[Federal Register Volume 64, Number 150 (Thursday, August 5, 1999)]
[Notices]
[Pages 42734-42736]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-20176]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-41668; File No. 4-208]
Intermarket Trading System; Order Approving Fourteenth Amendment
to the Restated ITS Plan Linking the Pacific Exchange's Application of
the OptiMark System to the Intermarket Trading System
July 29, 1999.
I. Introduction and Summary
Pursuant to Section 11A of the Securities Exchange Act of 1934
(``Exchange Act'' or ``Act'') \1\ and Rule aaAa3-2 thereunder,\2\ on
March 29, 1999, the Intermarket Trading System (``ITS'') submitted to
the Securities and Exchange Commission (``Commission'') an amendment
(``Fourteenth Amendment'') to the Restated ITS Plan (``Plan'') \3\ ITS
is a communications and order routing network linking eight national
securities exchanges and the electronic over-the-counter market
operated by the NASD. ITS was designed to facilitate intermarket
trading in exchange-listed equity securities based on current quotation
information emanating from the linked markets. The purpose of the
Fourteenth Amendment is to link the PCX Application of the OptiMark
system (``PCX Application'') to ITS.
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\1\ 15 U.S.C. 78k-1.
\2\ 17 CFR 240.11Aa3-2.
\3\ The ITS Plan is a National Market System plan approved by
the Commission pursuant to Section 11A of the Act and Rule 11Aa3-2
thereunder. See Exchange Act Release No. 19456 (January 27, 1983),
48 FR 4938 (February 3, 1999).
Participants to the Plan include the American Stock Exchange
LLC, the Boston Stock Exchange, Inc., the Chicago Board Options
Exchange, Inc., the Chicago Stock Exchange, Inc., the Cincinnati
Stock Exchange, Inc., the National Association of Securities
Dealers, Inc. (``NASD''), the New York Stock Exchange, Inc., the
Pacific Exchange, Inc. (``PCX''), and the Philadelphia Stock
Exchange, Inc.
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On April 12, 1999, the proposed plan amendment was published for
comment and made summarily effective on a temporary basis.\4\ No
comments were received on the proposal. For the reasons discussed
below, the Commission is approving the proposal on a permanent basis.
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\4\ See Exchange Act Release No. 41246 (April 2, 1999), 64 FR
17700 (April 12, 1999).
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II. Background to the Amendment
On January 26, 1999, the Commission granted the ITS participants a
temporary exemption from the ITS Plan provision requiring a Plan
amendment to reflect the PCX Application's interface with ITS.\5\ The
Commission granted this exemption to the participants, in part, because
the PCX Application was scheduled to begin operating on January 29, and
there was insufficient time to obtain authorization from each of the
authorizing bodied of the participants before the date.\6\ The PCX
Application began operating pursuant to the temporary exemption on
January 29, 1999. The exemption expired on April 2, 1999, but was
extended until publication of the notice.\7\ The Commission made the
proposed amendment summarily effective on a temporary basis not to
extend beyond August 10, 1999.\8\
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\5\ The Commission has authority under Exchange Act Rule 11Aa3-
2(f) to exempt participants in a national market system plan from
the requirements of that plan. Exchange Act Rule 11Aa3-2(f)
provides:
The Commission may exempt from the provisions of this section,
either unconditionally or on specified terms and conditions, any
self-regulatory organization, member thereof, or specified security,
if the Commission determines that such exemption is consistent with
the public interest, the protection of investors, the maintenance of
fair and orderly markets and the removal of impediments to, and
perfection of the mechanisms of, a national market system.
The Division of Market Regulation has delegated authority to
grant an exemption in this instance pursuant to 17 CFR 200.30-
3(a)(29). See Letter from Richard R. Lindsey, Director, Division of
Market Regulation, Commission, to Allan A. Bretzer, Committee
Chairman, ITS Operating Committee (``ITSOC''), dated January 27,
1999.
\6\ In general, to amend the ITS Plan, the ITS participants vote
on a particular amendment and, assuming unanimous approval, each
participant goes back to its respective authorizing body, such as
its Board of Directors or executive Committee. Following
ratification by each of the participants' authorizing bodies, the
ITSOC submits a proposed amendment to the Commission, which
publishes it for comment. An amendment to the ITS Plan is generally
not effective until approved by the Commission. On January 21, 1999,
the ITSOC unanimously voted to recommend to the participants'
authorizing bodies an amendment to the Plan that would allow the PCX
Application to link with ITS.
\7\ See Letter from Belinda Blaine, Associate Director, Division
of Market Regulation, Commission, to Allan A. Bretzer, Chairman,
ITSOC, dated April 1, 1999.
\8\ Pursuant to Exchange Act Rule 11Aa3-2(c)(4), the Commission
may summarily put into effect on a temporary basis a Plan amendment.
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III. Description
The purpose of the Fourteenth Amendment is to link the PCX
Application to ITS.\9\ The PCX Application is a facility of the PCX
that receives orders generated by the OptiMark System--an electronic
matching system that, on a periodic ``call'' basis, processes certain
qualifying expressions of trading interest (called ``profiles'').
Profiles may include those created from the published quotations
disseminated by the other participants in ITS at the commencement of
the
[[Page 42735]]
OptiMark System call reflecting the best bid and offer prices and
associated sizes (``CQS profiles'').\10\ The orders received by the PCX
Application are processed by the PCX to permit: (a) in the case of
those orders reflecting a match between non-CQS profiles, appropriate
execution on the PCX and reporting thereafter in accordance with the
applicable PCX rules; and (b) in the case of those orders reflecting a
match between an non-CQS profile and a CQS profile: (i) processing
pursuant to Section 6(a)(ii)(A), or (ii) transmission to ITS pursuant
to Section 6(a)(ii)(B) of the ITS Plan,\11\ whichever is applicable.
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\9\ The Fourteenth Amendment is identical to the amendment
approved by the ITSOC on January 21, 1999.
\10\ For further discussion of the PCX Application, see Exchange
Act Release No. 39086 (September 17, 1997), 62 FR 50036 (September
24, 1997) (order approving the PCX Application).
\11\ Section 6 of the ITS Plan describes various interfaces
between ITS and the participants.
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The Fourteenth Amendment adds subsections (33(A)) and (33(B)) to
Section 1 of the ITS Plan to define and include the terms ``PCX
Application'' and ``PCX application Module.'' The proposal also amends
existing definitions set forth in subsections (11), (23), (34(A)) and
(34(B)) to recognize the use of the PCX Application and the PCX
Application Module.
The proposed amendment adds to Section 6(a)(ii) a description of
the operation of the PCX Application and how PCX accesses other
participants' markets through ITS. The amendment also authorizes PCX to
computer-generate ITS commitments.
In addition, the proposed amendment adds Section 8(h), which sets
forth the parameters of the PCX Application's automated linkage to ITS.
This section establishes the ``PCX Application Formula'' (``Formula''),
which sets a ceiling on the volume of trade-at commitments \12\
generated by the PCX Application, relative to the total volume of
transactions resulting from the PCX Application. Specifically, the
Formula has as it numerator the number of shares computer-generated by
the PCX Application as ITS trade-at commitments that are executed in
other ITS participant markets, and as its denominator the same shares
as in the numerator plus all shares executed on the PCX received from
the PCX Application and reported to the Consolidated Tape Association.
The Formula results in the PCX Application Percentage. Section (h)
provides that PCX may computer-generate trade-at commitments if the PCX
Application Percentage does not exceed the agreed upon ceiling as
calculated over rolling calendar quarters, as defined in the Plan.\13\
The ceiling starts at 15% and will be reduced to 10% when the NYSE and
PCX jointly request that the percentage be reduced. Section (h)
provides that if the PCX Application Percentage exceeds the ceiling,
then PCX must cease computer-generating trade-at commitments for a
three-month period. During the first 24 calendar months following
implementation of the PCX Application, however, the PCX retains the
right to notify the ITSOC in writing, as specified in the new Section
(h)(iv), that it will implement system adjustments to the PCX
Application in an effort to ensure furture compliance with the PCX
Application ceiling. In the event of such notification, the PCX has, at
a minimum, nine calendar months from the date of such notice (or such
longer period as may be approved by all members of the ITSOC upon a
showing of reasonable cause), to implement its proposed system
adjustments. During this nine month period, the restrictions do not
apply. Notwithstanding other provisions, if, for any rolling calendar
quarter, the PCX Application Percentage exceeds 30%, the PCX must cease
computer-generating trade-at commitments for three calendar months
beginning the first business day of the second month following the end
of such rolling calendar quarter.
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\12\ ``Trade-at'' commitments are those commitments sent from
the PCX Application when there is no match of non-CQS profiles, or a
partial execution of a non-CQS profile, with the balance filled by
another participant market.
\13\ ``Rolling Calendar Quarter'' means any three consecutive
calendar months, with the first Rolling Calendar Quarter ending on
the last business day of the first three full calendar months
following the month in which the PCX Application commences
operation, i.e., April 30, 1999.
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Finally, Section 8(h)(vi) provides that the PCX will furnish the
ITSOC with a report each month showing the number of shares for each
component of the PCX Application Formula, as well as the number of
executed shares resulting from ``trade-through'' commitments.\14\
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\14\ A trade-through occurs when a transaction is effected at a
price below the best prevailing bid, or above the best prevailing
offer. The ITS Plan requires price continuity among the various
markets by ensuring that the best national bids and offers are
provided opportunities to trade with other markets effecting trades
outside the best national quote.
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IV. Discussion
The Commission finds that the proposed Fourteenth Amendment is
consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national market system plan,
and, in particular, with the requirements of Section 11A.\15\ The
Commission believes the proposal is consistent with the requirements of
Sections 11A(a)(1)(C)(i), (ii) and (iv), and (D),\16\ which provide for
the economically efficient execution of securities transactions and
fair competition among the ITS participants and their markets. These
sections also promote means to ensure that brokers execute investors'
orders in the best market, and all markets for qualified securities are
linked through communications and data processing facilities that
foster efficiency, enhance competition, increase the information
available to brokers, dealers, and investors, and contribute to the
best execution of such orders. The Commission also finds that the
amendment is consistent with Rule 11Aa3-2(c)(2),\17\ which requires the
Commission to determine that the amendment is necessary and appropriate
in the public interest, for the protection of investors and the
maintenance of fair and orderly markets, to remove impediments to, and
perfect the mechanisms of, a national market system or otherwise in
furtherance of the purposes of the Act.
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\15\ 15 U.S.C. 78k-1.
\16\ 15 U.S.C. 78k-1(a)(1)(C)(i), (ii) and (iv) and (D).
\17\ 17 CFR 240.11Aa3-2(c)(2).
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The Commission notes that the PCX Application has been linked to
ITS since January 29, 1999, under the same terms now being
approved.\18\ The Commission further notes that the amendment now being
approved was agreed to by the ITS participants after extensive
discussions.\19\ Furthermore, no comments were received on the proposed
amendment.
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\18\ The Commission notes that the PCX and NYSE reached an
agreement whereby, on or about June 1, 1999, the PCX Application
began sending its trade-at volume to the NYSE through SuperDot,
rather than through ITS. See Letter from John C. Katovich, Senior
Vice President and General Counsel, OptiMark Technologies, Inc., to
Allan A. Bretzer, Chairman, ITSOC, dated May 28, 1999.
\19\ The participants agreed upon these amendments after the
Commission published a proposal to amend the ITS Plan. See Exchange
Act Release No. 40204 (July 15, 1998), 63 FR 39306 (July 22, 1998).
The Commission received 30 comment letters on the Proposing Release,
generally favoring linking the PCX Application to ITS.
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Overall, the Commission believes that linking the PCX Application
to ITS has provided, and potentially will continue to provide, a new
and more efficient way to match and execute trading interest. Absent
this linkage, the PCX would not be able to operate the PCX Application
without major changes that would cripple the PCX Application, thereby
reducing market innovation and competition.
The ITS Plan states that ITS is not meant to be used to route
routinely all or a substantial portion of a market's orders to another
market. The Commission agrees that automated order routing of a
substantial share of a
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market's orders to ITS would violate the Plan and would be inconsistent
with the Plan's intention.
The adoption of a formula is reasonable in this instance to address
the participants' concerns. The Fourteenth Amendment should prevent the
PCX Application from being used as an automated order delivery device
to obtain cost-free, non-member access to other market centers, while
at the same time giving OptiMark an opportunity to offer an innovative
new service to investors.
V. Conclusion
It Is Therefore Ordered, pursuant to Section 11A(a)(3)(B) of the
Act,\20\ that the amendment be approved.
\20\ 15 U.S.C. 78k-1(a)(3)(B).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\21\
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\21\ 17 CFR 200.30-3(a)(29).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-20176 Filed 8-4-99; 8:45 am]
BILLING CODE 8010-01-M