31200 Federal Register / Vol. 65, No. 95 / Tuesday, May 16, 2000 / Notices

5 In approving this rule, the Commission has

considered the proposed rule’s impact on

efficiency, competition, and capital formation. 15

U.S.C. 78c(f). 6 15 U.S.C. 78f(b)(5).

7 Id.

8 Id.

9The Commission, in granting approval, notes

that Floor Officials should carefully review

specialist requests to enter these types of trades into

Crossing Session 1. In particular, Floor Officials

should consider the frequency with which

particular specialists request to use this rule, and

whether there have been any instances or prior

problems associated with a particular specialist’s

use of this rule. For example, Floor Officials should

consider whether there have been occasions in

which there were significant discrepancies between

the execution price contemplated by a member firm

and the price actually received as a result of the

Crossing Session 1 transaction.

10 15 U.S.C. 78s(b)(2).

11 17 CFR 200.30–3(a)(12).

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b–4.

Rule 906, if the Exchange determines

that material news is disclosed between

4:00 p.m. and 5:00 p.m., such as news

about a corporate development, the

Exchange will cancel orders received in

Crossing Session 1 and will preclude

the entry of any subsequent orders.

However, in the circumstances outlined

above, it is the Exchange’s view that a

good faith negotiation tied to

establishing the closing price should not

be affected by a subsequent event which

‘‘halts’’ trading.

Therefore, the Exchange proposes to

amend NYSE Rules 903 and 906 to

permit trades for the account of a

specialist and a member, member

organization or a non-member to be

executed immediately when entered

into Crossing Session 1, not at 5:00 p.m.,

regardless of whether the Exchange has

determined that all other Crossing

Session 1 orders be canceled and

precluded from entry. In addition, the

Exchange proposes to require a

specialist to obtain Floor Official

approval for the entry of his or her order

into Crossing Session 1 if such order is

not to be at the risk of the market, i.e.,

it will be executed immediately and will

not be precluded from entry because of

a trading ‘‘halt.’’ The Exchange believes

this requirement will help to insure that

orders which are intended to offset the

specialist’s participation at the close

have been reflected when the closing

price was established. Other coupled

orders would continue to be executed at

5:00 p.m., subject to the stock not being

withdrawn from Crossing Session 1. The

Exchange believes that retaining this

provision for other coupled orders is

appropriate for the protection of

investors who may not be aware of the

corporate development.

Under the proposal, total executed

volume for coupled orders which are

executed either immediately upon entry

or at 5:00 p.m. will be reported to the

tape as a single print, and will continue

to be reported as ‘‘sold.’’

Discussion

After careful review, 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.5 In particular, the

Commission finds the proposal is

consistent with Section 6(b)(5) of the

Act,6 which requires that an Exchange

promulgate rules that are designed to

promote just and equitable principles of

trade, to remove impediments to and

perfect the mechanism of a free and

open market and, in general, to protect

investors and the public interest.

The Exchange’s proposed amendment

to NYSE Rule 902 should allow a

specialist to increase his or her

participation at the close in anticipation

of trading with a member or member

organization in Crossing Session 1,

thereby resulting in a more orderly close

during periods of extraordinary

volatility.

The Exchange also proposes to amend

NYSE Rules 903 and 906 to permit

trades for the account of a specialist and

a member, member organization or a

non-member to be executed

immediately when entered into Crossing

Session 1, rather than at 5:00 p.m. The

amendment will allow such trades to be

executed immediately when entered

into Crossing Session 1, regardless of

whether the Exchange has determined

that all other Crossing Session 1 orders

in a particular security be canceled and

precluded from entry. The proposal also

will require a specialist to obtain Floor

Official approval for the entry of his or

her order into Crossing Session 1 if such

order is not to be executed immediately

and will not be precluded from entry

because of a trading ‘‘halt.’’ The

Exchange has represented that this

amendment is based on the premise that

a specialist involved in a good faith

renegotiation tied to establishing the

closing price should not have his or her

trades remain unexecuted if a

subsequent event ‘‘halts’’ trading in the

security.

The Commission finds that the

Exchange’s proposed amendments to

NYSE Rules 903 and 906 should help to

insure that orders which are intended to

offset a specialist’s participation at the

close have been reflected when the

closing price was established, resulting

in a more orderly close. Such provisions

are consistent with Section 6(b)(5),7

which requires the rules of an Exchange

be designed 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.

The Commission further finds that

retaining the provision requiring other

coupled orders to continue to be

executed at 5:00 p.m., subject to the

stock not being withdrawn from

Crossing Session 1, as appropriate under

Section 6(b)(5) of the Act,8 which

requires an Exchange’s rules be

designed to protect investors and the

public interest. An investor, after having

entered an order into Crossing Session

1, may be unaware of a corporate

development which could have

substantial impact on the price of a

security.Retaining the provision which

requires other coupled orders to be

executed at the close of Crossing

Session 1 will help to ensure that

investors who are unaware of corporate

news will be adequately protected,

should the corporate news have an

unfavorable impact on the price of the

stock.9

IV. Conclusion

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act,10 that the

proposed rule change (SR–NYSE–99–

31) is approved.

For the Commission, by the Division of

Market Regulations, pursuant to delegated

authority.11

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–12271 Filed 5–15–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–42767; File No. SR–PCX–

99–07]

Self-Regulatory Organizations; Order

Approving Proposed Rule Change and

Notice of Filing and Order Granting

Accelerated Approval to Amendment

No. 2 to the Proposed Rule Change by

the Pacific Exchange, Inc. Relating to

Its Competing Specialist Program

I. Introduction

On March 1, 1999, the Pacific

Exchange, Inc. (‘‘PCX’’ or ‘‘Exchange’’)

filed with the Securities and Exchange

Commission (‘‘Commission’’ or ‘‘SEC’’),

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 implement a

competing specialist program. The

Federal Register / Vol. 65, No. 95 / Tuesday, May 16, 2000 / Notices 31201

3See Letter from Michael Pierson, Director,

Regulatory Policy, PCX, to Michael Walinskas,

Deputy Associate Director, Division of Market

Regulation (‘‘Division’’), Commission, dated April

22, 1999 (‘‘Amendment No. 1’’). Amendment No. 1

made numerous technical and descriptive changes

to the filing.

4Securities Exchange Act Release No. 41327

(April 22, 1999), 64 FR 23370 (April 30, 1999)

(‘‘Notice’’).

5See Letter from Michael Pierson, Director,

Regulatory Policy, PCX, to Belinda Blaine,

Associate Director, Division, Commission, dated

May 8, 2000 (‘‘Amendment No. 2’’). Amendment

No. 2 made technical changes to reflect PCX’s

recent restructuring of its equity trading system and

rules, discussed recent technology upgrades

relevant to this filing, and made clarifying changes

to certain rules.

6Under the proposal, a ‘‘regular specialist’’ is a

specialist registered with the PCX in a security,

other than a competing specialist in that security.

Although PCX rules do not specify a minimum

number of regular specialists in a security, as a

practical matter there must be at least one regular

specialist in a security because regular specialists

have certain duties not shared by competing

specialists.

7P/COAST, the ‘‘Pacific Computerized Order

Access System,’’ is the Exchange’s communication,

order routing, and execution system for equity

securities. See Rule 7.70. 8Firms may also send orders to floor brokers for

representation on the exchange. Currently, floor

brokers are not required to enter orders they receive

into the P/COAST system, and they can direct

orders they represent to either specialist post

handling that security. 9The Exchange has proposed changing several

rules to reflect its implementation of the CLOB. See

Securities Exchange Act Release No. 41304 (April

16, 1999), 64 FR 22888 (April 28, 1999).

10Under certain limited circumstances, a

specialist can execute an order against its own

account even if a same-priced or better-priced order

is on the CLOB. For example, because an all-ornone order in the CLOB that is priced at or better

than the NBBO cannot execute against an incoming

market order that is smaller than the all-or-none

order, a specialist may execute the market order

against its own account.

11 In the Notice, Rule 7.19(c)(1) was identified as

Rule 5.8(c). PCX renumbered its equity trading rules

as part of a restructuring plan that the Commission

recently approved. See Securities Exchange Act

Release No. 42759 (May 5, 2000).

12Under the PCX equities trading restructuring

plan, the Exchange is delegating the responsibility

to operate PCX’s equities trading system to PCX

Equities, Inc. Rule 1.1(f) of the revised rules states

that the term ‘‘Corporation’’ means PCX Equities,

Inc.

Amendment No. 2 modified the language of

several rules published in the Notice to replace

references to the ‘‘Exchange’’ with references to the

‘‘Corporation.’’

Under the restructuring plan, firms that trade

equities on PCX now may hold Equity Trading

Privileges (‘‘ETP)’’ or Automated System Access

Privileges. Accordingly, Amendment No. 2 also

replaced references to ‘‘member’’ or ‘‘firm’’ with

references to ‘‘ETP Holder’’ or ‘‘ETP Firm.’’

Exchange amended the proposed rule

on April 22, 1999.3

The Commission published notice of

the proposed rule change in the Federal

Register on April 30, 1999.4 The

Commission received nine comments.

The Exchange filed a second

amendment on May 8, 2000.5 For the

reasons discussed below, the

Commission is approving the proposed

rule change as amended.

II. Description of the Proposal

The Exchange proposes to implement

a competing specialist program to allow

multiple specialists to make markets in

equity securities traded on the

Exchange. Currently, two specialists

continuously make markets in most

equity securities traded on the

Exchange. The proposal would allow

one or more competing specialists to

make markets in a security, in addition

to the existing ‘‘regular specialists.’’ 6

Like regular specialists, competing

specialists in a security will be required

to make a two-sided market and will be

subject to the rights and responsibilities

of regular specialists, subject to certain

exceptions discussed below. By

allowing additional specialists to make

markets in the most actively traded

stocks, the Exchange expects that its

competing specialist proposal will

attract additional order flow to the

Exchange. The Exchange also believes

that a competing specialist program will

result in greater competition, tighter

bid-ask spreads, and greater depth and

liquidity on the PCX.

A. PCX’s Current Order Routing

Procedures

Currently, the P/COAST trading

system 7 typically sends incoming

orders to a particular specialist based on

arrangements that the specialist has

made with the firm that sent the order

to the exchange. If a firm has not

designated a particular specialist to

receive the order, the Exchange sends

the order to one of the two regular

specialists on an alternating basis.8 A

specialist may execute market orders it

receives against the specialist’s own

account, unless the Exchange’s

Consolidated Limit Order Book

(‘‘CLOB’’) contains a limit order that is

priced at the National Best Bid or Offer

(‘‘NBBO’’).9 If the CLOB contains a limit

order priced at the NBBO, and a

specialist receives a market or

marketable limit order that would match

against the order that has priority on the

CLOB, the specialist typically must

execute the incoming order against the

CLOB order, unless the specialist retains

the order by executing the order against

its own account at a price better than

the order that has priority on the

CLOB.10 Other than requiring a

specialist to give priority to CLOB

orders, the existing system permits a

specialist to execute its designated order

flow at the NBBO or better whether or

not the specialist’s quoted bid or offer

was priced at the NBBO when it

received the order.

B. Proposed Order Routing Procedures

Under the Exchange’s competing

specialist proposal, if one specialist

disseminates a bid or offer at the NBBO

that has time priority on the Exchange,

and another specialist (a ‘‘contra

specialist’’) in that security receives a

market or marketable limit order that

would match against the first

specialist’s bid or offer, then the

specialist with time priority at the

NBBO would have the right to execute

the incoming market or marketable limit

order, unless the specialist that receives

the order executes the entire order at a

price better than the NBBO. If multiple

specialists are quoting at the NBBO,

then each of those specialists’ quotes

must be filled in time priority sequence

before a specialist without time priority

can execute an order against its own

account at the NBBO, unless the

specialist who receives the order

provides price improvement. As today,

a specialist could not execute an order

against its own account at the NBBO

until eligible orders in the CLOB priced

at the NBBO are filled. The priority

provisions would apply to trading in all

securities that have more than one

specialist on the PCX, including all

securities in which two regular

specialists make a market, whether or

not one or more competing specialists

also trades the security.

To implement these changes, PCX

proposes to modify Rule 7.19(e)(1),

which governs priority of bids and

offers.11 The rule currently provides,

among other things, that bids and offers

that are made first at a particular price

are entitled to priority, and that a

member may maintain priority by giving

the order to a specialist. The existing

language reflects a time when floor

brokers played a more active role on the

Exchange than is currently the case. The

proposed rule change would add

language stating that specialist bids and

offers must always yield to agency

orders represented at the same price,

unless otherwise excepted by the rules

of the ‘‘Corporation,’’ meaning PCX

Equities, Inc.12 The Exchange states that

the exception refers to odd lot orders,

orders that provide for settlement other

than in three days (non-regular way)

and conditional orders (such as all-orVerDate 11<MAY>2000 18:32 May 15, 2000 Jkt 190000 PO 00000 Frm 00066 Fmt 4703 Sfmt 4703 E:\FR\FM\16MYN1.SGM pfrm01 PsN: 16MYN1
31202 Federal Register / Vol. 65, No. 95 / Tuesday, May 16, 2000 / Notices

13The proposed rule change would also remove

a reference to individual floors. The filing further

proposes eliminating a reference to the ‘‘specialist’s

book’’ that is inconsistent with the Exchange’s use

of a CLOB.

14But see Rule 7.70, discussed below.

15Proposed Commentary .02 to these rules

defines the term ‘‘NBBO’’ as the national best bid

or offer made by an Intermarket Trading System

(‘‘ITS’’) participant. As set forth in the Notice,

proposed Commentary .03 to these rule provided

for specialists to manually intervene with orders to

assure that the priority rules would be maintained,

until the Exchange reprogrammed the P/COAST

system to implement the priority rules. Amendment

No. 2 eliminated proposed Commentary .03, which

is now unnecessary.

16 In the Notice, Rule 7.70(a) was identified as

Rule 5.25(a).

17But see note 36.

18 In the Notice, Rule 7.70(h) was identified as

Rule 5.25(h).

19Amendment No. 2 clarified Rule 7.70(a) by

stating that non-designated orders would alternate

among the two regular specialists. The amendment

also changed proposed Rule 7.70(h) to eliminate an

outdated reference to specialists interacting with

orders by using electronic orders or by vocalizing

bids and offers, to eliminate the inference that a

specialist who has time priority at the NBBO could

retain priority when increasing the size of its quote,

to make a clarifying change, and to eliminate

language suggesting that the rule described a

‘‘future modification’’ of P/COAST.

20See Amemdment No. 2. The Exchange further

states that it will not permit specialists to act as

competing specialists until the Exchange has

implemented this systems change.

21 In the Notice, Rule 7.30(a) was identified as

Rule 5.35(a).

22As proposed in the Notice, several portions of

Rule 7.30(a) (identified as Rule 5.35(a) in the

Notice) would have delegated certain

responsibilities regarding competing specialists to

the Exchange’s Equity Floor Trading Committee

(‘‘EFTC’’). Amendment 2 replaced reference to the

EFTC with references to the ‘‘Corporation.’’

Amendment No. 2 also replaced references to the

Exchange’s Board of Governors with references to

the Corporation’s Board of Directors.

23 In Amendment No. 2, the Exchange added

language to Rule 7.30(a)(2) stating that the denial of

an application to register as a competing specialist

may be appealed pursuant to Rule 10.14(a), which

provides a right of appeal if the Corporation denies

an application to serve as a specialist.

24As originally published in the Notice, proposed

Rule 7.30(a)(5) (identified as Rule 5.35(a)(5) in the

Notice) and Commentary .01 only applied to firms

affiliated with competing specialists. Amendment

No. 2 modified the proposal to also encompass

firms affiliated with regular specialists.

25As discussed above, however, Rule 7.19(c)(2),

would provide that if another specialist is quoting

at the NBBO and clearly has established priority on

the PCX, then that specialist would have priority to

fill the order.

26Competing specialists who wish to use ITS to

send preopening indications of interest to the

primary market in a security must send those

preopening indications through a regular specialist

who is an ITS Coordinator. During trading hours,

competing specialists at times will be able to send

outbound ITS commitments and execute incoming

ITS commitments independently and without the

need for a regular specialist to clear the activity; at

other times an ITS Coordinator will need to be

involved. See Securities Exchange Act Release No.

42708 (April 20, 2000), 65 FR 25780 (May 3, 2000).

The Exchange states that competing specialists will

not be permitted to act as an ITS Coordinator.

none orders, stop orders and market-onclose orders).13

The Exchange also proposes to add

new Rule 7.19(c)(2), governing priority

among specialists. The rule would

provide that if two or more specialists

are quoting at the NBBO and there are

no agency orders being represented at

that price, the earliest specialist bid or

offer at that price will have time priority

and be eligible for an execution first up

to its specified size.14 If no specialists

are quoting at the NBBO, a specialist

representing an order may execute that

order at the NBBO or better.15

In addition, the Exchange proposes to

change other rules to describe how the

P/COAST system will route orders in

the competing specialist environment.

An addition to Rule 7.70(a),16 which

generally describes P/COAST, states

that the Corporation will route orders to

a specialist in accordance with

arrangements that the customer has

made with that specialist. Absent such

arrangements, the Corporation will

alternate orders between the two regular

specialists.17 The Exchange also

proposes to add new Rule 7.70(h)18 to

explain that the P/COAST system will

provide that specialists who are quoting

with time priority at the NBBO will

have the right to execute incoming

orders at the NBBO, up to the size of

their quote. A specialist designated to

receive an order, however, could retain

the order even if the specialist’s quote

did not have priority at the NBBO, if the

specialist improve the price.19 The

Exchange estimates that it will

implement this change to P/COAST by

September 29, 2000.20

C. Other Provisions of the Competing

Specialist Program

The Exchange proposes to describe

the competing specialist program by

replacing the existing text of Rule

7.30(a)21 with new language.

Specifically, proposed Rule 7.30(a)(1)

would provide that only registered

specialists may act as competing

specialists. Similarly, proposed Rule

7.30(a)(3) would provide that all

applicant competing specialists must be

registered as ETP Holders or ETP Firms

with the Corporation, must meet capital

requirements set forth in the

Commission’s and the Corporation’s

rules, must conform to all other

performance requirements and

standards set forth in the rules of the

Corporation, and are subject to all the

rules and policies applicable to a regular

specialist, unless otherwise indicated.

The Commission notes that applicable

rules include, among other things, Rule

7.24(a), which makes a specialist

responsible for the execution of all

orders that he has accepted. Proposed

Rule 7.30(a)(3) also would provide that

applicants who control, are controlled

by, or are under common control with

another person engaged in a securities

or related business must have and

maintain appropriate information

barriers as approved by a self-regulatory

organization.

Proposed Rule 7.30(a)(2) would

provide that applications for registration

as a competing specialist must be

directed to the Corporation in writing

and must list in order of preference the

issue(s) in which the applicant intends

to compete.22 The Corporation would

consider several factors when reviewing

an application: financial capability;

adequacy of staffing; performance

evaluations; whether the allocation

would increase competition in the issue

and/or increase order flow to the

Corporation; and any objections of the

regular specialists in the issue. 23

Proposed Rule 7.30(a)(4) also states that

applicant organizations must

demonstrate to the Corporation that they

have adequate staffing.

Proposed Rule 7.30(a)(5) would

provide that order flow not specifically

designated for a competing specialist

must be routed to a regular specialist,

but that an ETP Firm affiliated with a

specialist in an issue must designate all

PCX order flow in that issue to that

specialist.24 Commentary .01 to

proposed Rule 7.30(a) explains that this

is designated to prevent ETP Firms

affiliated with a specialist from routing

non-profitable orders to another

(unaffiliated) specialist when market

conditions are unfavorable.25

Proposed Rule 7.30(a)(6) would

provide that if a firm wishes to

withdraw from acting as a competing

specialist in a security, it must notify

the Corporation at least three business

days prior to the desired effective date

of such withdrawal, except when notice

is not practicable. Also, proposed Rule

7.30(a)(7) would provide that any

competing specialist that withdraws its

registration in an issue will be barred

from applying to compete in that same

issue for a period of 90 days following

the effective date of withdrawal.

Proposed Rule 7.30(a)(8) would

provide that competing specialists must

cooperate with the regular specialists

regarding openings and reopenings to

ensure that they are unitary.26

Proposed Rule 7.30(a)(9) would

require that if a competing specialist

receives a limit order that is not

immediately executable, the competing

specialist must enter the order into the

CLOB and execute it according to the

Corporation’s rules on time priority.

Federal Register / Vol. 65, No. 95 / Tuesday, May 16, 2000 / Notices 31203

27 In the Notice, Rule 7.46(b) was identified as

Rule 5.31(b).

28Amendment No. 2 revised a reference to the

constitution and rules of the Exchange.

29The purpose of these reviews is to assure that

the new program will be operated appropriately,

particularly in its early phase, so that any problems

can be identified and corrected.

30 In the Notice, the Exchange proposed deleting

older rules for competing specialists, which were

codified as Rules 5.35(a)–(i). The Exchange had not

applied those rules since approximately 1977. The

Exchange recently deleted those rules as part of its

equity trading rule restructuring.

31See Letters from: Harvey Cloyd, President,

Harvey Cloyd & Co., dated April 27, 1999; Daniel

Turner, President, Rubicon Securities, Inc., dated

April 27, 1999; David Hultman, Vice President,

D.A. Davidson & Co., dated May 6, 1999 (‘‘Hultman/

Davidson letter’’); Thomas Stephenson, received

May 14, 1999; Walter Reinsdorf, D.A. Davidson &

Co., dated May 20, 1999 (‘‘Reinsdorf/Davidson

letter’’); Arnold Staloff, President, Bloom Staloff,

dated may 28, 1999; Ronald Melville, Ronald E.

Melville, Inc., dated May 25, 1999; Dennis LoPresti,

Senior Vice President, Wedbush Morgan Securities,

dated May 26, 1999; and David Gale, President,

Delta Dividend Group, Inc., dated June 16, 1999.

Four of the letters were virtually identical, stating

that the proposal would encourage quote

competition without interfering with specialists’

efforts to achieve price improvement, would result

in faster executions due to increased liquidity, and

would allow the PCX to keep pressure on the

primary market. See Wedbush Morgan letter,

Melville letter, Bloom Staloff letter, Reinsdorf/

Davidson letter. Other commenters emphasized that

the proposal would promote the quality of

executions. See Delta letter, Stephenson letter.

Other commenters said that the proposal would

allow specialists to provide improved service to

customers and add depth to the national market

system. See Hultman/Davidson letter, Rubicon

letter, Cloyd letter.

32 In approving this rule, the Commission has

considered the proposed rule’s impact on

efficiency, competition, and capital formation. 15

U.S.C. 78c(f).

33 15 U.S.C. 78f(b)(5).

34 15 U.S.C. 78k–1.

35Securities Exchange Act Release No. 37045

(March 29, 1996), 61 FR 15318 (April 5, 1996).

This rule reiterates certain of the order

routing principles discussed above, and

clarifies that they apply to competing

specialists as well as regular specialists.

Commentary .02 to proposed Rule

7.30(a) further states that incoming

orders are first executed against any

matching limit orders on the

Corporation, that all market and

marketable limit orders are exposed to

a specialist for possible price

improvement before execution, and that

specialists may execute their designated

order flow unless there is a matching

limit order eligible for execution on the

Corporation, or another specialist has a

bid or offer with time priority at the

NBBO.

Proposed Rule 7.30(a)(10) would

provide that all suspensions of trading

must be coordinated through a regular

specialist. The exchange is also

codifying the role of competing

specialists in trading halts in an

amendment to Rule 7.46(b).27 Rule

7.46(b)(1) currently provides, in part,

that when the flow of orders in a

security traded on both floors does not

allow either specialist to maintain an

orderly market in such security, either

specialist may suspend trading, and the

specialist who suspends trading must

notify the specialist on the other floor

who shall also suspend trading. Rule

7.46(b)(2) contains similar provisions

for securities traded only on one floor.

The Exchange is proposing to amend

both rules to require notification of all

specialists trading the security. The

Exchange also is proposing to add a

commentary to the rule stating that

competing specialists in an issue may

not suspend trading, and that all

suspensions of trading must be

coordinated through a regular specialist.

Finally, the Exchange proposes to

extend its rules on circuit breakers,

codified in Rule 7.47(a)–(b), to

competing specialists.

The Exchange is also proposing to add

Rule 7.30(a)(11), which would provide

that the registration of any competing

specialist may be suspended or

terminated by the Corporation upon a

determination of any substantial or

continued failure by that competing

specialist to engage in dealing in

accordance with the bylaws, rules and

procedures of the Corporation.28

Under proposed Rule 7.30(a)(12), the

Corporation will establish an effective

date for competition to commence, but

the Corporation will limit competition

during the initial phase as follows: (a)

any registered specialist may apply to

become a competing specialist in a

number of issues, not to exceed ten, that

has been previously established for the

program by the Board of Directors; (b)

the Board of Directors will determine

the total number of competing

specialists permitted on the

Corporation; and (c) the Corporation

will conduct a quarterly review of each

competing specialist, and in conducting

such reviews, the Corporation may

consider, among other things, the five

factors that it considers when reviewing

an application for registration as a

competing specialist.29

Proposed Rule 7.30(a)(13) would

provide that once the program has

operated for one year, the Corporation

will evaluate it and make a

recommendation to the Board of

Directors as to whether to continue the

program or to modify its terms.30

III. Summary of Comments

The Commission received nine

comment letters, all of which were from

individuals associated with PCX firms,

and all of which were favorable.31 The

commenters stated that the proposal

would encourage quote competition,

improve execution speed and quality,

improve customer service, and provide

additional competition to the primary

market.

IV. Discussion

After having carefully reviewed the

proposal, the Commission finds that the

proposed rule change is consistent with

the requirements of Sections 6(b)(5) and

11A of the Act.32 Section 6(b)(5)

requires, among other things, that the

rules of an exchange be designed to

promote just and equitable principles of

trade, to reflect the mechanism of a free

and open market and a national market

system, and to protect investors and the

public interest.33 Section 11A of the Act

promotes, among other things, the

development of a national market

system for securities to assure

economically efficient execution of

securities transactions, and fair

competition among brokers and dealers,

among exchange markets, and markets

other than exchange markets.34

The Commission finds that the

proposal is consistent with those

sections of the Act. The proposal has the

potential to enhance competition and

increase liquidity by permitting

multiple specialists to compete for order

flow on the Exchange, which may lead

to enhanced opportunities for price

improvement and improved services for

customers.

In 1996, the Commission granted

permanent approval to the Boston Stock

Exchange’s (‘‘BSE’s’’) competing

specialist program.35 The BSE’s program

is similar to the PCX’s proposal in that

both programs permit multiple

specialists to make markets in a

security, and both programs restrict a

specialist’s ability to execute its

designated order flow if customer orders

have priority on the exchange’s

consolidated limit order book or if other

specialists are quoting with time

priority at the NBBO. The Commission

approved the BSE competing specialist

program on the grounds that the BSE’s

program was designed to improve

market making and increase liquidity

and competition on BSE’s trading floor.

The Commission also recognized that

although the BSE program had the

potential to increase internalization of

orders, it was not necessarily

inconsistent with a broker-dealer’s duty

to seek best execution of customer limit

orders. The Commission emphasized,

however, that broker-dealers could not

31204 Federal Register / Vol. 65, No. 95 / Tuesday, May 16, 2000 / Notices

36The Commission finds that it is generally

appropriate for the Exchange to route nondesignated orders to a regular specialist, given that

regular specialists have market making

responsibilities not shared by the competing

specialists. That provision is subject to the

requirement that a specialist quoting with time

priority at the NBBO has a right to execute

incoming orders, regardless of which specialist was

designated to receive the order, absent price

improvement.

The Commission notes that the Exchange has

committed to implement systems changes, within

eighteen months of the Commission’s approval of

this program, so that incoming orders will be

automatically routed to the specialist with time

priority at the NBBO.

37The Commission recognizes that the proposed

competing specialist program has the potential to

increase internalization. The Commission will

monitor the impact of the competing specialist

program as part of its ongoing review of market

fragmentation. See Securities Exchange Act Release

No. 42450 (February 23, 2000), 65 FR 10577

(February 28, 2000).

38The Commission expects that the Exchange

will consider all permissible factors in assessing

applicants and will not be unduly influenced by

objections of the regular specialist in the issue.

Indeed, the Exchange may not reject an application

to be a competing specialist solely because of the

objections of the regular specialist in the issue.

automatically route their order flow to

an affiliated BSE specialist without

engaging in a regular and rigorous

evaluation of execution quality.

The Commission similarly finds that

the PCX proposal has the potential to

enhance competition consistent with

Sections 6(b)(5) and 11A of the Act.

Permitting additional specialists to

make markets in each stock on the PCX

could potentially bring increased

liquidity to the Exchange and could

allow additional customer limit orders

to benefit from the protections provided

by the CLOB. Moreover, the PCX

proposal’s order routing provisions

should give specialists an incentive to

improve their quotations by providing

that a specialist quoting with time

priority at the NBBO would execute

incoming orders unless the designated

specialist retains the order by providing

price improvement.36 Finally, allowing

additional specialists to make markets

on the PCX should also promote

competition among PCX specialists in

the rates of price improvement they

provide, and in the quality of their limit

order execution guarantees and other

services.

The Commission reiterates that while

an automated order routing

environment is not necessarily

inconsistent with the achievement of

best execution, broker-dealers choosing

where to automatically route orders

must assess periodically the quality of

competing markets to assure that order

flow is directed to markets providing

the most advantageous terms for their

customers’ orders. Thus, a broker-dealer

may not simply employ default order

routing to an affiliated PCX specialist

without undertaking such an evaluation

on an ongoing basis. A broker-dealer

sending orders to the PCX must satisfy

itself that its routing decision is

consistent with its best execution

obligations, irrespective of the firm’s

desire to internalize order flow through

an affiliated PCX specialist. To reach

this conclusion, the broker-dealer must

rigorously and regularly examine the

executions likely to be obtained for

customer orders in the different markets

trading the security, in addition to any

other relevant considerations in routing

customer orders.37

Several other proposed rule changes

govern the operations and

responsibilities of competing specialists.

The Commission finds that those

proposed rules would promote fair and

orderly markets by providing that

competing specialists meet all

requirements applicable to specialists

on the exchange, that competing

specialists follow all rules applicable to

regular specialists (with certain

exceptions), that competing specialists

maintain barriers against the disclosure

of information to affiliates, and that they

cooperate with regular specialists

during openings, suspensions, and

reopenings of trading.

The remaining proposed rule changes

govern the qualifications and selection

of competing specialists and the

implementation of the competing

specialist program. The Commission

finds that those proposed rule changes

set forth reasonable requirements that

will permit the Exchange to implement

the program in a fair and efficient

manner. The proposed rule changes

would permit the Exchange to evaluate

applications to serve as competing

specialist using factors that are relevant

and appropriate (e.g., financial

capability, adequacy of staffing, and

performance evaluations) to the

question of whether an applicant is

capable of making a market in a stock

and whether adding specialists to a

stock will benefit the public.38 The

proposed rules should also promote

specialist continuity and minimize

disruptions to the PCX market by

restricting a firm’s ability to repeatedly

start and cease making markets as a

competing specialist in a security. The

proposed rules set forth a phase-in plan

that should help the Exchange

implement the competing specialist

program with a minimum of disruption

to existing operations.

The Commission believes it is

consistent with the Act to allow the PCX

to implement its competing specialist

program on a permanent basis.

Nevertheless, Commission approval of

the PCX’s competing specialist program

is not a determination by the

Commission that mere default routing

by a firm to its affiliated competing

specialist is consistent with a firm’s best

execution obligations. As noted above, a

broker-dealer associated with a

competing specialist must still ensure

that its order routing decisions are

consistent with its best execution

obligations and assess periodically the

quality of competing markets to assure

that order flow is directed to markets

providing the most advantageous terms

for its customers’ orders.

The Commission finds good cause for

approving Amendment No. 2 prior to

the thirtieth day after the date of

publication of notice thereof in the

Federal Register. Amendment No. 2

renumbered several rules, made

necessary technical changes to reflect

the recent approved restructuring of

PCX’s equities trading, and clarified

aspects of the proposed amendments to

the Exchange’s priority rules. The

amendment eliminated a proposed

commentary to the priority rules that

provided for specialists to manually

intervene with orders, because the

commentary is unnecessary in light of

P/COAST improvements that the

Exchange is implementing. The

amendment modified proposed

competing specialist rules to state that

all firms affiliated with specialists must

send their PCX orders to that specialist

(not just firms affiliated with competing

specialists). The amendment also

clarified that firms whose applications

to serve as competing specialists are

denied would have the right of appeal.

Finally, Amendment No. 2 sets forth the

Exchange’s commitment to reprogram

the P/COAST system within eighteen

months of the competing specialist

program’s approval, so that the P/

COAST system would route incoming

orders directly to a specialist who is

quoting at the NBBO with time priority.

Those modifications were clarifying in

nature and did not change the substance

of the Exchange’s proposal, as it was

published in the Notice.

V. Solicitation of Comments

Interested persons are invited to

submit written data, views, and

arguments concerning Amendment No.

2, including whether it is consistent

with the Act. Persons making written

submissions should file six copies

thereof with the Secretary, Securities

and Exchange Commission, 450 Fifth

Street, NW, Washington, DC 20549–

0609. Copies of the submission, all

subsequent amendments, all written

Federal Register / Vol. 65, No. 95 / Tuesday, May 16, 2000 / Notices 31205

39See 17 CFR 200.30–3(a)(12).

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–99–07 and should be

submitted by June 6, 2000.

VI. Conclusion

It is therefore ordered, pursuant to

section 19(b)(2) of the Act, that the

proposed rule change SR–PCX–99–07,

including Amendment No. 2, is

approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.39

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–12272 Filed 5–15–00; 8:45 am]

BILLING CODE 8010–01–M

SMALL BUSINESS ADMINISTRATION

Notice Seeking Exemption Under

Section 312 of the Small Business

Investment Act, Conflicts of Interest

Notice is hereby given that TD Origen

Fund, L.P. (‘‘TD Origen’’), 150

Washington Avenue, Suite 201, Santa

Fe, New Mexico 87501, a Federal

Licensee under the Small Business

Investment Act of 1958, as amended

(‘‘the Act’’), TD Javelin Capital Fund, LP

(‘‘TD Javelin’’), 2850 Cahaba Road, Suite

240, Birmingham, Alabama 35223, a

Federal Licensee under the Act, TD

Javelin Capital Fund II, LP (‘‘TD Javelin

II’’), 2850 Cahaba Road, Suite 240,

Birmingham, Alabama 35223, a Federal

Licensee under the Act, and TD

Lighthouse Capital Fund, LP (‘‘TD

Lighthouse’’, and together with TD

Javelin, TD Javelin II, and TD Origen,

the ‘‘Funds’’), 303 Detroit Street, Suite

301, Ann Arbor, Michigan 48104, an

applicant for a Federal license under the

Act, in connection with the financing of

a small concern, are seeking an

exemption under section 312 of the Act

and section 107.730, Financings which

Constitute Conflicts of Interest of the

Small Business Administration (‘‘SBA’’)

rules and regulations (13 CFR 107.730

(2000)). The Funds propose to provide

equity financing to TransMolecular, Inc.

(‘‘TMI’’), 2850 Cahaba Road, Suite 240,

Birmingham, Alabama 35223. The

financing is contemplated for product

development and working capital.

The financing is brought within the

purview of Sec. 107.730(a)(1) of the

Regulations because TD Javelin, an

Associate of the Funds, currently owns

greater than 10 percent of TMI and

therefore TMI is considered an

Associate of each of the Funds as

defined in Sec. 107.50 of the

regulations.

Notice is hereby given that any

interested person may submit written

comments on the transaction to the

Associate Administrator for Investment,

U.S. Small Business Administration,

409 Third Street, SW; Washington, DC

20416.

Dated: April 26, 2000.

Don A. Christensen,

Associate Administrator for Investment.

[FR Doc. 00–12185 Filed 5–15–00; 8:45 am]

BILLING CODE 8025–01–U

SOCIAL SECURITY ADMINISTRATION

Agency Information Collection

Activities: Emergency Consideration

Request

In compliance with Public Law 104–

13, the Paperwork Reduction Act of

1995, the Social Security

Administration (SSA) is providing

notice of its information collections that

require submission to the Office of

Management and Budget (OMB). SSA is

requesting emergency consideration

from OMB by 06/02/2000 of the

information collection listed below.

1. Annual Earning Test-Direct Mail

Follow-up Program Notices–0960–0369.

In 1997, as part of the initiative to

reinvent government, SSA began to use

the information reported on W–2’s and

self-employment tax returns to adjust

benefits under the earnings test rather

than have beneficiaries make a separate

report, which often showed the same

information. As a result, beneficiaries

under full retirement age (FRA)

complete forms SSA–L9778–SM–SUP,

SSA–L9779–SM–SUP and SSA–L9781–

SM (the ‘‘Midyear Mailer’’ forms) under

this information collection.

With the passage of the Senior Citizen

Freedom to Work Act of 2000, the

annual earnings test (AET) at FRA was

eliminated. As a result, SSA designed 2

new Midyear Mailer forms, the SSA–

L9784–SM and the SSA–L9785–SM, to

request an earnings estimate in the year

of FRA for the period prior to the month

of FRA. Social Security benefits may be

adjusted based on the information

provided and this information is needed

to comply with the recent change to the

law. Consequently, the Midyear Mailer

program has become an even more

important tool in helping SSA to ensure

that Social Security payments are

correct. Respondents are beneficiaries

who must update their current year

estimate of earnings, give SSA an

estimate of earnings for the following

year and an earnings estimate (in the

year of FRA) for the period prior to the

month of FRA.

Number of Respondents: 315,000.

Frequency of Response: 1.

Average Burden Per Response: 10

minutes.

Estimated Annual Burden: 52,500

hours.

You can obtain a copy of the

collection instruments and/or OMB

clearance package by calling the SSA

Reports Clearance Officer on (410) 965–

4145, or by writing to him. Written

comments and recommendations

regarding the information collection

should be submitted to the SSA Reports

Clearance Officer and to the OMB Desk

Officer at the addresses at the end of

this document. Comments and

recommendations should be received

before June 2, 2000.

(OMB Address)

Desk Officer for SSA, New Executive

Office Building, Room 10230, 725 17th

St., NW, Washington, DC 20503.

(SSA Address)

Social Security Administration,

DCFAM, Attn: Frederick W.

Brickenkamp, 1–A–21 Operations Bldg.,

6401 Security Blvd., Baltimore, MD

21235.

Dated: May 9, 2000.

Frederick W. Brickenkamp,

Reports Clearance Officer.

[FR Doc. 00–12323 Filed 5–15–00; 8:45 am]

BILLING CODE 4190–29–U

DEPARTMENT OF TRANSPORTATION

Federal Aviation Administration

Proposed Advisory Circular 25–XX,

Sustained Engine Imbalance

AGENCY: Federal Aviation

Administration, DOT.

ACTION: Notice of availability of

proposed advisory circular (AC) 25–XX

and request for comments.

SUMMARY: This notice announces the

availability of and requests comments

on a proposed advisory circular (AC)

which provides methods acceptable to