[Federal Register Volume 65, Number 113 (Monday, June 12, 2000)]
[Notices]
[Pages 36877-36878]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-14722]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42890; File No. SR-PCX-00-11]


Self-Regulatory Organizations; Pacific Exchange, Inc.; Order 
Approving Proposed Rule Change To Rescind Rules 5.43-5.49, and Modify 
Rule 5.5(b), Relating to the Exchange's Off-Board Trading Restrictions

June 1, 2000.

I. Introduction

    On March 26, 2000, the Pacific Exchange, Inc. (``PCX'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``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 to rescind Rules 5.43-5.49, the 
Exchange's off-board trading rules, and to make a conforming change to 
Rule 5.5(b). The proposed rule change was published for comment in the 
Federal Register on April 19, 2000.\3\ Similar proposed rule changes 
filed by the American Stock Exchange, Chicago Stock Exchange, the 
Philadelphia Stock Exchange, and the Boston Stock Exchange had already 
been published for public comment.\4\ The Commission received no 
comments on any of these proposals. Today, in separate orders, the 
Commission is approving the proposed rule changes to rescind off-board 
trading rules filed by the exchanges noted above.\5\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 42660 (April 10, 2000), 
65 FR 21052.
    \4\ Securities Exchange Act Release No. 42460 (February 25, 
2000), 65 FR 11618 (March 3, 2000) (File No. SR-Amex-00-05); 
Securities Exchange Act Release No. 42459 (February 25, 2000), 65 FR 
11619 (March 3, 2000) (File No. SR-CHX-99-28); Securities Exchange 
Act Release No. 42458 (February 25, 2000), 65 FR 11628 (March 3, 
2000) (File No. SR-Phlx-00-12); Securities Exchange Act Release No. 
42661 (April 10, 2000), 65 FR 20497 (April 17, 2000) (File No. SR-
BSE-00-02).
    \5\ The New York Stock Exchange was first to submit a proposed 
rule change rescinding its off-board trading rule, Rule 390. 
Securities Exchange Act Release No. 42450 (February 23, 2000), 65 FR 
10577 (February 28, 2000) (``NYSE Release'').
    On May 5, 2000, the Commission approved the New York Stock 
Exchange's proposed rule change to rescind Rule 390. Securities 
Exchange Act Release No. 34-42758 (May 5, 2000), 65 FR 30175 (May 
10, 2000) (``NYSE Approval Order'').
    In the NYSE Release, the Commission also solicited the public's 
views on a broad range of issues related to market fragmentation--
the trading of orders in multiple locations without interaction of 
those orders. The period for public comment on market fragmentation 
expired on May 12, 2000. The Commission currently is reviewing the 
comments submitted in response to the NYSE Release.
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II. Description of the Proposal

    Exchange Rules 5.43-5.49 restrict a member's ability to effect 
transactions in Exchange-listed securities off a national securities 
exchange. In the proposing release, the Exchange stated that ``once the 
Commission approves the NYSE's proposal to rescind its off-board 
trading restrictions, the Exchange's off-board trading restrictions 
will no longer be necessary or appropriate.'' Therefore, the Exchange 
proposed to rescind Rules 5.43-5.49, and to make a conforming change to 
Rule 5.5(b).

III. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange. In particular, 
the Commission finds the proposed rule change is consistent with 
Section 6(b)(5) of the Act \6\ which requires, among other things, that 
the rules of an exchange be designed to promote just and equitable 
principles of trade, to remove impediments to and perfect the mechanism 
of a free and open market and a national market system and, in general, 
to protect investors and the public interest, and Section 6(b)(8), 
which requires that the rules of an exchange not impose any burden on 
competition not necessary or appropriate in furtherance of the Act. The 
rescission of the Exchange's off-board trading restrictions is also 
consistent with Section 11A of the Act \7\ which sets forth the 
findings and objectives that are to guide the Commission in its 
oversight of the national market system. Specifically, rescinding the 
off-board trading restrictions will help further the national market 
system objective in Section 11A(a)(1)(C)(i) to assure the

[[Page 36878]]

economically efficient execution of securities transactions, and in 
Section 11A(a)(1)(C)(ii) to assure fair competition between exchange 
markets and markets other than exchange markets.\8\
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    \6\ 15 U.S.C. 78f(b)(5).
    \7\ 15 U.S.C. 78k-1.
    \8\ In approving this proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
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    As discussed more fully in the NYSE Approval order, the existence 
of off-board trading restrictions can no longer be justified in an age 
when advancing technology and expanding trading volume are introducing 
new competitive challenges for the U.S. securities markets, both at 
home and abroad. Off-board trading rules such as Rules 5.43-5.49 
directly restrict a certain type of market center competition--
competition between exchange markets and markets other than exchange 
markets. Their rescission today eliminates an inappropriate regulatory 
burden on competition that runs contrary to the objectives set forth in 
the Act.
    Off-board trading restrictions have been justified on the basis 
that they promote the interaction of investors' orders without 
participation by a dealer--indeed an objective set forth in the Act.\9\ 
The Commission believes, however, that whatever beneficial effect off-
board trading restrictions such as Rules 5.43-5.49 may have in 
enhancing the interaction of investor orders can no longer justify 
their anticompetitive nature. To the extent off-board trading rules 
enhance order interaction, they do so in an undesirable way--by 
attempting a direct restriction on competition. Such attempts are never 
wholly successful and typically only distort, rather than eliminate, 
competition and introduce unnecessary costs ultimately borne by 
investors.
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    \9\ Section 11A(a)(1)(C)(v) of the Act.
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    The outcome of competition between market centers should depend on 
which market centers are most able to serve investor interests by 
providing the highest quality trading services at the lowest possible 
prices; the Commission's regulatory task is removing unwarranted 
regulatory barriers to competition between market centers. As stated in 
the NYSE Approval Order, the rescission of off-board trading rules is 
``intended solely to free the forces of competition and allow investor 
interests to control the success or failure of individual market 
centers.'' \10\ The same nationale and motivation support the 
Commission's action today.
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    \10\ NYSE Approval Order at 30179.
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\11\ that the proposed rule change (SR-PCX-00-11) is approved.
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    \11\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, pursuant 
to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-14722 Filed 6-9-00; 8:45 am]
BILLING CODE 8010-01-M