change, as amended, is available at the Exchange and at the Commission.
II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the PCX included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it had received on the proposed rule change. The text of these statements may be examined at the places specified in Item III below. The Exchange has prepared summaries, set forth in Sections A, B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of this filing is to implement a proposed rule change related to proposed Joint Amendment No. 11 to the Linkage Plan. That amendment to the Linkage Plan, together with this proposed rule change, will enhance the manner in which the PCX processes Satisfaction Orders following a Trade-Through. If the displayed price that is traded through represents a customer order, the PCX Lead Market Maker (“LMM”) or a member of another participant in the Linkage Plan (“Participant”) can send a Satisfaction Order requiring the member on the exchange who caused the Trade-Through to satisfy the customer order. While the PCX believes that this process generally works well, the experience with the Linkage to date has led the options exchanges to agree to implement three changes to Satisfaction Order processing.
See Securities Exchange Act Release No. 49691 (May 12, 2004), 69 FR 28954 (May 19, 2004) (File No. 4-429) (Notice of filing Joint Amendment No. 11 to the Linkage Plan).
A “Participant” is defined as an Eligible Exchange whose participation in the Linkage Plan has become effective pursuant to Section 4(c) of the Linkage Plan. See Section 2(24) of the Linkage Plan. Currently, the Participants in the Linkage Plan are the International Securities Exchange, Inc., the American Stock Exchange LLC, the Chicago Board Options Exchange, Inc., the PCX, the Philadelphia Stock Exchange, Inc. and the Boston Stock Exchange, Inc.
See Sections 7(a)(ii)(D) and 8(c)(ii) of the Linkage Plan.
First, Section 8(c)(ii)(C) of the Linkage Plan and PCX Rule 6.94 (the “Rule”) currently permit a LMM to send a Satisfaction Order for the full size of the customer order traded through, regardless of the size of the transaction that caused the Trade-Through (although the Participant receiving the Satisfaction Order that elects to execute it must limit its execution to the size of the Trade-Through). This proposed rule change would provide that the size of the Satisfaction Order be limited to the lesser of the size of the customer order traded through and the size of the transaction that caused the Trade-Through.
Second, the Linkage Plan and the Rule currently permit a LMM to reject an execution (“fill”) of a Satisfaction Order if the customer order that underlies the Satisfaction Order either has been filled on the PCX or has been canceled while the Satisfaction Order is being processed. However, if the order is filled or canceled, there is no current requirement to cancel the pending Satisfaction Order, which leads to the rejection of Satisfaction Order fills that may have been avoided had the Satisfaction Order been canceled. To address this issue, the proposed rule change would require the LMM to cancel a pending Satisfaction Order as soon as practical if the underlying customer order is filled or canceled.
Third, as noted above, a LMM can reject a Satisfaction Order fill if the underlying customer order is executed or canceled while the Satisfaction Order is pending. However, it is possible that the LMM itself could trade against the customer order before the LMM receives a notice that the Satisfaction Order has been filled. In this case, the PCX believes that it would be inappropriate to reject the fill. Accordingly, the proposed rule change would provide that the LMM must accept the fill of the Satisfaction Order in that scenario.
2. Statutory Basis
The PCX believes that the proposed rule is consistent with section 6(b) of the Act, in general, and furthers the objectives of section 6(b)(5) in particular, because it is designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of change, to foster cooperation and coordination with persons engaged in facilitating transactions in securities, and to remove impediments to and perfect the mechanism of a free and open market and a national market system.
15 U.S.C. 78f(b)(5).
B. Self-Regulatory Organization's Statement on Burden on Competition
The PCX does not believe that the proposed rule change, as amended, will impose any burden on competition 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
No written comments were solicited or received with respect to the proposed rule change.
III. Solicitation of Comments
Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change, as amended, is consistent with the Act. Comments may be submitted by any of the following methods:
Electronic Comments
- Use the Commission's Internet comment form ( http://www.sec.gov/rules/sro.shtml ); or
- Send an e-mail to rule-comments@sec.gov. Please include File Number SR-PCX-2004-34 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-2004-34. 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 Section, 450 Fifth Street, NW., Washington, DC 20549. Copies of such filing also will 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 Number SR-PCX-2004-34 and should be submitted on or before August 2, 2004.
IV. Commission's Findings and Order Granting Accelerated Approval of Proposed Rule Change
The Commission finds that the proposed rule change, as amended, is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange. In particular, the Commission finds that the proposed rule change is consistent with the requirements of section 6(b)(5) of the Act which requires, among other things, that the rules of an exchange be designed to promote just and equitable principles of trade, to remove impediments to and perfect the mechanism of a free and open market, and a national market system, and to protect investors and the public interest. The Commission believes that the proposed rule change should facilitate the handling of Satisfaction Orders in an efficient and fair manner.
In approving this proposed rule change, the Commission has considered the proposed rule's impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
15 U.S.C. 78f(b)(5).
The Commission finds good cause for approving the proposed rule change prior to the thirtieth day after the date of publication of the notice thereof in the Federal Register. As noted above, the proposed rule change incorporates changes into the PCX Rules that correspond to changes made to the Linkage Plan through Joint Amendment No. 11, which was published for public comment in the Federal Register on May 19, 2004. The Commission received no comments in response to publication of Joint Amendment No. 11. The Commission believes that no new issues of regulatory concern are being raised by PCX's proposed rule change. The Commission believes, therefore, that granting accelerated approval of the proposed rule change, as amended, is appropriate and consistent with sections 6 and 19(b) of the Act.
See supra note 5.
15 U.S.C. 78f and 78s(b).
V. Conclusion
It is therefore ordered, pursuant to section 19(b)(2) of the Act, that the proposed rule change, as amended, (SR-PCX-2004-34) is approved on an accelerated basis.
For the Commission, by the Division of Market Regulation, pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-15687 Filed 7-9-04; 8:45 am]
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