[Federal Register Volume 62, Number 118 (Thursday, June 19, 1997)]
[Notices]
[Pages 33448-33454]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-16084]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38740; File No. SR-PCX-97-18]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by Pacific Exchange, Inc. Relating to the PCX Application of the 
OptiMark System

June 13, 1997.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act'' or ``Act''), 15 U.S.C. 78s(b)(1), and Rule 19b-4 
thereunder, 17 CFR 240.19b-4, notice is hereby given that on June 11, 
1997, 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, which Items 
have been prepared by the self-regulatory organization.\1\ The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ The Exchange originally submitted this filing to the SEC on 
May 20, 1997. On June 3, 1997, the Exchange submitted Amendment No. 
1 to the filing. It was later determined that the rule filing was 
not complete as a result of the omitted submission of an exhibit 
containing the required ``Completed Notice of Proposed Rule Change 
for Publication in the Federal Register.'' The Exchange elected to 
resubmit the entire filing (received on June 11, 1997). The re-
submitted filing incorporates the substance of the June 3,1997, 
Amendment No. 1.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Pursuant to Rule 19b-4 of the Act, the Exchange proposes to 
establish rules for a new exchange facility called the PCX Application 
of the OptiMark System (``PCX Application'' or ``Application''). The 
PCX Application is a computerized, screen-based trading service made 
available from an electronic communications and information system 
known as the ``OptiMark System'' \2\ for the benefit of the

[[Page 33449]]

Exchange members and their customers. It will provide automatic order 
formulation, matching, and execution capabilities in the equity 
securities listed or traded on the Exchange (collectively, ``PCX 
Securities''). Similar to other proposals in the past to accommodate 
new forms of trading involving stock baskets and index derivatives, the 
Exchange believes that the proposed facility will meet institutional 
investors' growing demand for a new secure medium of trading that may 
be utilized in addition to (but not in lieu of) the traditional 
continuous auction facilities of the Exchange. Moreover, because the 
PCX Application will be an additional trading service available for the 
Exchange Specialists and floor brokers to utilize in satisfying their 
existing customer interest, retail investors also are expected to 
benefit from the PCX Application.
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    \2\ The OptiMark System has been developed by OptiMark 
Technologies, Inc. (``OTI''), a computer technology firm located in 
Durango, Colorado, based on certain patent-pending market 
restructuring technology referred to as ``OptiMarkTM.'' 
The PCX Application is expected to be one of several different 
trading services based on that technology that will be made 
available form the OptiMark System for other exchanges and markets 
in the future. OTI expects its wholly-owned subsidiary, OptiMark 
Services, Inc. (``OSI''), a registered broker-dealer, to be 
responsible for operating portions of the PCX Application for the 
Exchange and delivering the trading service to the Exchange's 
members and their customers. OTI is licensing the OptiMark System to 
OSI for purposes of the PCX Application.
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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 self-regulatory organization 
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 self-regulatory organization 
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 establish rules for 
the PCX Application, a new trading service that may be used, in 
addition to the traditional floor facilities, to buy and sell the PCX 
Securities.\3\ The Application will allow the PCX members and their 
customers to submit anonymously from their own computer terminals, 
without ever revealing their trading strategies, visual depictions of 
trading interest to the OptiMark System. At specified times during the 
trading day, the OpitMark System will conduct certain trade 
optimization calculations against such expressions of interest to 
identify specific orders capable of execution. All such orders as 
formulated by the OptiMark System will be automatically executed on the 
Exchange, except to the extent that they may be executed on other 
market centers through the Intermarket Trading System (``ITS'').
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    \3\ This rule filing addresses trading in the PCX Securities 
only. If and when the Application extends in the future to options 
or other types of securities listed or traded on the Exchange, an 
appropriate rule change will be filed with the Securities and 
Exchange Commission.
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    The Exchange proposes to offer this new trading service as an 
additional exchange facility available for use by its members and their 
customers. The Exchange believes that the OptiMark System represents a 
significant step forward in the development of computer technology to 
receive and process complex sets of information from investors. By 
utilizing a trading service based on such technological innovation, 
investors will be able to express fully their trading strategies 
without fear of provoking an unfavorable price reaction. In the 
Exchange's view, the PCX Application thus will result in increased 
total liquidity in the market as more and more investors begin to 
express the true extent of their trading interest. Further, by enabling 
retail order flow to interact with such newly expressed interest while 
preserving the integrity of the Exchange's auction-pricing mechanism, 
the PCX Application is expected to enhance the capacity, efficiency and 
fairness of the overall marketplace to the advantage of both small and 
large orders.
2. Description of How the PCX Application Operates
    The PCX Application is being developed jointly by the Exchange and 
OTI. It represents one specific trading service made available from the 
OptiMark System to be utilized by the Exchange members and their 
customers in the manner described below:
Proposed Method of Operation
    At the outset, it should be noted that the PCX Application is 
modular in nature. Two distinct operations will be involved in running 
the Application: (i) the central information processing system and 
related administrative and communications terminal network of the 
OptiMark System, which includes such physical infrastructure as 
computers performing the functions of collecting data, processing it, 
logging activities and switching messages from and to other systems and 
carriers, as well as the communication network linking such computers 
with customer terminals; and (ii) the computer hardware and software 
needed (collectively, the ``PCX Interfaces'') for the OptiMark System 
to communicate with the PCX's computerized order system (including any 
terminals in use by the PCX Specialists or floor brokers). The Exchange 
will continue to operate its electronic linkages with the ITS, 
Consolidated Quote System (``CQS''), and the Consolidated Tape System 
(``CTS''), as they currently exist.
    The Exchange will have direct ownership of and control over the PCX 
Interfaces. The OptiMark System will provide such electronic 
communications and information services needed for the PCX Application 
as described herein. From time to time, various functionalities of the 
computer services provided by the OptiMark System will be modified to 
allow such system improvement and enhancement as may be deemed 
appropriate or necessary. The Exchange will assure that, at all 
relevant times, the material terms and conditions of the trading 
service offered hereby as a facility of the Exchange, will comply fully 
with the applicable rules of the Exchange.
Access to the PCX Application
    The PCX Application will be available to all members of the PCX 
and, only through them, to non-members such as institutional investors 
and other non-member broker-dealers. Each interested member and non-
member customer will be eligible to enter into a subscription agreement 
(``User Agreement'') with OTI to establish an appropriate basis on 
which to communicate with the OptiMark System and also to execute an 
addendum to the User Agreement with OSI authorizing the delivery of the 
trading service made available from the OptiMark System.
    The OptiMark System subscribers (``User'') will log in from their 
own computer terminals and communicate with the OptiMark System over 
any customary commercial information services and network of their 
choice (such as Dow Jones Markets). Those Users that serve as 
Specialists and floor brokers on the Exchange also will be able to 
communicate with the OptiMark System from certain floor-located 
computer terminals as discussed in more detail below. As specified in 
the User Agreement, appropriate security codes and protocols will be 
required to log in to the OptiMark System. Once logged in, Users with 
authorized access to the PCX Application will be able to utilize the 
specific trading service offered by the Exchange as a new facility, by 
submitting certain expressions of their trading interest in a PCX 
Security to the OptiMark System. Users will be responsible for any and 
all

[[Page 33450]]

of such expressions and any other messages submitted to the OptiMark 
System under their passwords and security codes.
    Each member of the Exchange will be granted access to the PCX 
Application directly as a User. Any and all orders formulated and 
matched by the OptiMark System based on the expressions of trading 
interest received from a member User will be automatically routed, 
executed and reported in that User's name. Each such member User will 
be responsible for all transactions resulting from the PCX Application 
for its own or customer accounts in the same way as it currently is for 
more traditional transactions on the floor.
    Non-member Users, on the other hand, will be required to designate 
in advance member firms (``Designated Broker'') that will authorize 
their access to the PCX Application. Under a non-member's agreement 
with a Designated Broker (``Give-Up Agreement''), the Designated Broker 
will accept responsibility for that non-member User's transactions and 
provide a written statement to the Exchange to that effect. Under the 
Designated Broker's agreement with OSI (``Transmission Consent 
Agreement''), the Designated Broker will authorize any and all orders 
formulated and matched by the OptiMark System based on the expressions 
of trading interest received from the non-member User to be 
automatically routed, executed and reported in the Designated Broker's 
name. Both agreements must be in force before any non-member User may 
be given access to the PCX Application. At a minimum, the provisions in 
these Agreements will include any credit limit that may be imposed by a 
Designated Broker (or its clearing broker if applicable) on a non-
member User; \4\ the Designated Broker's understanding that it is 
responsible for the non-member User's transactions; and such other 
terms and conditions that may be agreed to from time to time.
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    \4\ A non-member User's credit limits, as they may be 
established from time to time by a Designated Broker (or its 
clearing broker if applicable), will be programmed into the OptiMark 
System. In addition, the Designated Broker will be notified as its 
potential exposure to its customers, individually or in the 
aggregate, approaches the established credit limits.
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Entry of Profiles
    One of the most innovative features offered by the OptiMark System 
to the financial community is the ability to depict complex trading 
strategies in a visually intuitive way. A User will submit an 
expression of its trading interest in the form of a satisfaction 
profile (``Profile'') that shows that the User's degree of satisfaction 
or willingness (expressed as a number between zero and one) to trade at 
each coordinate of the price/size grid. Instead of being limited to 
specifying a single price and size, a User thus may depict a varying 
degree of its trading preferences, encompassing a wide range of prices 
and sizes, in a Profile. To simplify and enhance the User's ability to 
define and enter Profiles, sophisticated graphical interfaces and 
software that operate under such operating systems as Microsoft Windows 
(3.1 through NT), OS/2, Sun Solaris, and AIX will be offered.
    The price/size grid over which Profiles are defined will be 
appropriately unitized into individual coordinates. Specifically, the 
price axis will be divided into the minimum trading increments in the 
relevant security being traded.\5\ The size axis, on the other hand, 
will be divided into 1,000 share increments. A User may create a three-
dimensional Profile over each coordinate in the desired region of the 
price/size grid by indicating a degree of willingness (a ``satisfaction 
value'') to trade at that coordinate. Such willingness to trade or 
satisfaction value may range from the most satisfactory (i.e., ``1'' 
satisfaction value) to a cut-off point at which a transaction at that 
price and size becomes undesirable (i.e., ``0'' satisfaction value).
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    \5\ PCX notes that the current increment is \1/8\ of a dollar 
for most securities, but may be subject to change based upon recent 
filings that move to \1/16\ of a dollar, and depending on any 
possible change to decimalization.
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    In this regard, the delineation of the size axis into 1,000 share 
increments for purposes of defining a Profile should be distinguished 
from the minimum units of trading in the PCX Application, which are in 
round lots. By way of example, consider a User seeking to submit a buy 
Profile for 4,100 shares that shows a 100% willingness to trade at the 
price of 20, decreasing to no willingness as the price reaches 22. 
Because of the 1,000 share increments on the size axis, the User's 
interest in excess of 4,000 shares would be reflected in the next 
available coordinate size--5,000. To draw this particular Profile on 
the grid, therefore, the User would assign the satisfaction value of 1 
to all the coordinates with the associated size of 5,000 shares or less 
and price of 20 or below. As the associated price increases from 20 to 
22, the satisfaction value of the relevant coordinates would decrease 
steadily down to 0. Of course, any such visual rendition involving the 
grid size of 5,000 shares does not mean that the User actually would 
receive a 5,000 share trade in excess of the desired amount, because 
the Profile would contain the appropriate User instruction to limit the 
transaction size to 4,100 shares.
    Indeed, each User may specify, with respect to each Profile 
submitted, an associated maximum quantity of shares in any round lot 
multiples starting at 1,000 shares; provided, however, those Profiles 
submitted by the PCX Specialists as discussed below and certain system-
generated CQS Profiles (as defined later) will each have such 
associated round lot size as reflected in the relevant limit order book 
or quotation, which may be less than 1,000 shares. In addition, Users 
may, at their option, set boundary conditions on a Profile to restrict 
the total number of shares that may be purchased or sold within any 
particular price or size range. Similarly, Users may, at their option, 
place restrictions on any potential purchase or sale of shares through 
the ITS.\6\
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    \6\ The Commission notes that the current proposal does not 
address how orders entered into the OptiMark System would comply 
with the short sale rule under the Exchange Act, 17 CFR 240.10a-1.
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    The OptiMark System will perform the necessary credit verification 
procedures on each Profile submitted by a non-member User. Such 
procedures will ensure that the maximum absolute dollar value of each 
Profile received by the OptiMark System when added to the non-member 
Users' current credit usage, is consistent with the applicable credit 
limits. All Profiles not meeting the credit validation requirement will 
be deactivated.
    Users will submit Profiles by means of telecommunications access 
services of the OptiMark System. All Profiles thus received from a User 
will be treated confidentially and may be viewed only by that User. 
Unlike orders found in the Exchange's traditional floor facilities, 
Profiles will not be widely disseminated to elicit any trading interest 
when they are received. Instead, they will be simply logged and 
maintained by the OptiMark System until they are centrally processed. 
Accordingly, Profiles will not be executable outside of the specified 
times at which the OptiMark System conducts certain trade optimization 
calculations. As a specialized form of trading interest contingent upon 
such periodic occurrences, Profiles as received by and kept within the 
OptiMark System will have no standing against orders on the floor and 
no bearing on the Exchange's traditional auction-pricing mechanism.

[[Page 33451]]

    In accordance with customary audit trail requirements, all Profiles 
submitted by Users will be appropriately marked as proprietary or 
agency. In addition, each will be time-stamped with a unique serial 
number when received by the OptiMark System. Users may revise or cancel 
their own Profiles at any time prior to commencement of the next 
scheduled central processing. Because it will be important for Users to 
be able to adjust their outstanding Profiles in a timely manner in 
response to sudden market developments, such adjustments will be 
processed as rapidly as computationally feasible so as to take effect 
against any central processing scheduled to take place more than one 
second after receipt. In general, submitting a revised Profile will 
result in a new time stamp, unless the only change made is a reduction 
in the maximum quantity of shares previously specified that may be 
bought or sold.
    All Users will be held responsible for the terms and conditions 
contained in each Profile received from them. Each will assume any and 
all responsibility for canceling or revising its Profile. Users may 
specify in advance whether to cancel their outstanding Profiles or to 
keep such Profiles active in the event of an unexpected interruption 
experienced in their own telecommunications linkage to the OptiMark 
System. If Users decide to keep their Profiles active, they will be 
accountable, at all relevant times, for any and all transactions 
resulting from the PCX Application based on such Profiles, 
notwithstanding any communication interruptions.
    Because the OptiMark System assures anonymity and confidentiality, 
it is expected to appeal to institutional investors that often do not 
reveal their full trading strategies (not even when they remain 
anonymous) for fear of provoking unfavorable market reaction. The vast 
majority of Profiles submitted to the OptiMark System will thus reflect 
new expressions of previously withheld interest covering a wide range 
of trading possibilities in the price, size and satisfaction continuum. 
As a result of increased total liquidity, all investors, small or 
large, simple or sophisticated, are expected to benefit from the 
availability of the PCX Application.
Interaction With Existing Market Interest
    The PCX Application is designed to provide Users with certain 
automated access to and interaction with quotations emanating from 
other participating market centers of the ITS. At the specified times 
during the trading day when central processing by the OptiMark System 
is scheduled, the prevailing bid and offer quotations in CQS from each 
such market that may be reached by ITS, including the Intermarket 
Trading System/Computer Assisted Execution System interface (``ITS/
CAES''), will be transformed into a pair of buy and sell Profiles 
(``CQS Profiles''). Each CQS Profile will have, for the relevant limit 
price and size, a satisfaction of 1 for all the corresponding 
coordinates in the price/size grid. As discussed in more detail below, 
creation of these CQS Profiles and their interaction with the Profiles 
submitted by Users will assure consistency of the PCX Application with 
the intermarket price protection requirement under the ITS Plan.
    The PCX Application is also designed to serve as an additional 
trading service available for the Exchange Specialists and floor 
brokers to utilize in handling existing market interest found on the 
floor today. In their capacity as Users, the Specialists and floor 
brokers may submit Profiles based on customer limit orders at hand. To 
this end, the PCX Specialists will be provided with a uniquely designed 
electronic interface at their posts that will provide simple retrieval 
instructions to facilitate designation of customer orders on their 
limit order books for inclusion in the OptiMark System as Profiles. 
Such an interface also will permit the PCX Specialists to revise and/or 
cancel the relevant Profile if any of the limit orders thus reflected 
subsequently becomes executable against some other market interest. The 
resulting Profiles created from the PCX Specialist's book will be 
treated the same as any other Profiles submitted by other Users.\7\ 
Similarly, the Exchange will ensure that floor brokers have the ability 
to use existing terminals for submission of Profiles, or a number of 
OptiMark System terminals will be installed on the Exchange's trading 
floor to allow floor broker Users to submit Profiles at their 
convenience if they wish to utilize the PCX Application to fill 
existing customer interest.
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    \7\ Of course, the PCX Specialists also may submit Profiles 
based on their own proprietary trading strategies, in addition to 
Profiles reflecting public limit orders on their books. To the 
extent that a PCX Specialist chooses to represent a proprietary 
trading interest in its designated security by submitting a Profile, 
that particular Profile will have lower time priority than that of 
the Profile submitted by any other User in the security as discussed 
further below.
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Central Processing
    All Profiles received by the OptiMark System (including CQS 
Profiles) for each relevant security will be centrally processed by 
computer at one or more specified times during the trading day in order 
to generate one or more orders of identified prices and sizes at which 
execution may occur immediately (``Orders''). As explained further 
below, such processing will involve a series of high-speed calculations 
performed at a rapid pace (``Cycle''). Cycles will be based on an 
innovative computer algorithm that is designed to measure and rank all 
relevant mutual satisfaction outcomes by matching individual 
coordinates from intersecting Buy Profiles and Sell Profiles. The 
matching algorithm of the OptiMark System is intended to compute 
optimal trade results for Users based on their different willingness to 
trade across a wide range of price and size. A buy coordinate and a 
sell coordinate, each with a full satisfaction value of 1, will be 
matched, based on price, standing, time of entry, and size. If one or 
both of coordinates have a partial satisfaction value of less than 1 
(but greater than 0), they will be matched, generally based on the 
joint, mutual satisfaction value--that is, the product of the specific 
satisfaction values associated with the buy coordinate and sell 
coordinate. Throughout the Cycle, there will be derived combinations of 
Orders suitable for immediate execution that achieve the sequentially 
optimal mutual satisfaction between potential buyers and sellers.
    Profiles will be processed, based on the following matching 
eligibility restrictions and priority principles:
    1. Eligibility Restrictions. At commencement of a Cycle, each 
individual coordinate with a non-zero satisfaction value from all buy 
Profiles and all sell Profiles received by the OptiMark System 
(including CQS Profiles) in a given PCX Security will be grouped into 
the Buy Profile Data Base or the Sell Profile Data Base, respectively. 
Each individual coordinate, no matter how small or large in the 
corresponding size, from either Profile Data Base will be eligible to 
be matched with one or more coordinates from the other Profile Data 
Base and will result in one or more Orders, provided that:
    1.1  No buy and sell coordinates may be matched in violation of any 
applicable User instructions for the respective Profiles, including (a) 
the maximum quantity associated with the Profile, (b) any boundary 
conditions restricting the aggregate number of shares that may be 
bought or sold at a particular price or size range, and (c) the 
restrictions on any potential sale or purchase of shares through ITS; 
and
    1.2  No buy and sell coordinates may be matched from contra CQS 
Profiles.

[[Page 33452]]

    1.3  No buy and sell coordinates may be matched at a price inferior 
to that of another coordinate with Standing (as defined below) that is 
eligible for matching. A buy (sell) coordinate has Standing if (a) it 
has 1 satisfaction value and (b) all coordinates having the same price 
and a smaller size, down to and including the minimum trading increment 
(100 shares), are included in the associated Profile at 1 satisfaction 
value; provided, however, that no coordinate from a Profile containing 
any boundary conditions restricting the aggregate number of shares that 
may be bought or sold at a particular size range has Standing. By way 
of example, each coordinate from a CQS Profile has Standing. By 
contrast, no coordinate from a Profile submitted by a User on an ``all-
or-none'' basis has Standing.
    2. Priority Principles. The methods for considering potential 
matches between buy and sell coordinates in the Profile Data Bases will 
vary, depending on whether both coordinates represent satisfaction 
values of 1 or less than 1, resulting in two separate stages of a 
Cycle:
    2.1   Aggregation Stage. The OptiMark System initially will process 
eligible buy and sell coordinates in the Profile Data Bases, each with 
the full satisfaction value of 1 only. At this stage of calculation 
(``Aggregation Stage''), smaller-sized coordinates may be aggregated to 
build sufficient size to be matched with larger-sized coordinates to 
generate Orders in accordance with the following rules of priority, 
subject to the applicable eligibility restrictions:
    (A) Price aggressiveness. A coordinate with a more aggressive price 
(i.e., a higher price for a buy coordinate and a lower price for a sell 
coordinate) has priority over coordinates with less aggressive prices.
    (B) Standing. Among the coordinates with the same price, a 
coordinate with Standing has priority over all other coordinates 
without Standing.
    (C) Time of entry. Among the coordinates with the same price and 
Standing, the time of the entry of the associated Profile determines 
relative priority, with earlier submissions having priority. All 
Profiles submitted by Users will be appropriately time-stamped with a 
unique serial number when received by the OptiMark System; provided, 
however, that the effective time of entry for any Profile submitted by 
a PCX Specialist representing proprietary trading interest in the 
Specialist's designated security will fall behind that of the Profile 
submitted by any other User in that security. Because each CQS Profile 
is generated from the relevant market's most current quotation 
prevailing at the time of commencement of a Cycle, its effective time 
of entry will be later than that of any other Profile submitted by a 
User.
    (D) Size. Among the coordinates with the same price, Standing and 
time of entry, priority for matching is determined by size, with larger 
sizes having higher priority.
    2.2  Accumulation Stage. Upon completion of calculation at the 
Aggregation Stage, the OptiMark System will consider potential matches 
between eligible buy coordinates and sell coordinates in the Profile 
Data Bases where one or both parties have less than 1 (but greater than 
0) satisfaction values. At this stage of calculation (``Accumulation 
Stage''), only those buy and sell coordinates with the same associated 
price and size may be matched to generate Orders in accordance with the 
following rules of priority, subject to the applicable eligibility 
restrictions:
    (A) Mutual satisfaction. A potential match with a higher mutual 
satisfaction value (the product of the two satisfaction values) takes 
precedence over other potential matches with lower mutual satisfaction 
values.
    (B) Time of entry (based on the earlier Profile). Among the 
potential matches with the same mutual satisfaction, the match with the 
earlier time of entry, as determined initially by the effective time of 
entry assigned to the earlier of the buy and sell Profiles involved 
(the ``earlier Profile''), has priority over other potential matches.
    (C) Size. Among the potential matches with the same mutual 
satisfaction and time of entry for the earlier Profile, priority is 
given to one with a larger size.
    (D) Time of entry (based on the later Profile) . Among the 
potential matches with the same mutual satisfaction, time of entry (for 
the earlier Profile), and size, the match with the earlier time of 
entry, as determined this time by the effective time of entry assigned 
to the later of the buy and sell Profiles involved (the ``later 
Profile''), has priority over other potential matches.
    (E) Price assignment. In regard to all remaining ties between 
potential matches, which will consist solely of the coordinates from a 
single pair of buy and sell Profiles from two Users that may be matched 
with the same mutual satisfaction, time of entry and size, but at 
different prices, priority is given to the match at a price more 
favorable to the User whose Profile has the earlier time of entry. By 
way of example, among the last potential matches remaining at the price 
of 10 and also at 10\1/8\, if the sell Profile is the earlier Profile, 
then the match will take place at the price of 10\1/8\.\8\
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    \8\ The Commission notes that two or more Profiles that are 
entered into the OptiMark System representing the same number of 
shares may result in executions at differing prices depending on the 
other information and conditions entered into the System.
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    For purposes of the PCX Application, the specific times at which 
Profiles will be centrally processed will vary, depending on the 
security involved. No Cycle, however, will be scheduled until after the 
opening of the PCX market for any such security. Similarly, no Cycle 
will be scheduled at or after the closing of the PCX market for that 
security. The maximum frequency with which Cycles may take place 
throughout the trading day will be 90 seconds, while the minimum is 
once a day.
    The exact frequency of Cycles as to any given PCX Security will be 
determined by OSI, taking into account the general characteristics of 
the security (e.g., trading volume, price and number of shareholders), 
the robustness of the associated Profile flow over a period, and the 
current level of interest expressed by Users. From time to time, OSI 
may alter the frequency of Cycles in response to subsequent 
developments in the above-stated market circumstances. Any change in 
the frequency of Cycles will be effective upon three days' notice to 
Users in advance. Such notice will be provided electronically, using 
the same telecommunications linkage and protocols that are used by 
Users to submit Profiles. At all relevant times, Users will be fully 
informed as to when the next Cycle in a particular PCX Security will 
take place.
    The Exchange will assure that the frequency of Cycles remain 
commensurate with the financial community's need and demand for the new 
trading service, thereby securing the maximum usefulness of the PCX 
Application for the benefit of its members and their customers. In 
addition, the Exchange will assure that the PCX Interfaces and the 
OptiMark System have sufficient capacity in place to handle any 
material increase in the volume of data prior to implementing a change 
in the frequency of Cycles.
Order Execution and Reporting
    The Exchange will make available the necessary PCX Interfaces to 
permit Orders in PCX Securities from the OptiMark System to be 
executed, either on the Exchange or on other market centers 
participating in ITS through the appropriate Exchange communications 
linkage. The Exchange will permit one or more pairs of Orders resulting 
from intersection of the Profiles submitted

[[Page 33453]]

directly by Users (including the PCX Specialists and floor brokers) to 
be routed and executed on the Exchange. Every trade resulting from 
executing each such pair of Orders on the Exchange will be 
appropriately reported, by way of the traditional Exchange linkage to 
the CTS processor for dissemination, in sequence in which Orders are 
generated from the Cycle. The Exchange envisions reporting these 
trades, similar to the way it currently reports other trades in the PCX 
Securities to the CTS. Accordingly, consistent with the existing 
reporting practices, in the case of a series of Orders generated from a 
single Cycle for the same seller with different buyers at an identical 
price, they will be printed on the Tape as one transaction. In general, 
the report for any transaction resulting from the PCX Application will 
not be distinguished on the Tape from the trade report of any other 
order executed on the floor.
    As for one or more Orders representing matched coordinates from CQS 
Profiles, and other contra Profiles, the Exchange will submit an ITS 
Commitment reflecting each such Order and seeking execution on other 
market centers to which the OptiMark System is not directly linked. 
Every ITS commitment will be sent under the give-up of the relevant 
Member User or the Designated Broker, by way of the traditional 
Exchange linkage to the ITS, in sequence in which Orders are generated 
from the Cycle. Each ITS commitment will be designated for ``T-1'' (one 
minute) time period as specified in the ITS Plan. The Exchange 
envisions sending ITS commitments resulting from the PCX Application in 
the way other ITS commitments are sent currently from the PCX. 
Accordingly, ITS commitments resulting from the PCX Application will 
not be distinguishable from other ITS commitments.
    The operation of the PCX Application will not amend the existing 
Exchange rules for handling traditional trading interest on the equity 
trading floor. Market orders routed from members will continue to be 
executed in the same manner. Similarly, ITS commitments received from 
other ITS participating market centers will be executed against the 
Exchange's prevailing quotations as specified under the ITS Plan. As 
for limit orders, the PCX Specialists and floor brokers will be 
afforded an additional (but not alternative) opportunity to fill such 
interest through the PCX Application. To the extent that the Exchange 
Specialists and floor brokers submit Profiles to the OptiMark System 
based on customer interest in their books, the handling of any such 
Profiles and any resulting trade executions through the PCX Application 
will be fully consistent with the parameters under which public limit 
orders are filled currently.
    Morover, the PCX Specialists will continue to be responsible for 
their books to the same degree as they are now. Accordingly, if a 
Specialist elects not to reflect any customer limit order in the 
OptiMark System, it will remain accountable for execution at or any 
more favorable price through the PCX Application, just as it currently 
is held responsible under similar circumstances. In such a case, 
consistent with the Exchange's existing floor procedures an practices, 
the Specialist will be required to satisfy or cause to be satisfied the 
customer limit order so held, either at the limit price specified, or 
at any better price at which the Specialist's proprietary interest was 
satisfied utilizing the PCX Application.
    Similarly, the operation of the PCX Application will be fully 
consistent with the Exchange's intermarket price protection obligations 
under the ITS Plan. As described above, the OptiMark System 
incorporates existing market interest emanating from each of the ITS 
participant markets to which it is not directly linked in the form of 
CQS Profiles. Because of the rules of priority for considering 
potential matches between buy coordinates and sell coordinates from any 
Profiles (including CQS Profiles), all Orders that are priced inferior 
to the quotations of another market center will be generated and 
executed on the PCX only upon submission of appropriate ITS commitments 
seeking to reach such better-priced interest. As a result, the 
execution of any such Orders on the PCX will not violate the trade-
through rule under the ITS Plan.
    All Users will be informed of executions that take place against 
the Profiles that they submitted for their own or customer accounts 
promptly after the trades occur. If an ITS commitment resulting from 
the PCX Application is canceled or only partially filled, the OptiMark 
System will notify the relevant User and restore to the Profile the 
volume of the security represented by the unfilled Order. All such 
reports will be sent electronically, using the same telecommunications 
linkage and protocols that were used to submit the Profiles initially. 
Unless specified otherwise by non-member Users in advance, executions 
will not be reported to relevant Designated Brokers until after the 
close of the trading day in order to limit market impact and other such 
adverse effects of non-member Users' trading.
Clearance and Settlement
    Transactions in the PCX Securities resulting from the PCX 
Application, including any ITS commitment that has been sent to another 
market center and accepted, generally will clear and settle in the same 
way as other transactions occurring on the Exchange floor, all in 
accordance with established securities industry practices and through 
established securities industry systems. All Orders generated by the 
OptiMark System that are executed on the PCX or another market center 
through ITS will be each reported and entered into the comparison 
system on a locked-in basis. Orders generated by the OptiMark System on 
behalf of a member User and the resulting transactions will be cleared 
and settled, using that member User's mnemonic (or its clearing 
broker's mnemonic as may be applicable). Orders generated by the 
OptiMark system on behalf of a non-member User and the resulting 
transactions will be cleared and settled, using the appropriate 
Designated Broker's mnemonic (or its clearing broker's mnemonic as may 
be applicable).
    In no event will the Exchange or any operator, administrator or 
licensor of the Optimark system be responsible for any User's failure 
to pay for the PCX Securities purchased or to deliver the PCX 
Securities sold. Neither OTI nor OSI will be deemed to be a party to or 
a participant in, as principal or as agent, any trade or transaction 
entered into or otherwise conducted by users while using the OptiMark 
System for the purposes of clearance and settlement.
Hours of Operation
    The PCX Application will be initially available for execution of 
Orders and routings of ITS commitments during the regular PCX hours 
after the opening and prior to the closing.\9\ In the event of a 
suspension in trading of a security listed or traded on the Exchange, 
the Exchange will suspend the related trading activities respecting 
that security through the PCX Application. In addition, the trading 
activities through the PCX Application respecting all of the PCX 
Securities will halt whenever the Chairman or, in the Chairman's 
absence, Chief Operating Officer, or other PCX Officer(s) as the 
Chairman may designate, determines that market conditions warrant such 
a market-wide halt pursuant to the Exchange's Policy Statement on 
Market Closings. The

[[Page 33454]]

Exchange may suspend the trading activities through the PCX Application 
relating to one or more PCX Securities at any time upon consultation 
with OptiMark Technologies, Inc. if deemed necessary and proper to 
preserve system capacity and integrity.
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    \9\ The Exchange's hours are currently 6:30 a.m. (P.T.) to 1:50 
p.m. (P.T.).
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Audit Trail and Surveillance
    The Exchange will maintain, or cause to be maintained, the detailed 
audit trail of each transaction resulting from the PCX Application, 
including time sequenced records of Profiles submitted to the OptiMark 
System, Orders resulting from a Cycle, and their execution and 
reporting through the PCX facilities. Such data will be stored and 
preserved for a period of not less than three years, the first two 
years in an easily accessible place, to assure that the Exchange has 
sufficient information for exercising its regulatory oversight. In this 
regard, the Exchange will apply appropriate equity trading surveillance 
procedures to monitor transactions resulting from the PCX Application.
System Capacity and Integrity
    The Exchange believes that the PCX Interfaces and the Optimark 
System will provide sufficient capacity to handle the volume of data 
reasonably anticipated for the PCX Application. The Exchange will have 
in place security procedures designed to prevent unauthorized access to 
the PCX Application. The Exchange will assure that reasonsable security 
procedures are in place to safeguard the PCX Interfaces. The Exchange 
will obtain similar assurances from OTI and OSI that reasonable 
security procedures are in place to safeguard the OptiMark System and 
to protect against threats to the proper functioning of the OptiMark 
System including any networks used by the OptiMark System. The Exchange 
will also obtain appropriate assurances that proper system reliability 
and system capacity exists to ensure the integrity of the data handled 
and timely response of the OptiMark host computers in connection with 
the PCX Application.
Fees for the PCX Application
    Transaction resulting from the PCX Application will be subject to 
the Exchange's customary assessment of transaction charges and the 
Commission's exchange transaction fee under section 31 of the Act. As a 
sponsor of the OptiMark System within the meaning of Rule 17a-23 under 
the Act, OSI will be compensated by way of usual and customary 
commissions, on a cents-per-share-filled basis, for delivering to Users 
the computerized, screen-based trading service made available from the 
OptiMark System and offered hereby as a PCX facility. OSI will be paid 
commissions on a regular basis with respect to the transactions 
effected by a member User for its own or customer accounts. With 
respect to the transactions effected by a non-member User, OSI will be 
paid commissions on a regular basis with respect to the transactions 
effected by a member User for its own or customer accounts. With 
respect to the transactions effected by a non-member User, OSI will be 
paid commissions on a similar basis from the relevant Designated 
Broker.
3. Applicability of New and Existing PCX Rules
    The PCX Application is generally designed to ensure compliance with 
existing PCX Rules and with other rules and regulations to the extent 
that they are deemed appropriate. In addition, the Application would be 
subject to new rules that set forth the operation of the PCX 
Application as described above.
4. Justification
    The Exchange believes that the proposed rule change is consistent 
with the provisions of Section 6(b)(5) of the Act in that the PCX 
Application is a faciltity that is designed to promote just and 
equitable principles of trade and to protect investors and the public 
interest, and is not designed to permit unfair discrimination between 
customers, issuers, brokers or dealers. In addition, the PCX believes 
that the proposed rule change is consistent with provisions of Section 
11A(a)(1)(B) of Act, which states that new data processing and 
communications techniques create the opportunity for more efficient and 
effective market operations.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The PCX does not believe that the proposed rule change will result 
in or impose any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act, as amended.

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 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 oranziation 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. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 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. 552, will be available for inspection and copying at the 
Commission's Public Reference Section, 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 Exchange. All 
submissions should refer to File No. SR-PCX-97-18 and should be 
submitted by July 10, 1997.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-16084 Filed 6-18-97; 8:45 am]
BILLING CODE 8010-01-M