[Federal Register Volume 64, Number 49 (Monday, March 15, 1999)]
[Notices]
[Pages 12826-12829]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-6220]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41143; File No. SR-PCX-99-01]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Pacific Exchange, Inc. to 
Define OptiMark Profile and Order Types

March 5, 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 January 22, 1999, 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. The Commission is publishing this notice to solicit comments 
on 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.
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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 new rules to distinguish between 
two types of principal profiles (i.e., ``principal exempt'' and 
``principal non-exempt'') that may be entered into the OptiMark System 
(``OptiMark'') and to distinguish between four categories of order 
types for purposes of time priority under the PCX rules on OptiMark.
    The text of the proposed rule change is available at the Office of 
the Secretary, 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.

[[Page 12827]]

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

1. Purpose
    Background. The PCX commenced use of OptiMark in January 1999. As 
part of the operational planning for OptiMark's integration into the 
PCX auction market, the PCX and OptiMark have examined the structure of 
the OptiMark matching cycle algorithm to ensure that it reflects (1) 
the terms of the Commission's approval of the PCX application of the 
OptiMark system; \3\ (2) the equity trading rules of the PCX; and (3) 
the requirements of Section 11(a) of the Act.\4\ As a result of this 
examination, OptiMark will program its matching cycle algorithm to 
provide four different levels of time priority. The PCX believes that 
this algorithm is reasonably and fairly implied by its rules and the 
terms of the OptiMark Approval Order.
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    \3\ Securities Exchange Act Release No. 39086 (September 17, 
1997); 62 FR 50036 (September 24, 1997) (``OptiMark Approval 
Order'').
    \4\ 15 U.S.C. 78k(a).
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    Proposal. The PCX proposes to distinguish between two types of 
principal profiles (i.e., ``principal exempt'' and ``principal non-
exempt'') and four categories of order types for time priority under 
its Rule 15.3(b).
    First, ``principal exempt'' and ``principal non-exempt'' will 
identify profiles for the account of a member or member organization. 
The ``principal non-exempt'' profile includes specialist proprietary, 
floor broker proprietary and non-exempt member profiles as described 
below. All other member profiles will be categorized as principal-
exempt. The separation of member profiles is designed to insure that 
entry of these profiles in the OptiMark matching cycle complies with 
PCX rules. Member proprietary profiles (other than those of specialists 
and floor brokers) are on parity with agency profiles only when the 
member does not hold or have knowledge of an unexecuted customer's 
order or profile at the same price or better. If the member holds or 
has knowledge of a customer order or profile, the member must designate 
any proprietary profile as ``principal non-exempt.''
    Second, in the OptiMark Approval Order, the Commission explained 
the OptiMark priority principals as follows. At the Aggregation Stage, 
profile priority would be determined by price, standing, time of entry 
of a profile, and size, in that order.\5\ Subject to the considerations 
imposed by other PCX rules, specialist proprietary profiles would have 
a lower time priority than that of a profile submitted by any other 
user of the system.\6\ In addition, a CQS profile's time of entry would 
be later than that of a profile generated by any other user, including 
a PCX specialist's proprietary trading profile.\7\
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    \5\ See OptiMark Approval Order, supra note 3; and PCX Rule 
15.3(b).
    \6\ See OptiMark Approval Order, supra note 3.
    \7\ See OptiMark Approval Order, Supra note 3.
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    To comply with these specifications and other PCX rules, the 
OptiMark cycle matching process will prioritize specific categories of 
orders for time of entry purposes. In other words, after screening for 
price and standing, the matching algorithm will rank the following 
categories of profile and order types for time priority purposes:
    (1) PCX Book--limit orders from the PCX limit order book;
    (2) Agency--other public customer profiles, non-member profiles and 
``exempt'' member proprietary profiles (``principal-exempt'') entered 
directly into OptiMark;
    (3) Principal--proprietary profiles submitted by PCX specialists 
and floor brokers, and ``non-exempt'' members (all three considered 
``principal non-exempt''); and
    (4) Consolidated Quote System (``CQS'') profiles.
    Exempt members are those who can have proprietary orders 
represented on the floor of the PCX without yielding priority under 
Section 11(a) of the Act. These include non-members of the PCX and, 
with one exception noted below, PCX members who are not specialists or 
floor brokers. This category reflects the Commission's no-action letter 
of November 30, 1998, that generally granted relief with respect to 
Section 11(a) to all PCX members except specialists and floor brokers 
(i.e., to members utilizing only off-floor terminals).\8\ The exception 
involves a member who has knowledge that his firm has entered a 
customer profile into OptiMark. PCX Rule 4.5 and Article XI, Section 
2(b) of the PCX Constitution, prohibit a member from engaging in 
proprietary trading for his or his firm's account on the PCX when he 
has knowledge of an unexecuted limit order for his firm's customer. 
Consequently, to prevent a member from knowingly trading ahead of his 
firm's customer order, a member with knowledge of such an unexecuted 
customer limit order or profile on the PCX would enter a proprietary 
profile as a ``non-exempt'' member and the profile would be placed in 
the third priority category so that his firm's customer limit order 
could be executed first.
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    \8\ Letter from Catherine McGuire, Chief Counsel, Division of 
Market Regulation, SEC, to David E. Rosedahl, Executive Vice 
President and Chief Regulatory Officer, PCX.
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    For each of the four priority categories, orders within a category 
would be ranked according to time priority. For example, a limit order 
entered on the specialist's book at 10:00 would have time priority over 
a similarly priced limit order entered on the book at 10:01. Both 
orders would have time priority over other public customer and 
principal exempt profiles entered directly into OptiMark, principal 
non-exempt profiles, and CQS profiles. These priorities, however, only 
reflect time of entry; profiles with better prices or standing would 
have priority over profiles that are lesser-priced or lack standing, 
regardless of time of entry into OptiMark.\9\
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    \9\ A coordinate with standing has no size limitation at a given 
price. For example, if a profile to purchase 10,000 shares of stock 
has a coordinate with a satisfaction value of 1 to purchase all 
10,000 shares at a single price, that coordinate would have 
standing. For a more detailed description of standing see OptiMark 
Approval Order, Central Processing, supra note 3.
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    PCX limit order book profiles receive the highest time priority in 
order to comply with the procedures under which limit orders currently 
are handled on the PCX.\10\ Under PCX Rule 5.8(c), a bid or offer 
established as the first made at a particular price obtains priority 
and precedence over other bids or offers. Because orders on the PCX 
limit order book exist as bids or offers before they are entered into 
OptiMark as profiles, they have been established on the PCX before any 
other profiles are entered into OptiMark. Conversely, profiles entered 
into OptiMark from off the PCX floor are considered by PCX to be 
indications of interest that become orders on the PCX only when they 
are processed in an OptiMark matching cycle.\11\ To ensure that orders 
from the PCX limit order book retain the priority to which they are 
entitled under PCX Rule 5.8(c), they are accorded the first level of 
time priority in the OptiMark matching process.
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    \10\ The OptiMark Approval Order states that the handling of 
profiles resulting from limit orders submitted by PCX specialists or 
floor brokers would be consistent with the parameters under which 
public limit orders are currently filled on the PCX. See OptiMark 
Approval Order, Supra note 3.
    \11\ Id.
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    As to the second level of priority, the PCX's current auction 
procedures do not differentiate between agency and proprietary orders 
for priority purposes.\12\ Consequently, the second

[[Page 12828]]

time priority level includes agency and principal exempt profiles.
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    \12\ See PCX Rule 5.8(c), which states that: ``When a bid or 
offer is clearly established as the first made at a particular price 
regardless of the floor, the maker shall be entitled to priority and 
shall have precedence on the next sale at that price, up to the 
number of shares of stocks . . . specified in the bid or offer[.]'' 
PCX Rule 5.8(c), Priority of Bids and Offers.
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    Specialist and floor broker proprietary profiles and non-exempt 
member profiles are placed in the third time priority level. The third 
level reflects: (1) the statement in the OptiMark Approval Order that 
PCX specialists would have a lower time priority than all other 
profiles except for CQS profiles;\13\ (2) the need to enable floor 
brokers to comply with Section 11(a) of the Act; and (3) a means to 
enable an individual member to comply with PCX Rule 4.5. The PCX 
believes that its existing rules and policies justify equivalent 
treatment for the three types of principal non-exempt orders. Under 
current PCX policy, a specialist trading for his own account is on 
parity with a floor broker trading for his own account on the PCX 
floor.\14\ Because floor broker proprietary orders occur infrequently, 
they are normally on parity with specialist orders on the PCX floor, 
and, like specialist profiles, will have to go behind all other 
profiles in OptiMark except CQS profiles, the PCX believes that it is 
unnecessary to separate specialist and floor broker proprietary 
profiles for time priority purposes. Similarly, a member trading for 
his own account on the PCX normally would be on parity with the 
specialist. For OptiMark purposes, however, most member proprietary 
profiles have a higher priority than specialist proprietary profiles. 
In the limited situation where a member is constrained from trading due 
to PCX Rule 4.5, the PCX believes it is reasonable to group such a 
member's profile with specialist and floor broker proprietary profiles. 
It would be burdensome for the PCX OptiMark Application to create a 
separate priority category for a member's profile subject to Rule 4.5 
when such situations should occur infrequently and considering that 
under regular PCX priority rules such a member on the floor would be on 
parity with the specialist and floor broker. Accordingly, the PCX 
believes that the grouping of specialist, floor broker, and non-exempt 
member proprietary profiles into the principal non-exempt category is 
both reasonable and consistent with the OptiMark Approval Order's 
statement that ``the Exchange would continue to apply all existing 
rules governing trading on its equity floor.'' \15\
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    \13\ Id. The provision was intended to prevent specialists from 
trading ahead of any agency orders. Thus, PCX contends that it is 
consistent with the OptiMark Approval Order to rank specialist 
profiles in the same category with other principal non-exempt 
profiles.
    \14\ Telephone conversation between Robert P. Pacileo, Staff 
Attorney, Regulatory Policy, PCX, and David Sieradzki, Special 
Counsel, Division of Market Regulation, Commission, on February 25, 
1999.
    \15\ See  OptiMark Approval Order, supra note 3.
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    Finally, as noted in the Optimark Approval Order, CQS profiles 
receive the lowest time priority.
    The PCX believes that the four levels of time priority in the 
OptiMark matching algorithm accurately reflect the description of the 
Optimark Application in the OptiMark Approval Order and PCX Rule 
15.1(h), which states that the Optimark Application will permit 
executions in accordance with ``other applicable rules and policies of 
the Exchange.'' PCX believes that the time priority levels constitute a 
material aspect of the operation of the facilities of the PCX,\16\ as 
well as a stated policy, practice or interpretation with respect to the 
meaning, administration, or enforcement of existing PCX rules under 
Rule 19b-4(b) of the Act.\17\
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    \16\ The PCX Application of OptiMark will be regulated as a 
facility of the PCX. Id.
    \17\ For the reasons noted above, the PCX believes that the 
priority levels are reasonably and fairly implied from the OptiMark 
Approval Order and the rules of the Exchange. Nevertheless, the PCX 
has determined to file the time priority levels under Section 
19(b)(3)(A) of the Act for immediate effectiveness to codify the 
operation of the matching algorithm of the OptiMark application.
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2. Statutory Basis
    The Exchange represents that the proposed rule change is consistent 
with Section 6(b) \18\ of the Act in general and further the objectives 
of Section 6(b)(5) \19\ in particular, because it is designed to 
promote just and equitable principles of trade, to facilitate 
transactions in securities, 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.\20\
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    \18\ 15 U.S.C. 78f(b).
    \19\ 15 U.S.C. 78f(b)(5).
    \20\ In Reviewing this proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
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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

    The Exchange has neither solicited nor received written comments on 
the proposed rule change.

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

    According to the PCX, the foregoing rule change constitutes a 
stated policy, practice or interpretation with respect to the meaning, 
administration, or enforcement of an existing rule of the Exchange and 
therefore, has become effective pursuant to Section 19(b)(3)(A)(i) of 
the Act \21\ and subparagraph (f)(1) of Rule 19b-4 thereunder.\22\ 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.
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    \21\ 15 U.S.C. 78s(b)(3)(A)(i).
    \22\ 17 CFR 240.19b-4(f)(1).
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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 also will 
be available for inspection and copying at the principal office of the 
Exchange. All submissions should refer to File No. SR-PCX-99-01 and 
should be submitted by April 5, 1999.


[[Page 12829]]


    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\23\
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    \23\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-6220 Filed 3-12-99; 8:45 am]
BILLING CODE 8010-01-M