[Federal Register Volume 61, Number 42 (Friday, March 1, 1996)]
[Notices]
[Pages 8092-8094]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-4824]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36874; File No. SR-PSE-95-32]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by Pacific Stock Exchange, Inc. to Establish a Competing
Specialist Program
February 22, 1996.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on December
21, 1995, the Pacific Stock Exchange, Inc. (``PSE''
[[Page 8093]]
or ``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change, and on February 16, 1996,
Amendment No. 1 to the proposed rule change,\1\ as described in Items
I, II and III below, which Items have been prepared by the self-
regulatory organization. The Commission is publishing this notice to
solicit comments on the proposed rule change from interested persons.
\1\ See letter from David P. Semak, Vice President Regulation,
to Katherine A. Simmons, Attorney, SEC, dated February 15, 1996.
Amendment No. 1 provided additional description of the proposal and
changes to the Procedures for Competing Specialists. These additions
and changes are incorporated herein.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The PSE is proposing to establish a competing specialist pilot
program. The proposal includes specific procedures for competing
specialists, including procedures for registration, withdrawal, and
participation in the competing specialist program. The Exchange is also
proposing to extend its official policies relating to circuit breakers
to Competing Specialists.\2\
\2\ Securities Exchange Act Release No. 26368 (December 16,
1988), 53 FR 51942 (December 23, 1996). The PSE filed the rule in
the form of an official policy that stated it would cooperate with a
request from the Commission to halt trading in all equity and
equity-related products traded on the Exchange in conjunction with
halted trading at other U.S. markets. The Commission, in approving
the PSE's proposed rule change, requested that the PSE implement its
policy statement by imposing a trading halt as quickly as
practicable whenever the NYSE and other equity markets have
suspended trading. See also Securities Exchange Act Release No.
27370 (October 23, 1989), 54 FR 43881, n.5 (October 27, 1989).
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The Text of the proposed procedures for competing specialists is as
follows:
Pacific Stock Exchange incorporated; Procedures for Competing
Specialists
The following are procedures for the Competing Specialist Pilot
Program.
1. Registered Specialists are not eligible to act as Competing
Specialists.
2. Applications to compete must be directed to the Equity Floor
Trading Committee in writing and must list in order of preference
the stock(s) in which the applicant intends to compete. The Equity
Floor Trading Committee will consider the following in reviewing an
application:
Financial capability.
Adequacy of staffing on the Floor.
Existence of adequate Chinese Wall Procedures at the
applicant firm.
Agreement of both Registered Specialist to allow
trading of specific issues by the Competing Specialist.
3. All applicants must be registered as members with the
Exchange and must meet the net capital requirements pursuant to SEC
Rule 15c3-1 and capital requirements set forth in Rule 2.2(b) of the
Rules of the Exchange, and conform to all other performance
requirements and standards set forth in the Rules of the Exchange.
All applicants who control, are controlled by, or are under common
control with another person engaged in a securities or related
business shall have and maintain appropriate Chinese Wall procedures
as approved by a self-regulatory organization. A competing
specialist will be subject to all the rules and policies applicable
to a regular specialist, unless otherwise indicated.
4. All applicant organizations, existing or newly created, must
satisfy the Equity Floor Trading Committee that they have sufficient
staffing to enable them to fulfill the functions of a specialist in
all of the stocks in which the applicant will be registered as a
Competing Specialist.
5. Order flow not specifically designated for a Competing
Specialist must be routed to either Registered Specialist. However,
a firm that is affiliated with a competing specialist in an issue
must designate all PSE order flow to that competing specialist in
that issue.
6. In a competitive situation, if the Competing Specialist
organization that received approval to compete with the Registered
Specialist desires to terminate the competition by requesting that
it be relieved of the stock that is the subject of the competition,
it should so notify the Equity Floor Trading Committee at least 3
business days prior to the desired effective date of such
withdrawal, except in those situations when such notice is not
practicable.
7. Any Competing Specialist who withdraws his/her registration
in a stock will be barred from applying to compete in that same
stock for a period of ninety (90) days following the effective date
of withdrawal.
8. Notwithstanding the existence of Competing Specialist
situations, there is only one Exchange market in a security subject
to competition. Competitors must cooperate with the Registered
Specialist regarding openings and reopenings to ensure that they are
unitary.
9. Limit orders entrusted to the Competing Specialist are to be
represented and executed strictly according to time priority as to
receipt of the order on the Exchange in accordance with Exchange
rules.
10. Competing Specialists must keep the Registered Specialists
informed about the full size of any executable ``all or none''
orders in their possession since all-or-none orders cannot be
represented in the disseminated quote. The Competing Specialist is
expected to represent such orders on a ``best efforts'' basis to
ensure the execution of the entire order at a single price or
prices, or not at all.
11. The registration of any Competing Specialist may be
suspended or terminated by the Equity Floor Trading Committee upon a
determination of any substantial or continued failure by such
Competing Specialist to engage in dealing in accordance with the
Constitution and Rules of the Exchange.
12. The Exchange shall establish an effective date for
competition to commerce. Since the Exchange cannot know what the
impact of competition will be on its marketplace, it will limit
competition during the first year of operation as follows:
a. The total number of stocks in which competition will be
permitted shall initially be limited to ten per applicant firm, or a
number (not to exceed twenty) as determined by the Board of
Governors.
b. No applicant firm will have more than one Competing
Specialist.
c. The number of Competing Specialists will be limited to two on
each Equity Floor.
d. The number of competitors in any given stock will be limited
to three (two Registered Specialists and one Competing Specialist).
e. There will be a quarterly review of the program, or upon
request by a Registered Specialist in a specific Competing
Specialist issue.
Once the program has operated for one year, the Board of Governors
will evaluate it and determine whether to continue the program or to
modify its terms.\3\
\3\ The Commission notes that the Exchange will be required to
file a proposed rule change pursuant to Section 19(b) of the Act
before it may modify the terms of the program.
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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 self-regulatory organization
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 self-regulatory organization
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 purpose of the proposed rule change is to establish a competing
specialist pilot program. Under the proposal, competing specialists are
permitted to compete with registered specialist on the floor of the
Exchange. Orders are directed either to a registered specialist or the
competing specialist in an issue based on each customer's independent
decision, but all orders in a stock received by the Exchange are
executed in accordance with strict time priority. Once all limit orders
at a price level are depleted, each specialist is responsible for the
market orders directed to them.
The registered specialists are responsible for updating quotations
and coordinating openings and reopenings to ensure that they are
unitary. All ITS activity must be cleared through a
[[Page 8094]]
registered specialist. To all other markets in the national market
system, there is only one PSE market. Trading halts are coordinated
through a registered specialist and apply to all competitors in the
stock.
Under the proposed competing specialist program, the Exchange's
rules governing the auction market principles of priority, parity, and
precedence remain unchanged for quotes at the NBBO.\4\ Under the PSE's
rules, if two or more specialists are quoting at the NBBO, the earliest
bid/offer at that price has time priority and will be filled first up
to its specified size.\5\ When none of the specialists are quoting at
the NBBO, the competing specialist program permits orders to be
executed by a particular specialist at the NBBO or better.\6\ If a
particular specialist is not specified, the order is directed to a
regular specialist. However, if a routine firm is affiliated with a
Competing Specialist, that firm may not route orders to another
specialist, but must route them to the member firm's affiliated
specialist, thereby preventing member firms affiliated with a
specialist from routing non-profitable orders to another specialist
when market conditions are unfavorable.\7\
\4\ See PSE Rules 5.8(a)-(i). PSE Rule 5.8(c) states in part:
``When a bid or offer is clearly established as the first made at a
particular price regardless of the floor, the maker shall be
entitled to priority and shall have precedence on the next sale at
that price * * *.''
\5\ See PSE Rule 5.8(c).
\6\ For example, assume that the NBBO is 20 bid to 20/18
offered, and specialist A is bidding 19\3/4\ while specialist B is
bidding 19\1/2\. A market order to sell may be directed to
specialist B for execution even though specialist A has a better bid
because neither specialist is bidding at the NBBO. Under the
competing specialist program, specialist B would execute the order
at 20 (the NBBO) or better. If specialist A had been bidding 20 (the
NBBO), specialist A would have had priority to execute the order
even though it was designated to specialist B.
\7\ As noted above, however, if another specialist is quoting
the NBBO and clearly has established priority on the PSE floors,
then that specialist will fill the order despite the fact that the
order was designated for the affiliated Competing Specialist.
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All limit orders will be represented and executed strictly
according to time priority on the Exchange.\8\ Incoming orders are
first executed against any contra-side limit orders on the Exchange.
All specialists may execute their designated order flow unless there is
a contra-side limit order on the Exchange or another specialist has a
superior quote (with tie priority) at the NBBO.
\8\ There is only one PSE market in a particular security, and
time priority is maintained among all orders received by the PSE.
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Where a security is traded on both equity floors, each specialist
is responsible for properly coordinating and synchronizing orders (and
executions) with the corresponding specialist on the other Floor.\9\
PSE specialists currently have the capability to enter their own quotes
into P/COAST, and Competing Specialists at the PSE will have the same
capability. In addition, the Exchange anticipates having in place by
March 31, 1996, a Consolidated Limit Order File, which will allow all
of the PSE specialists in a given issue to have access to the
information in each other's limit order books.\10\
\9\ See PSE Rule 5.8(c).
\10\ See letter from David P. Semak, Vice President Regulation,
PSE, to Katherine A. Simmons, Attorney, SEC, dated February 20,
1996.
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All competing specialists will be evaluated on competing stocks in
accordance with the Exchange's Specialist Performance Evaluation
Program. In addition, at any time, a registered specialist may request
an evaluation of a competing specialist's performance in an issue that
is traded by both the registered and competing specialists.
2. Statutory Basis
The proposed rule change is consistent with Section 6(b) of the
Act, in general, and furthers the objectives of Section 6(b)(5), in
particular, in that it is designed to promote just and equitable
principles of trade and to protect investors and the public interest.
B. Self-Regulatory Organization's Statement on Burden on Competition
The PSE does not believe that the proposed rule change will impose
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
No written comments on the proposed rule change were neither
solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the publication of this notice in the Federal
Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve the proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance wit the provisions
of 5 U.S.C. 552, will be available for inspection and copying at the
Commission's Public Reference Section, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Copies of such filing will also be available
for inspection and copying at the principal office of the PSE. All
submissions should refer to File No. SR-PSE-95-32 and should be
submitted by March 22, 1996.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-4824 Filed 2-29-96; 8:45 am]
BILLING CODE 8010-01-M
