[Federal Register Volume 65, Number 86 (Wednesday, May 3, 2000)]
[Notices]
[Pages 25780-25782]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-11008]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42708; File No. SR-PCX-99-37]


Self-Regulatory Organizations; Pacific Exchange, Inc.; Order 
Approving Proposed Rule Change and Amendment Nos. 1 and 2 Authorizing 
the PCX ITS Coordinator To Accept Inbound Commitments on Behalf of 
Other PCX Specialists

April 20, 2000.

I. Introduction

    On October 5, 1999, 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 authorize the PCX Intermarket 
Trading System (``ITS'') Coordinator \3\ (``ITS Coordinator'') to 
accept inbound commitments on behalf of other PCX specialists. PCX 
filed an amendment on November 2, 1999 (``Amendment No. 1''),\4\ and an 
amendment on December 7, 1999 (``Amendment No. 2''),\5\ The

[[Page 25781]]

proposed rule change, as amended, was published for comment in the 
Federal Register on January 25, 2000.\6\ The Commission did not receive 
any comment letters on the proposal. This order approves the proposal.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ ``ITS Coordinator'' is used interchangeably with the term 
``PCX Coordinating Specialist'' as defined in new PCX Rule 
5.20(a)(xi).
    \4\ See November 1, 1999 letter from Michael Pierson, Director, 
Regulatory Policy, PCX, to Marla Chidsey, Law Clerk, Division of 
Market Regulation, Commission (``Amendment No. 1''). Amendment No. 1 
clarifies that the ITS coordinator need not confirm with other PCX 
specialists executions made on behalf of those other PCX specialists 
before executions occur. Also, Amendment No. 1 explains that when an 
ITS inbound commitment is received on the PCX, and the commitment 
would match against multiple specialists' bids or offers, every 
specialist in that issue will receive a ``shadow'' notification of 
the ITS commitment.
    \5\ See December 6, 1999 letter from Michael Pierson, Director, 
Regulatory Policy, PCX to Marla Chidsey, Law Clerk, Division of 
Market Regulation, Commission (``Amendment No. 2''). Amendment No. 2 
adds PCX 5.20(a)(xi) defining the term ``PCX Coordinating 
Specialist'' as the specialist responsible for coordinating the 
acceptance of inbound ITS commitments.
    \6\ See Securities Exchange Act Release No. 42349 (January 19, 
2000), 65 FR 4008.
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II. Description of the Proposal

    The PCX proposed to adopt PCX Rule 5.20 Commentary .04, which will 
provide that in the case of the assignment of an ITS stock to more than 
one PCX Registered Specialist, the PCX Coordinating Specialist or PCX 
Registered Specialist at whose ITS station an ITS commitment to trade 
is received is authorized to accept such commitment at the PCX bid or 
offer price, if still available (or at a better price if available), 
and up to the size of the PCX bid or offer without the need to 
communicate with other PCX members. Whenever an inbound ITS commitment 
is received on the PCX, the specialists whose quotes prompted the 
inbound commitment will be notified by a ``shadow'' message that the 
inbound commitment has been received on the PCX.\7\
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    \7\ See Amendment No. 1 (explaining that the ITS coordinator 
will not need to confirm with the other PCX specialists because 
every specialist in that issue will receive a ``shadow'' 
notification of the ITS commitment at the time it is received on the 
PCX).
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    At the PCX, there are generally two registered specialists per 
equity issue traded on the Exchange.\8\ However, there is only one 
specialist per issue who acts as the ITS Coordinator. The ITS 
Coordinator is generally responsible for coordinating acceptance of 
incoming ITS commitments among the specialists in a particular stock. 
The PCX expects that there will continue to be only one ITS Coordinator 
per stock after the Exchange expands the number of specialists per 
issue.
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    \8\ The PCX expects that there will be more than one specialist 
per stock when its competing specialist program is implemented. See 
Securities Exchange Act Release No. 41327 (April 22, 1999), 64 FR 
23370 (April 30, 1999) (SR-PCX-99-07).
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    Currently, any PCX specialist may send an outbound ITS commitment 
to another market center without that ITS Coordinator's assistance. A 
PCX specialist who is not an ITS Coordinator may also receive inbound 
ITS commitments without the involvement of the ITS Coordinator, as long 
as the ITS Coordinator is not designated to participate in the trade as 
a result of the inbound commitment.\9\ However, if an inbound 
commitment involved more than one PCX specialist as the contra side, 
then the ITS Coordinator is required to coordinate the execution of the 
commitment among the PCX participants verbally.
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    \9\ The ITS Coordinator need not coordinate the commitment if he 
or she is not quoting at the price of the inbound commitment and is 
not representing an order at that price.
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    The current PCX rules do not authorize expressly the ITS 
Coordinator to accept ITS commitments on behalf of other specialists. 
The ITS Coordinator must obtain the verbal consent of the other 
specialist before accepting an inbound commitment on behalf of that 
other specialist. The PCX proposed to provide the ITS Coordinator with 
the express authority to accept ITS commitments on behalf of other 
specialists.\10\
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    \10\ For example, assume Specialist A and Specialist B (PCX 
specialists) are both bidding $20 (the national best bid) for 500 
shares of XYZ stock. If the PCX receives an inbound ITS commitment 
to sell 1,000 shares of stock, and if Specialist A is the ITS 
Coordinator, then Specialist A will confirm with Specialist B that 
500 shares of XYZ may be accepted by Specialist A on Specialist B's 
behalf. The proposed rule change would allow Specialist A to accept 
the 500 shares on Specialist B's behalf, on the ground that 
Specialist B's bid for 500 shares is still outstanding at the time 
that Specialist A receives the inbound commitment for 1,000 shares.
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III. Discussion

    The Commission has reviewed carefully the PCX's proposed rule 
change, as amended, and, for the reasons set forth below, finds the 
proposed rule change is consistent with the Act and the rules and 
regulations under the Act applicable to a national securities exchange. 
In particular, the Commission finds the proposed rule change is 
consistent with Section 6(b)(5) \11\ and Section 11A of the Act.\12\
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    \11\ 15 U.S.C. 78f(b)(5).
    \12\ 15 U.S.C. 78k-1.
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    The Commission finds the proposed rule change is consistent with 
the Section 6(b)(5) \13\ requirements that the rules of an exchange be 
designed to foster cooperation and coordination with persons engaged in 
regulating, clearing, settling, processing information with respect to, 
and facilitating transactions in securities, to promote just and 
equitable principles of trade and to protect investors and the public 
interest. The proposed PCX Rule 5.20, Commentary .04 allows the PCX 
Coordinating Specialist or the PCX Registered Specialist to accept an 
ITS commitment at the PCX bid or offer price without the need to 
communicate with other PCX members. Allowing the PCX Coordinating 
Specialist to accept ITS commitments on behalf of other specialists is 
consistent with Section 6(b)(5) \14\ of the Act because it fosters 
cooperation and coordination by providing quick and efficient execution 
of securities transactions.
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    \13\ 15 U.S.C. 78f(b)(5).
    \14\ 15 U.S.C. 78f(b)(5).
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    In addition, the Commission finds the proposed rule change is 
consistent with the goals set forth in Section 11A \15\ of the Act. 
Section 11A(a)(1)(B) notes that new data processing and communications 
techniques may create the opportunity for more efficient and effective 
market operations.\16\ Under Section 11A(a)(1)(C), Congress found that 
it is in the public interest and appropriate for the protection of 
investors and the maintenance of fair and orderly markets to assure 
economically efficient execution of securities transactions.\17\ The 
linking of markets for qualified securities through communication and 
data processing facilities should help to foster efficiency, enhance 
competition, increase the information available to brokers, dealers, 
and investors, facilitate the offsetting of investors' orders, and 
contribute to the best execution of such orders.\18\ The proposed PCX 
rule change should facilitate the acceptance of ITS commitments, and 
should help foster efficiency, facilitate the offsetting of investors' 
orders, and contribute to the best execution of such orders.\19\
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    \15\ 15 U.S.C. 78k-1.
    \16\ 15 U.S.C. 78k-1(a)(1)(B).
    \17\ 15 U.S.C. 78k-1(a)(1)(C).
    \18\ 15 U.S.C. 78k-1(a)(1)(D).
    \19\ 15 U.S.C.. 78k-a(a)(1)(D).
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    Further, whenever an inbound ITS commitment is received on the PCX, 
the specialists whose quotes prompted the inbound commitment will be 
notified by a ``shadow'' message that the inbound commitment has been 
received on the PCX.\20\ The shadow notification gives the specialists 
(other than the ITS Coordinator) an opportunity to notify the ITS 
Coordinator that the commitment should not be accepted on the 
specialist's behalf, under appropriate circumstances. The PCX 
specialist must stand up to the quote and cannot back away from 
executing the trade. This is consistent with the Act because the 
``shadow'' message increases the information available to brokers, 
dealers, and investors, and facilitates efficiency by providing the 
specialist with the opportunity to notify the ITS Coordinator that the 
commitment should not be accepted on the specialist's behalf.
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    \20\ See footnotes 4 and 10, supra
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    The Commission notes that if the PCX receives notification of 
incoming ITS commitments, it must comply with the firm quote rule.\21\ 
The Commission also notes that priority and parity rules will

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not be affected by the proposed rule change.\22\
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    \21\ 17 CFR 270.11Ac1-1(c)(2).
    \22\ January 18, 2000, telephone conversation among Michael 
Pierson, Director, Regulatory Policy, PCX, and Christine Richardson, 
Attorney, and Marla Chidsey, Attorney, Division of Market 
Regulation, Commission.
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    The PCX asserts that currently the ITS Coordinator can accept 
commitments on behalf of other specialists without creating reasonable 
disputes among PCX specialists. However, the PCX is waiting for 
Commission approval of the proposed rule change prior to providing the 
ITS Coordinator with the express authority to accept inbound ITS 
commitments on behalf of other specialists. The Commission believes 
that codification of practices and procedures in written form is 
appropriate. The new PCX Rule provides the ITS Coordinator with the 
express authority to accept ITS commitments on behalf of other 
specialists without verbal consent. The Commission therefore finds it 
is appropriate for the Exchange to adopt new PCX Rule 5.20, Commentary 
.04.\23\
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    \23\ In approving this proposed rule change, the Commission has 
considered the proposal's impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\24\ that the proposed rule change (SR-PCX-99-37) is approved.
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    \24\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\25\
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    \25\ 17 CFR 200.30.3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-11008 Filed 5-2-00; 8:45 am]
BILLING CODE 8010-01-M