Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change and Amendment No. 1 to the Proposed Rule Change by the Pacific Exchange, Inc. Relating to Telephone Use on the Options Floor

[Federal Register Volume 64, Number 30 (Tuesday, February 16, 1999)]
[Notices]
[Pages 7681-7683]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-3670]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41018; File No. SR-PCX-98-30]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 to the Proposed Rule Change by the Pacific 
Exchange, Inc. Relating to Telephone Use on the Options Floor

February 3, 1999.
    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 June 26, 1998, the Pacific Exchange, Inc. (``PCX'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``SEC'' or 
``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. On 
November 12, 1998, the Exchange filed Amendment No. 1 to the proposed 
rule change.\3\ The Commission is publishing this notice to solicit 
comments on the proposed rule change and Amendment No. 1 to the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Robert Pacileo, Staff Attorney, Regulatory 
Policy, PCX, to David Sieradzki, Attorney, Division of Market 
Regulation, SEC dated November 10, 1998 (``Amendment No. 1''). The 
substance of Amendment No. 1 is incorporated into this notice.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange is proposing to adopt a new rule setting forth 
procedures and restrictions regarding telephone use on the Options 
Trading Floor (``Options Floor''). The text of the proposed rule change 
is available at the Office of the Secretary, the PCX, 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 Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
Sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of this proposal is to establish rules and procedures 
for telephone use on the Options Floor. Proposed Rule 6.2(h) sets 
guidelines for the use of telephones by Market Makers, Lead Market 
Makers (``LMMs''), Floor Brokers, Clerks, and Floor Managers.
    The PCX is proposing to establish a formal rule requiring that 
Members and Member Firms must register, prior to use, any new telephone 
to be used on the Options Floor. Proposed Rule 6.2(h) states that each 
phone registered with the Exchange must be registered by category of 
user (Market Maker, LMM, Floor Broker, Clerk or Manager). If there is a 
change in the category of any user, the phone must be re-registered 
with the Exchange. At the time of registration, Members and Member Firm 
representatives must sign a statement indicating that they are aware of 
and understand the rules governing the use of telephones on the Options 
Floor.
    The Rule further states that no Member or Member Firm may employ 
any alternative communication device, including but not limited to e-
mail, on the Options Floor without the prior approval of the Options 
Floor Trading Committee.

Capacity and Functionality

    The proposed Rule specifies the capacity and functionality 
permitted for the use of telephones on the Options Floor. The Rule 
states specifically that no wireless telephone used on the Options 
Floor may have an output greater than one watt and that no person on 
the Options Floor may use any device for the purpose of maintaining an 
open line of continuous communication whereby a person not located in 
the trading crowd may continuously monitor the activities in the 
trading crowd. This prohibition covers intercoms, walkie-talkies and 
any similar devices. The rule does permit speed-dialing features for 
Member phones.

Members and Member Firm Employees

    The proposed Rule states specific guidelines for each category of 
user on the Options Floor, as follows:

Market Makers and LMMs

    The proposed Rule states that Market Makers and LMMs may use their 
own cellular and cordless phones to place calls to any person at any 
location (whether on or off the Options Floor).

[[Page 7682]]

The Rule also states that Market Makers and LMMs may use the Pit Rep 
and LMM telephones located at the trading posts only for the purpose of 
marketing option issues, responding to customer inquiries, or otherwise 
conducting Exchange business. No person other than a Pit Rep, Market 
Maker \4\ or an LMM may use the Pit Rep or LMM phones. This is to 
ensure that phones will be accessible for customer inquiries and 
marketing.
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    \4\ See Amendment No. 1, supra note 3.
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    The Rule further states that Market Makers located off the Options 
Floor may not place an order by calling a Floor Broker who is present 
in a trading crowd. Market Makers located off the Options Floor may not 
otherwise place an order by calling the Pit Rep or LMM phone in the 
trading crowd. The Rule also states that any telephonic order entered 
from the Options Floor must be placed with a person located in a member 
firm booth. This will facilitate adequate surveillance of telephonic 
orders and ensure that there is a record of the order in the event that 
a problem arise in connection with the order. It is also consistent 
with Rule 6.85. Commentary .03, which requires verbal orders from 
Market Makers to be written up outside of the trading crowd.\5\
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    \5\ PCX Rule 6.85, Commentary .03 provides in part: ``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 shall immediately prepare an 
order ticket from outside the trading crowd and time-stamp it.''
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Floor Brokers

    The Rule states that Floor Brokers may use cellular and cordless 
phones, but only to communicate with persons located on the Options 
Floor. These phones may not include a call forwarding feature. This 
Rule codifies long-standing PCX policies regarding phone use by Floor 
Brokers which are designed to ensure that orders are entered in a 
manner that allows for routine monitoring and surveillance by the 
Exchange. In addition, the Rules states that headset are permitted for 
Floor Brokers, but if the Exchange determines that a Floor Broker is 
maintaining a continuous open line through the use of a headset, the 
Floor Broker will be prohibited from future use of any headset for a 
length of time to be determined by the Exchange.
    The Rule further states that Floor Brokers may receive orders over 
their phones from any persons located on the Options Floor. Floor 
Brokers who receive telephonic orders while in the trading crowd must 
step outside of the crowd, write up an order ticket and time stamp it 
before representing the order in the crowd. This is consistent with 
Rule 6.85, Commentary .03, which states that when a Floor Broker 
receives a verbal order from a Market Maker, the Floor Broker shall 
immediately prepare an order ticket from outside the trading crowd and 
time-stamp it.\6\
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    \6\ Id.
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    Any telephonic order entered from off the Options Floor must be 
placed with a person located in a member firm booth. Further, the Rule 
prohibits the Floor Brokers from using the Pit Rep or LMM telephones 
under any circumstances. This is to ensure that telephones are 
available for marketing option issues, responding to customer 
inquiries, or othewise conducting Exchange business relating to Market 
Makers and Lead Market Makers.

Clerks

    The proposed Rule states that Floor Broker Clerks and Stock 
Executions Clerks are subject to the same terms and conditions on 
telephone use as Floor Brokers and that Market Maker Clerks are subject 
to the same terms and conditions on telephone use as Market Makers. The 
Rule further states that the Options Floor Trading Committee reserves 
the right to prohibit clerks from using cellular or cordless phones on 
the floor at any time that it is necessary due to electronic 
interference problems \7\ or capacity problems \8\ resulting from the 
number of such phones then in use on the Options Floor. In such 
circumstances, the Committee will first consider restricting the use of 
such phones by Market Maker Clerks, then by Stock Execution Clerks, and 
then finally, by Floor Broker Clerks.
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    \7\ The term ``electronic interference'' refers to a situation 
where, even though there are talk paths available, a user cannot get 
a good signal because of interference with monitors, static, or a 
bay station not working correcty. Amendent No. 1, supra note 3.
    \8\ The Term ``capacity problems'' is used to describe a 
situation where a user cannot get a signal because no talk path is 
available on a bay station. Currently, there are 96 talk paths 
available. If all 96 talk paths are being used, the 97th user will 
be unable to get a signal because all talk paths are being used. 
Ammendment No. 1 supra note 3.
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Floor Managers

    Proposed Rule 6.2(h) states that Member Firm Floor Managers may use 
any telephone, including any cellular or cordless phones, for any 
business purpose relating to their management responsibilities.

General Access Phones, Telephone Records, and Exchange Liability

    Proposed Rule 6.2(h) states that phones located outside the trading 
areas may be used by any Member, Clerk, or Member Firm Floor Manager to 
communicate with persons on the Options Floor. The rule also states 
that Members must maintain their cellular or cordless telephone 
records, including logs of calls placed, for a period of not less than 
one year and the Exchange reserves the right to inspect such records 
pursuant to Rule 10.2.
    Finally, proposed Rule 6.2(h) states that the Exchange assumes no 
liability to Members or Member Firms due to conflicts between phones in 
use on the Options Floor or due to electronic interference problems 
resulting from the use of telephones on the Options Floor.

Minor Rule Plan

    Currently the PCX Minor Rule Plan includes as a minor rule 
violation, the unauthorized use of telephones located in the trading 
post areas.\9\ The PCX is proposing to change the language in the rule 
to refer to the proposed rule on telephone use on the Option Trading 
Floor (Rule 6.2(h)). Specifically, the provision will now state: Floor 
Member or Member Firm employee violated rules on telephones on the 
Options Floor. In addition, the PCX is proposing to increase the fine 
amount for a third violation from $750.00 to $1,000.00 to better 
reflect the seriousness of a third violation within two years.
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    \9\ See PCX Rule 10.13.
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2. Statutory Basis
    The proposal is consistent with Section 6(b) \10\ of the Act, in 
general, and Section 6(b)(5) \11\ of the Act, in particular, in that it 
is designed to regulate communications to and from the Exchange's 
Options Trading Floor in a manner that promote just and equitable 
principles of trade and protects investors and the public interest.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any inappropriate burden on competition.

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

    No written comments were either solicited or received.

[[Page 7683]]

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    Within 35 days of the 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 the 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. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. 
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. Sec. 552, will be available for inspection and copying at 
the Commission's Public Reference Room. Copies of such filing will also 
be available for inspection and copying at the principal office of the 
Exchange.
    All submissions should refer to File No. SR-PCX-98-30 and should be 
submitted by March 9, 1999.
    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-3670 Filed 2-12-99; 8:45 am]
BILLING CODE 8010-01-M