[Federal Register Volume 65, Number 106 (Thursday, June 1, 2000)]
[Notices]
[Pages 35150-35152]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-13673]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42822; File No. SR-PCX-00-10]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Pacific Exchange, Inc. 
Relating to the PCX Application's Mid-Point Price Profile

May 24, 2000.
    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 26, 2000, the Pacific Exchange, Inc. (``Exchange'' or 
``PCX''), filed a proposed rule change with the Securities and Exchange 
Commission (``SEC'' or ``Commission''). The proposed rule change is 
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 filing a proposed rule change to modify the 
definition of the term ``Orders'' under Exchange Rule 15.1(f) of its 
Rules of the Board of Governors, as such term is used for purposes of 
the PCX Application of the OptiMark System (``PCX Application''), and 
to add Commentary .04 to Rule 5.3, Rules of the Board of Governors, 
Equities Trading, Trading Differentials, to provide for separate 
minimum trading differentials for certain profiles in the PCX 
Application. The proposed rule change would permit certain PCX 
Application Profiles to receive an execution under specified 
circumstances at price increments finer than the minimum trading 
differential permitted under the Exchange's rules for other 
transactions on the Exchange. The text of the proposed rule change is 
available at the Exchange 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.

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

1. Purpose
    On September 17, 1997, the Commission approved the PCX 
Application.\3\ The PCX Application is a computerized, screen-based 
trading service for use by Exchange members and their customers to 
purchase or sell equity securities listed or traded on the Exchange 
(``PCX Securities''). The PCX Application is a supplement to the 
Exchange's traditional floor facilities and allows PCX members and 
their customers to submit expressions of trading interest known as 
``Profiles'' anonymously from their computer terminal. As stated in the 
Approval Order, Profiles do not constitute ``bids'' or ``offers'' 
within the meaning of Exchange Act Rule 11Ac1-1, the ``Firm Quote 
Rule.'' Rather, each Profile ``is only a generalized expression of 
interest with conditions attached and is not eligible for execution 
until the completion of the Cycle.'' \4\
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    \3\ See Securities Exchange Act Release No. 39086 (September 17, 
1997), 62 FR 50036 (September 24, 1997) (SR-PCX-97-18)(``Approval 
Order''). The PCX Application has been in operation on the Exchange 
since January 1999.
    \4\ Id. at 50046.
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    The PCX Application includes several types of Profiles where price 
can be pegged to reflect changes in a specific market parameter. The 
midpoint price (``MP'') Profile is a type of pegged Profile. An MP 
Profile allows a user to enter a Profile to be priced at the midpoint 
of the national best bid or offer (``NBBO'') posted on the consolidated 
Quotation System (``CQS'') at the time of a matching cycle of the PCX 
Application. The MP feature will automatically update the price of any 
buy or sell Profile designated by the user of the PCX Application to 
conform to the midpoint of the NBBO displayed on CQS. All Profiles, 
other than the CQS

[[Page 35151]]

Profiles and those Profiles created from the PCX Specialist's book, are 
eligible to be designated as an MP Profile.
    The tracking of the relevant CQS information for MP Profiles occurs 
on a real-time basis in a dynamic fashion, such that the price of each 
designated MP Profile, irrespective of the NBBO when it was entered, is 
based on most current available NBBO. For example, if the matching 
cycle of the PCX Application (known as a ``Call'') for a particular PCX 
Security is scheduled to take place at 11:30 a.m. Eastern time, the 
price of each MP Profile will be updated to reflect the midpoint 
between the consolidated best bid and offer prices immediately prior to 
commencement of the Call at 11:30. From a functional standpoint, it 
would be as if the user of the PCX Application had entered a Profile at 
that instant with the associated price equal to the midpoint of the 
NBBO. Accordingly, all MP Profiles receive a new entry time at the 
beginning of each matching cycle in which they are included.\5\ Of 
course, all Profiles received by the OptiMark System, whether or not 
designated as MP, will be centrally processed based on a computer 
algorithm. As specified in Exchange Rule 15.3(c), eligible coordinates 
from such buy and sell Profiles will be matched based on the stated 
principles of priority, and Profiles so matched will result in orders 
capable of immediate execution.\6\
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    \5\ The Exchange has represented that Optimark will make 
information on the operation of the MP Profile available to users of 
the PCX Application.
    \6\ All MP Profiles in a matching cycle on the same side of the 
market are prioritized according to time of entry of the Profile 
into the PCX Application. After a cycle, all unexecuted MP Profiles 
that are not cancelled are automatically entered into the next 
matching cycle at the beginning of the cycle.
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    The Exchange proposes to modify its rules so that an MP Profile can 
be executed at a trading differential finer than permitted under 
Exchange rules. Currently, the Exchange's minimum price variation is 
\1/16\ (``teenie''). Over the course of the first year of operation of 
the PCX Application, OptiMark and the Exchange have become aware of a 
limitation affecting MP Profiles when the NBBO in a matching cycle is 
an odd teenie or a single teenie. As described above, an MP Profile 
should be priced at the midpoint of the NBBO. For an even teenie spread 
of \1/8\ or greater, the midpoint can be determined precisely (e.g., 
the midpoint of an NBBO of $20-$20\1/8\ is $20\1/16\). Midpoint pricing 
is more difficult for an odd teenie spread because the true midpoint 
can only be expressed in one thirty seconds. For example, the midpoint 
of an NBBO of $20-$20\3/16\ is $20\3/32\. Because the Exchange's 
minimum trading differential is \1/16\, a true midpoint cannot be 
achieved. Thus, OptiMark would effect a match between buy and sell MP 
Profiles at either $20\1/8\ or $20\1/16\, depending upon whether the 
buy or sell Profile had time priority. A similar problem arises when 
the NBBO is \1/16\ because the true midpoint can only be expressed in 
one thirty seconds (e.g., an NBBO of $20-$20\1/16\). In this situation, 
OptiMark will not effect a match of MP Profiles.
    Institutional customers of OptiMark have asked the Exchange to 
revise the midpoint pricing feature so that a real midpoint trade can 
take place in odd teenie markets and \1/16\ markets.\7\ To achieve 
this, the Exchange proposes to allow executions of MP Profiles to take 
place in the PCX Applications at finer trading differentials than \1/
16\. Thus, the Exchange proposes to amend its Rules to allow an MP 
Profile to be executed at a price increment as small as \1/64\ or, upon 
conversion to decimal pricing, to one half of the minimum price 
variation.\8\
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    \7\ Customers that use indexation strategies or are passive 
investors are particularly interested in using the midpoint pricing 
feature.
    \8\ Under Exchange Rule 5.3(b), most PCX Securities trade in 
minimum increments of \1/16\ of a dollar. In 1998, the Commission 
approved the Exchange's proposal to permit trading on the Exchange 
Floor at increments of \1/32\ or \1/64\ in order to match bids and 
offers displayed by other markets for the purpose of preventing 
Intermarket Trading System trade-throughs. See Securities Exchange 
Act Release No. 40199 (July 14, 1998), 63 FR 39366 (July 22, 1998) 
(SR-PCX-97-46).
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    Exchange Rule 5.3(b) provides the Exchange with the authority to 
determine the trading increments for equity securities traded on the 
Exchange by filing a proposed rule change with the Commission pursuant 
to Section 19(b)(3)(A) of the Act.\9\ The PCX believes that a trading 
differential of \1/64\ is appropriate for MP Profiles so that a true 
midpoint trade can be effected in the PCX Application. The PCX notes 
that several other exchanges operate auxiliary matching systems that 
price in finer increments than available in regular trading.\10\ The 
Exchange believes that a finer trading differential for executions of 
MP Profiles will facilitate enhanced Profile interaction at prices 
consistent with the continued movement in the industry to reduce the 
minimum trading increment. This is a value-added service that has been 
requested by many customers and supported by PCX members in discussions 
with PCX staff and OptiMark personnel.
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    \9\ 15 U.S.C. 78s(b)(3)(A).
    \10\ For example, the Philadelphia Stock Exchange (``Phlx'') 
operates a VWAP matching system which report trades in fractions 
rounded to the nearest \1/256\. See Securities Exchange Act Release 
No. 41210 (March 24, 1999), 64 FR 15847 (April 1, 1999) (SR-PHLX-96-
14). The Commission also approved a modified trading variation for 
the Chicago Match System. See Securities Exchange Act Release No. 
35030 (November 30, 1994), 59 FR 63141 (December 7, 1994).
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    The Exchange notes that all transactions resulting from midpoint 
pricing will be identified with a special sale condition so that 
members, public investors and others can distinguish such trades from 
other trade reports executed on the Exchange.\11\ It is important to 
note that these new finer price increments apply only to executed 
trades and not to the entry of Profiles or to publish bids and offers. 
In other words, trades resulting from the MP service may be executed on 
the basis of \1/64\ increments; however, it will still not be possible 
to enter Profiles, bids, or offers in \1/64\ increments.
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    \11\ The Exchange confirmed with the Securities Industry 
Automation Corporation (``SIAC'') that it is feasible to report 
through the Consolidated Trade System (``CTS'') any transactions 
resulting from midpoint pricing in price increments as small as \1/
64\ of a dollar, and that such transactions will be reported to CTS 
with the sale condition ``B'' to indicate midpoint pricing. 
Telephone conversation between Brian P. Faughnan, Managing Director, 
MDS/NMS Planning and CTS/CQS Development, SIAC, and David DiCenso, 
Director, Equity Operations, PCX on March 21, 2000.
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2. Statutory Basis
    The Exchange believes that the proposal is consistent with the 
provisions of Section 6(b)(5) of the Act \12\ in that the PCX 
Application is a facility that is designed to promote just and 
equitable principles of trade and to protect investors and the public 
interest, and is not designed to permit unfair discrimination between 
customers, issuers, or dealers. In addition, the Exchange believes that 
the proposed rule change is consistent with provisions of Section 
11A(a)(1)(B) of the Act, \13\ which states that new data processing and 
communications techniques create the opportunity for more efficient and 
effective market operations.
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    \12\ 15 U.S.C. 78f(b)(5).
    \13\ 15 U.S.C. 78k-1(a)(1)(B).
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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 burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.

[[Page 35152]]

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

    The foregoing rule change constitutes a stated policy, practice or 
interpretation of Exchange Rule 5.3(b) and therefore, has become 
immediately effective pursuant to Section 19(b)(3)(A) of the Act \14\ 
and subparagraph (f)(1) of Rule 19b-4 thereunder.\15\ The Commission 
further notes that Commentary .01 of the Exchange's rules states that 
the Exchange may change the trading differentials for securities traded 
on the Exchange by filing a proposed rule change with the Commission 
pursuant to Section 19(b)(3)(A) of the Act.\16\ This proposed rule 
change would change the trading differentials for the PCX Application, 
which constitutes trading on the Exchange. The language changes to Rule 
5.3(b) and Rule 15 merely effectuate this change in trading 
differentials for Profile sin the PCX Application.
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    \14\ 15 U.S.C. 78s(b)(3)(A).
    \15\ 17 CFR 240.19b-4(f)(1).
    \16\ See Securities Exchange Act Release No. 38780 (June 26, 
1997), 62 FR 36087 (July 3, 1997)(SR-PCX-97-15).
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    At any time within 60 days of the filing of a rule change pursuant 
to Section 19(b)(3)(A) of the Act, the Commission may summarily 
abrogate the 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.

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. Copies of such filing will also be 
available for inspection and copying at the principal office of the 
Exchange. All submissions should refer to File No. SR-PCX-00-10 and 
should be submitted by June 22, 2000.\17\
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    \17\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary
[FR Doc. 00-13673 Filed 5-31-00; 8:45 am]
BILLING CODE 8010-01-M