[Federal Register Volume 64, Number 83 (Friday, April 30, 1999)]
[Notices]
[Pages 23370-23378]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-10806]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-41327; File No. SR-PCX-99-07]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Pacific Exchange, Inc. Relating to Its Competing
Specialist Program
April 22, 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 March 1, 1999, as amended on April 22, 1993,\3\ the Pacific
Exchange, Inc. (``PCX'' or ``Exchange'') filed with the Securities and
Exchange Commission (``Commission'' or ``SEC'') 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.
\3\ See Letter from Michael Pierson, Director, Regulatory
Policy, PCX to Michael Walinskas, Deputy Associate Director,
Division of Market Regulation, Commission, dated April 22, 1999
(``Amendment No. 1''). Amendment No. 1 made numerous technical and
descriptive changes to the filing.
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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 establish a Competing Specialist
Program on the Exchange. The proposal includes specific procedures for
Competing Specialists, including procedures for registration,
withdrawal and participation in the Competing Specialist Program.
Proposed new
[[Page 23371]]
language is italicized: proposed deletions are in brackets.\4\
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\4\ On August 21, 1998, the Exchange filed an earlier version of
this proposal with the Commission. See File No. SR-PCX-98-40. Since
that time, the Exchange modified the original proposal in several
respects and accordingly, the Exchange has determined to withdraw
SR-PCX-98-40 and refile it as modified.
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* * * * *
para.3999 Priority of Bids and Offers
Rule 5.8(c)(1). 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 stock or principal
amount of bonds specified in the bid or offer irrespective of the
number of shares of stock or principal amount of bonds specified in
such bid or offer. Specialist bids and offers must always yield to
agency orders being represented at the same price, unless otherwise
provided in Exchange Rules.
A member having priority on the floor with a bid or offer may not
increase the size of his bid or offer if objection is made by another
member. By placing his order with the specialist he may maintain his
priority, but in an amount no greater than originally bid for or
offered by him on the Floor. Orders so placed may be accepted as and
retain the status of open orders if so designated at the time of
placement but shall not gain priority over orders existing in the
Consolidated Limit Order book [specialist's book] at the time the
member secured the Floor with his original bid or offer.
Priority Among Specialists
Rule 5.8(c)(2) If two or more specialists are quoting at the NBBO
and there are no agency orders being represented at the same price, the
earliest specialist bid or offer at that price will have time priority
and will be eligible for an execution first up to its specified size.
When no specialists are quoting at the NBBO, a specialist who is
representing an order may execute that order in the same security at
the NBBO or better.
Commentary
.01--No change.
.02 The term ``NBBO,'' as used in Rule 5.8(c), refers to the
national best bid or offer made by an Intermarket Trading System (ITS)
participant.
.03 Temporary Rule Applicable to Securities Traded on a Competing
Specialist Basis. The Exchange intends to reprogram its P/COAST system
to assure that incoming orders will execute first against any matching
agency orders in the book and then against any specialist interest at
the NBBO. Until that systems change has been effected, Exchange
specialists will be required to manually intervene with orders in their
custody to assure that quotes for a contra specalist's proprietary
account with time priority at the NBBO will be honored. If a specialist
receives an order and is aware that another specialist is disseminating
a quote for his own account at the NBBO, the specialist receiving the
order must provide the other specialist with an execution, up to the
specified size. A specialist whose time priority has been violated may
demand an execution, up to the quoted size, but must make that demand
within two minutes after the trade-through has occurred. Otherwise, the
specialist's right to an execution will be deemed to have been waived.
* * * * *
P/COAST
para. 4153 Pacific Computerized Order Access sysTem
Rule 5.25(a). P/COAST, a securities . . . [No change to remainder of
this paragraph]
Member organizations wishing to participate in P/COAST may do so by
entering, through direct connections between member firms and the
Exchange or through a floor member on the Exchange floor, market and
limit orders up to the maximum number of shares in securities traded
under P/COAST as shall be fixed by the Exchange from time to time. The
Exchange routes orders to a specialist in one city or the other based
on arrangements that the specialists have previously made with firms
that send orders to the Exchange. For orders for which neither
specialist has made specific arrangements with the firm sending the
order, the Exchange will generally assure that the orders are
transmitted to the two specialists on an alternating basis (e.g., the
first order goes to Specialist A, the next order to Specialist B, the
next to Specialist A, etc.) Specialists who accept orders pursuant to
these routing procedures are obligated to represent those orders
pursuant to Rule 5.29(f).
* * * * *
Rule 5.25(h). Future Modification of P/COAST. The Exchange intends
to reprogram P/COAST to assure that incoming orders will execute first
against any matching agency orders with priority and then against any
specialist interest with priority. Unfilled portions of such orders
will default to the specialist who receives them according to
previously-established routing procedures. P/COAST will continue to
designate orders for representation by the specialist who has been
specified to represent them according to pre-defined routing parameters
(such as because the order-sending firm designated the specialist),
even if another specialist has priority under Rule 5.8(c). Once P/COAST
receives a market or marketable limit order, if another specialist in
that security has a bid or offer with priority at the NBBO, the system
will ``lock in'' the execution match so that the contra specialist will
be guaranteed an execution, unless the receiving specialist executes
the order at a price superior to the NBBO. If the receiving specialist
moves the order into his or her manual-ex window, then the other
specialist in the issue will receive a 30-second ``shadow'' message of
the order on their manual-ex windows if they either have a matching
limit order or proprietary quote with priority at the NBBO. The contra
specialists can interact with the receiving specialist's order by
seeking an execution either by sending an electronic order or calling
the specialist and vocalizing a bid or offer. For example, assume that
there are five PCX specialists (A, B, C, D and E) each bidding $20 for
500 shares for their own accounts. The specialists' quotes have time
priority in the following order: A, B, C, D, E. There are no agency
orders to buy at 20 on the PCX, and 20 is the national best bid. E's
customers sends a market order to the PCX to sell 5,000 shares. The
order will be represented by E. The order will be displayed for up to
15 seconds on E's auto-ex window. E may execute the entire order at 20-
1/16. However, the system will lock in A's, B's, C's, D's and E's bids,
so that if any trades at $20 occur on the PCX, they will be executed in
time priority order. If E moves the order into the manual-ex window,
then A, B, C and D will receive a 30-second shadow message of the
order. Their outstanding bids remain locked in, unless updated so that
they no longer match with the original order. However, A, B, C and D
can improve the price or size of their proprietary quotes, and these
will become locked in, as long as the original order remains in E's
manual-ex window. To change the example, if A were bidding $20 for
5,000 shares (with priority, and B, C and D were bidding $19-7/8), E
can keep the order by filing it at 20-1/16; otherwise, if the order is
filled at $20, A can fill the entire order. If E moves the order into
his manual-ex
[[Page 23372]]
window, A will receive a shadow message (but B, C and D will not).
* * * * *
para. 4271 Suspend Trading
Rule 5.31(b)(1)--No change.
(i)--No change.
(ii) to all other specialists trading the security [the specialist
on the other Floor] who also shall suspend trading,
(iii)-(iv)--No change.
Rule 5.31(b)(2)--No change.
(i)--No change.
(ii) to all other specialists trading the security [the specialist
on the other Floor] who also shall suspend trading,
(iii)-(iv)--No change.
Commentary
.01 Competing Specialist in an issue may not suspend trading
pursuant to this rule. All suspensions of trading must be coordinated
through a regular Specialist
* * * * *
para. 4319 Procedures for the Competing Specialist Program
Rule 5.35(a) The following are procedures for the Competing
Specialist Program.
(1) Only Registered Specialists may act as Competing Specialists.
For purposes of this Rule, a ``regular Specialist'' is a Registered
Specialist who is not a Competing Specialist.
(2) Applications for Registration as a Competing Specialist must be
directed to the Equity Floor Trading Committee (``EFTC'') in writing
and must list in order of preference the issue(s) in which the
applicant intends to compete. The EFTC will consider the following
factors in reviewing an application:
(A) financial capability;
(B) adequacy of staffing on the Floor;
(C) current recent performance evaluations of the applicant;
(D) whether the allocation will result in increased competition in
the issue and/or increased order flow to the Exchange; and
(E) objections, if any, of the regular Specialists in the issue as
to whether the issue should be traded on a Competing specialist basis.
(3) All applicants must be registered as members with the Exchange
and must meet the net capital requirements of SEC Rule 15c3-1 and the
capital requirements set forth in Rule 2.2(b) of the Rules of the
Exchange, and must conform to all other performance requirements and
standards set forth in the Rules of the Exchange. All applicants who
control, are controlled by, or are under common control with another
person engaged in a securities or related business must have and
maintain appropriate information barriers, pursuant to Rule 4.20, as
approved by a self-regulatory organization. A Competing Specialist will
be subject to all the rules and policies applicable to a regular
Specialist, unless otherwise indicated.
(4) All applicant organizations, existing or newly created, must
satisfy the Equity Floor Trading Committee that they have sufficient
staffing to enable them to fulfill the functions of a specialist in all
of the issues in which the applicant will be registered as a Competing
Specialist.
(5) Order flow not specifically designated for a Competing
Specialist must be routed to a regular Specialist. However, a firm that
is affiliated with a Competing Specialist in an issue must designate
all PCX order flow to that Competing Specialist in that issue.
(6) In a competitive situation, if the Competing Specialist
organization that received approval to compete desires to terminate the
competition by requesting that it be relieved of the stock that is the
subject of the competition, it must so notify the EFTC at least three
(3) business days prior to the desired effective date of such
withdrawal, except in those situations when such notice is not
practicable.
(7) Any Competing Specialist that withdraws its registration in an
issue will be barred from applying to compete in that same issue for a
period of ninety (90) days following the effective date of withdrawal.
(8) Notwithstanding the existence of Competing Specialist
situations, there is only one Exchange market in a security subject to
competition. Competitors must cooperate with the regular Specialists
regarding openings and reopenings to ensure that they are unitary.
(9) All limit orders not immediately executable that are sent a
Competing Specialist must be entered directly into the Consolidated
Limit Order Book and be executed according to the Exchange's rules on
time priority.
(10) Competing Specialists in an issue may not suspend trading
pursuant to Rule 5.31(b)(1). All suspensions of trading made must be
coordinated through a regular Specialist.
(11) The registration of any Competing Specialist may be suspended
or terminated by the EFTC upon a determination of any substantial or
continued failure by such Competing Specialist to engage in dealing in
accordance with the Constitution and Rules of the Exchange.
(12) The Exchange will establish an effective date for competition
to commence. Since the Exchange cannot know what the impact of
competition will be on its marketplace, it will limit competition
during the initial phase as follows:
(A) Any Registered Specialist may apply to become a Competing
Specialist in a number of issues, not to exceed ten, that has been
previously established for the program by the EFTC and the Board of
Governors.
(B) The EFTC and the Board of Governors will determine the total
number of Competing Specialists permitted on the Exchange.
(C) The Exchange will conduct a quarterly review of each Competing
Specialist on the Exchange. In conducting such reviews, the Exchange
may consider, among other things, the factors set forth in subsection
(2), above.
(13) Once the program has operated for one year, the EFTC will
evaluate it and make a recommendation to the Board of Governors as to
whether to continue the program or to modify its terms.
Commentary
.01 If a particular Specialist is not specified by the P/COAST
order routing parameters for the receipt of an order, the order must be
directed to a regular Specialist. However, if a routing firm is
affiliated with a Competing Specialist, that firm may not route orders
to another specialist, but must route them to that member firms's
affiliated specialist, thereby preventing member firms affiliated with
a specialist from routing non-profitable orders to another specialist
when market conditions are unfavorable.
.02 All limit orders must be represented and executed in
accordance with the rules on time priority on the Exchange. Incoming
orders are first executed against any contra-side limit orders on the
Exchange. All market and marketable limit orders are exposed to the
Specialist for possible price improvement before execution. Specialists
may execute their designated order flow unless there is contra-side
limit order eligible for executive on the Exchange or another
Specialist has a bid or offer with time priority at the NBBO.
* * * * *
[para.4319 Securities Traded on a Competing Specialist Basis
RULE 5.35(a). The Board of Governors may from time to time
designate securities to be traded on a competing specialist basis.
Securities traded on a competing specialist basis will be traded in
accordance with the provisions of Rule 5.27 through 5.38.]
[[Page 23373]]
[para.4321 Competing Specialist--Definition and Procedure for
Appointment
RULE 5.35(b). A competing specialist is a member who is registered
with the Exchange for the purpose of making transactions as dealer-
specialist on the floor of the Exchange, in securities traded on a
competing specialist basis, in accordance with the Rules of the
Exchange. Appointment as a competing specialist shall be made by the
Floor Trading Committee pursuant to an application which shall include
such information as is required by the Floor Trading Committee. In
making such appointments the Floor Trading Committee shall satisfy
itself as to the applicant's ability to perform the duties of a
competing specialist and the applicant's financial resources. The Floor
Trading Committee shall not appoint any person as a competing
specialist in a security if such person is associated with a member
firm with which the book broker in such security is also associated.
The registration of any person as a competing specialist may be
suspended or terminated by the Floor Trading Committee upon a
determination of any substantial or continued failure by such competing
specialist to engage in dealings in accordance with the Constitution
and Rules of the Exchange.]
[para.4323 Book Broker--Definition and Procedure for Appointment
RULE 5.35(c). A book broker is a member of the Exchange who has
been selected by the Floor Trading Committee to operate the book of
limit orders and to execute odd lot orders and COMEX routed orders in
securities traded on the Exchange on a competing specialist basis. For
each security traded on the Exchange on a competing specialist basis,
the Floor Trading Committee may appoint one book broker on the Los
Angeles floor of the Exchange and one book broker on the San Francisco
floor of the Exchange. Application for appointment as a book broker
shall be made on such form, and shall include such information, as is
prescribed by the Floor Trading Committee. The appointment of any
person as book broker may be suspended or terminated by the Floor
Trading Committee upon a determination that, in its judgment, the
interest of a fair and orderly market are best served by such action.]
[para.4325 Responsibilty of Book Broker
RULE 5.35(d). A book broker shall accept any limited order from
members for placement in the book, including limited orders placed by
members on a principal basis. All principal orders must be so marked.
Public orders in the book (agency orders) shall at all times have
priority and precedence over principal orders in the book at the same
price of at inferior prices.]
[para.4327 Book Broker Prohibited from Engaging in Principal
Transactions
RULE 5.35(e).
(1). A book broker is prohibited from executing transactions for
his own account or for the account of his firm. The prohibition of this
Rule 5.35(e), however, shall not apply to odd lot transactions effected
to fill odd lot orders, or to round lot transactions to decrease a
position acquired as a result of the book broker's odd lot transactions
or error account transactions.
(2). When a book broker acting as odd lot dealer determines to sell
a round lot, he shall give the order a competing specialist or another
member not associated with him for execution, if the transaction would
establish the price for the execution of odd lot orders the book broker
holds and make the book broker a buyer on balance.
(3). When a book broker acting as odd lot dealer determines to buy
a round lot, he shall give the order to a competing specialist or
another member not associated with him for execution, if the
transaction would establish the price for the execution of odd lot
orders the book broker holds and made the book broker a seller on
balance.
(4). If unusual circumstances exist, such as unusual activity in a
stock with a corresponding increase in the number of orders being
received and a need for effecting an unusual number of off-setting
round lot transactions, the off-setting orders may, with the approval
of a Floor official, despite the provisions of subparagraphs (2) and
(3) above, be handled by the book broker acting as odd lot dealer. A
record shall be kept of the circumstances.
(5). The approval of a Floor Official is required for transactions
described in paragraphs (2) and (3) when a competing specialist acts as
a principal on the opposite side of the transaction and such
transaction is at a price more than one-eight point away from the
previous sale.
(6). A book broker acting as odd lot dealer may not, without the
approval of a Floor Official, effect a transaction or cause a
transaction to be effected for the account of the book broker which
would effect any odd lot stop order held by such book broker.]
[para.4329 Maintaining Fair, Orderly, and Competitive Market
RULE 5.35(f). At the request of a floor broker who holds an order
for purchase or sale of a security trading on a competing specialist
basis, or whenever in the book broker's opinion the interests of a fair
and orderly and competitive market are best served by such action, a
book broker shall call upon those competing specialists appointed to
act as such in that security or as many of such competing specialists
as deemed necessary by the book broker to make bids and/or offers or to
narrow spreads in existing bids and offers or to take other appropriate
action, so as to contribute to meeting the standards set forth in Rule
5.35(g). Whenever called upon by a book broker in accordance with Rule
5.35(f), a competing specialist shall take reasonable action under the
circumstances to respond to the book broker's call by providing a
market or improving upon the market. To the extent practicable, and in
a form prescribed by the Exchange, the book broker will shall keep a
record of the responses of competing specialists that provide or
improve upon a market commensurate with these standards. If
satisfactory responses are not forthcoming promptly, the book broker
shall make a record of this fact. Copies of all records kept in
accordance with this Section shall be forwarded to the Floor Trading
Committee and the Division of Member Organizations. In addition, in the
interests of maintaining a fair and orderly and competitive market, a
request for a quotation may be made at any time of any competing
specialist by Exchange personnel for the purposes of dissemination over
any quote reporting system.
Commentary
.01 Maximum Spreads.
Without limiting the standards expressed in Rules 5.35(f) and
5.35(g) a competing specialist, in the course of maintaining a fair and
orderly market, is expected to conform to the following specific
standards relating to maximum spreads in the following securities.
(a) BankAmerica Corporation Common Stock-
Bidding and/or offering so as to create differences of no more than
1/2 of $1; provided that, the book broker with the consent of a Floor
Official, or the Exchange, because of unusual market conditions, may
determine to increase or decrease the maximum spreads specified above.
The stated maximum spread is not intended as a limit on the book
broker's
[[Page 23374]]
power to call for narrower spreads between bids and offers. Depending
upon market conditions, a book broker may well call for bids and/or
offers that provide narrower spreads than those stated, and competing
specialists may be considered to be in derogation of their
responsibilities under Rules 5.35(f) and 5.35(g) if they do not make
bids and/or offers that provide narrower spreads.]
[para. 4331 Responsibility of Competing Specialist
RULE 5.35(g). Transactions of a competing specialist should
constitute a course of dealings reasonably calculated to contribute to
the maintenance of a fair and orderly market, and no competing
specialist should enter into transactions or make bids or offers that
are inconsistent with such a course of dealings. With respect to
securities in which he is registered as a competing specialist, a
competing specialist shall have a continuous obligation to engage, to a
reasonable degree under the existing circumstances, in dealings for his
own account when there exists, or it is reasonably anticipated that
there will exist, a lack of price continuity, a temporary disparity
between the supply of and the demand for a particular security, or a
temporary distortion of the price relationships between the Exchange
and other markets.]
[para. 4333 Acting as Competing Specialist and Floor Broker in
Same Day
RULE 5.35(h). A competing specialist is prohibited from acting as a
floor broker and a competing specialist on the same trading day in any
security in which the competing specialist is so registered.]
[para. 4335 Applicability of Other Exchange Rules
RULE 5.35(i). The following Rules of the Exchange relating to
Dealings upon the Exchange shall apply to book brokers: Rule 1.1, Rule
4.2, 4.3, Rule 5.1-5.16, 5.20-5.23, 5.27-5.38 (except 5.30(e), 5.32(a),
5.32(b), 5.33(g), and 5.34(b)) which shall not apply to book brokers,
and Rule 4.4-4.13, and Rule 5.18, 5.25. The following Rules of the
Exchange relating to Dealings Upon the Exchange shall apply to
competing specialists: Rules 1.1; 4.2-4.13; 5.1-5.9; 5.11-5.16; 5.18;
5.20-5.23; 5.25; 5.27; 5.28(b), (c), (d), (f); 5.29(e); 5.30(a), (d);
5.33(a), (d), (e), (f); 5.35(a); 5.36; and 5.37. All other Exchange
Rules shall be applicable to transactions on the Exchange in securities
traded on a competing specialist basis and to the activities of book
brokers and competing specialists unless the context clearly indicates
otherwise.]
* * * * *
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
a. Current Practices
The Exchange currently operates two equity trading floors, one in
Los Angeles and one in San Francisco. For most of the equity securities
traded on the Exchange, there are two Registered Specialists \5\
continuously making two-sided markets. An order sent to the Exchange is
routed to a specialist in one city or the other based on arrangements
that the specialist has previously made. If no specific arrangements
have been made, the Exchange will generally assure that orders are
transmitted to the two specialists on an alternating bases (e.g., the
first order goes to Specialist A, the next order goes to Specialist B,
the next to Specialist A, and so on).
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\5\ For purposes of this rule filing, a ``Registered
Specialist'' is a PCX member who has been appointed and registered
pursuant to Rule 5.27 to act as a Specialist on the Exchange. A
``Competing Specialist'' is a Registered Specialist who has been
approved by the Equity Floor Trading Committee to trade securities
on a Competing Specialist basis pursuant to proposed PCX Rule 5.35.
A ``Regular Specialist'' is a Registered Specialist who is not a
Competing Specialist.
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The Exchange disseminates a single two-sided quote on the
Consolidated Quote System (``CQS'') in each security traded on the PCX,
based on the combined best bids and offers from each city. If the Los
Angeles specialist is disseminating a bid of $30 for 5,000 shares of
XYZ and the San Francisco specialist is disseminating a bid of $30 for
3,000 shares of XYZ, then the Exchange will disseminate a combined bid
of $30 for 8,000 shares of XYZ.
The Exchange developed its Consolidated Limit Order Book (``CLOB'')
in August 1998 for orders that are entered into the Exchange's P/COAST
trading system.\6\ Incoming orders other than market and marketable
limit orders are maintained in the CLOB and are represented by the
specialist designated to represent them. Incoming market and marketable
limit orders are executed against orders in the CLOB based on price and
time priority. Before any orders are executed, P/COAST will display
them to the specialist designated to receive the order for up to 15
seconds to provide an opportunity for price improvement.\7\ If a
specialist manually executes a limit order that does not have priority,
P/COAST will generate a message that a priority violation has been
committed so that corrective action may be taken. In addition, the
Exchange's Surveillance Department will receive a report of the
priority violation.
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\6\ See generally File No. SR-PCX-99-06. The Commission notes
that the proposal to implement the CLOB is still pending with the
Commission.
P/COAST, the ``Pacific Computerized Order Access SysTem,'' is
the Exchange's communication, order routing and execution system for
equity securities. See PCX Rule 5.25(a)-(f).
\7\ When P/COAST displays an order for possible price
improvement, the order will appear on the recipient specialist's
automatic execution window. If another specialist in the issue is
simultaneously representing an order in the CLOB that is priced at
the national best bid or offer made by an Intermarket Trading System
(``ITS'') participant, or ``NBBO,'' that specialist will see a
``shadow'' record of the order being represented by the other
specialist and can interact with that order by calling the other
specialist and vocalizing a bid or offer.
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b. Proposed Competing Specialist Program
The purpose of the proposed rule change is to expand the Exchange's
two-specialist system for equity securities by establishing a Competing
Specialist Program on the Exchange. Under the proposal, Competing
Specialists will be permitted to compete with Regular Specialists on
the floor of the Exchange. Like Regular Specialists, Competing
Specialists in a security will be required to make a two-sided market
and will be subject to the rights and responsibilities of Regular
Specialist, subject to certain exceptions discussed below.
The Exchange's P/COAST system will electronically route each
incoming order for an equity security to a Regular Specialist or a
Competing Specialist in that security based on instructions of the firm
submitting the order. As specified in the Exchange's proposed amendment
to Rule 5.25(a), specialists who accept orders via P/COAST will be
obligated to represent those orders pursuant to PCX Rule 5.29(f), which
states that a specialist is repsonsible for the execution of all orders
it has accepted.
[[Page 23375]]
Specialists on the Exchange will be required to execute all orders
received--whether via the P/COAST system or from a floor broker--in
accordance with the Exchange's rules on priority. Accordingly, as
discussed below, a specialist cannot execute incoming market and
marketable limit orders against its own account until after all limit
orders priced at or better than the NBBO have been executed, and all
specialist quotes with time priority at the NBBO have been filled.
In a few respects, the Regular Specialists in a security will have
rights and obligations not shared by Competing Specialists. Regular
Specailists will continue to be responsible for coordinating openings
and reopenings to ensure they are unitary. Also, Computing Specialists
who wish to use the ITS to send preopening indications of interest to
the primary market in a security must send those preopening indications
through a Regular Specialist (but during trading hours Competing
Specialists will be able to send outbound ITS commitments and execute
incoming ITS commitments independently and without the need for a
Regular Specialist to clear the activity).
Like Regular Specialists, Competing Specialists will be able to
enter two-sided quotes into the P/COAST system. The Exchange will
continue to disseminate a single CQS quote.
The Exchange believes that having a Competing Specialist Program
will result in greater competition, tighter bid-ask spreads, and
greater depth and liquidity on the PCX. As a result, the Exchange
expects to improve its competitive posture in the industry and expects
that members' customers will send more order flow to the PCX for
execution than they currently send.
c. Priority Rule Changes
The Exchange is also proposing to modify its Priority Rule for
equity securities, Rule 5.8(c). The existing rule, which will be
renumbered as Rule 5.8(c)(1), will be amended to provide that
specialist bids or offers must always yield to agency orders being
represented at the same price, unless otherwise provided for by rule.
The exceptions to this general principle would include odd lot oders,
orders that provide for settlement other than in three days (non-
regular way) and conditional orders (such as all-or-none orders, stop
orders and market-on-close orders).
Proposed Rule 5.8(c)(2) will provide that if two or more
specialists are quoting at the NBBO and there are no agency orders
being represented at the same price, the earliest bid or offer at that
price will have time priority and will be eligible for execution first
up to its specified size. It will further provide that when no
specialists are quoting at the NBBO, the specialist who is representing
an order may execute the order in the same security at the NBBO or
better. The Exchange is also proposing to add a new Commentary .02 to
the rule, which will provide that the term ``NBBO,'' as used in Rule
5,8(c), will refer to the national best bid or offer made by an ITS
participant.
The provisions of Rules 5.8(c)(1) and 5.8(c)(2) will apply to
trading in all securities in which there is more than one specialist on
the PCX. This incudes all securities in which two Regular Specialists
make a market, whether or not one or more Competing Specialist trades
the security.\8\
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\8\ For example, assume that the NBBO is 20 bid to 20\1/8\
offered, and Specialist A is bidding 19\3/4\, while Specialist B is
bidding 19\1/2\. A market order to sell may be directed to
specialist B for execution, even though Specialist A has a better
bid, because neither specialist is bidding at the NBBO. Under the
Competing Specialist Program, Specialist B would execute the order
at 20 (the national best bid) or better. If Specialist A has been
bidding 20 (the national best bid), Specialist A would have had
priority to execute the order, even though it was directed to
Specialist B.
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If a particular specialist is not specified within the P/COAST
routing parameters for the receipt of an order (such as because the
specialist has not made prior arrangements with an order-sending firm),
the order will be directed to a Regular Specialist. However, if a
routing firm is affiliated with a Competing Specialist, that firm may
not route orders to another specialist, but must route them to the
member firm's affiliated specialist, thereby preventing member firms
affiliated with a specialist from routing non-profitable orders to
another specialist when market conditions are unfavorable.\9\
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\9\ As noted above, however, Rule 5.8(c)(2) will provide that if
another Specialist is quoting at the NBBO and clearly has
established priority on the PCX floors, then that Specialist will
have priority to fill the order despite the fact that the order was
designated for the affiliated Competing Specialist.
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Under the Competing Specialist Program, all limit orders are
required to be represented and executed according to the rules on time
priority on the Exchange.\10\ All market and marketable limit orders
will be exposed to the specialist representing the order for possible
price improvement before execution. Specialists may execute their
designated order flow unless there is a matching limit order with
priority being represented on the Exchange or another specialist has a
superior quote (with time priority) at the NBBO.
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\10\ Time priority is required to be maintained among all orders
received by the PCX.
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d. Order Handling
(1) Routing Mechanism
The Exchange proposes to add new Rule 5.25(h) to reflect that the
Exchange intends to reprogram P/COAST to assure that incoming orders
will execute first against any matching agency orders with priority and
then against any specialist interest with priority. Unfilled portions
of such orders will default to the specialist who receives them
according to previously established routing procedures.
P/COAST will continue to designate orders for representation by the
specialist who has been specified to represent them according to pre-
defined routing parameters (such as because the order-sending firm
designated the specialist), even if another specialist has priority
under Rule 5.8(c)(2). Once
P/COAST receives a market or marketable limit order, if another
specialist in that security has a bid or offer with priority at the
NBBO, the system will ``lock in'' the execution match so that the
contra specialist will be guaranteed an execution unless the receiving
specialist executes the order at a price superior to the NBBO. If the
receiving specialist moves the order into his or her manual-ex window,
then the other specialists in the issue will receive a 30-second
``shadow'' message of the order on their manual-ex windows if they
either have a matching limit order or proprietary quote with priority
at the NBBO. The contra specialists can interact with the receiving
specialist's order by seeking an execution either by sending an
electronic order or calling the specialist and vocalizing a bid or
offer.
For example, assume that there are five PCX specialists (A, B, C, D
and E) each bidding $20 for 500 shares for their own accounts. The
specialists' quotes have time priority in the following order: A, B, C,
D, E. There are no agency orders to buy at 20 on the PCX, and 20 is the
national best bid. E's customer sends a market order to the PCX to sell
5,000 shares. The order will be represented by E. The order will be
displayed for up to 15 seconds on E's auto-ex window. E may execute the
entire order if E improves the price to 20\1/16\. However, the system
will lock in A's, B's, C's, D's and E's bids, so that if any trades at
$20 occur on the PCX, they will be executed in time priority order.
If E moves the order into the manual-ex window, then A, B, C and D
will receive a 30-second shadow message of the order. Their outstanding
bids remain locked in, unless updated so that they
[[Page 23376]]
no longer match with the original order. However, A, B, C and D can
improve the price or size of their proprietary quotes, and these
improvements in price or size will become locked in, as long as the
original order remains in E's manual-ex window.
To change the example, if A were bidding $20 for 5,000 shares (with
priority, and B, C and D were bidding $19\7/8\), E can keep the order
by filling it at 20\1/16\; otherwise, if the order is filled at $20, a
can fill the entire order. If E moves the order into his manual-ex
window, A will receive a shadow message (but B, C and D will not).
The Exchange believes that this proposed modification to P/COAST
will better assure that incoming orders will be executed against PCX
bids and offers in priority sequence because specialists bids and
offers at the NBBO will be ``locked in'' systemically. The proposal
will encourage quote competition among specialists. If specialists are
quoting at the NBBO with time priority, they will be eligible to trade
with any incoming order, regardless of who is receiving it. The
proposal will encourage price improvement because the Competing
Specialists will be required to quote a letter prices in order to
retain the order flow received by the Exchange.
The Exchange has considered changing P/COAST to route orders to the
specialist with priority at the NBBO, but has concluded that splitting
orders up into multiple partial orders or routing orders to various
specialists other than the receiving specialist would not be in the
customers' best interest. The Exchange further believes that
implementing such changes would place the Exchange at a competitive
disadvantage. The Exchange represents that its customers are placing a
higher premium on turnaround time for executions of their orders. With
the significant growth of the Exchange's base of on-line customers, the
PCX anticipates that speed of execution will continue to be a high
priority for PCX customers. The PCX contends that it is imperative that
the Exchange devise an order handling method that facilities quick
executions, avoids unnecessary errors from occurring, and does not
place PCX specialists at a competitive disadvantage to other exchanges
and alternative trading systems.
(2) Interim Methodology
The Exchange proposes to add Commentary .03 to Rule 5.8(c), to
reflect that until the Exchange has reprogrammed P/COAST to implement
order routing for the competing specialist program, as described in
proposed Rule 5.25(h), specialists will need to rely on manual
procedures to assure that any quotes for a specialist's proprietary
account with time priority at the NBBO will be honored. In particular,
if a specialist receives an order an is aware that another specialist
is disseminating a quote for his own account at the NBBO, the
specialist receiving the order will be required to provide the other
specialist with an execution, up to the specified size.\11\
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\11\ For example, if Specialist A is bidding $75 (the nations
best bid, with price and time priority) for 100 shares for his own
account, and Specialist B receives a market order to sell 5,000
shares, Specialist B will be required to execute 100 shares of that
order for Specialist A's account by entering Specialist A's post
number as the contra side of the trade. Specialist A will then
receive a report of the executed trade through P/COAST.
---------------------------------------------------------------------------
The Exchange believes that in some cases, due to system
limitations, a specialist will be unable to know, at the time of
receipt of an order, whether a contra specialist has time priority at
the same price being quoted by the order specialist. As a result, the
Exchange is proposing to adopt a new Commentary .03 to Rule 5.8(c),
stating that when two specialists are quoting for their own accounts at
the NBBO, a specialist whose time priority has been violated may demand
an execution, up to the quoted size, but must make that demand within
two minutes after thee trade-through has occurred.\12\ Otherwise, the
specialist's right to an execution will be deemed to have been
waived.\13\ Having a two-minute window will assure that members will
not request relief well after the market has moved and a reasonable
time to research a trade has passed. It will also serve to ensure that
PCX specialists trading the same issue will keep each other apprised of
bids and offers for their own accounts that they intend to invoke when
competing for the same order flow.
---------------------------------------------------------------------------
\12\ The Exchange intends to codify this provision as a
temporary rule that will expire upon the implementation of the P/
COAST changes discussed above. The Exchange anticipates that from
the time of commencement of programming, these system changes will
take approximately one year to implement.
\13\ A similar provision exists in the ITS Rules for orders
executed out of price priority (but not for orders out of time
priority at the same price). See, e.g., PCX Rule 5.21(b).
---------------------------------------------------------------------------
e. Procedures for Competing Specialist Program
The Exchange is proposing to adopt new Rule 5.35(a) for the
Competing Specialist Program.\14\ Specifically, proposed Rule
5.35(a)(1) will provide that only Registered Specialists may act as
Competing Specialist. This requirements is intended to assure that
Competing Specialists meet the same standards as Registered Specialists
as required under PCX Rule 5.27. The rule also clarifies that the term
``regular Specialists'' is a Registered Specialist who is not a
Competing Specialist.
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\14\ Most of these procedures are similar to those set forth in
the Boston Stock Exchange (``BSE'') Rules, Chapter XV, Section 18,
which were approved in Exchange Act Release No. 37045 (March 29,
1996), 61 FR 15318 (April 5, 1996).
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Proposed Rule 5.35(a)(2) states that applications for Registration
as a Competing Specialist must be directed to the Equity Floor Trading
Committee (``EFTC'') in writing and must list in order of preference
the issue(s) in which the applicant intends to compete. The EFTC will
consider the following factors in reviewing an application: (a)
financial capability; (b) adequacy of staffing on the Floor; (c)
current and recent performance evaluations of the applicant; (d)
whether the allocation will result in increased competition in the
issue and/or increased order flow to the Exchange; and (e) objections,
if any, of the Regular Specialists in the issue as to whether the issue
should be traded on a competing specialist basis.\15\
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\15\ PCX Rule 11 provides a right of appeal for members or
member organizations aggrieved by a decision of the EFTC regarding
the competing specialist program.
---------------------------------------------------------------------------
Proposed Rule 5.35(a)(3) states that all applicants must be
registered as members with the Exchange, must meet the net capital
requirements of SEC Rule 15c3-1 and the capital requirements of PCX
Rule 2.2(b), and must conform to all other performance requirements and
standards set forth in the Rules of the Exchange. All applicants who
control, are controlled by, or are under common control with another
person engaged in a securities or related business will be required to
have and maintain appropriate information barriers as approved by a
self-regulatory organization. A Competing Specialist will be subject to
to all the rules and policies applicable to a Regular Specialist,
unless otherwise indicated.
Proposed Rule 5.35(a)(4) states that all applicant organizations,
existing or newly created, must satisfy the EFTC that they have
sufficient staffing to enable them to fulfill the functions of a
specialist in all of its issues in which the applicant will be
registered as a Competing Specialist.
Proposed Rule 5.35(a)(5) states that order flow are specially
designated for a Competing Specialist must be routed to a Regular
Specialist. However, a firm that is affiliated with a Competing
Specialist in an issue must designate all PCX order flow to that
Competing Specialist in that issue. Commentary .01 to proposed Rule
5.35 explains that this
[[Page 23377]]
is designed to prevent member firms affiliated from a Competing
Specialist from routing non-profitable orders to another (unaffiliated)
specialist when market conditions are unfavorable.
Proposed Rule 5.35(a)(6) states that if the Competing Specialist
organization that received approval to compete desires to terminate the
competition by requesting that it be relieved of the stock in which it
is competing, it must so notify the EFTC as least three business days
prior to the desired effective date of such withdrawal, except when
such notice is not practicable.
Proposed Rule 5.35(a)(7) states that any Competing Specialist that
withdraws its registration in an issue will be barred from applying to
compete in that same issue for a period of 90 days following the
effective date of withdrawal.
Proposed Rule 5.35(a)(8) states that Competing Specialists must
cooperate with the Regular Specialists regarding openings and
reopenings to ensure that they are unitary. In this regard, the
procedures note that, notwithstanding the existence of Competing
Specialist situations, there is only one Exchange market in a security
subject to competition, meaning that the Exchange will disseminate a
single quote onto the CQS.
Proposed Rule 5.35(a)(9) states that all limit orders not
immediately executable that are sent to a Competing Specialist must be
entered directly into the CLOB and be executed according to the
Exchange's rules on time priority. Commentary .02 to proposed Rule 5.35
further states that incoming orders are first executed against any
matching limit orders on the Exchange, that all market and marketable
limit orders are exposed to the specialist for possible price
improvement before execution, and that specialists may execute their
designated order flow unless there is a matching limit order eligible
for execution on the Exchange or another specialist has a bid or offer
with time priority at the NBBO.
Proposed Rule 5.35(a)(10) states that all suspensions of trading
must be coordinated through a Regular Specialist.\16\
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\16\ Trading halts are discussed in more detail infra.
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Proposed Rule 5.35(a)(11) states that the registration of any
Competing Specialist may be suspended or terminated by the EFTC upon a
determination of any substantial or continued failure by that Competing
Specialist to engage in dealing in accordance with the Constitution and
Rules of the Exchange.
Proposed Rule 5.35(a)(12) states that the Exchange will establish
an effective date for competition to commence, but since the Exchange
cannot know what the impact of competition will be on its marketplace,
it will limit competition during the initial phase as follows: (a) any
Registered Specialist may apply to become a Competing Specialist in a
number of issues, not to exceed ten, that has been previously
established for the program by the EFTC and the Board of Governors: (b)
the EFTC and the Board of Governors will determine the total number of
Competing Specialists permitted on the Exchange; and (c) the Exchange
will conduct a quarterly review of each Competing Specialist on the
Exchange, and in conducting such reviews, the Exchange may consider,
among other things, the five factors the EFTC considers when reviewing
an application for registration under the Competing Specialist
Program.\17\
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\17\ The purpose of these reviews is to assure that the new
program will be operating appropriately, particularly in its early
phase, so that any problems can be identified and corrected. The
Exchange anticipates that its staff will provide the EFTC with
objective data for the EFTC's review and that floor members and
others will have an opportunity to raise their concerns, if any, in
the context of these reviews.
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Proposed Rule 5.35(a)(13) states that once the program has operated
for one year, the EFTC will evaluate it and made a recommendation to
the Board of Governors as to whether to continue the program or to
modify its terms.
f. Trading Halts and Circuit Breakers
PCX Rule 5.31(b)(1) currently provides, in part, that when the flow
of orders in a security traded on both Floors does not allow either
specialist to maintain an orderly market in such security, either
specialist may suspend trading, and the specialist who suspends trading
must notify the specialist on the other Floor who shall also suspend
trading. Rule 5.31(b)(2) contains similar provisions for securities
traded only on one Floor. The Exchange is proposing to amend both rules
to require notification of all specialists trading the security. The
Exchange also is proposing to add a Commentary to this Rule stating
that Competing Specialists in an issue may not suspend trading pursuant
to this Rule, and further that all suspensions of trading must be
coordinated through a Regular Specialist. The Exchange further proposes
to add a similar provision to the Procedures for the Competing
Specialist Program, as new Rule 5.35(a)(11). Finally, the Exchange is
also proposing to extend its rules on circuit breakers, previously
approved by the Commission,\18\ to Competing Specialists.
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\18\ See PCX Rule 4.22; Securities Exchange Act Release No.
40418 (September 9, 1998), 63 FR 49624 (September 16, 1998).
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g. Elimination of Current Rules on Competing Specialists
In 1976, the Exchange adopted its existing rules on Competing
Specialists (PCX Rules 5.35(a)--(i)). The Exchange is proposing to
eliminate those rules and replace them with provisions set forth in
this proposal, which the Exchange believes to be consistent, in
general, with the rules of the BSE on Competing Specialists.\19\ The
Exchange has not applied its existing rules on Competing Specialists
since approximately 1977.
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\19\ See Chapter XV, Section 18, of the BSE Rules; Securities
Exchange Act Release No. 37045, note 14, supra.
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(2) Basis
The proposed rule change is consistent with Section 6(b) of the
Act,\20\ in general, and furthers the objectives of Section
6(b)(5),\21\ in particular, in that it is designed to promote just and
equitable principles of trade, to reflect the mechanism of a free and
open market and a national market system, and to protect investors and
the public interest. Specifically, the Exchange believes that the
proposal, when implemented, will result in greater competition, tighter
bid-ask spreads, and greater depth and liquidity on the PCX, and
thereby, will promote those three objectives. The Exchange further
believes that the proposed rule change and will serve to permit the
Exchange to compete more effectively for order flow, and thereby will
serve to promote greater industry-wide competition, and help to perfect
the mechanism of a free and open market and a national market system.
---------------------------------------------------------------------------
\20\ 15 U.S.C. 78f(b)
\21\ 15 U.S.C. 78f(b)(5)
---------------------------------------------------------------------------
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments on the proposed rule change were neither solicited
nor received.
[[Page 23378]]
III. Date of Effectiveness of the Proposed Rule Change and Timing
for Commission Action
Within 35 days of the date of 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 such 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-
0609. 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 Room, 450 Fifth Street, N.W., Washington,
D.C. 20549. Copies of such filing will also be available for inspection
and copying at the principal office of the PCX. All submissions should
refer to File No. SR-PCX-99-07 and should be submitted by June 25,
1999.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-10806 Filed 4-29-99; 8:45 am]
BILLING CODE 8010-01-M