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###### Securities and Exchange Commission

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

## 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                           ( print 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.                

## 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] 

                    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.                

                    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.                

                    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] 

## 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] 

                    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.                

                    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] 

                    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.                

                    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                           ( print page 25782)                        not be affected by the proposed rule change.[22] 

                    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] 

## 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.                

                        For the Commission, by the Division of Market Regulation, pursuant to delegated authority.[25] 

Margaret H. McFarland,

Deputy Secretary.

# Footnotes

1.                             15 U.S.C. 78s(b)(1).                    
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2.                             17 CFR 240.19b-4.                    
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3.                             “ITS Coordinator” is used interchangeably with the term “PCX Coordinating Specialist” as defined in new PCX Rule 5.20(a)(xi).                    
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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.                    
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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.                    
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6.                                                     *See*                        Securities Exchange Act Release No. 42349 (January 19, 2000), 65 FR 4008.                    
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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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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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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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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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11.                             15 U.S.C. 78f(b)(5).                    
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12.                             15 U.S.C. 78k-1.                    
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13.                             15 U.S.C. 78f(b)(5).                    
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14.                             15 U.S.C. 78f(b)(5).                    
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15.                             15 U.S.C. 78k-1.                    
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16.                             15 U.S.C. 78k-1(a)(1)(B).                    
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17.                             15 U.S.C. 78k-1(a)(1)(C).                    
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18.                             15 U.S.C. 78k-1(a)(1)(D).                    
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19.                             15 U.S.C.. 78k-a(a)(1)(D).                    
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20.                                                     *See*                         footnotes 4 and 10,                         *supra*
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21.                             17 CFR 270.11Ac1-1(c)(2).                    
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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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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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24.                             15 U.S.C. 78s(b)(2).                    
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25.                                 17 CFR 200.30.3(a)(12).                        
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[FR Doc. 00-11008  Filed 5-2-00; 8:45 am]

BILLING CODE 8010-01-M