39306 Federal Register / Vol. 63, No. 140 /Wednesday, July 22, 1998 / Notices

1Rule 11Aa3–2 (17 CFR 240.11Aa3–2) establishes

procedures for initiating or approving amendments

to national market system plans such as the ITS

Plan. Paragraph (b)(2) of Rule 11Aa3–2 states that

the Commission may propose amendments to an

effective national market system plan by publishing

the text thereof together with a statement of purpose

of the amendments. Paragraph (c)(2) requires the

Commission to publish notice of any amendments

initiated by the Commission and provide interested

parties an opportunity to submit written comments.

Further, Paragraph (c)(2) of Rule 11Aa3–2 requires

that promulgation of an amendment to an effective

national market system plan initiated by the

Commission be by rule.

2 ITS is a communications and order routing

network linking eight national securities exchanges

and electronic over-the-counter (‘‘OTC’’) market

operated by the National Association of Securities

Dealers, Inc. (‘‘NASD’’). ITS was designed to

facilitate intermarket trading in exchange-listed

equity securities based on current quotation

information emanating from the linked markets.

The ITS Plan governs the use of ITS. Signatories to

the ITS Plan are the American Stock Exchange, Inc.

(‘‘Amex’’), the Boston Stock Exchange, Inc. (‘‘BSE’’),

the Chicago Board Options Exchange, Inc.

(‘‘CBOE’’), the Chicago Stock Exchange, Inc.

(‘‘CHX’’), the Cincinnati Stock Exchange, Inc.

(‘‘CSE’’), the NASD, the New York Stock Exchange,

Inc. (‘‘NYSE’’), the Pacific Exchange, Inc. (‘‘PCX’’),

and the Philadelphia Stock Exchange, Inc. (‘‘Phlx’’)

(collectively, ‘‘Partcipants’’).

3Section 4(c) of the ITS Plan requires a

unanimous vote of approval in order to amend the

Plan. The full ITSOC met on June 3, 1998, to vote

on amendments proposed by the PCX that are

substantially similar to one alternative being

proposed today by the Commission. The PCX

proposed a ‘‘Description Amendment’’ and a

‘‘Formula Amendment.’’ The NYSE provided

alternative proposed language but did not formally

propose the language amendments or seek a vote on

its language. The ITSOC members were divided on

the PCX’s amendments. The amendments were not

approved.

4Pub. L. No. 94–29 (June 4, 1975).

5Section 11A(a)(1)(D) of the Act, 15 U.S.C. 78k–

1(a)(1)(D).

6Exchange Act Release No. 14416 (January 26,

1978) (‘‘1978 Statement’’), at 26, 43 FR 4354, 4358.

Previously, on June 23, 1977, the Commission had

indicated that a national market system would

include those ‘‘regulatory and technological steps

[necessary] to achieve a nationwide interactive

market system.’’ See Exchange Act Release No.

13662 (June 23, 1977), at 20, 42 FR 33510, 33512.

7 1978 Statement, supra, note 6, at 4358.

8 In this connection, the Commission specifically

indicated that ‘‘qualified markets’’ would include

not only exchanges but OTC market makers as well.

Id.

9The exchanges involved were Amex, BSE,

NYSE, PSE (now the PCX), and Phlx.

profitability. In addition to any other

information the Board may request, the

Adviser will provide information

concerning the Adviser’s profitability

for the preceding quarter with respect to

the relevant Fund.

For the Commission, by the Division of

Investment Management, under delegated

authority.

Joanathan G. Katz,

Secretary.

[FR Doc. 98–19497 Filed 7–21–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–40204; File No. 4–208]

RIN 3235–AH51

Proposed Rulemaking Pursuant to

Section 11A of the Securities

Exchange Act of 1934 to Amend the

Intermarket Trading System (‘‘ITS’’)

Plan To Link the PCX Application of

the OptiMark System to the ITS System

AGENCY: Securities and Exchange

Commission.

ACTION: Proposed amendments to

national market system plan.

SUMMARY: The Securities and Exchange

Commission (‘‘Commission’’) is

proposing alternative amendments to

the plan governing the operation of the

Intermarket Trading System (‘‘ITS Plan’’

or ‘‘Plan’’) that was approved pursuant

to Rule 11Aa3–2 under the Securities

Exchange Act of 1934, as amended

(‘‘Exchange Act’’ or ‘‘Act’’). The

proposed amendments provide for the

linkage of the Pacific Exchange, Inc.

(‘‘PCX’’) Application of the OptiMark

System to the ITS System.

DATES: Comments should be submitted

by August 21, 1998.

ADDRESSES: All comments should be

submitted in triplicate and addressed to

Jonathan G. Katz, Secretary, Securities

and Exchange Commission, Mail Stop

6–9, 450 Fifth Street, NW., Washington,

DC 20549. Comments also may be

submitted electronically at the following

E-mail address: rule-comments@sec.gov.

All comments should refer to File No.

4–208; this file number should be

included in the subject line if E-mail is

used. Comment letters will be available

for public inspection and copying at the

Commission’s Public Reference Room at

the same address. Electronically

submitted comment letters will be

posted on the Commission’s web site

(http://www.sec.gov).

FOR FURTHER INFORMATION CONTACT:

Katherine A. England, Assistant

Director, at (202) 942–0154; Elizabeth

Prout Lefler, Special Counsel, at (202)

942–0170; Heather A. Seidel, Attorney,

at (202) 942–4165; or Christine

Richardson, Attorney, at (202) 942–

0748, Office of Market Supervision,

Division of Market Regulation,

Securities and Exchange Commission,

Mail Stop 10–1, 450 Fifth Street, NW.,

Washington, DC 20549.

SUPPLEMENTARY INFORMATION: The

Commission is proposing, on its own

initiative pursuant to Rule 11Aa3–2

under the Exchange Act,1 alternative

amendments to the ITS Plan 2 to link the

PCX Application of the OptiMark

System (‘‘PCX Application’’) to the ITS

System. Facilitation of this linkage is

intended to further the statutory goals of

efficient execution of securities

transactions, opportunities for best

execution of customer orders, as well

opportunities for investors’ order to be

executed without the participation of a

dealer. The Commission is proposing

these alternative amendments only after

the ITS Operating Committee (‘‘ITSOC’’)

was unsuccessful in reaching agreement

on Plan amendments to implement the

linkage with the PCX Application.3 The

Commission is publishing this proposal

for comment from interested persons.

I. Background

A. The ITS System

Section 11A(a)(2) of the Exchange

Act, adopted by the Securities Acts

Amendments of 1975 (‘‘1975

Amendments’’),4 directs the

Commission, having due regard for the

public interest, the protection of

investors and the maintenance of fair

and orderly markets, to use its authority

under the Act to facilitate the

establishment of a national market

system (‘‘NMS’’) for securities in

accordance with the Congressional

findings and objects set forth in Section

11A(a)(1) of the Act. Among these

findings and objectives is the ‘‘linking of

all markets for qualified securities

through communication and data

processing facilities.’’ 5

On January 26, 1978, the Commission

issued a statement on the national

market system calling for, among other

things, the prompt development of

comprehensive market linkage and

order routing systems to permit the

efficient transmission of orders among

the various markets for qualified

securities, whether on an exchange or

over-the-counter.6 In particular, the

Commission stated that an intermarket

order routing system was necessary to

‘‘permit orders for the purchase and sale

of multiply-traded securities to be sent

directly from any qualified market to

another such market promptly and

efficiently.’’7 The Commission further

stated that ‘‘[t]he need to develop and

implement a new intermarket order

routing system to link all qualified

markets could be obviated if

participation in the ITS market linkage

currently under development were

made available on a reasonable basis to

all qualified markets and if all qualified

markets joined that linkage.’’8

As requested by the Commission, in

March 1978, various exchanges 9 filed

jointly with the Commission a ‘‘Plan for
Federal Register / Vol. 63, No. 140 /Wednesday, July 22, 1998 / Notices 39307

10The ITS Plan is contained in File No. 4–208.

11 15 U.S.C. 78k–l(a)(3)(B).

12See Exchange Act Release No. 14661 (April 14,

1978), 43 FR 17419. In authorizing the

implementation of ITS, the Commission urged those

SROs not yet ITS participants to participate in ITS.

Id. at 7 n.15, 43 FR 17421. On August 11, 1978, the

Commission extended ITS authority for an

additional period of one year. See Exchange Act

Release No. 15058 (August 11, 1978), 43 FR 36732.

In the interim the ITS Plan had been amended to

include the Midwest Stock Exchange (‘‘MSE’’) as a

participant. The MSE is now the CHX.

13See Exchange Act Release No. 19456 (January

27, 1983), 48 FR 4938 (February 3, 1983).

14A trade-through occurs when a transaction is

effected at a price below the best prevailing bid, or

above the best prevailing offer. The ITS Plan

requires price continuity among the various markets

by ensuring that the best national bids and offers

are provided opportunities to trade with other

markets affecting trades outside the best national

quote.

15See ITS Plan, Section 8(d)(iii).

16On April 28, 1981, due to a reluctance of the

ITS Participants, the Commission issued an order

requiring the ITS Participants to implement an

automated interface between CAES and ITS by

March 1, 1982, limited to Rule 19c–3 securities, and

to submit proposed amendments to the ITS Plan

reflecting the inclusion of the NASD as an ITS

Participant. See Exchange Act Release No. 17744

(April 21, 1981), 46 FR 23856 (April 28, 1981). On

March 11, 1982 the Commission delayed the

implementation date of the interface until May 1,

1982 and published its own proposed amendments

to the ITS Plan. See Exchange Act Release No.

18536 (March 11, 1982), 47 FR 10658.

Consequently, due to the inability of the ITS

Participants to submit an amendment, on May 12,

1982, the Commission adopted its own

amendments to the ITS Plan, providing for the

inclusion of the NASD in ITS. See Exchange Act

Release No. 18713 (May 12, 1982), 47 FR 20413.

Rule 19c–3 under the Act, as adopted, precludes

exchange off-board trading restrictions from

applying to securities listed after April 26, 1979.

See Exchange Act Release No. 16888 (June 11,

1980), 45 FR 41125.

In April 1981, the ITS Plan was amended to

provide for participation of the CSE in ITS via a

manual interface between ITS and CSE’s automated

National Securities Trading System (‘‘NSTS’’). See

Exchange Act Release No. 17702 (April 9, 1981).

The Plan was later amended again to provide for

automated interface between ITS and the CSE’s

NSTS. See Exchange Act Release No. 23365 (June

23, 1986), 51 FR 23865 (July 1, 1986).

17For a more detailed description of the

OptiMark System, see Exchange Act Release No.

39086 (September 17, 1997), 62 FR 50036

(September 24, 1997).

18The OptiMark System was developed by

OptiMark Technologies, Inc. (‘‘OTI’’), a computer

technology firm located in Durango, Colorado.

19CQS Profiles are profiles created from the

published quotations disseminated by the other

Participants at commencement of the OptiMark

System call reflecting the public best bid and offer

prices and associated sizes. See Proposed ITS Plan

Section 1(33A).

20Cycles would be based on a computer

algorithm that is designed to measure and rank all

relevant mutual satisfaction outcomes by matching

individual coordinates from intersecting Buy

Profiles and Sell Profiles. The matching algorithm

of the OptiMark System is intended to compute

optimal trade results from Users based on their

different willingness to trade across a wide range

of price and size.

21See Petition for Rulemaking to Amend the ITS

Plan, from PCX and OptiMark, dated June 9, 1998

(‘‘PCX Rulemaking Petition’’).

22 5 U.S.C. 78k–l(a)(3)(B).

23The alternative amendments being proposed by

the Commission substantively reflect those

amendments proposed by the PCX and the NYSE.

24 15 U.S.C. 78k–l.

the Purpose of Creating and Operating

an Intermarket Communications

Linkage,’’ now known as the ITS Plan.10

On April 14, 1978, the Commission,

noting that ITS might provide the basis

for an appropriate market linkage

facility in a national market system,

issued a provisional order, pursuant to

Section 11A(a)(3)(B) of the Act,11

authorizing the filing exchanges (and

any other self-regulatory organization

(‘‘SRO’’) that agreed to become a

participant in the ITS Plan) to act jointly

in planning, developing, operating and

regulating the ITS in accordance with

the terms of the ITS Plan for a period

of 120 days.12

The ITS Plan was approved on a

permanent, indefinite basis on January

27, 1983.13 It contains a number of

market integrity provisions to provide

for continuity of transaction prices

among the various market centers. For

example, the Plan includes a tradethrough rule.14 It also contains a block

trade policy, that provides special rights

to any market displaying the best

national bid or offer when block-size

transactions are occurring in another

market.15

Furthermore, since its permanent

approval, the NASD and CSE have been

added as Participants to the Plan.16

B. Description of the PCX Application

The PCX application 17 is the

computerized facility of the PCX that

receives orders generated by the

‘‘OptiMark System’’,18 a patented

electronic matching system based on an

optimization algorithm that, on a

periodic ‘‘call’’ basis, processes certain

qualifying expressions of trading

interest called satisfaction profiles

(‘‘Profiles’’), including Profiles created

from the published quotations

disseminated by the other participants

at commencement of the OptiMark

System call reflecting the best bid and

offer prices and associated sizes (‘‘CQS

Profiles’’).19 OptiMark is a screen-based

trading service intended for use by PCX

members and their customers. The

OptiMark System will provide

automatic order formulation, matching,

and execution capabilities in the equity

securities listed or traded on the PCX

(‘‘PCX Securities’’). The OptiMark

system will be used by PCX members,

in addition to PCX’s traditional floor

facilities, to buy and sell PCX Securities.

The PCX Application will allow PCX

members and their customers to submit

anonymously from their computer

terminals Profiles to the OptiMark

System. At specified times during the

trading day, the OptiMark System will

conduct certain calculations against the

Profiles to identify specific orders

capable of execution (a ‘‘cycle’’).20 All

orders formulated by the OptiMark

System will be executed automatically

on the PCX, except to the extent that

they are executed on other market

centers through ITS.

II. Discussion

The Commission is proposing, on its

own initiative as requested by PCX,21 to

amend the ITS Plan, pursuant to Rule

11Aa3–2(b)(2) and (c)(1) and the

Commission’s authority under Section

11A(a)(3)(B) of the Act,22 to link the

PCX Application of the OptiMark

System to the ITS System. Specifically,

the Commission is proposing two

alternative ITS Plan amendments, each

of which would incorporate definitions

of basic terms and a description of ITS

transactions resulting from the PCX

Application (‘‘PCX Description

Amendment’’ and ‘‘NYSE Description

Amendment’’). In addition, the

Commission is proposing two

alternative amendments, each of which

would establish a formula limiting the

percentage of outgoing commitments to

trade that can be sent from the PCX

Application to ITS (‘‘PCX Formula

Amendment’’ and ‘‘NYSE Formula

Amendment’’). The proposed alternative

amendments substantially reflect

amendments presented by the PCX to

the ITSOC on June 6, 1998, as well as

amendments submitted to the ITSOC by

the NYSE in response to PCX’s

proposed amendments.23 The

Commission has determined to take this

action only after the ITS Participants,

despite extended negotiations, have

proven unable to come to agreement

regarding the linkage of the PCX

Application to the ITS System. The PCX

Application will be ready to begin

operations in September 1998. The

Commission believes that this linkage

will further the purposes of Section 11A

of the Act 24 and the development of a

NMS by promoting economically

efficient execution of securities

transactions, fair competition among

markets, the best execution of customer

orders, and an opportunity for orders to

be executed without the participation of

a dealer.

The Commission believes that linkage

of the PCX Application to the ITS

System will provide a new and

potentially more efficient way to match

and execute trading interest. The PCX

Application appears principally
39308 Federal Register / Vol. 63, No. 140 /Wednesday, July 22, 1998 / Notices

25 In 1982, when recognizing the Cincinnati Stock

Exchange’s NSTS as a permanent program, the

Commission stated:

In mandating the development of a NMS,

Congress expressly stated that ‘‘[n]ew data

processing and communications techniques create

the opportunity for more efficient market

operations.’’ . . . In carrying out Congress’

mandate, the Commission has taken an

evolutionary approach by encouraging the

securities industry to take the primary initiative in

fashioning trading mechanisms which are

consistent with the goals of a NMS. The

Commission believes that, as a general matter, the

industry has responded well to changing economic

and technological demands by attempting to

integrate state of the art data processing and

communications technology to develop many new

trading systems which have advanced the objectives

of a NMS. In this respect, the Commission believes

that ITS, the NASD’s [National Association of

Securities Dealers’] Computer Assisted Execution

System (‘‘CAES’’) and the NSTS represent

constructive approaches to integrating trading in

physically dispersed locations. (citations omitted)

Exchange Act Release No. 19315 (December 9,

1982), 47 FR 56236 (December 15, 1982).

26See, e.g., Exchange Act Release No. 19315 (Dec.

9, 1982), 47 FR 56236 (Dec. 15, 1982) (Commission

approval to terminate the NSTS as an experimental

program and extend its duration for an indefinite

period of time); Exchange Act Release No. 12451

(May 14, 1976), 41 FR 20932 (May 21, 1976)

(Commission approval of the MAX system to

operate on a permanent basis); Exchange Act

Release No. 32631 (July 14, 1993), 58 FR 39069

(July 21, 1993) (Commission approval to operate the

SuperMAX system on a permanent basis); Exchange

Act Release No. 17601 (March 4, 1981), 46 FR

16171 (March 11, 1981) (Commission notice of the

NASD filing of proposed rule change for the

establishment of CAES); Exchange Act Release No.

17744 (April 21, 1981), 46 FR 23856 (April 28,

1981) Commission order to implement an

automated interface between the ITS and the

CAES); and Exchange Act Release No. 18713 (May

6, 1982), 47 FR 20413 (May 12, 1982)

(implementing ITS/CAES interface and operations).

27Exchange Act Release No. 35030 (November 30,

1994), 59 FR 63141 (December 7, 1994). The PCX

Application differs from Chicago Match in that it

is a periodic, rather than a unitary, call market.

28See Exchange Act Release No. 39086

(September 17, 1997), 62 FR 50036 (September 24,

1997). 29Id.

designed to meet the demands of

sophisticated portfolio managers and

other market professionals

implementing complex trading

strategies. These market participants

often require instantaneous access to the

market, and desire to minimize the

market impact of their transactions

through the expression of varied trading

interests on a confidential basis. At the

same time, the PCX Application is

designed to allow retail customers,

through PCX members Users, to interact

with institutional trading interests.

The Commission believes that PCX is

entitled to modify its market place,

subject to Commission approval, to

provide a new, innovative trading

system for listed securities. The PCX

Application is likely to promote

competition among market centers

because it has the potential to attract

new market participants and to increase

order flow to the PCX. By attracting

order flow, the PCX Application may

provide a new and enhanced source of

liquidity for investors that may lessen

order flow to other less-automated

exchanges. The linkage of the PCX

Application to the ITS System should

increase the ability of investor orders to

interact directly with other investor

orders. Moreover, the Commission

believes that the linking of the PCX

Application to the ITS System should

benefit both institutional and retail

investors insofar as their expressions of

trading interest will be represented in

the OptiMark System and should be

more likely to result in executions.

The Commission has historically

encouraged exchanges to integrate new

data communications and trade

execution mechanisms into their

markets in furtherance of the

development of the NMS.25 The

Commission, for example, approved the

fully computerized NSTS of the

Cincinnati Stock Exchange, the MAX

and SuperMAX Systems of the CHX, the

CAES operated by Nasdaq.26 In fact, the

PCX Application shares many of the

characteristics of the CHX’s Chicago

Match System, which was approved by

the Commission in 1994.27 The

Commission notes that both the NSTS

and CAES are linked with the ITS

System.

The PCX represented in its rule filling

for the PCX Application that the PCX

Application would be operated in a

manner consistent with the PCX’s

intermarket price protection obligations

under the ITS Plan.28 The PCX

Application would incorporate existing

market interest from each of the ITS

Participant markets in the form of CQS

Profiles. All orders generated from a

cycle priced inferior to the quotations of

another ITS Participant market would

executed on the PCX only upon

submission of appropriate ITS

commitments seeking to reach such

better-priced interest. For orders

representing matched coordinates from

CQS Profiles and other Profiles, the PCX

would send an ITS commitment

reflecting each such order for execution

on other market centers to which the

OptiMark System is not directly linked.

Under the PCX Description

Amendment, an ITS commitment would

be sent immediately following the

matching of the Profiles. Under the

NYSE Description Amendment, before

an ITS commitment could be sent, the

PCX Application would first be required

to provide the PCX specialist with an

opportunity to trade in place of the

pending ITS commitment. Every ITS

commitment would then be sent under

the ‘‘give-up’’ (an identifying symbol) of

the member User or the Designated

Broker, by way of the traditional PCX

linkage to the ITS, in the sequence in

which orders are generated from the

cycle. Thus, the Commission

preliminarily believes that the linkage of

the PCX Application to the ITS System

may be accomplished in a manner fully

consistent with the ITS Plan.

The Commission understands that

certain ITS Participants believe that

adoption of an amendment establishing

a percentage formula is necessary in

order to prevent the possibility that ITS,

as used by the PCX members and their

customers through the PCX Application,

will be used as an automated order

delivery device to obtain cost-free, nonmember access to other market centers.

The Participants considered two

formulas, the PCX Formula and the

NYSE Formula, in an attempt to provide

a form of ‘‘back-end’’ protection that

would serve as a prophylactic measure

to address potential access concerns.

The Commission is proposing these as

alternative amendments. Although they

differ in specifics, both the PCX

Formula Amendment and the NYSE

Formula Amendment would prevent, by

establishing a numerical limit, the PCX

Application’s linkage to ITS from

becoming an automated order delivery

system to other market centers. The

proposed percentage ceilings of each

formula amendment vary depending on

what types of trades are included in the

formula.

A. Background to the PCX Application

Amendment

The Commission approved the PCX’s

new facility called the PCX Application

of the OptiMark System in September

1997.29 With regard to ITS, the

Commission notes that the PCX has

consistently taken the position that no

ITS Plan amendments are necessary

before the PCX Application of the

OptiMark System is implemented, but

that after such implementation, the PCX

Application would be monitored to

ensure that no Plan violations occurred.

This position was affirmed by six of the

eight other ITS Participants when the

issue was presented to the entire ITSOC

for deliberation on December 11, 1997.

Two Participants, the NYSE and Amex,

abstained from voting. Despite the

results of the ITSOC vote, the NYSE

continued to express its belief that the

PCX Application requires a Plan

amendment that includes certain

specific protections to ensure that the

PCX Application will not be used in an

improper manner. The NYSE also
Federal Register / Vol. 63, No. 140 /Wednesday, July 22, 1998 / Notices 39309

30Both the PCX and NYSE Description

Amendments proposed identical changes with

respect to the following: (a) section 1(11) is being

amended to reflect that, in addition to meaning the

floor(s) of an Exchange Participant, the term

‘‘Exchange (Participant’s) Market’’ also means the

PCX Application of the PCX; (b) section 1(23) is

being amended to provide that ‘‘member,’’ member

in the market center,’’ ‘‘member on the floor’’ and

‘‘member in the Participant’’ (and any derivative)

are defined to include one or more PCX members

in their use of the PCX Application; (c) section

1(34A) is being amended to state that, in the case

of PCX, members will be able to participate with

the regional computer interface by means of the

PCX Application Module; and (d) section 1(34B) to

state that on PCX the entry of commitments to trade

and receipt of reports of executions or cancellations

of such commitments will be by means of the PCX

Application Module.

31The NYSE proposed amendment to Section

6(a)(ii) contained language that, if adopted, would

have required a Plan amendment for any proposal

that was developed by a Participant for

communicating with the ITS System in a manner

different that described in Section 6(a)(ii) for that

Participant. The Commission, however, is not

including this language in the amendments

currently being proposed.

disagreed with the implication that the

ITSOC has the policy-making authority

to interpret provisions of the ITS Plan.

Notwithstanding the NYSE’s position,

the PCX continued to believe that an

amendment to the ITS Plan prior to the

implementation of the PCX Application

was not necessary, however, the PCX

indicated that, to the extent that certain

prophylactic protections were deemed

necessary by the ITSOC, the PCX would

submit for ITSOC consideration a

description amendment, as well as a

formula amendment. On June 3, 1998,

the ITSOC met to consider PCX’s

proposed amendments to the ITS Plan

regarding the PCX Application of the

OptiMark System. The first amendment,

the PCX Description Amendment,

contained a definition of basic terms

and a description of ITS transactions

resulting from the PCX Application. The

second amendment, the PCX Formula

Amendment, contained a prophylactic

protection in the form of a percentage

formula to prevent any potential misuse

of the PCX Application. Neither

amendment was approved. The NYSE

also submitted its own version of an

NYSE Description Amendment and as

NYSE Formula Amendment; however,

these amendments were not presented

for a vote to the ITSOC. As a result of

the ITSOC vote, the Commission, on its

own initiative, is proposing in

substantially similar form, both the PCX

and NYSE Description Amendments, as

well as the PCX and NYSE Formula

Amendments, in order to link the PCX

Application to the ITS System.

B. Description of the ITS Amendments

The Commission proposes to add two

new terms to Section 1, the ‘‘PCX

Application’’ and the ‘‘PCX Application

Module,’’ in subsections 33(a) and 33(b)

respectively. Both the PCX and NYSE

Description Amendments propose to

add the term, ‘‘PCX Application,’’

which refers to the computerized

facility of the PCX (as defined in PCX

Rule 15.1) that will receive orders

generated by the OptiMark System.

Specifically, Section 1(33A) provides

that the PCX would process orders

received by the PCX Application to

permit: (1) Execution on PCX of orders

that reflect a match between contra-side

non-CQS Profiles; and (2) transmission

to ITS of those orders reflecting a match

between a non-CQS Profile and a CQS

Profile. The two proposed definitions of

‘‘PCX Application’’ are similar except

for the method by which orders

reflecting a match between a non-CQS

Profile and a CQS Profile would be

transmitted to ITS. The PCX

Application would not become an ITs

Participant under either proposed

definition.

Both the PCX and NYSE Description

Amendment provide for identical

definitions of ‘‘PCX Application

Module’’ to be added to the Plan. ‘‘PCX

Application Module’’’ refers to the

computerized subsystem of the PCX

Application that will permit automatic

formatting of orders received from the

OptiMark System to ITS commitments.

Certain technical amendments to the

existing definitions are also being

proposed to specifically incorporate the

proposed operation of the PCX

Application.30

The Commission is proposing both

the PCX’s and the NYSE’s Description

Amendment to Section 6(a)(ii) of the

Plan. In proposing these alternative

amendments, the Commission takes no

position with respect to the need for any

Plan amendment. The amendments

being proposed provide a detailed

description of four generic scenarios in

which ITS commitments will be

automatically generated and sent by

means of the PCX Application

Module.31 As proposed, the NYSE’s

Description Amendment to Section

6(a)(ii) differs from the PCX’s version in

that the fourth scenario refers to

commitments generated via a

transaction involving one or more

commitments to trade at the inferior

block trade price for all of the size

associated with the CQS Profile as

‘‘block policy’’ commitments originating

from the PCX Application Module. In

contrast, the PCX Description

Amendment refers to such

commitments as ‘‘trade-through’’

commitment. The substantive result is

that these trades would be counted

differently in the formula calculation.

Both the PCX and NYSE Description

Amendments distinguish between (1)

‘‘trade-at’’ commitments and (2) ‘‘tradethrough’’ commitments. For the specific

purposes of the PCX Application,

‘‘trade-at’’ commitments refer to those

commitments sent to obtain access to

the quotes of other ITS Participants

upon exhausting all available PCX

trading interest at a price superior or

equal to the quoted interest. ‘‘Tradethrough’’ commitments refer to those

commitments sent when trades

otherwise would be executed on the

PCX at inferior prices—that is, these

commitments are sent to satisfy the

away market superior quotes to avoid a

potential violation of the ITS tradethrough rule and block trade policy.

The NYSE Description Amendment to

Section 6(a)(ii) also would require, prior

to the PCX Application Module

generating a commitment to trade

representing an OptiMark System order,

that the PCX process the order in

accordance with proposed Section

8(a)(v) (requiring a probe of the PCX

market—that is, a second exposure of

the order to the PCX floor specialists

before an ITS commitment is sent to

another market), and, if possible,

execution of the order on the PCX. The

PCX Description Amendment does not

contain this requirement. The PCX

believes that, since PCX specialists will

be required to enter their displayed bids

and offers into the OptiMark System, a

secondary probe is unnecessary after an

order is generated by OptiMark and sent

to the PCX Application.

Finally, the Commission realizes that

certain ITS Participants believe that

adoption of an amendment establishing

a percentage formula is necessary in

order to prevent the possibility that ITS,

as used by the PCX members and their

customers through the PCX Application,

will be used as an order-delivery device

to obtain cost-free, non-member access

to other market centers. Therefore, the

Commission is proposing both the PCX

Formula Amendment and the NYSE

Formula amendment. Generally, both

Amendments add Section 8(h) to

describe the operational parameters of

the automated linkage between the PCX

Application and ITS.

The PCX Formula Amendment

establishes a percentage formula that

would operate as a ceiling on the

volume of ‘‘trade-at’’ commitments

generated by the PCX on an automated

basis, relative to the total volume of

transactions resulting from the PCX

Application (inclusive of ITS

commitments). The percentage would

be calculated on a share volume basis
39310 Federal Register / Vol. 63, No. 140 /Wednesday, July 22, 1998 / Notices

32 ‘‘Rolling Calendar Quarter’’ means any three

consecutive calendar months, with the first Rolling

Calendar Quarter ending on the last business day

of the first three full calendar months following the

month in which the PCX Application commences

operation.

33Any Participant may notify the PCX, in writing,

that it chooses to have included in the formula the

ITS share volume (for ‘‘trade-at’’

34See PCX Rulemaking Petition, supra note 21.

35For example, assume that the percentage of

PCX Application ITS volume exceeded the PCX

Application ceiling for the Rolling Calendar

Quarters ending January, February and March of a

given year. The restriction date would be the first

business day of May of that year, which is the first

business day of the second month following March.

The restrictions would apply as of that date and

would continue through the end of July (ceasing as

of the first business day of August, which is the first

business day of the third month following May).

Nothing would prohibit PCX from sending ‘‘tradeat’’ commitments through an acceptable alternative

means, in lieu of utilizing the PCX Application,

such as by electing to participate manually, as

permitted under the ITS Plan outside the scope of

Section 8(a)(v) of the Plan.

36The NYSE Formula Amendment bases these

ceiling levels on the PCX’s historical use of ITS for

agency business (that is, excluding activity for the

accounts of PCX specialists).

for each ‘‘Rolling Calendar Quarter.’’32

This calculation would look at the

‘‘trade-at’’ commitments sent to and

executed by certain Participants that

appropriately notify PCX in advance.33

Under the PCX Formula Amendment,

the generation of ‘‘trade-through’’

commitments would be outside the

scope of the formula because the PCX

does not believe that it should be

penalized for, or prevented from,

sending any ‘‘trade-through’’

commitments that it is obligated to send

in order to fulfill what it characterizes

as its ‘‘best execution obligations as a

national market system participant.’’34

The ceiling applicable to the PCX

Application is determined in reference

to the PCX’s historical use of ITS, but

will be higher for the first two phase-in

stages. In this regard, the base

percentage ceiling is set at 20%, with

the phase-in ceilings set at 25% and

22.5%, subject to an adjustment in the

ceilings to account for sudden periods

of market volatility.

The PCS Formula Amendment also

provides that, in the event that the

Percentage of PCX Application ITS

Volume exceeds the PCX Application

ceiling for three consecutive rolling

calendar quarters, PCX would be

required to stop sending ‘‘trade-at’’

commitments that originate from the

PCX Application Module on the first

business day of the second month

following the end of the third of such

consecutive rolling calendar quarters.

The restrictions would end on the first

business day of the third month

following the restriction date.35 The

PCX Formula Amendment further

provides for a twenty-four-month

implementation period during which

the PCX may notify the ITSOC that it

will undertake system adjustments to

the PCX Application to ensure future

compliance with the PCX Application

ceiling. The PCX would have a

minimum of nine calendar months from

the date of notice to implement the

proposed system adjustments. During

this implementation period, the

restrictions on sending ITS ‘‘trade-at’’

commitments originating from the PCX

Application Module would not apply.

Furthermore, the PCX Formula

Amendment would require the PCX to

provide the ITSOC with a report each

month, indicating the number of shares

for each of the components of the PCX

Application Formula for the previous

month, as well as the data necessary to

determine the number of ‘‘tradethrough’’ commitments originating from

the PCX Application Module. Any

Participant may call for an audit of these

reports by a certified public accountant.

The NYSE Formula Amendment

would calculate the percentage ceiling

by dividing (a) ITS executed share

volume resulting from PCX Applicationgenerated automated commitments sent

to other Participant markets by (b) total

OptiMark share volume (that is, ITS

outgoing executed share volume plus

internal PCX Application executed

volume). The NYSE Formula

Amendment also provides for

application of the formula on a rolling

calendar quarter basis. Furthermore, the

NYSE Formula Amendment initially

would cover only ‘‘trade-at’’

commitments. It would not include

‘‘block trade’’ commitments. The

formula also would not initially cover

‘‘trade-through’’ commitments, but such

commitments would be included on a

prospective basis if the ITS executed

share volume resulting from a cycle

evidences that the exclusion of tradethroughs creates a loophole in the

formula. Specifically, the NYSE

Formula Amendment provides that

share volume from ‘‘trade-through’’

commitments would not be included in

the formula unless, for a rolling

calendar quarter, the PCX fails to

execute internally at least 75 percent of

the volume in those OptiMark calls

producing trade-through commitments.

Under the NYSE Formula Amendment,

the base percentage ceiling applicable to

the PCX Application would be set at

5%, with the phase-in ceilings set at

15% and 10%.36 The NYSE Formula

Amendment does not provide for

adjustments to the ceiling limits to

account for market volatility.

The NYSE Formula Amendment

provides that, in the event that the

Percentage of PCX Application ITS

Volume exceeds the PCX Application

ceiling for three consecutive rolling

calendar quarters, PCX would be

required to stop sending ‘‘trade-at’’

commitments, as well as ‘‘non-blocktrade-through’’ commitments that

originate from the PCX Application

Module on the first business day of the

second month following the end of the

third of such consecutive rolling

calendar quarters. The restrictions

would end on the first business day of

the third month following the restriction

date. The restrictions would not apply

to block trade commitments. The NYSE

Formula Amendment also provides for

a twenty-four-month implementation

period during which the PCX may

notify the ITSOC that it will undertake

system adjustments to the PCX

Application to ensure future compliance

with the PCX Application ceiling. The

NYSE Formula Amendment also grants

the PCX a minimum of nine calendar

months from the date of notice to

implement the proposed system

adjustments. During this

implementation period, the restrictions

on sending ITS ‘‘trade-at’’ commitments

originating from the PCX Application

Module would not apply; however, the

NYSE Formula Amendment provides

for a ‘‘fail-safe’’ mechanism: if the

formula produces a number greater than

30 percent for a rolling calendar quarter,

the restrictions would take effect

notwithstanding any grace periods or

other delay. The NYSE Formula

Amendment also would require the PCX

to provide the ITSOC with a report each

month, indicating the number of shares

for each of the components of the PCX

Application Formula for the previous

month, as well as the data necessary to

determine the number of ‘‘tradethrough’’ commitments originating from

the PCX Application Module. Any

Participant may call for an audit of these

reports by a certified public account.

III. Request for Comment

The Commission is soliciting

comment on the proposed amendments

to the ITS Plan to link the PCX

Application to the ITS System as

discussed above, and also requests

comment on specific issues presented

by the proposed linkage. Interested

persons are invited to submit written

presentations of views, data and

arguments concerning the proposed

amendments to the ITS Plan, including

the feasibility of implementing the

proposed changes. The Commission

further solicits comments on any other

alternative amendments that
Federal Register / Vol. 63, No. 140 /Wednesday, July 22, 1998 / Notices 39311

37See 15 U.S.C. 78w(a)(2).

38 5 U.S.C. 603(a).

39 15 U.S.C. 78k–1.

40 17 CFR 240.11Aa3–2.

commenters may feel would better

achieve the goals of the federal

securities laws with respect to linking

the PCX Application to the ITS.

The NYSE does not believe that the

PCX Application complies with the

probing requirement contained in

Section 8(a)(v) of the Plan, which states,

in part, that ‘‘[r]easonable efforts to

probe the market to achieve a

satisfactory execution there are expected

to be taken before an order is

reformatted as a commitment to trade

and rerouted to another market through

the System.’’ The PCX believes that a

requirement (which it plans to

implement) that all specialists on its

floor enter their quotes into the

OptiMark System prior to a matching

session satisfies the probing

requirement. The Commission is

requesting comment on whether the

PCX Application, in light of PCX’s

requirement, complies with the

‘‘reasonable’’ probing aspect of Section

8(a)(v) of the Plan. The Commission also

seeks comment on whether the PCX’s or

NYSE’s version of the Description

Amendment better meets the objectives

of Section 11A of the Exchange Act, or

whether an alternative that combines

features of each version should be

adopted.

According to the ITS Plan, ITS is not

to be used as ‘‘an order delivery system

whereby all or a substantial portion of

orders to buy and sell System securities

which are sent to a particular market are

not executed within that market, but are

rerouted to another market through the

System for execution,’’ as described in

Section 8(a)(v) of the Plan. The

Commission requests comment on the

alternative formula amendments. The

Commission may, after considering the

comments, adopt some or all of the

components of these formula

amendments. The Commission also is

requesting comment on whether it is

necessary to amend the Plan to include

a percentage formula in order to satisfy

the requirements of Section 8(a)(v), or

whether it would be sufficient for PCX

to integrate OptiMark without a

limitation on the amount of outgoing

ITS commitments that are sent from the

PCX Application to another marketplace

for execution. If a percentage formula is

not adopted in the Plan at this time, the

Commission would expect the PCX to

monitor the amount of outgoing

commitments sent to ITS through the

PCX Application in order to ensure that

the PCX Application was not being used

as this type of default order delivery

system. If the Commission found that

the PCX Application was being used in

a manner inconsistent with this

provision, the Commission would then

require that the Plan be amended or that

the operation of the PCX Application be

altered in order to resolve the problem.

IV. Costs and Benefits of the Proposed

Amendments and Their Effects on

Competition, Efficiency and Capital

Formation

Section 23(a)(2) of the Exchange Act

requires the Commission, when

promulgating rules under the Exchange

Act, to consider the anti-competitive

effects of such rules, if any, and to not

adopt any rule that would impose a

burden on competition that is not

necessary or appropriate to further the

purposes of the Exchange Act.37 The

Commission preliminarily has

considered the proposed amendments to

the ITS Plan in light of the standards

cited Section 23(a)(2) of the Act and

believes that they would not likely

impose any significant burden on

competition not necessary or

appropriate in furtherance of the

Exchange Act. The Commission believes

that the PCX Application likely will

promote competition among market

centers because it has the potential to

attract new market participants and to

increase order flow to the PCX. By

attracting order flow, the PCX

Application may provide a new and

enhanced source of liquidity for

investors.

Commenters should consider the

proposed rule’s effect on competition,

efficiency and capital formation.

For purposes of the Small Business

Regulatory Enforcement Fairness Act of

1996, the Commission is also requesting

information regarding the potential

impact of the proposed rule on the

economy on an annual basis. If possible,

commenters should provide empirical

data to support their views.

The assist the Commission in its

evaluation of the costs and benefits that

may result from the proposes

amendments, commenters are requested

to provide analysis and data, if possible,

relating to costs and benefits associated

with the proposal herein. The

Commission preliminarily believes that

the proposed amendments to the ITS

Plan to include the PCX Application of

the OptiMark System in the ITS System

will provide a new and potentially more

efficient way for the PCX to match and

execute trading interest on behalf of

investors. The Commission is requesting

comment on the costs and benefits of

the proposed amendments, and a

comparison of the two alternative sets of

amendments, as well as any possible

anti-competitive impact of the proposed

amendments. Specifically, the

Commission requests commenters to

address whether the proposed

amendment would generate the

anticipated benefits or impose any cost

on U.S. investors or others.

Comments should be submitted by

August 21, 1998.

V. Initial Regulatory Flexibility

Analysis

This Initial Regulatory Flexibility

Analysis (‘‘IRFA’’) has been prepared in

accordance with Section 3 of the

Regulatory Flexibility Act (‘‘RFA’’).38 It

relates to proposed amendments to the

ITS Plan to allow the linkage of the PCX

Application of the OptiMark System to

ITS.

A. Reasons for and Objectives of the

Proposed

The Commission preliminarily

believes that the Plan should be

amended to add the PCX Application as

an approved interface with ITS. The

Commission is proposing the

amendments on its own initiative

because, despite prolonged negotiations,

the ITS Participants have been unable to

agree on how or whether to amend the

Plan to link the PCX Application to ITS.

The Commission preliminarily

believes that this linkage will further the

purposes of Section 11A of the Act 39

and the development of a national

market system by promoting

economically efficient executions of

securities transactions, fair competition

among markets, best execution of

customer order, and an opportunity for

orders to be executed without the

participation of a dealer.

B. Legal Basis

Section 11A(a)(3)(B) of the Exchange

Act authorizes the Commission, by rule

or order, the authorize or require SROs

to act jointly with respect to matters as

to which they share authority under the

Exchange Act in planning, developing,

operating or regulating a national

market system (or a subsystem thereof)

or one or more facilities thereof. It states

explicitly that the Commission not only

may approve national market system

facilities in response to an application

by SROs, but also may require SROs to

implement such facilities on their own

initiative. Rule 11Aa3–2,40 adopted by

the Commission under Section 11A,

establishes procedures for proposing

amendments to national market system

plans such as the ITS Plan. Paragraph

(b)(2) states that the Commission may

propose amendments to an effective
39312 Federal Register / Vol. 63, No. 140 /Wednesday, July 22, 1998 / Notices

41 17 CFR 240.0–10(c)(1).

42The Commission recently adopted revised

definitions of ‘‘small entity.’’ See Definitions of

‘‘Small Business’’ or ‘‘Small Organization’’ Under

the Investment Company Act of 1940, the

Investment Advisers Act of 1940, the Securities

Exchange Act of 1934, and the Securities Act of

1933, Exchange Act Release No. 40122 (June 24,

1998). The revision, among other things, expanded

the affiliation standard applicable to broker-dealers,

to exclude from the definition of a small entity

many introducing broker-dealers that clear

customer transactions through large firms.

Currently, approximately 1079 of all registered

broker-dealers will be characterized as ‘‘small.’’ See

revised Rule 0–10(i). [The Commission estimates

there are 8,300 registered broker-dealers.] 43 15 U.S.C. 78k–l(a)(3)(B).

national market system plan by

publishing the text of the amendment

together with a statement of purpose of

the amendment.

C. Small Entities Affected by the

Proposed Amendments

The proposal would directly affect the

nine Participants of ITS, none of which

are small entities. However, specialists

on the exchange floors who trade ITS

securities, floor brokers on exchange

floors placing orders into ITS, and

registered ITS/CAES market makers

who trade ITS securities in the third

market could be indirectly affected.

Paragraph (c)(1) of Rule 0–10 41 states

that the term ‘‘small business’’ or ‘‘small

organization,’’ when referring to a

broker-dealer, means a broker or dealer

that: (1) Had total capital (net worth

plus subordinated liabilities) of less

than $500,000 in its prior fiscal year

audited financial statements or, if not

required to file such statements, on the

last business day of the preceding fiscal

year; and (2) is not affiliated with any

person (other than a natural person) that

is not a small business or small

organization. The Commission currently

does not have any data on the number

of small entities that could be affected.42

1. ITS Participants

The ITS Participants must comply

with the proposed amendments once

the amendments are adopted. The

amendments would affect the eight

Participants (other than PCX) in that

they would be obliged to accept all

properly transmitted ITS commitments

reflecting a match between an

expression of interest from OptiMark

and a quote from another Participant

market sent to their markets from the

PCX Application by virtue of PCX being

allowed to link the PCX Application to

ITS.

2. Specialists, Floor Brokers, and Market

Makers

Specialists who trade ITS securities

on exchange floors, and floor brokers

who enter orders into ITS, would be

indirectly affected by the proposed

amendments. Specialists would be

required to accept commitments

originating from the PCX Application

reflecting a match between their quote

or a floor broker order. Specifically,

when a specialist entered its quote into

ITS (or a floor broker entered an order

into ITS) that constituted the best bid or

offer for that security (ITS/BBO), the

OptiMark System would match that

quote (a ‘‘CQS Profile’’) with any

appropriately priced OptiMark

expression of interest (a ‘‘non-CQS

profile’’), resulting in an ITS

commitment being sent from the PCX

Application to the specialist. ITS/CAES

market makers would be similarly

affected.

D. Reporting, Recordkeeping, and Other

Compliance Requirements

The proposal would not impose any

new reporting, recordkeeping, or other

compliance requirements on brokerdealers indirectly affected by the

proposal.

E. Duplicative, Overlapping or

Conflicting Federal Rules

The Commission believes that there

are no rules that duplicate, overlap or

conflict with, the proposed rules.

F. Significant Alternatives

The RFA directs the Commission to

consider significant alternatives that

would accomplish the stated objectives,

while minimizing any significant

economic impact on small entities. In

connection with the proposal, the

Commission considered the following

alternatives: (1) The establishment of

differing compliance or reporting

requirements or timetables that take into

account the resources available to small

entities; (2) the clarification,

consolidation, or simplification of

compliance and reporting requirements

under the Rule for small entities; (3) the

use of performance rather than design

standards; and (4) an exemption from

coverage of the Rule, or any part thereof,

for small entities.

The Commission believes that none of

the above alternatives is applicable to

the proposed amendments. The ITS

Participants are the only parties that are

subject to the requirements of the ITS

Plan. The ITS Participants are all

national SROs and, as such, are not

‘‘small entities.’’ The additional

recordkeeping and reporting burden is

solely on PCX, which is subject to

Exchange Act Rule 11Aa3–1 reporting

requirements, and is not a small entity

for purposes of the RFA. Therefore,

having considered the foregoing

alternatives in the context of the

proposed amendments, the Commission

does not believe they are applicable to

the instant proposal.

G. Solicitation of Comments

The Commission encourages the

submission of comments with respect to

any aspect of this IRFA. The

Commission requests comment as well

as empirical data on the impact the

proposal will have on small brokerdealers, specialists or market makers

that utilize ITS. Comment is specifically

requested on whether broker-dealers

that access ITS meet the revised

definition of ‘’small business’’ and on

the number of small entities that would

be affected by the proposed

amendments and whether they would

be considered small entities for

purposes of the RFA. Also, the

Commission is seeking comment on the

perceived nature of the impact of the

proposed amendments on these entities.

Such comments will be considered in

the preparation of the Final Regulatory

Flexibility Analysis, if the proposed

amendments to the ITS Plan are

adopted, and will be placed in the same

public file as comments on the proposed

amendments themselves. Comments

should be submitted in triplicate to

Jonathan G. Katz, Secretary, Securities

and Exchange Commission, 450 Fifth

Street, N.W., Washington, D.C. 20549.

Comments also may be submitted

electronically at the following E-mail

address: rule-comments@sec. gov. All

comment letters should refer to File No.

4–208; this file number should be

included on the subject line if E-mail is

used. Comment letters will be available

for public inspection and copying in the

Commission’s Public Reference Room,

450 Fifth Street, N.W., Washington, D.C.

20549. Electronically submitted

comment letters also will be posted on

the Commission’s Internet web site

(http://www.sec.gov).

VI. Commission Authority

Pursuant to Section 11A(a)(3)(B) of

the Exchange Act,43 the Commission is

proposing changes to the ITS Plan as set

forth below.

VII. Description of Proposed

Amendments to the ITS Plan

The Commission hereby proposes, on

its own initiative, two alternative sets of

amendments to the ITS Plan to provide

for the linking of the PCX Application

to the ITS System, pursuant to Rule

11Aa3–2(b)(2) and (c)(1) and the

Commission’s authority under Section
Federal Register / Vol. 63, No. 140 /Wednesday, July 22, 1998 / Notices 39313

44 5 U.S.C. 78k–l(a)(3)(B). Section 11A(a)(3)(B)

authorizes the Commission, in furtherance of its

statutory directive to facilitate the development of

a national market system, by rule or order, to

authorize or require self-regulatory organizations to

act jointly with respect to matters as to which they

share authority under the Act in planning,

developing, operating, or regulating a national

market system (or subsystem thereof) or one or

more of the facilities thereof.

45The text reflects the latest unofficial

compilation of the ITS Plan supplied by the ITSOC,

including all previously incorporated amendments

up to May 30, 1997.

11A(a)(3)(B) of the Act.44 Below is the

text of the amended ITS Plan.45 The first

version presented reflects the PCX

Description and Fomula Amendments.

The second version presented

substantially reflects the NYSE

Description and Formula Amendments.

Deleted text is [bracketed] and new

language is italicized.

* * * * *

PCX Version of the Description and

Formula Amendments

Section 1 Definitions

* * * * *

(11) ‘‘Exchange (Participant’s)

Market’’ means the floor(s) of an

Exchange Participant, except that, in the

case of (a) the CSE, ‘‘Exchange

(Participant’s) Market’’ means in

addition to the premises on which

NSTS terminals are located, NSTS and

ITS stations located in the NSTS

Supervisory Center [.] and (b) the PCX,

‘‘Exchange (Participant’s) Market’’ also

means the ‘‘PCX Application.’’

* * * * *

(23) ‘‘Member,’’ ‘‘members in the

market center,’’ ‘‘member on the floor’’

and ‘‘member in the Participant’’ (and

any derivative and comparable phrases)

as applied to (a) the CSE each mean one

or more NSTS Users in their use of

NSTS well as more as one or more

members physically on the CSE floor ,

and (b) the PCX in addition to the PCX

members on the PCX floors, each also

mean one or more PCX members in their

use of the PCX Application.

* * * * *

(33A) ‘‘PCX Application’’ means the

computerized facility of the PCX, as

defined in PCX Rule 15.1, that receives

orders generated by the OptiMark

System, a patented electronic matching

system based on an optimization

algorithm that, on a periodic ‘‘call’’

basis, processes certain qualifying

expressions of trading interest called

satisfaction profiles (‘‘profiles’’),

including profiles created from the

published quotations disseminated by

the other Participants at commencement

of the OptiMark System call reflecting

the best bid and offer prices and

associated sizes (‘‘CQS profiles’’) and

other PCX member profiles reflecting

the bids or offers disseminated by the

PCX specialists at commencement of the

OptiMark System call. The orders

received by the PCX Application will be

processed by the PCX to permit: (a) in

the case of those orders reflecting a

match between contra-side non-CQS

profiles, appropriate execution on the

PCX and reporting thereafter in

accordance with applicable PCX rules;

and (b) in the case of those orders

reflecting a match between a non-CQS

profile and a CQS profile, appropriate

transmission to the System by means of

the PCX Application Module or any

other authorized method. The PCX

Application is not a part of the System.

(33B) ‘‘PCX Application Module’’

means the computerized subsystem of

the PCX Application that permits

automatic formatting of the orders

received from the OptiMark System

reflecting a match between a non-CQS

profile and a CQS profile as

commitments to trade for transmission

thereafter to the System via the PCX

Regional Switch.

(34A) ‘‘RCI’’ means the ‘‘Regional

Computer Interface,’’ the automated

linkage between the System and

collectively, the Regional Switches and

the AMEX DBM that, when

implemented, will enable members

located on the floors of the AMEX, the

BSE, the CHX, the PCX and the PHLX

to participate in the Applications, and,

in the case of (a) the CSE, will enable

members to participate by means of the

NSTS Switch and (b) the PCX, will also

enable members to participate by means

of the PCX Application Module.

(34B) ‘‘Regional Switch’’ means the

computerized system of each of the BSE,

the CHX, the PCX and the PHLX that,

when implemented, will replace the

original ITS stations on its floor. Each

Regional Switch is not a part of the

System, but permits the entry and

receipt of System communications by

means of CRT or other terminals, card

readers and, in some instances,

associated printers on the floor or the

BSE, the CHX, the PCX or the PHLX, as

appropriate (collective ‘‘ITS/Regional

stations’’), and, also in the case of the

PCX, the entry of commitments to trade

and receipt of reports of executions or

cancellations of such commitments by

means of the PCX Application Module.

* * * * *

Section 6 ITS

(a)(ii)

* * * * *

The PCX would then report the trade

to the CTA Plan Processor for

dissemination under the CTA Plan at

401⁄8 (or at the better price) with the

identifier assigned to the PCX.

If a trade involves the PCX

Application, the commitment to trade

originating from the PCX may enter the

System from the PCX Application

Module through the RCI. In this case, a

trade involving the PCX Application

would take place as follows: In the

original example, assume that the stock

in question is traded on the NYSE as

well as on the PCX. From time to time,

on a periodic call basis, the OptiMark

System matches available profiles

(including CQS profiles and other PCX

member profiles reflecting the bids or

offers disseminated by the PCX

specialists) in the stock and generates

orders capable of immediate execution.

For purposes of this example, assume

that at the time an OptiMark System

call commences, the continuously

updated quotation display shows that

the NYSE has a displayed best bid of 20

for 10,000 shares and a displayed best

offer of 201⁄4 for 12,000 shares (i.e., 20–

201⁄4, 100×120), representing the ITS

BBO, and that all other Participant

Markets’ published quotations are

disseminated at inferior prices and that

none are greater in size than 100 shares.

The OptiMark System automatically

creates the corresponding ‘‘buy’’ and

‘‘sell’’ CQS profiles reflecting the

displayed interest from the NYSE and

includes such profiles in ensuing call.

As all profiles at hand are matched

sequentially based on the satisfaction

values assigned to different prices an

sizes, a series of orders will be generated

and delivered to the PCX. The PCX

Application Module automatically will

format any order reflecting a match with

another Participant’s displayed interest

(in whole or in part) as a commitment

to trade with such market, and acting on

behalf of the responsible PCX member,

will cause such commitment to enter the

System (which, in turn, will route such

commitment to the Participant Market).

There are four possible scenarios that

illustrate the different types of

commitments to trade originating from

the PCX Application Module.

Scenario 1

Upon exhausting all available

matches among the non-CQS profiles,

the OptiMark System call finds a match

(in whole or in part) between the

remainder of any such profile with the

contra-side bid or offer as reflected in a

CQS profile. In Scenario 1, the

implementation of the PCX Application

would result in (a) one or more trades

reported by the PCX at a price better

than or equal to the CQS profile and (b)

one or more commitments to trade at
39314 Federal Register / Vol. 63, No. 140 /Wednesday, July 22, 1998 / Notices

the associated CQS profile price (the

commitments generated in this context

referred to as ‘‘trade-at’’ commitments

originating from the PCX Application

Module).

For example, an OptiMark System

call may include a buy member profile

for 20,000 shares at 201⁄4, a sell member

profile for 16,000 shares at 201⁄4, and

the NYSE’s CQS sell profile for 12,000

shares at 201⁄4. The call may result in

the generation of (a) orders reflecting

the match between the contra member

profiles to buy and sell 16,000 shares at

201⁄4 for immediate delivery to and

execution on the PCX and (b) an order

reflecting the match between the

remaining portion of the member profile

to buy 4,000 shares and the NYSE’s

stated offer at the price of 201⁄4 for

immediate acceptance by the PCX

Application Module and issuance

thereafter of a commitment to buy. If the

201⁄4 offer is still available when the

‘‘trade-at’’ commitment originating from

the PCX Application Module reaches

the NYSE, or if a better offer is available

and if the rules of the NYSE permit an

execution at that price, then the NYSE

offer would accept the commitment, and

an execution at 201⁄4 (or at the better

price) would take place. The NYSE

would then report the trade to the CTA

Processor dissemination under the CTA

Plan at 201⁄4 (or at the better price) with

the identifier assigned to the NYSE.

Scenario 2

Upon finding no matching potential

among the non-CQS profiles, the

OptiMark System call finds a match (in

whole or in part) between a PCX

member profile and the contra-side bid

or offer as reflected in a CQS profile. In

Scenario 2, the implementation of the

PCX Application would result in (a) no

trade reported by the PCX and (b) one

or more commitments to trade at the

associated CQS profile price (the

commitments generated in this context

also referred to as ‘‘trade-at’’

commitments originating from the PCX

Application Module).

For example, an OptiMark System

call may include a buy member profile

for 20,000 shares at 201⁄4 with no contra

sell profile at 201⁄4 or lower, except for

the NYSE’s CQS sell profile for 12,000

shares at 201⁄4. The call may result in

the generation of an order reflecting the

match between the buy member profile

and the NYSE’s stated offer of 12,000

shares at 201⁄4 for immediate

acceptance by the PCX Application

Module and issuance thereafter of a

commitment to buy. If the 201⁄4 offer is

still available when the ‘‘trade-at’’

commitment originating from the PCX

Application Module reaches the NYSE,

or if a better offer is available and if the

rules of the NYSE permit an execution

at that price, then the NYSE offer would

accept the commitment, and an

execution at 201⁄4 (or at the better price)

would take place. The NYSE would then

report the trade to the CTA Processor for

dissemination under the CTA Plan at

201⁄4 (or at the better price) with the

identifier assigned to the NYSE.

Scenario 3

Prior to initiating any match among

the non-CQS profiles at a price inferior

to any CQS profile that otherwise may

result in a potential ‘‘trade-through’’ as

that term is defined in Exhibit B (TradeThrough Rule), the OptiMark System

call finds a separate match (in whole or

in part) with the contra-side bid or offer

as reflected in the CQS profile. In

Scenario 3, the implementation of the

PCX Application would result in (a) one

or more trades reported by the PCX at

a price inferior to the CQS profile and

(b) one or more commitments to trade at

the superior price of the CQS profile for

all of its associated size (the

commitments generated in this context

referred to as ‘‘trade-through’’

commitments originating from the PCX

Application Module).

For example, an OptiMark System

call may include a buy member profile

for 20,000 shares at 203⁄8, a sell member

profile for 1,000 shares at 201⁄4, another

sell member profile for 10,000 shares at

203⁄8, and the NYSE’s CQS sell profile

for 12,000 shares at 201⁄4. The call may

result in the generation of (a) orders

reflecting the matches between the

contra member profiles to buy and sell

1,000 shares at 203⁄8 and 7,000 shares

also at 203⁄8 for immediate delivery to

an execution on the PCX and (b) an

order reflecting the match between the

relevant portion of the member profile

to buy 12,000 shares and the NYSE’s

stated offer of 12,000 shares at the price

of 201⁄4 for immediate acceptance by the

PCX Application Module and issuance

thereafter a commitment to buy in

accordance with Exhibit B (TradeThrough Rule).

Scenario 4

In connection with any matching

potential found among the non-CQS

profiles at a price inferior to any

outstanding CQS profile and in a size

that may result in a potential ‘‘block

trade’’ as that term is defined in Exhibit

C (Block Trade Policy), the OptiMark

System call finds a separate match (in

whole or in part) with the contra-side

bid or offer as reflected in the CQS

profile at the inferior price associated

with the potential block trade. In

Scenario 4, the implementation of the

PCX Application would result in (a) one

or more block trades by the PCX at a

price inferior to the CQS profile and (b)

one or more commitments to trade at

the inferior block trade price for all of

the size associated with the CQS profile

(the commitments generated in this

context also referred to as ‘‘tradethrough’’ commitments originating from

the PCX Application Module).

For example, an OptiMark System

call may include a buy member profile

for 22,000 shares at 203⁄8, a sell member

profile for 10,000 shares at 203⁄8, and

the NYSE’s CQS sell profile for 12,000

shares at 201⁄4. The call may result in

the generation of (a) orders reflecting

the match between the contra member

profiles to buy and sell 10,000 shares at

203⁄8 for immediate delivery to and

execution on the PCX and (b) an order

reflecting the match between the

relevant portion of the member profile

to buy 12,000 shares and the NYSE’s

stated offer of 12,000 shares at the block

trade price of 203⁄8 for immediate

acceptance by the PCX Application

Module and issuance thereafter of a

commitment to buy in accordant with

Exhibit C (Block Trade Policy).

* * * * *

Section 8 Participants’ Implementation

Obligations.

* * * * *

(h) Operational Parameters for the

PCX Application Automated Linkage. (i)

In order to ensure the proper use of the

PCX Application in a manner consistent

with the requirements set forth in

Section 8(a)(v) of this Plan, the PCX may

send ‘‘trade-at’’ commitments

originating from the PCX Application

Module (as such ‘‘trade-at’’

commitments are described more fully

in section 6(a)(ii) in Scenarios 1 and 2)

to other Participant Markets only in

compliance with the requirements of

this section 8(h).

(ii) For the purpose of this section

8(h):

(A) ‘‘Rolling Calendar Quarter’’ means

any three consecutive calendar months,

with the first Rolling Calendar Quarter

ending on the last business day of the

first three full calendar months

following the month in which the PCX

Application commences operation.

(B) ‘‘Percentage of PCX Application

ITS Volume’’ for a Rolling Calendar

Quarter is defined pursuant to the

following formula (the ‘‘PCX

Application Formula’’), expressed as a

percentage:

X

X Y+
Federal Register / Vol. 63, No. 140 /Wednesday, July 22, 1998 / Notices 39315

X = Executed ITS share volume

reported pursuant to the CTA Plan by

the Notifying Participants resulting from

the acceptance and execution of ‘‘tradeat’’ commitments originating from the

PCX Application Module (as such

‘‘trade-at’’ commitments are described

more fully in section 6(a)(ii) in

Scenarios 1 and 2).

Y = Executed share volume reported

pursuant to the CTA Plan by the PCX

resulting from the execution of orders

through the PCX Application.

(C) The ‘‘notifying Participant’’ means

any Participant that notifies the PCX, in

writing, that ‘‘X‘‘ of the PCX Application

Formula should include the ITS share

volume reported to the CTA Plan by

such Participant resulting from the

acceptance and execution of ‘‘trade-at’’

commitments originating from the PCX

Application Module. Initial notice is

due prior to the end of the first Rolling

Calendar Quarter and will remain in

effect until such notice is withdrawn.

(D) the ‘‘PCX Application Ceiling’’ for

a Rolling Calendar Quarter is:

* For the first five consecutive Rolling

Calendar Quarters: 25 percent;

* For the second five consecutive

Rolling Calendar Quarters: 22.5 percent;

and

* For each subsequent Rolling

Calendar Quarters: 20 percent;

provided, however, that each of the

above-listed percentages shall be

adjusted upward with respect to any

given Rolling Calendar Quarter to

include the difference, if any, by which

the average Percentage of PCX

Application ITS Volume for the

immediately preceding three Rolling

Calendar Quarter fell short of the

average PCX Application Ceiling for the

corresponding period of time.

For example, assume that the PCX

Application is in the 11th Rolling

Calendar Quarter of its operation.

Further assume that the average

Percentage of PCX Application ITS

Volume for the 8th, 9th, and 10th

Rolling Calendar Quarter was 18%. The

applicable PCX Application Ceiling for

the 11th Rolling Calendar Quarter

would be calculated by adding the

difference by which 18% fell short of the

average PCX Application Ceiling over

the same period of time—that is, the

difference between 22.5% and 18%—to

the initial percentage of 20%. In this

case, the applicable PCX Application

Ceiling for the 11th Rolling Calendar

Quarter would be 24.5%, after adjusting

the initial percentage of 20% to add the

difference of 4.5%.

(iii) In the event that the Percentage

of PCX Application ITS Volume exceeds

the PCX Application Ceiling for three

consecutive Rolling Calendar Quarters,

the PCX shall cease sending ‘‘trade-at’’

commitments originating from the PCX

Application Module (the prohibition on

sending such commitments hereinafter

referred to as the ‘‘Restrictions’’) on the

first business day of the second month

following the end of the third of such

consecutive Rolling Calendar Quarters

(the ‘‘Restriction Date’’). The

Restrictions will end on the first

business day of the third month

following the Restriction Date.

For example, assume that the

Percentage of PCX Application ITS

Volume exceeds the PCX Application

Ceiling for the Rolling Calendar Quarter

ending in January, February and March

of a given year. The Restriction Date

would be the first business day of May

of that year, which is the first business

day of the second month following

March. The Restrictions would apply as

of that date and would continue through

the end of July (ceasing as of the first

business day of August, which is the

first business day of the third month

following May).

The Restrictions set forth in this

subsection 8(h)(iii) shall, under no

circumstances, be construed to apply to

the ‘‘trade-through’’ commitments

originating from PCX Application

Module (as such ‘‘trade-through’’

commitments are described more fully

in section 6(a)(ii) in Scenarios 3 and 4).

Nothing herein prohibits the PCX from

sending any ‘‘trade-at’’ commitments

through an acceptable alternative

means, in lieu of utilizing the PCX

Application Module, such as by electing

to participate manually as permitted

under the ITS Plan outside the scope of

section 8(a)(v).

(iv) Notwithstanding subsection

8(h)(iii) above, during the first 24

calendar months following

implementation of the PCX Application,

the PCX retains the right to notify the

Operating Committee in writing, on or

prior to the Restriction Date, that it will

undertake, or cause to be undertaken,

system adjustments to the operation of

the PCX Application in an effort to

ensure future compliance with the PCX

Application Ceiling. In the event of such

notification, the PCX shall have, at a

minimum, nine calendar months from

the date of such notice (or such longer

period as may be approved by the

Operating Committee upon showing of

reasonable cause) to implement its

proposed system adjustments (the

‘‘Implementation Period’’). During the

Implementation Period, the Restrictions

shall not apply. During the next 12

calendar months following the end of

the Implementation Period, if the

Percentage of PCX Application ITS

Volume exceeds the PCX Application

Ceiling for any Rolling Calendar

Quarter, the Restrictions shall apply on

the first business day of the second

month following the end of such Rolling

Calendar Quarter (the ‘‘Subsequent

Restriction Date’’). In that event, the

Restrictions will end on the first

business day of the third month

following the Subsequent Restriction

Date.

For example, assume that the

Percentage of PCX Application ITS

Volume exceeds the PCX Application

Ceiling for the Rolling Calendar

Quarters ending in January, February

and March of Year 1 (which fall within

the first 24 calendar months of the

operation of the PCX Application). As in

the example above, the Restriction Date

would be the first business day of May

of that year, which is the first business

day of the second month following

March. The Restrictions would apply as

of that date, unless the PCX notified the

Operating Committee, on or prior to the

first business day in May, that it

planned to effect system adjustments in

an attempt to ensure future compliance

with the PCX Application Ceiling.

Assuming that the PCX provides such

notification on the Restriction Date, the

Restrictions would not apply during the

Implementation Period, which would

last for, at a minimum, nine months

from the Restriction Date (that is,

assuming the minimum duration, the

nine calendar months of May through

January of Year 2). Following the end of

the Implementation Period, assume that

the Percentage of PCX Application ITS

Volume exceeded the PCX Application

Ceiling for the next Rolling Calendar

Quarter (the quarter beginning in

February and ending April or Year 2). In

that event, the Subsequent Restriction

Date would be the first business day of

June of Year 2, which is the first

business day of the second month

following April. The Restrictions would

apply beginning on the day and would

continue through the end of August of

Year 2 (ceasing as of the first business

day of September of Year 2, which is the

first business day of the third month

following June).

The Restrictions set forth in this

subsection 8(h)(iv) shall, under no

circumstances, be construed to apply to

the ‘‘trade-through’’ commitments

originating from the PCX Application

Module (as such ‘‘trade-through’’

commitments are described more fully

in section 6(a)(ii) in Scenarios 3 and 4).

Nothing herein prohibits the PCX from

sending any ‘‘trade-at’’ commitments

through an acceptable alternative

means, in lieu of utilizing the PCX

Application Module, such as by electing

to participate manually as permitted
39316 Federal Register / Vol. 63, No. 140 /Wednesday, July 22, 1998 / Notices

under the ITS Plan outside the scope of

section 8(a)(v).

(v) Reporting and Audits, Each month

the PCX shall furnish the Operating

Committee with a report showing the

number of shares for each of the

components of the PCX Application

Formula for the previous month, as well

as the date necessary to determine the

number of ‘‘trade-through’’

commitments originating from the PCX

Application Module (as such ‘‘tradethrough’’ commitments are described

more fully in section 6(a)(ii) in

Scenarios 3 and 4). Any one or more

Participants may cause a certified

public accountant to audit any one or

more such reports. The requesting

Participant(s) shall pay for such audits.

* * * * *

NYSE Version of the Description and

Formula Amendments

Section 1 Definitions

* * * * *

(11) ‘‘Exchange (Participant’s)

Market’’ means the floor(s) of an

Exchange Participant, except that, in the

case of (a) the CSE, ‘’Exchange

(Participant’s) Market’’ means in

addition to the premises on which

NSTS terminals are located, NSTS and

ITS stations located in the NSTS

Supervisory Center[.], and (b) the PCX

‘‘Exchange (Participant’s) Market’’ also

means the ‘‘PCX Application.’’

* * * * *

(23) ‘‘Member,’’ ‘‘member in the

market center,’’ ‘‘member on the floor’’

and ‘‘member in the Participant’’ (and

any derivative and comparable phrases)

as applied to (a) the CSE each mean one

or more NSTS Users in their use of

NSTS as well as one or more members

physically on the CSE floor, and (b) the

PCX, in addition to the PCX members

on the PCX floors, each also mean one

or more PCX members in their use of the

PCX Application.

* * * * *

(33A) ‘‘PCX Application’’ means the

computerized facility of the PCX, as

defined in PCX Rule 15.1, that receives

orders generated by the OptiMark

System, a patented electronic matching

system based on an optimization

algorithm that, on a periodic ‘‘call’’

basis processes certain qualifying

expressions of trading interest called

satisfaction profiles (‘‘profiles’’),

including profiles created from the

published quotations disseminated by

the other Participants at the

commencement of the OptiMark System

call reflecting the best bid and offer

prices and associated sizes (‘‘CQS

profiles’’). The orders received by the

PCX Application will be processed by

the PCX to permit: (a) in the case of

those orders reflecting a match between

contra-side non-CQS profiles,

appropriate execution on the PCX and

reporting thereafter in accordance with

the applicable PCX rules; and (b) in the

case of those orders reflecting a match

between a non-CQS profile and a CQS

profile (i) processing pursuant to

Section 6(a)(ii)(A); or (ii) transmission to

the System pursuant to Section

6(a)(ii)B).) The PCX Application is not

part of the System.

(33B) ‘‘PCX Application Module’’

means the computerized subsystem of

the PCX Application that permits

automatic formatting of the orders

received from the OptiMark System

reflecting a match between a non-CQS

profile and a CQS profile as

commitments to trade for transmission

thereafter to the System via the PCX

Regional Switch.

(34A) ‘‘RCI’’ means the ‘‘Regional

Computer Interface,’’ the automated

linkage between the System and, and

collectively, the Regional Switches and

the AMEX DBM that, when

implemented, will enable members

located on the floors of the AMEX, the

BSE, the CHX, the PCX and the PHLX

to participate in the Applications, and,

in the case of (a) the CSE, will enable

members to participate by means of the

NSTS Switch and (b) the PCX, also will

enable members to participate by means

of the PCX Application Module.

(34B) ‘‘Regional Switch’’ means the

computerized system of each of the BSE,

the CHX, the PCX and the PHLX that,

when implemented, will replace the

original ITS stations on its floor. Each

Regional Switch is not a part of the

System, but permits the entry and

receipt of System communications by

means of CRT or other terminals, card

readers, and, in some instances,

associated printers on the floor or the

BSE, the CHX, the PCX or the PHLX, as

appropriate (collectively ‘‘ITS/Regional

stations’’), and, also in the case of the

PCX, the entry of commitments to trade

and receipt of reports of executions or

cancellations of such commitments by

means of the PCX Applications Module.

* * * * *

Section 6 ITS.

* * * * *

(a)(ii) Description of ITS Transactions.

Through ITS, a member located in one

Participant Market who wishes to buy

(or sell), for example, 100 shares of a

particular common stock that is also

traded through the System by members

in one or more other Participant Markets

is able to buy the stock from (or sell

stock to) such member(s).

(A) Description Applicable to the

AMEX, BSE, CBOE, CHX, NYSE, PHLX

and PCX.

With respect to an ITS transaction

involving the AMEX, BSE, CBOE, CHX,

NYSE, PHLX and PCX (other than with

respect to transactions involving the

PCX Application Module), for example,

assume that a member firm of the NYSE

receives from a customer an order to

purchase 100 shares of a given NYSE

listed stock that is also traded on the

PCX and the PHLX and sends that order

to the NYSE floor for execution.

* * * * *

The PCX would then report the trade

to the CTA Processor for dissemination

under the CTA Plan at 40–401⁄8 (or at

the better price) with the identifier

assigned to the PCX.

(B) Description Applicable to the PCX

Application

(1) Generation of ITS Commitments

If a trade involves the PCX

Application, the commitment to trade

originating from the PCX may enter the

System from the PCX Application

Module through the RCI. In this case, a

trade involving the PCX Application

would take place as follows: In the

original example, assume that the stock

in question is traded on the NYSE as

well as on the PCX. From time to time,

on a periodic call basis, the OptiMark

System matches available profiles

(including CQS profiles) in the stock

and generates orders capable of

immediate execution. For the purposes

of this example, assume that at the time

an OptiMark System call commences,

the continuously updated quotation

display shows that the NYSE has a

displayed best bid of 20 for 10,000

shares and a displayed best offer of 201⁄4

for 12,000 shares (i.e., 20–201⁄4, 100 ×

120), representing the ITS BBO, and that

all other Participant Markets’ published

quotations are disseminated at inferior

prices and that none are greater in size

than 100 shares.

The OptiMark System automatically

creates the corresponding ‘‘buy’’ and

‘‘sell’’ CQS profiles reflecting the

displayed interest from the NYSE and

includes such profiles in the ensuing

call. As all profiles at hand are matched

sequentially based on the satisfaction

values assigned to different prices and

sizes, a series of orders will be generated

and delivered to the PCX. Thereafter,

the PCX Application Module

automatically will format any order

reflecting a match with another

Participant Market’s displayed interest

(in whole or in part) as a commitment

to trade with such market, and acting on

behalf of the responsible PCX member,
Federal Register / Vol. 63, No. 140 /Wednesday, July 22, 1998 / Notices 39317

will cause such commitment to enter the

System (which, in turn, will route such

commitment to the Participant Market).

There are four possible scenarios that

illustrate the different types of

commitments to trade originating from

the PCX Application Module.

Scenario 1

Upon exhausting all available

matches among the non-CQS profiles,

the OptiMark System call finds a match

(in whole or in part) between the

remainder of any such profile with the

contra-side bid or offer as reflected in

CQS profile. In Scenario 1, the

implementation of the PCX Application

would result in (a) one or more trades

reported by the PCX at a price better

than or equal to the CQS profile and (b)

one or more commitments to trade at

the associated CQS profile price (the

commitments generated in this context

referred to as ‘‘trade-at’’ commitments

originating from the PCX Application

Module).

For example, an OptiMark System

call may include a buy member profile

for 20,000 shares at 201⁄4, a PCX sell

member profile for 16,000 shares at

201⁄4, and the NYSE’s CQS sell profile

for 12,000 shares at 201⁄4. The call will

result in the generation of (a) orders

reflecting the match between the contra

member profiles to buy and sell 16,000

shares at 201⁄4 for immediate delivery to

an execution on the PCX and (b) an

order reflecting the match between the

remaining portion of the member profile

to buy 4,000 shares and the NYSE’s

stated offer at the price of 201⁄4 for

immediate acceptance by the PCX

Application Module and issuance

thereafter of a commitment to buy. If the

201⁄4 offer is still available when the

‘‘trade-at’’ commitment originating from

the PCX Application Module reaches

the NYSE, or if a better offer is available

and if the rules of the NYSE permit an

execution at that price, then the NYSE

offer would accept the commitment, and

an execution at 201⁄4 (or at the better

price) would take place. The NYSE

would then report the trade to the CTA

Processor for dissemination under the

CTA Plan at 201⁄4 (or at the better price)

with the identifier assigned to the NYSE.

Scenario 2

Upon finding no matching potential

among the non-CQS profiles, the

OptiMark System call finds a match (in

whole or in part) between a PCX

member profile and the contra-side bid

or offer as reflected in a CQS profile. In

Scenario 2, the implementation of the

PCX Application would result in (a) no

trade reported by the PCX and (b) one

or more commitments to trade at the

associated CQS profile price (the

commitments generated in this context

also referred to as ‘‘trade-at’’

commitments originating from the PCX

Application Module).

For example, an OptiMark System

call may include buy member profile for

20,000 shares at 201⁄4 with no contra sell

profile at 201⁄4 or lower, except for the

NYSE’s CQS profile to sell 12,000 shares

at 201⁄4. The call will result in the

generation of an order reflecting the

match between the buy member profile

and the NYSE’s stated offer of 12,000

shares at 201⁄4 for immediate

acceptance by the PCX Application

Module and issuance thereafter of a

commitment to buy. If the 201⁄4 offer is

still available when the ‘‘trade-at’’

commitment originating from the PCX

Application Module reaches the NYSE,

or if a better offer is available and if the

rules of the NYSE permit an execution

at that price, then the NYSE offer would

accept the commitment, and an

execution at 201⁄4 (or at the better price)

would take place. The NYSE would then

report the trade to the CTA Processor for

dissemination under the CTA Plan at

201⁄4 (or at the better price) with the

identifier assigned to the NYSE.

Scenario 3

Prior to initiating any potential match

among the non-CQS profiles at a price

inferior to any outstanding CQS profile

that may result in a potential ‘‘tradethrough’’ as that term is defined in

Exhibit B (Trade-Through Rule), the

OptiMark System call finds a separate

match (in whole or in part) with the

contra-side bid or offer as reflected in

the CQS profile. In Scenario 3, the

implementation of the PCX Application

would result in (a) one or more trades

reported by the PCX at a price inferior

to the CQS profile and (b) one or more

commitments to trade at the superior

price of the CQS profile for all of its

associated size (the commitments

generated in this context referred to as

‘‘trade-through’’ commitments

originating from the PCX Application

Module).

For example, an OptiMark System

call may include a buy member profile

for 20,000 shares at 203⁄8, a sell member

profile for 1,000 shares at 201⁄4, another

sell member profile for 10,000 shares at

203⁄8, and the NYSE’s CQS profile to sell

12,000 shares at 201⁄4. The call will

result in the generation of (a) orders

reflecting the matches between the

contra member profiles to buy and sell

1,000 shares at 203⁄8 and 7,000 shares

also at 203⁄8 for immediate delivery to

and execution on the PCX and (b) an

order reflecting the match between the

relevant portion of the member profile

to buy 12,000 shares and the NYSE’s

stated offer 12,000 shares at the price of

201⁄4 for immediate acceptance by the

PCX Application Module and issuance

thereafter of a commitment to buy in

accordance with Exhibit B (TradeThrough Rule).

Scenario 4

In connection with any matching

potential found among the non-CQS

profiles at a price inferior to any

outstanding CQS profile and in any size

that may result in a potential ‘‘block

trade’’ as that term is defined in Exhibit

C (Block Trade Policy), the OptiMark

System call finds a separate match (in

whole or in part) with the contra-side

bid or offers as reflected in the CQS

profile at the inferior price associated

with the potential block trade. In

Scenario 4, the implementation of the

PCX Application would result in (a) one

or more block trades reported by the

PCX at a price inferior to the CQS

profile and (b) one or more

commitments to trade at the inferior

block trade price for all of the size

associated with the CQS profile (the

commitments generated in this context

referred to as ‘‘block policy’’

commitments originating from the PCX

Application Module).

For example, an OptiMark system call

may include a PCX buy member profile

for 22,000 shares at 203⁄8, a sell member

profile for 10,000 shares at 203⁄8, and

the NYSE’s CQS profile to sell 12,000

shares at 201⁄4. The call will result in the

generation of (a) orders reflecting the

match between the contra member

profiles to buy and sell 10,000 shares at

203⁄8 for immediate delivery to and

execution on the PCX and (b) an order

reflecting the match between the

relevant portion of the member profile

to buy 12,000 shares and the NYSE’s

stated offer of 12,000 shares at the block

trade price of 203⁄8 for immediate

acceptance by the PCX Application

Module and issuance thereafter of a

commitment to buy in accordance with

Exhibit C (Block Trade Policy).

(2) PCX Application Processing/Pricing

Prior to the PCX Application Module

generating a commitment to trade

representing an OptiMark system order,

the PCX shall process such order as

required by Section 8(a)(v) of the Plan

and PCX Rule 15.X, and, if possible,

execute the order on the PCX. If after

processing in accordance with the

foregoing Plan provision and PCX rule,

any portion of such order remains, the

PCX Application Module will format the

balance of the order into a commitment

to trade and, acting on behalf of the

PCX member who represented the
39318 Federal Register / Vol. 63, No. 140 /Wednesday, July 22, 1998 / Notices

customer interest in the OptiMark

System, send the commitment to the

Participant Market with whose

quotation the order had been matched.

Such commitment shall priced at the

published contra-side bid of offer price

disseminated by the Participant Market

with which the order is matched, except

that in the case of a ‘‘block policy’’

commitment, the price of the

commitment shall be the price of the

block trade on the PCX.

(C) Description Applicable to the CSE

With respect to an ITS transaction

that [If a trade] involves the CSE, the

commitment to trade or a response

thereto destined for or originating from

the CSE will leave and enter the System

through a NSTS Switch. In the

[foregoing] example in Section

6(a)(ii)(A) above, a trade involving the

CSE would occur as follows:

* * * * *

The CSE would then report the trade

to the CTA Plan Processor for

dissemination under the CTA Plan at

the response price with the identifier

assigned to the CSE.

(D) Description Applicable to the NASD

With respect to an ITS transaction

that [If a trade] involves the ITS/CAES

Third Market, the commitment to trade

or response thereto destined for or

originating with an ITS/CAES Market

Maker will leave and enter the System

at the CAES Switch. A trade involving

the ITS/CAES Third Market would take

place as follows. In the [original]

example in Section 6(a)(ii)(a) above,

assume that the stock in question is also

an ITS/CAES security and that the order

is for 300 shares.

* * * * *

Section 8 Participant’s Implementation

Obligations

(a)(v) Automated Generation of

Commitments. Section 6(a)(ii) describes

the approved methods by which each of

the Participants is authorized to send

commitments to trade via the System. In

addition to that section, and with

respect to the general use of the System

(and when considering possible

amendments to the Plan), [T]the

Participants agree that: ITS is not

designed to be, and should not be used

as, an order delivery system whereby all

or a substantial portion of orders to buy

and sell System securities which are

sent to a particular market are not

executed within that market, but are

routinely rerouted to another market

through the System for execution. In the

normal course, most orders received

within the market of an Exchange

Participant are expected to be executed

within the market. Reasonable efforts to

probe the market to achieve a

satisfactory execution there are expected

to be taken before the order is reformed

as a commitment to trade and rerouted

to another market through the System;

provided, however, that PCX, with

respect to an order received from the

OptiMark System, shall not be required

to probe the PCX market for an

execution therein prior to the PCX

Application Module automatically

reformatting a commitment to trade

with respect to such order if the share

volume of the commitment, if executed,

would not be included in the ‘‘X

variable,’’ as that term is used in

subsection 8(h)(ii)(B).

* * * * *

(h) Operational Parameters for the

PCX Application Automated Linkage. (i)

The PCX may send computer-generated

commitments to trade to other

Participant Markets through the PCX

Application Module only in compliance

with the requirements of this Section.

(ii) For the purposes of this Section:

(A) ‘‘Rolling Calendar Quarter’’ means

any three consecutive calendar months,

with the first Rolling Calendar Quarter

ending in the last business day of the

first three full calendar months

following the month in which the PCX

Application commences operation.

(B) ‘‘Percentage of PCX Application

ITS Volume’’ for a Rolling Calendar

Quarter is defined pursuant to the

following formula (the ‘‘PCX

Application Formula’’) expressed as a

percentage:

X=Executed share volume reported

pursuant to the CTA Plan by all

Participant Markets (other than the

PCX) (the ‘‘Executed ITS Share

Volume’’) resulting from the acceptance

and execution of ‘‘trade-at’’

commitments originating from the PCX

Application Module; provided however,

that if in any Rolling Calendar Quarter

the PCX does not execute in its own

market more than 75 percent of the

aggregate number if shares in those calls

that produce ‘‘trade-through’’

commitments, then, beginning in the

month following such Rolling Calendar

Quarter, this X variable will include the

Executed ITS Share Volume resulting

from the acceptance and execution of

‘‘trade-through’’ commitments

originating from the PCX Application

Module. In that event, the Executed

Share Volume resulting from the

acceptance and execution of ‘‘tradethrough’’ commitments shall continue

to be included in this X variable until,

for a Rolling Calendar Quarter, the PCX

executes in its own market at least 75

percent of the aggregate number of

shares in those calls that produce

‘‘trade-through’’ commitments (‘‘Tradeat’’ and ‘‘trade-through’’ commitments

are described more fully in Section

6(a)(ii)(B).)

Y=Executed share volume reported

pursuant to the CTA Plan by the PCX

resulting from the execution of orders

through the PCX Application.

(C) The ‘‘PCX Application Ceiling’’ for

a Rolling Calendar Quarter is:

*For the first five consecutive Rolling

Calendar Quarters: 15 percent.

*For the second five consecutive Rolling

Calendar Quarters: 10 percent.

*For each subsequent Rolling Calendar

Quarter: 5 percent.

(iii) In the event that the Percentage

of PCX Application ITS Volume exceeds

the PCX Application Ceiling for three

consecutive Rolling Calendar Quarters,

the PCX shall cease sending (i) ‘‘tradeat’’ commitments and (ii) trade-through

commitments, if, at the end of each

third consecutive Rolling Calendar

Quarter, the share volume of such tradethrough commitments were included in

the ‘‘X variable’’ (as that term is used in

subsection 8(h)(ii)(B)) originated from

the PCX Application Module (the

prohibition on sending such

commitments hereinafter referred to as

the ‘‘Restrictions’’) on the first business

day of the second month following the

end of the third of such consecutive

Rolling Calendar Quarters (the

‘‘Restriction Date’’). The Restrictions

will end on the first business day of the

third month following the Restriction

Date.

For example, assume that the

Percentage of PCX Application Volume

exceeds the PCX Application Ceiling for

the Rolling Calendar Quarters ending in

January, February and March of a given

year. The Restriction Date would be the

first business day of May of that year,

which is the first business day of the

second month following March. The

Restrictions would apply as of that date

and would continue through the end of

July (ceasing as of the first business day

of August, which is the first business

day of the third month following May).

The restrictions set forth in this

subsection 8(h)(iii) shall not be

construed to apply to the ‘‘tradethrough’’ commitments except as

provided in the preceding paragraph) or

‘‘block policy’’ commitments originating

from the PCX Application Module (as

such commitments are described more

fully in Section 6(a)(ii)(B) in Scenarios

3 and 4). Nothing herein prohibits the

PCX from sending any commitments

resulting from orders generated by the

OptiMark System pursuant to Section
Federal Register / Vol. 63, No. 140 /Wednesday, July 22, 1998 / Notices 39319

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

2 17 CFR 240.19b–4.

6(a)(ii) above in lieu of utilizing the PCX

Application Module.

(iv) Notwithstanding subsection

8(h)(iii) above, during the first 24

calendar months following

implementation of the PCX Application,

the PCX retains the right to notify the

Operating Committee in writing, on or

prior to the Restriction Date, that it will

undertake, or cause to be undertaken,

system adjustments to the operation of

the PCX Application in an effort to

ensure future compliance with the PCX

Application Ceiling. In the event of such

notification, the PCX shall have, at a

minimum, nine calendar months from

the date of such notice (or such longer

period as may be approved by all

members of the Operating Committee

upon showing of reasonable cause), to

implement its proposed system

adjustments (the ‘‘Implementation

Period’’). During the Implementation

Period, the Restrictions shall not apply.

During the next 12 calendar months

following the end of the Implementation

Period, if the Percentage of PCX

Application ITS Volume exceeds the

PCX Application Ceiling for any Rolling

Calendar Quarter, the Restrictions shall

apply on the first business day of the

second month following the end of such

Rolling Calendar Quarter (the

‘‘Subsequent Restriction Date’’). In that

event, the Restrictions will end on the

first business day of the third month

following the Subsequent Restriction

Date.

For example, assume that the

Percentage of PCX Application ITS

Volume exceeds the PCX Application

Ceiling for the Rolling Calendar

Quarters ending in January, February

and March of Year 1 (which fall within

the first 24 calendar months of the

operation of the PCX Application). As in

the above example, the Restriction Date

would be the first business day of May

of that year, which is the first business

day of the second month following

March. The Restrictions would apply as

of that date, unless the PCX notified the

Operating Committee, on or prior to the

first business day in May, that it

planned to effect system adjustments in

an attempt to ensure future compliance

with the PCX Application Ceiling.

Assuming that the PCX provides such

notification on the Restriction Date, the

Restrictions would not apply during the

Implementation Period, which would

last for at least nine months from the

Restriction Date (that is, assuming the

minimum duration, the nine calendar

months of May through January of Year

2). Following the end of the

Implementation Period, assume that the

Percentage of PCX Application ITS

Volume exceeded the PCX Application

Ceiling for the next Rolling Calendar

(the quarter beginning in February and

ending April of Year 2). In that event,

the Subsequent Restriction Date would

be the first business day of June of Year

2, which is the first business day of the

second month following April. The

Restrictions would apply beginning on

that day and would continue through

the end of August of Year 2 (ceasing as

of the first business day of September of

Year 2, which is the first business day

of the third month following June).

(v) Notwithstanding subsections 8(h)

(iii) and (iv) above, if for any Rolling

Calendar Quarter the Percentage of PCX

Application ITS Volume exceeds 30

percent, the Restrictions shall apply as

of the first business day of the second

month following the end of such rolling

Calendar Quarter. In that event, the

Restrictions shall apply for three

calendar months.

(vi) Each month the PCX shall furnish

the Operating Committee with a report

showing the number of shares for each

of the components of the PCX

Application Formula for the previous

month, as well as the data necessary to

determine if the shares in those calls

that produce ‘‘trade-through’’

commitments (as such commitments are

described more fully in Section

6(a)(ii)(B) in Scenario 3) originating

from the PCX Application Module are or

are not included in the ‘‘X variable’’ of

the PCX Application Formula. Any one

or more Participants may cause a

certified public accountant to audit any

one or more of such reports. The

requesting Participant(s) shall pay for

all such audits.

* * * * *

Dated: July 15, 1998.

By the Commission.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98–19435 Filed 7–21–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–40202; File No. SR–CHX–

98–15]

Self-Regulatory Organizations; Notice

of Filing of Proposed Rule Change by

the Chicago Stock Exchange, Inc.

Relating to Specialists’ Payment of

Listing Fees

July 14, 1998.

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 June 16,

1998, the Chicago Stock Exchange,

Incorporated (‘‘CHX’’ or ‘‘Exchange’’)

filed with the Securities and Exchange

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

the proposed rule change, as described

in Items I, II, and III below, which Items

have been prepared by the CHX. The

Commission is publishing this notice to

solicit comments on the proposed rule

change from interested persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The Exchange proposes to add Article

XXX, Rule 20A in order to establish that

Specialists, Co-Specialists and Relief

Specialists may not pay listing fees for

any issuing corporation for which they

act in such capacity. The text of the

proposed rule change is available at the

Office of the Secretary, the CHX, 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

CHX 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 CHX 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

The Exchange proposes to adopt new

Rule 20A to Article XXX to establish

that Specialists, Co-Specialists and

Relief Specialists may not pay listing

fees, including initial and maintenance

fees, for any issuing corporation for

which they act in such capacity.

The purpose of the proposed rule

change is to avoid situations in which

either an actual or apparent conflict of

interest may arise. A Specialist has an

obligation to maintain a free and open

market in an issue. In order to maintain

the integrity of the market, Specialists

must remain independent of issuers.

The Exchange has already established

rules that seek to ensure that

independence. For example, Article

XXX, Rule 23 prohibits Specialists from

engaging in any business transactions

with the issuer of exclusive issues. Also,

Interpretation .01 to Article XXXVIII,