[Federal Register Volume 64, Number 49 (Monday, March 15, 1999)]
[Notices]
[Pages 12826-12829]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-6220]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-41143; File No. SR-PCX-99-01]
Self-Regulatory Organizations; Notice of Filing and Immediate
Effectiveness of Proposed Rule Change by the Pacific Exchange, Inc. to
Define OptiMark Profile and Order Types
March 5, 1999.
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 January 22, 1999, the Pacific Exchange, Inc. (``PCX'' or
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I, II, and III below, which Items have been prepared by the
Exchange. The Commission is publishing this notice to solicit comments
on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The Exchange is proposing to adopt new rules to distinguish between
two types of principal profiles (i.e., ``principal exempt'' and
``principal non-exempt'') that may be entered into the OptiMark System
(``OptiMark'') and to distinguish between four categories of order
types for purposes of time priority under the PCX rules on OptiMark.
The text of the proposed rule change is available at the Office of
the Secretary, PCX 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 Exchange 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 Exchange has prepared summaries, set forth in
Sections A, B, and C below, of the most significant aspects of such
statements.
[[Page 12827]]
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
Background. The PCX commenced use of OptiMark in January 1999. As
part of the operational planning for OptiMark's integration into the
PCX auction market, the PCX and OptiMark have examined the structure of
the OptiMark matching cycle algorithm to ensure that it reflects (1)
the terms of the Commission's approval of the PCX application of the
OptiMark system; \3\ (2) the equity trading rules of the PCX; and (3)
the requirements of Section 11(a) of the Act.\4\ As a result of this
examination, OptiMark will program its matching cycle algorithm to
provide four different levels of time priority. The PCX believes that
this algorithm is reasonably and fairly implied by its rules and the
terms of the OptiMark Approval Order.
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\3\ Securities Exchange Act Release No. 39086 (September 17,
1997); 62 FR 50036 (September 24, 1997) (``OptiMark Approval
Order'').
\4\ 15 U.S.C. 78k(a).
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Proposal. The PCX proposes to distinguish between two types of
principal profiles (i.e., ``principal exempt'' and ``principal non-
exempt'') and four categories of order types for time priority under
its Rule 15.3(b).
First, ``principal exempt'' and ``principal non-exempt'' will
identify profiles for the account of a member or member organization.
The ``principal non-exempt'' profile includes specialist proprietary,
floor broker proprietary and non-exempt member profiles as described
below. All other member profiles will be categorized as principal-
exempt. The separation of member profiles is designed to insure that
entry of these profiles in the OptiMark matching cycle complies with
PCX rules. Member proprietary profiles (other than those of specialists
and floor brokers) are on parity with agency profiles only when the
member does not hold or have knowledge of an unexecuted customer's
order or profile at the same price or better. If the member holds or
has knowledge of a customer order or profile, the member must designate
any proprietary profile as ``principal non-exempt.''
Second, in the OptiMark Approval Order, the Commission explained
the OptiMark priority principals as follows. At the Aggregation Stage,
profile priority would be determined by price, standing, time of entry
of a profile, and size, in that order.\5\ Subject to the considerations
imposed by other PCX rules, specialist proprietary profiles would have
a lower time priority than that of a profile submitted by any other
user of the system.\6\ In addition, a CQS profile's time of entry would
be later than that of a profile generated by any other user, including
a PCX specialist's proprietary trading profile.\7\
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\5\ See OptiMark Approval Order, supra note 3; and PCX Rule
15.3(b).
\6\ See OptiMark Approval Order, supra note 3.
\7\ See OptiMark Approval Order, Supra note 3.
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To comply with these specifications and other PCX rules, the
OptiMark cycle matching process will prioritize specific categories of
orders for time of entry purposes. In other words, after screening for
price and standing, the matching algorithm will rank the following
categories of profile and order types for time priority purposes:
(1) PCX Book--limit orders from the PCX limit order book;
(2) Agency--other public customer profiles, non-member profiles and
``exempt'' member proprietary profiles (``principal-exempt'') entered
directly into OptiMark;
(3) Principal--proprietary profiles submitted by PCX specialists
and floor brokers, and ``non-exempt'' members (all three considered
``principal non-exempt''); and
(4) Consolidated Quote System (``CQS'') profiles.
Exempt members are those who can have proprietary orders
represented on the floor of the PCX without yielding priority under
Section 11(a) of the Act. These include non-members of the PCX and,
with one exception noted below, PCX members who are not specialists or
floor brokers. This category reflects the Commission's no-action letter
of November 30, 1998, that generally granted relief with respect to
Section 11(a) to all PCX members except specialists and floor brokers
(i.e., to members utilizing only off-floor terminals).\8\ The exception
involves a member who has knowledge that his firm has entered a
customer profile into OptiMark. PCX Rule 4.5 and Article XI, Section
2(b) of the PCX Constitution, prohibit a member from engaging in
proprietary trading for his or his firm's account on the PCX when he
has knowledge of an unexecuted limit order for his firm's customer.
Consequently, to prevent a member from knowingly trading ahead of his
firm's customer order, a member with knowledge of such an unexecuted
customer limit order or profile on the PCX would enter a proprietary
profile as a ``non-exempt'' member and the profile would be placed in
the third priority category so that his firm's customer limit order
could be executed first.
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\8\ Letter from Catherine McGuire, Chief Counsel, Division of
Market Regulation, SEC, to David E. Rosedahl, Executive Vice
President and Chief Regulatory Officer, PCX.
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For each of the four priority categories, orders within a category
would be ranked according to time priority. For example, a limit order
entered on the specialist's book at 10:00 would have time priority over
a similarly priced limit order entered on the book at 10:01. Both
orders would have time priority over other public customer and
principal exempt profiles entered directly into OptiMark, principal
non-exempt profiles, and CQS profiles. These priorities, however, only
reflect time of entry; profiles with better prices or standing would
have priority over profiles that are lesser-priced or lack standing,
regardless of time of entry into OptiMark.\9\
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\9\ A coordinate with standing has no size limitation at a given
price. For example, if a profile to purchase 10,000 shares of stock
has a coordinate with a satisfaction value of 1 to purchase all
10,000 shares at a single price, that coordinate would have
standing. For a more detailed description of standing see OptiMark
Approval Order, Central Processing, supra note 3.
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PCX limit order book profiles receive the highest time priority in
order to comply with the procedures under which limit orders currently
are handled on the PCX.\10\ Under PCX Rule 5.8(c), a bid or offer
established as the first made at a particular price obtains priority
and precedence over other bids or offers. Because orders on the PCX
limit order book exist as bids or offers before they are entered into
OptiMark as profiles, they have been established on the PCX before any
other profiles are entered into OptiMark. Conversely, profiles entered
into OptiMark from off the PCX floor are considered by PCX to be
indications of interest that become orders on the PCX only when they
are processed in an OptiMark matching cycle.\11\ To ensure that orders
from the PCX limit order book retain the priority to which they are
entitled under PCX Rule 5.8(c), they are accorded the first level of
time priority in the OptiMark matching process.
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\10\ The OptiMark Approval Order states that the handling of
profiles resulting from limit orders submitted by PCX specialists or
floor brokers would be consistent with the parameters under which
public limit orders are currently filled on the PCX. See OptiMark
Approval Order, Supra note 3.
\11\ Id.
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As to the second level of priority, the PCX's current auction
procedures do not differentiate between agency and proprietary orders
for priority purposes.\12\ Consequently, the second
[[Page 12828]]
time priority level includes agency and principal exempt profiles.
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\12\ See PCX Rule 5.8(c), which states that: ``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, up to the
number of shares of stocks . . . specified in the bid or offer[.]''
PCX Rule 5.8(c), Priority of Bids and Offers.
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Specialist and floor broker proprietary profiles and non-exempt
member profiles are placed in the third time priority level. The third
level reflects: (1) the statement in the OptiMark Approval Order that
PCX specialists would have a lower time priority than all other
profiles except for CQS profiles;\13\ (2) the need to enable floor
brokers to comply with Section 11(a) of the Act; and (3) a means to
enable an individual member to comply with PCX Rule 4.5. The PCX
believes that its existing rules and policies justify equivalent
treatment for the three types of principal non-exempt orders. Under
current PCX policy, a specialist trading for his own account is on
parity with a floor broker trading for his own account on the PCX
floor.\14\ Because floor broker proprietary orders occur infrequently,
they are normally on parity with specialist orders on the PCX floor,
and, like specialist profiles, will have to go behind all other
profiles in OptiMark except CQS profiles, the PCX believes that it is
unnecessary to separate specialist and floor broker proprietary
profiles for time priority purposes. Similarly, a member trading for
his own account on the PCX normally would be on parity with the
specialist. For OptiMark purposes, however, most member proprietary
profiles have a higher priority than specialist proprietary profiles.
In the limited situation where a member is constrained from trading due
to PCX Rule 4.5, the PCX believes it is reasonable to group such a
member's profile with specialist and floor broker proprietary profiles.
It would be burdensome for the PCX OptiMark Application to create a
separate priority category for a member's profile subject to Rule 4.5
when such situations should occur infrequently and considering that
under regular PCX priority rules such a member on the floor would be on
parity with the specialist and floor broker. Accordingly, the PCX
believes that the grouping of specialist, floor broker, and non-exempt
member proprietary profiles into the principal non-exempt category is
both reasonable and consistent with the OptiMark Approval Order's
statement that ``the Exchange would continue to apply all existing
rules governing trading on its equity floor.'' \15\
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\13\ Id. The provision was intended to prevent specialists from
trading ahead of any agency orders. Thus, PCX contends that it is
consistent with the OptiMark Approval Order to rank specialist
profiles in the same category with other principal non-exempt
profiles.
\14\ Telephone conversation between Robert P. Pacileo, Staff
Attorney, Regulatory Policy, PCX, and David Sieradzki, Special
Counsel, Division of Market Regulation, Commission, on February 25,
1999.
\15\ See OptiMark Approval Order, supra note 3.
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Finally, as noted in the Optimark Approval Order, CQS profiles
receive the lowest time priority.
The PCX believes that the four levels of time priority in the
OptiMark matching algorithm accurately reflect the description of the
Optimark Application in the OptiMark Approval Order and PCX Rule
15.1(h), which states that the Optimark Application will permit
executions in accordance with ``other applicable rules and policies of
the Exchange.'' PCX believes that the time priority levels constitute a
material aspect of the operation of the facilities of the PCX,\16\ as
well as a stated policy, practice or interpretation with respect to the
meaning, administration, or enforcement of existing PCX rules under
Rule 19b-4(b) of the Act.\17\
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\16\ The PCX Application of OptiMark will be regulated as a
facility of the PCX. Id.
\17\ For the reasons noted above, the PCX believes that the
priority levels are reasonably and fairly implied from the OptiMark
Approval Order and the rules of the Exchange. Nevertheless, the PCX
has determined to file the time priority levels under Section
19(b)(3)(A) of the Act for immediate effectiveness to codify the
operation of the matching algorithm of the OptiMark application.
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2. Statutory Basis
The Exchange represents that the proposed rule change is consistent
with Section 6(b) \18\ of the Act in general and further the objectives
of Section 6(b)(5) \19\ in particular, because it is designed to
promote just and equitable principles of trade, to facilitate
transactions in securities, to remove impediments to and perfect the
mechanism of a free and open market and a national market system, and
to protect investors and the public interest.\20\
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\18\ 15 U.S.C. 78f(b).
\19\ 15 U.S.C. 78f(b)(5).
\20\ In Reviewing this proposal, the Commission has considered
its impact on efficiency, competition, and capital formation. 15
U.S.C. 78c(f).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any inappropriate burden on competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange has neither solicited nor received written comments on
the proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing
for Commission Action
According to the PCX, the foregoing rule change constitutes a
stated policy, practice or interpretation with respect to the meaning,
administration, or enforcement of an existing rule of the Exchange and
therefore, has become effective pursuant to Section 19(b)(3)(A)(i) of
the Act \21\ and subparagraph (f)(1) of Rule 19b-4 thereunder.\22\ At
any time within 60 days of the filing of the proposed rule change, the
Commission may summarily abrogate such rule change if it appears to the
Commission that such action is necessary or appropriate in the public
interest, for the protection of investors, or otherwise in furtherance
of the purposes of the Act.
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\21\ 15 U.S.C. 78s(b)(3)(A)(i).
\22\ 17 CFR 240.19b-4(f)(1).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. 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 with the provisions
of 5 U.S.C. Sec. 552, will be available for inspection and copying at
the Commission's Public Reference Room. Copies of such filing also will
be available for inspection and copying at the principal office of the
Exchange. All submissions should refer to File No. SR-PCX-99-01 and
should be submitted by April 5, 1999.
[[Page 12829]]
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\23\
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\23\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-6220 Filed 3-12-99; 8:45 am]
BILLING CODE 8010-01-M
