[Federal Register Volume 65, Number 59 (Monday, March 27, 2000)]
[Notices]
[Pages 16235-16236]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-7437]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42550; File No. SR-PCX-99-38]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change by the Pacific Exchange, Inc. Relating to Statistical Reports 
Provided to Market Makers

March 20, 2000.

I. Introduction

    On October 5, 1999, the Pacific Exchange, Inc. (``Exchange'' or 
``PCX''), filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change relating to statistical reports provided to market 
makers. The Exchange filed Amendment No. 1 to the proposed rule change 
on January 11, 2000.\3\ The proposed rule change, as amended, was 
published for comment in the Federal Register on February 15, 2000.\4\ 
The Commission received no comments on the proposal. This order 
approves the proposal, as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Letter from Robert P. Pacileo, Staff Attorney, Regulatory 
Policy, PCX, to Richard C. Strasser, Assistant Director, Division of 
Market Regulation, Commission, dated January 7, 2000 (``Amendment 
No. 1''). Amendment No. 1 adds Exchange Rule 6.41 to the text of 
Exchange Rule 6.
    \4\ Securities Exchange Act Release No. 42401 (Feb. 7, 2000), 65 
FR 6647.
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II. Description of the Proposal

    The Exchange proposes to furnish its market makers with statistical 
reports designed to measure trading volume and participation in trading 
activity in each option issue traded on the Exchange. The reports will 
identify which order flow providers currently are bringing trades to 
the PCX and how those orders are being executed. Specifically, the 
reports will include monthly trading information that describes, by 
order flow provider, the issue and number of contracts traded, the Lead 
Market Maker post where the issue is traded, the contra and executing 
broker symbols, and whether the trade was executed through the 
Exchange's Automatic Execution System, through the Limit Order Book, or 
manually in the trading crowd.
    The Exchange believes these reports will help market makers develop 
marketing plans specific to order flow providers that the market makers 
can use to help increase order flow to the PCX. In addition, the 
reports are designed to help market makers support their business 
relationships and encourage further business development with order 
flow providers. Furthermore, these reports will help the market makers 
identify specific customers to whom they should direct their marketing 
efforts. The Exchange believes that these reports will help the market 
makers focus on specific business needs of their customers, so that 
they can attract more business to the PCX. Finally, the Exchange 
believes the reports will help the Exchange compete for order flow in 
multiple traded issues.

III. Discussion

    After careful review, the Commission finds that the proposed rule 
change is consistent with the Act and the rules and regulations 
thereunder applicable to a national securities exchange, and, in

[[Page 16236]]

particular, the requirements of Section 6 of the Act.\5\ Specifically, 
the Commission finds that the proposed rule change is consistent with 
Section 6(b)(5) of the Act,\6\ in that it is designed to facilitate 
securities transactions and to remove impediments to and perfect the 
mechanism of a free and open market.\7\
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    \5\ 15 U.S.C. 78f.
    \6\ 15 U.S.C. 78f(b)(5).
    \7\ In approving this rule change, the Commission has considered 
the proposal's impact on efficiency, competition, and capital 
formation, consistent with Section 3 of the Act. 15 U.S.C. 78c(f).
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    The Commission recognizes the extent to which the proposed rule 
change may facilitate the practice of market makers offering incentives 
such as payment for order flow to firms that agree to direct their 
order flow to the Exchange. Specifically, by providing market makers 
with firm-specific volume breakdowns, the reports will permit market 
makers to identify firms that have not historically provided 
significant order flow to the Exchange. Market makers may in turn seek 
to attract new orders from these firms by offering payment in exchange 
for the new order flow. Such arrangements, standing along, are not 
inconsistent with the purposes of the Act as long as price competition 
remains vigorous and brokers vigilantly pursue their best execution 
obligation.
    Accordingly, the Commission does not believe the proposal's 
potential to facilitate payment for order flow arrangements constitutes 
a barrier to approval. We will, however, monitor the manner in which 
the reports are used, to ensure that they are used in a manner 
consistent with the purposes of the Act.

IV. Conclusion

    For the above reasons, the Commission finds that the proposed rule 
change is consistent with the provisions of the Act, and in particular 
with Section 6(b)(5).
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\8\ that the proposed rule change (SR-PCX-99-38), as amended, is 
approved.
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    \8\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-7437 Filed 3-24-00; 8:45 am]
BILLING CODE 8010-01-M