[Federal Register Volume 64, Number 69 (Monday, April 12, 1999)]
[Notices]
[Pages 17700-17702]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-9011]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-41246; File No. 4-208]
Intermarket Trading System; Notice of Filing and Temporary
Summary Effectiveness of Proposed Fourteenth Amendment to the ITS Plan
To Link the PCX Application of the OptiMark System to the Intermarket
Trading System (``ITS'')
April 2, 1999.
I. Introduction
Pursuant to Rule 11Aa3-2 under the Securities Exchange Act of 1934
(``Exchange Act'' or ``Act''), notice is hereby given that on March 29,
1999, the Intermarket Trading System Operating Committee (``ITSOC'')
submitted to the Securities and Exchange Commission (``Commission'') an
amendment (``Fourteenth Amendment'') to the restated ITS Plan.\1\ The
purpose of the amendment is to link the Pacific Exchange, Inc.'s
(``PCX'') Application of the OptiMark System (``PCX Application'') to
ITS. The Commission is publishing this notice to solicit comment on the
amendment from interested persons. While comment is being solicited on
the proposed amendment, the Commission
[[Page 17701]]
has determined to make the proposed amendment summarily effective upon
publication of notice on a temporary basis.\2\
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\1\ The ITS is a National Market System plan approved by the
Commission pursuant to Section 11A of the Act and Rule 11Aa3-2. See
Exchange Act Release No. 19456 (January 27, 1983), 48 FR 4938.
\2\ Exchange Act Rule 11Aa3-2(c)(4) empowers the Commission to
summarily put into effect on a temporary basis a Plan amendment ``If
the Commission finds that such action is necessary or appropriate in
the public interest, for the protection of investors or the
maintenance of fair and orderly markets, to remove impediments to,
and perfect mechanisms of, a national market system or otherwise in
furtherance of the purposes of the Act.''
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ITS is a communications and order routing network linking eight
national securities exchanges and the electronic over-the-counter
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.
Participants in the ITS Plan include the American Stock Exchange
LLC, the Boston Stock Exchange, Inc., the Chicago Board Options
Exchange, Inc., the Chicago Stock Exchange, Inc., the Cincinnati Stock
Exchange, Inc., the NASD, the New York Stock Exchange, Inc., the PCX,
and the Philadelphia Stock Exchange, Inc.
II. Background to the Amendment
On January 27, 1999, the Commission granted temporary exemptive
relief to the ITS participants to exempt them from the ITS Plan
provision requiring a Plan amendment to reflect the PCX Application
interface with ITS.\3\ The Commission granted this exemption to the
participants, in part, because the PCX Application was scheduled to
begin operating on January 29, and there was insufficient time to
obtain authorization from each of the authorizing bodies of the
participants before this date.\4\ The PCX Application began operating
pursuant to the exemption on January 29, 1999. The exemption expires on
April 2, 1999.\5\
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\3\ The Commission has authority under Exchange Act Rule 11Aa3-
2(f) to exempt participants in a national market system plan from
the requirements of that plan. Exchange Act Rule 11Aa3-2(f)
provides: ``The Commission may exempt from the provisions of this
section, either unconditionally or on specified terms and
conditions, any self-regulatory organization, member thereof, or
specified security, if the Commission determines that such exemption
is consistent with the public interest, the protection of investors,
the maintenance of fair and orderly markets and the removal of
impediments to, and perfection of the mechanisms of, a national
market system.''
The Division of Market Regulation has delegated authority to
grant an exemption in this instance pursuant to 17 CFR 200.30-
3(a)(29). See Letter from Richard R. Lindsey, Director, Division of
Market Regulation, Commission, to Allan A. Bretzer, Committee
Chairman, ITSOC, dated January 27, 1999.
\4\ In general, to amend the ITS Plan, the ITS participants vote
on a particular amendment and, assuming unanimous approval, each
participant goes back to its respective authorizing body, such as
its Board of Directors or Executive Committee. Following
ratification by each of the participants' authorizing bodies, the
ITSOC submits a proposed amendment to the Commission, which
publishes it for comment. An amendment to the ITS Plan is generally
not effective until approved by the Commission. On January 21, 1999,
the ITSOC unanimously voted to recommend to the participants'
authorizing bodies an amendment to the Plan that would allow the PCX
Application to link with ITS.
\5\ The Commission extended the exemption until publication of
this notice. See Letter from Belinda Blaine, Associate Director,
Division of Market Regulation, Commission, to Allan A. Bretzer,
Chairman, ITSOC, dated April 1, 1999.
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III. Description
The purpose of the Fourteenth Amendment is to link the PCX
Application to ITS.\6\ The PCX Application is a facility of the PCX
that receives orders generated by the OptiMark System, an electronic
matching system that, on a periodic ``call'' basis, processes certain
qualifying expressions of trading interest (called ``profiles'').
Profiles may be 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'').\7\ 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 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 ITS pursuant to Section
6(a)(ii)(B), whichever is applicable.
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\6\ The Fourteenth Amendment is identical to the amendment
approved by the ITSOC on January 21, 1999.
\7\ For further discussion of the PCX Application, see Exchange
Act Release No. 39086 (September 17, 1997), 62 FR 50036 (September
24, 1997) (order approving the PCX Application).
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The proposed amendment adds subsections (33A) and (33B) to Section
1 of the ITS Plan to define and include the terms ``PCX Application''
and ``PCX Application Module.'' The proposed amendment also amends
existing definitions set forth in subsections (11), (23), (34A), and
(34B) to recognize the use of the PCX Application and the PCX
Application Module.
The proposed amendment adds to Section 6(a)(ii) a description of
the operation of the PCX Application and how PCX will access other
participants' markets through ITS. The amendment also authorizes PCX to
computer-generates ITS commitments.
In addition, the proposed amendment adds Section 8(h), which sets
forth the parameters for the PCX Application's automated linkage to
ITS. This section establishes the ``PCX Application Formula''
(``Formula'') for calculating the ``Percentage of PCX Application ITS
Volume'' (``PCX Application Percentage'') and a ``PCX Application
Ceiling'' (``Ceiling''). The Formula establishes a ceiling on the
volume of trade-at commitments generated by the PCX Application,
relative to the total volume of transactions resulting from the PCX
Application. Specifically, the Formula has as its numerator the number
of shares computer-generated by the PCX Application Module as ITS
``trade-at'' commitments that are executed in other ITS participant
markets,8 and as its denominator the same shares as in the
numerator plus all shares executed on the PCX received from the PCX
Application and reported to the Consolidated Tape Association by the
PCX. The Formula results in the PCX Application Percentage. Section (h)
provides that PCX may computer-generates ``trade-at'' commitments if
the PCX Application Percentage does not exceed the agreed upon Ceiling
as calculated over Rolling Calendar Quarters.\9\ The Ceiling starts at
15% and will be reduced to 10% when the NYSE and PCX jointly request
that the percentage be reduced. Section (h) provides that if the PCX
Application Percentage exceeds the Ceiling then PCX must cease
computer-generating ``trade-at'' commitments for a three-month period.
However, during the first 24 calendar months following implementation
of the PCX Application, the PCX retains the right to notify the ITSOC
in writing, as specified in new Section (h)(iv), 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 ITSOC upon a showing of reasonable cause), to
implement its
[[Page 17702]]
proposed system adjustments. During this 9-month period, the
restrictions shall not apply. Notwithstanding other provisions, if, for
any Rolling Calendar Quarter, the PCX Application Percentage exceeds
30%, the PCX must cease computer-generating ``trade-at'' commitments
for three calendar months beginning the first business day of the
second month following the end of such Rolling Calendar Quarter.
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\8\ ``Trade-at'' commitments are those commitments sent from the
PCX Application when there is no match of non-CQS profiles, or a
partial execution of a non-CQS profile, with the balance filled by
another participant.
\9\ ``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, i.e., April 30, 1999.
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Finally, Section 8(h)(vi) provides that, each month, the PCX shall
furnish the ITSOC with a report showing the number of shares for each
component of the PCX Application Formula, as well as the number of
executed shares resulting from ``trade-through'' commitments.\10\
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\10\ A 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 effecting trades
outside the best national quote.
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IV. Discussion
The Commission has made a preliminary determination that the
proposed amendment is consistent with the public interest, the
protection of investors, the maintenance of fair and orderly markets,
and the removal of impediments to, and perfection of the mechanisms of,
a national market system. While comment is being solicited on the
proposed amendment, the Commission therefore will make the amendment
summarily effective on a temporary basis upon publication of notice of
the amendment.\11\
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\11\ See Exchange Act Rule 11Aa3-2(c)(4).
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The Commission believes that the linkage of the PCX Application to
ITS will further the purposes of Section 11A of the exchange Act \12\
and the development of the national market system by promoting
economically efficient 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 notes that the PCX Application has been linked to ITS since
January 29, 1999, under the same terms now being proposed. These terms
were agreed upon by the ITS participants after extensive
discussions.\13\ The Commission believes that linking the PCX
Application to ITS has provided, and potentially will continue to
provide, a new and more efficient way to match and execute trading
interest.\14\ The Commission therefore believes it is appropriate to
make the proposed amendment summarily effective on a temporary basis
upon publication of notice of such amendment in order to allow the PCX
Application to continue to be linked to ITS without interruption
following termination of the ITS participants' exemptive relief.
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\12\ Section 11A(a)(1)(D) of the Act, 15 U.S.C. 78k-1(a)(1)(D).
\13\ The participants agreed upon these amendments after the
Commission published a proposal to amend the ITS Plan. See Exchange
Act Release No. 40204 (July 15, 1998), 63 FR 39306 (July 22, 1998)
(``Proposing Release''). The Commission received 30 comment letters
on the Proposing Release, generally favoring linking the PCX
Application to ITS.
\14\ See Id.
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V. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the proposed amendment, including whether the
proposed Plan amendment is consistent with the Act. Persons making
written submissions should file six copies thereof with the Secretary,
Securities and Exchange Commission, 450 Fifth Street, NW., Washington,
DC 20549-0609. Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed Plan amendment change
that are filed with the Commission, and all written communications
relating to the proposed Plan amendment change between the Commission
and any person, other than those that may be withheld from the public
in accordance with the provisions of 5 U.S.C. 552, will be available
for inspection and copying at the Commission's Public Reference Room.
Copies of such Plan amendment will also be available for inspection and
copying at the principal office of the ITS. All submissions should
refer to File No. 4-208 and should be submitted by May 3, 1999.
VI. Conclusion
The Plan amendment is hereby made summarily effective on a
temporary basis not to exceed August 10, 1999 pursuant to Exchange Act
Rule 11Aa3-2(c)(4).\15\
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\15\ 17 CFR 240.11Aa3-2(c)(4).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\16\
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\16\ 17 CFR 200.30-3(a)(29).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-9011 Filed 4-9-99; 8:45 am]
BILLING CODE 8010-01-M
