[Federal Register Volume 62, Number 118 (Thursday, June 19, 1997)]
[Notices]
[Pages 33448-33454]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-16084]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38740; File No. SR-PCX-97-18]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by Pacific Exchange, Inc. Relating to the PCX Application of the
OptiMark System
June 13, 1997.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(``Exchange Act'' or ``Act''), 15 U.S.C. 78s(b)(1), and Rule 19b-4
thereunder, 17 CFR 240.19b-4, notice is hereby given that on June 11,
1997, 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, which Items
have been prepared by the self-regulatory organization.\1\ The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ The Exchange originally submitted this filing to the SEC on
May 20, 1997. On June 3, 1997, the Exchange submitted Amendment No.
1 to the filing. It was later determined that the rule filing was
not complete as a result of the omitted submission of an exhibit
containing the required ``Completed Notice of Proposed Rule Change
for Publication in the Federal Register.'' The Exchange elected to
resubmit the entire filing (received on June 11, 1997). The re-
submitted filing incorporates the substance of the June 3,1997,
Amendment No. 1.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Pursuant to Rule 19b-4 of the Act, the Exchange proposes to
establish rules for a new exchange facility called the PCX Application
of the OptiMark System (``PCX Application'' or ``Application''). The
PCX Application is a computerized, screen-based trading service made
available from an electronic communications and information system
known as the ``OptiMark System'' \2\ for the benefit of the
[[Page 33449]]
Exchange members and their customers. It will provide automatic order
formulation, matching, and execution capabilities in the equity
securities listed or traded on the Exchange (collectively, ``PCX
Securities''). Similar to other proposals in the past to accommodate
new forms of trading involving stock baskets and index derivatives, the
Exchange believes that the proposed facility will meet institutional
investors' growing demand for a new secure medium of trading that may
be utilized in addition to (but not in lieu of) the traditional
continuous auction facilities of the Exchange. Moreover, because the
PCX Application will be an additional trading service available for the
Exchange Specialists and floor brokers to utilize in satisfying their
existing customer interest, retail investors also are expected to
benefit from the PCX Application.
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\2\ The OptiMark System has been developed by OptiMark
Technologies, Inc. (``OTI''), a computer technology firm located in
Durango, Colorado, based on certain patent-pending market
restructuring technology referred to as ``OptiMarkTM.''
The PCX Application is expected to be one of several different
trading services based on that technology that will be made
available form the OptiMark System for other exchanges and markets
in the future. OTI expects its wholly-owned subsidiary, OptiMark
Services, Inc. (``OSI''), a registered broker-dealer, to be
responsible for operating portions of the PCX Application for the
Exchange and delivering the trading service to the Exchange's
members and their customers. OTI is licensing the OptiMark System to
OSI for purposes of the PCX Application.
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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 rules for
the PCX Application, a new trading service that may be used, in
addition to the traditional floor facilities, to buy and sell the PCX
Securities.\3\ The Application will allow the PCX members and their
customers to submit anonymously from their own computer terminals,
without ever revealing their trading strategies, visual depictions of
trading interest to the OptiMark System. At specified times during the
trading day, the OpitMark System will conduct certain trade
optimization calculations against such expressions of interest to
identify specific orders capable of execution. All such orders as
formulated by the OptiMark System will be automatically executed on the
Exchange, except to the extent that they may be executed on other
market centers through the Intermarket Trading System (``ITS'').
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\3\ This rule filing addresses trading in the PCX Securities
only. If and when the Application extends in the future to options
or other types of securities listed or traded on the Exchange, an
appropriate rule change will be filed with the Securities and
Exchange Commission.
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The Exchange proposes to offer this new trading service as an
additional exchange facility available for use by its members and their
customers. The Exchange believes that the OptiMark System represents a
significant step forward in the development of computer technology to
receive and process complex sets of information from investors. By
utilizing a trading service based on such technological innovation,
investors will be able to express fully their trading strategies
without fear of provoking an unfavorable price reaction. In the
Exchange's view, the PCX Application thus will result in increased
total liquidity in the market as more and more investors begin to
express the true extent of their trading interest. Further, by enabling
retail order flow to interact with such newly expressed interest while
preserving the integrity of the Exchange's auction-pricing mechanism,
the PCX Application is expected to enhance the capacity, efficiency and
fairness of the overall marketplace to the advantage of both small and
large orders.
2. Description of How the PCX Application Operates
The PCX Application is being developed jointly by the Exchange and
OTI. It represents one specific trading service made available from the
OptiMark System to be utilized by the Exchange members and their
customers in the manner described below:
Proposed Method of Operation
At the outset, it should be noted that the PCX Application is
modular in nature. Two distinct operations will be involved in running
the Application: (i) the central information processing system and
related administrative and communications terminal network of the
OptiMark System, which includes such physical infrastructure as
computers performing the functions of collecting data, processing it,
logging activities and switching messages from and to other systems and
carriers, as well as the communication network linking such computers
with customer terminals; and (ii) the computer hardware and software
needed (collectively, the ``PCX Interfaces'') for the OptiMark System
to communicate with the PCX's computerized order system (including any
terminals in use by the PCX Specialists or floor brokers). The Exchange
will continue to operate its electronic linkages with the ITS,
Consolidated Quote System (``CQS''), and the Consolidated Tape System
(``CTS''), as they currently exist.
The Exchange will have direct ownership of and control over the PCX
Interfaces. The OptiMark System will provide such electronic
communications and information services needed for the PCX Application
as described herein. From time to time, various functionalities of the
computer services provided by the OptiMark System will be modified to
allow such system improvement and enhancement as may be deemed
appropriate or necessary. The Exchange will assure that, at all
relevant times, the material terms and conditions of the trading
service offered hereby as a facility of the Exchange, will comply fully
with the applicable rules of the Exchange.
Access to the PCX Application
The PCX Application will be available to all members of the PCX
and, only through them, to non-members such as institutional investors
and other non-member broker-dealers. Each interested member and non-
member customer will be eligible to enter into a subscription agreement
(``User Agreement'') with OTI to establish an appropriate basis on
which to communicate with the OptiMark System and also to execute an
addendum to the User Agreement with OSI authorizing the delivery of the
trading service made available from the OptiMark System.
The OptiMark System subscribers (``User'') will log in from their
own computer terminals and communicate with the OptiMark System over
any customary commercial information services and network of their
choice (such as Dow Jones Markets). Those Users that serve as
Specialists and floor brokers on the Exchange also will be able to
communicate with the OptiMark System from certain floor-located
computer terminals as discussed in more detail below. As specified in
the User Agreement, appropriate security codes and protocols will be
required to log in to the OptiMark System. Once logged in, Users with
authorized access to the PCX Application will be able to utilize the
specific trading service offered by the Exchange as a new facility, by
submitting certain expressions of their trading interest in a PCX
Security to the OptiMark System. Users will be responsible for any and
all
[[Page 33450]]
of such expressions and any other messages submitted to the OptiMark
System under their passwords and security codes.
Each member of the Exchange will be granted access to the PCX
Application directly as a User. Any and all orders formulated and
matched by the OptiMark System based on the expressions of trading
interest received from a member User will be automatically routed,
executed and reported in that User's name. Each such member User will
be responsible for all transactions resulting from the PCX Application
for its own or customer accounts in the same way as it currently is for
more traditional transactions on the floor.
Non-member Users, on the other hand, will be required to designate
in advance member firms (``Designated Broker'') that will authorize
their access to the PCX Application. Under a non-member's agreement
with a Designated Broker (``Give-Up Agreement''), the Designated Broker
will accept responsibility for that non-member User's transactions and
provide a written statement to the Exchange to that effect. Under the
Designated Broker's agreement with OSI (``Transmission Consent
Agreement''), the Designated Broker will authorize any and all orders
formulated and matched by the OptiMark System based on the expressions
of trading interest received from the non-member User to be
automatically routed, executed and reported in the Designated Broker's
name. Both agreements must be in force before any non-member User may
be given access to the PCX Application. At a minimum, the provisions in
these Agreements will include any credit limit that may be imposed by a
Designated Broker (or its clearing broker if applicable) on a non-
member User; \4\ the Designated Broker's understanding that it is
responsible for the non-member User's transactions; and such other
terms and conditions that may be agreed to from time to time.
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\4\ A non-member User's credit limits, as they may be
established from time to time by a Designated Broker (or its
clearing broker if applicable), will be programmed into the OptiMark
System. In addition, the Designated Broker will be notified as its
potential exposure to its customers, individually or in the
aggregate, approaches the established credit limits.
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Entry of Profiles
One of the most innovative features offered by the OptiMark System
to the financial community is the ability to depict complex trading
strategies in a visually intuitive way. A User will submit an
expression of its trading interest in the form of a satisfaction
profile (``Profile'') that shows that the User's degree of satisfaction
or willingness (expressed as a number between zero and one) to trade at
each coordinate of the price/size grid. Instead of being limited to
specifying a single price and size, a User thus may depict a varying
degree of its trading preferences, encompassing a wide range of prices
and sizes, in a Profile. To simplify and enhance the User's ability to
define and enter Profiles, sophisticated graphical interfaces and
software that operate under such operating systems as Microsoft Windows
(3.1 through NT), OS/2, Sun Solaris, and AIX will be offered.
The price/size grid over which Profiles are defined will be
appropriately unitized into individual coordinates. Specifically, the
price axis will be divided into the minimum trading increments in the
relevant security being traded.\5\ The size axis, on the other hand,
will be divided into 1,000 share increments. A User may create a three-
dimensional Profile over each coordinate in the desired region of the
price/size grid by indicating a degree of willingness (a ``satisfaction
value'') to trade at that coordinate. Such willingness to trade or
satisfaction value may range from the most satisfactory (i.e., ``1''
satisfaction value) to a cut-off point at which a transaction at that
price and size becomes undesirable (i.e., ``0'' satisfaction value).
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\5\ PCX notes that the current increment is \1/8\ of a dollar
for most securities, but may be subject to change based upon recent
filings that move to \1/16\ of a dollar, and depending on any
possible change to decimalization.
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In this regard, the delineation of the size axis into 1,000 share
increments for purposes of defining a Profile should be distinguished
from the minimum units of trading in the PCX Application, which are in
round lots. By way of example, consider a User seeking to submit a buy
Profile for 4,100 shares that shows a 100% willingness to trade at the
price of 20, decreasing to no willingness as the price reaches 22.
Because of the 1,000 share increments on the size axis, the User's
interest in excess of 4,000 shares would be reflected in the next
available coordinate size--5,000. To draw this particular Profile on
the grid, therefore, the User would assign the satisfaction value of 1
to all the coordinates with the associated size of 5,000 shares or less
and price of 20 or below. As the associated price increases from 20 to
22, the satisfaction value of the relevant coordinates would decrease
steadily down to 0. Of course, any such visual rendition involving the
grid size of 5,000 shares does not mean that the User actually would
receive a 5,000 share trade in excess of the desired amount, because
the Profile would contain the appropriate User instruction to limit the
transaction size to 4,100 shares.
Indeed, each User may specify, with respect to each Profile
submitted, an associated maximum quantity of shares in any round lot
multiples starting at 1,000 shares; provided, however, those Profiles
submitted by the PCX Specialists as discussed below and certain system-
generated CQS Profiles (as defined later) will each have such
associated round lot size as reflected in the relevant limit order book
or quotation, which may be less than 1,000 shares. In addition, Users
may, at their option, set boundary conditions on a Profile to restrict
the total number of shares that may be purchased or sold within any
particular price or size range. Similarly, Users may, at their option,
place restrictions on any potential purchase or sale of shares through
the ITS.\6\
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\6\ The Commission notes that the current proposal does not
address how orders entered into the OptiMark System would comply
with the short sale rule under the Exchange Act, 17 CFR 240.10a-1.
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The OptiMark System will perform the necessary credit verification
procedures on each Profile submitted by a non-member User. Such
procedures will ensure that the maximum absolute dollar value of each
Profile received by the OptiMark System when added to the non-member
Users' current credit usage, is consistent with the applicable credit
limits. All Profiles not meeting the credit validation requirement will
be deactivated.
Users will submit Profiles by means of telecommunications access
services of the OptiMark System. All Profiles thus received from a User
will be treated confidentially and may be viewed only by that User.
Unlike orders found in the Exchange's traditional floor facilities,
Profiles will not be widely disseminated to elicit any trading interest
when they are received. Instead, they will be simply logged and
maintained by the OptiMark System until they are centrally processed.
Accordingly, Profiles will not be executable outside of the specified
times at which the OptiMark System conducts certain trade optimization
calculations. As a specialized form of trading interest contingent upon
such periodic occurrences, Profiles as received by and kept within the
OptiMark System will have no standing against orders on the floor and
no bearing on the Exchange's traditional auction-pricing mechanism.
[[Page 33451]]
In accordance with customary audit trail requirements, all Profiles
submitted by Users will be appropriately marked as proprietary or
agency. In addition, each will be time-stamped with a unique serial
number when received by the OptiMark System. Users may revise or cancel
their own Profiles at any time prior to commencement of the next
scheduled central processing. Because it will be important for Users to
be able to adjust their outstanding Profiles in a timely manner in
response to sudden market developments, such adjustments will be
processed as rapidly as computationally feasible so as to take effect
against any central processing scheduled to take place more than one
second after receipt. In general, submitting a revised Profile will
result in a new time stamp, unless the only change made is a reduction
in the maximum quantity of shares previously specified that may be
bought or sold.
All Users will be held responsible for the terms and conditions
contained in each Profile received from them. Each will assume any and
all responsibility for canceling or revising its Profile. Users may
specify in advance whether to cancel their outstanding Profiles or to
keep such Profiles active in the event of an unexpected interruption
experienced in their own telecommunications linkage to the OptiMark
System. If Users decide to keep their Profiles active, they will be
accountable, at all relevant times, for any and all transactions
resulting from the PCX Application based on such Profiles,
notwithstanding any communication interruptions.
Because the OptiMark System assures anonymity and confidentiality,
it is expected to appeal to institutional investors that often do not
reveal their full trading strategies (not even when they remain
anonymous) for fear of provoking unfavorable market reaction. The vast
majority of Profiles submitted to the OptiMark System will thus reflect
new expressions of previously withheld interest covering a wide range
of trading possibilities in the price, size and satisfaction continuum.
As a result of increased total liquidity, all investors, small or
large, simple or sophisticated, are expected to benefit from the
availability of the PCX Application.
Interaction With Existing Market Interest
The PCX Application is designed to provide Users with certain
automated access to and interaction with quotations emanating from
other participating market centers of the ITS. At the specified times
during the trading day when central processing by the OptiMark System
is scheduled, the prevailing bid and offer quotations in CQS from each
such market that may be reached by ITS, including the Intermarket
Trading System/Computer Assisted Execution System interface (``ITS/
CAES''), will be transformed into a pair of buy and sell Profiles
(``CQS Profiles''). Each CQS Profile will have, for the relevant limit
price and size, a satisfaction of 1 for all the corresponding
coordinates in the price/size grid. As discussed in more detail below,
creation of these CQS Profiles and their interaction with the Profiles
submitted by Users will assure consistency of the PCX Application with
the intermarket price protection requirement under the ITS Plan.
The PCX Application is also designed to serve as an additional
trading service available for the Exchange Specialists and floor
brokers to utilize in handling existing market interest found on the
floor today. In their capacity as Users, the Specialists and floor
brokers may submit Profiles based on customer limit orders at hand. To
this end, the PCX Specialists will be provided with a uniquely designed
electronic interface at their posts that will provide simple retrieval
instructions to facilitate designation of customer orders on their
limit order books for inclusion in the OptiMark System as Profiles.
Such an interface also will permit the PCX Specialists to revise and/or
cancel the relevant Profile if any of the limit orders thus reflected
subsequently becomes executable against some other market interest. The
resulting Profiles created from the PCX Specialist's book will be
treated the same as any other Profiles submitted by other Users.\7\
Similarly, the Exchange will ensure that floor brokers have the ability
to use existing terminals for submission of Profiles, or a number of
OptiMark System terminals will be installed on the Exchange's trading
floor to allow floor broker Users to submit Profiles at their
convenience if they wish to utilize the PCX Application to fill
existing customer interest.
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\7\ Of course, the PCX Specialists also may submit Profiles
based on their own proprietary trading strategies, in addition to
Profiles reflecting public limit orders on their books. To the
extent that a PCX Specialist chooses to represent a proprietary
trading interest in its designated security by submitting a Profile,
that particular Profile will have lower time priority than that of
the Profile submitted by any other User in the security as discussed
further below.
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Central Processing
All Profiles received by the OptiMark System (including CQS
Profiles) for each relevant security will be centrally processed by
computer at one or more specified times during the trading day in order
to generate one or more orders of identified prices and sizes at which
execution may occur immediately (``Orders''). As explained further
below, such processing will involve a series of high-speed calculations
performed at a rapid pace (``Cycle''). Cycles will be based on an
innovative 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 for Users based on their different willingness to
trade across a wide range of price and size. A buy coordinate and a
sell coordinate, each with a full satisfaction value of 1, will be
matched, based on price, standing, time of entry, and size. If one or
both of coordinates have a partial satisfaction value of less than 1
(but greater than 0), they will be matched, generally based on the
joint, mutual satisfaction value--that is, the product of the specific
satisfaction values associated with the buy coordinate and sell
coordinate. Throughout the Cycle, there will be derived combinations of
Orders suitable for immediate execution that achieve the sequentially
optimal mutual satisfaction between potential buyers and sellers.
Profiles will be processed, based on the following matching
eligibility restrictions and priority principles:
1. Eligibility Restrictions. At commencement of a Cycle, each
individual coordinate with a non-zero satisfaction value from all buy
Profiles and all sell Profiles received by the OptiMark System
(including CQS Profiles) in a given PCX Security will be grouped into
the Buy Profile Data Base or the Sell Profile Data Base, respectively.
Each individual coordinate, no matter how small or large in the
corresponding size, from either Profile Data Base will be eligible to
be matched with one or more coordinates from the other Profile Data
Base and will result in one or more Orders, provided that:
1.1 No buy and sell coordinates may be matched in violation of any
applicable User instructions for the respective Profiles, including (a)
the maximum quantity associated with the Profile, (b) any boundary
conditions restricting the aggregate number of shares that may be
bought or sold at a particular price or size range, and (c) the
restrictions on any potential sale or purchase of shares through ITS;
and
1.2 No buy and sell coordinates may be matched from contra CQS
Profiles.
[[Page 33452]]
1.3 No buy and sell coordinates may be matched at a price inferior
to that of another coordinate with Standing (as defined below) that is
eligible for matching. A buy (sell) coordinate has Standing if (a) it
has 1 satisfaction value and (b) all coordinates having the same price
and a smaller size, down to and including the minimum trading increment
(100 shares), are included in the associated Profile at 1 satisfaction
value; provided, however, that no coordinate from a Profile containing
any boundary conditions restricting the aggregate number of shares that
may be bought or sold at a particular size range has Standing. By way
of example, each coordinate from a CQS Profile has Standing. By
contrast, no coordinate from a Profile submitted by a User on an ``all-
or-none'' basis has Standing.
2. Priority Principles. The methods for considering potential
matches between buy and sell coordinates in the Profile Data Bases will
vary, depending on whether both coordinates represent satisfaction
values of 1 or less than 1, resulting in two separate stages of a
Cycle:
2.1 Aggregation Stage. The OptiMark System initially will process
eligible buy and sell coordinates in the Profile Data Bases, each with
the full satisfaction value of 1 only. At this stage of calculation
(``Aggregation Stage''), smaller-sized coordinates may be aggregated to
build sufficient size to be matched with larger-sized coordinates to
generate Orders in accordance with the following rules of priority,
subject to the applicable eligibility restrictions:
(A) Price aggressiveness. A coordinate with a more aggressive price
(i.e., a higher price for a buy coordinate and a lower price for a sell
coordinate) has priority over coordinates with less aggressive prices.
(B) Standing. Among the coordinates with the same price, a
coordinate with Standing has priority over all other coordinates
without Standing.
(C) Time of entry. Among the coordinates with the same price and
Standing, the time of the entry of the associated Profile determines
relative priority, with earlier submissions having priority. All
Profiles submitted by Users will be appropriately time-stamped with a
unique serial number when received by the OptiMark System; provided,
however, that the effective time of entry for any Profile submitted by
a PCX Specialist representing proprietary trading interest in the
Specialist's designated security will fall behind that of the Profile
submitted by any other User in that security. Because each CQS Profile
is generated from the relevant market's most current quotation
prevailing at the time of commencement of a Cycle, its effective time
of entry will be later than that of any other Profile submitted by a
User.
(D) Size. Among the coordinates with the same price, Standing and
time of entry, priority for matching is determined by size, with larger
sizes having higher priority.
2.2 Accumulation Stage. Upon completion of calculation at the
Aggregation Stage, the OptiMark System will consider potential matches
between eligible buy coordinates and sell coordinates in the Profile
Data Bases where one or both parties have less than 1 (but greater than
0) satisfaction values. At this stage of calculation (``Accumulation
Stage''), only those buy and sell coordinates with the same associated
price and size may be matched to generate Orders in accordance with the
following rules of priority, subject to the applicable eligibility
restrictions:
(A) Mutual satisfaction. A potential match with a higher mutual
satisfaction value (the product of the two satisfaction values) takes
precedence over other potential matches with lower mutual satisfaction
values.
(B) Time of entry (based on the earlier Profile). Among the
potential matches with the same mutual satisfaction, the match with the
earlier time of entry, as determined initially by the effective time of
entry assigned to the earlier of the buy and sell Profiles involved
(the ``earlier Profile''), has priority over other potential matches.
(C) Size. Among the potential matches with the same mutual
satisfaction and time of entry for the earlier Profile, priority is
given to one with a larger size.
(D) Time of entry (based on the later Profile) . Among the
potential matches with the same mutual satisfaction, time of entry (for
the earlier Profile), and size, the match with the earlier time of
entry, as determined this time by the effective time of entry assigned
to the later of the buy and sell Profiles involved (the ``later
Profile''), has priority over other potential matches.
(E) Price assignment. In regard to all remaining ties between
potential matches, which will consist solely of the coordinates from a
single pair of buy and sell Profiles from two Users that may be matched
with the same mutual satisfaction, time of entry and size, but at
different prices, priority is given to the match at a price more
favorable to the User whose Profile has the earlier time of entry. By
way of example, among the last potential matches remaining at the price
of 10 and also at 10\1/8\, if the sell Profile is the earlier Profile,
then the match will take place at the price of 10\1/8\.\8\
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\8\ The Commission notes that two or more Profiles that are
entered into the OptiMark System representing the same number of
shares may result in executions at differing prices depending on the
other information and conditions entered into the System.
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For purposes of the PCX Application, the specific times at which
Profiles will be centrally processed will vary, depending on the
security involved. No Cycle, however, will be scheduled until after the
opening of the PCX market for any such security. Similarly, no Cycle
will be scheduled at or after the closing of the PCX market for that
security. The maximum frequency with which Cycles may take place
throughout the trading day will be 90 seconds, while the minimum is
once a day.
The exact frequency of Cycles as to any given PCX Security will be
determined by OSI, taking into account the general characteristics of
the security (e.g., trading volume, price and number of shareholders),
the robustness of the associated Profile flow over a period, and the
current level of interest expressed by Users. From time to time, OSI
may alter the frequency of Cycles in response to subsequent
developments in the above-stated market circumstances. Any change in
the frequency of Cycles will be effective upon three days' notice to
Users in advance. Such notice will be provided electronically, using
the same telecommunications linkage and protocols that are used by
Users to submit Profiles. At all relevant times, Users will be fully
informed as to when the next Cycle in a particular PCX Security will
take place.
The Exchange will assure that the frequency of Cycles remain
commensurate with the financial community's need and demand for the new
trading service, thereby securing the maximum usefulness of the PCX
Application for the benefit of its members and their customers. In
addition, the Exchange will assure that the PCX Interfaces and the
OptiMark System have sufficient capacity in place to handle any
material increase in the volume of data prior to implementing a change
in the frequency of Cycles.
Order Execution and Reporting
The Exchange will make available the necessary PCX Interfaces to
permit Orders in PCX Securities from the OptiMark System to be
executed, either on the Exchange or on other market centers
participating in ITS through the appropriate Exchange communications
linkage. The Exchange will permit one or more pairs of Orders resulting
from intersection of the Profiles submitted
[[Page 33453]]
directly by Users (including the PCX Specialists and floor brokers) to
be routed and executed on the Exchange. Every trade resulting from
executing each such pair of Orders on the Exchange will be
appropriately reported, by way of the traditional Exchange linkage to
the CTS processor for dissemination, in sequence in which Orders are
generated from the Cycle. The Exchange envisions reporting these
trades, similar to the way it currently reports other trades in the PCX
Securities to the CTS. Accordingly, consistent with the existing
reporting practices, in the case of a series of Orders generated from a
single Cycle for the same seller with different buyers at an identical
price, they will be printed on the Tape as one transaction. In general,
the report for any transaction resulting from the PCX Application will
not be distinguished on the Tape from the trade report of any other
order executed on the floor.
As for one or more Orders representing matched coordinates from CQS
Profiles, and other contra Profiles, the Exchange will submit an ITS
Commitment reflecting each such Order and seeking execution on other
market centers to which the OptiMark System is not directly linked.
Every ITS commitment will be sent under the give-up of the relevant
Member User or the Designated Broker, by way of the traditional
Exchange linkage to the ITS, in sequence in which Orders are generated
from the Cycle. Each ITS commitment will be designated for ``T-1'' (one
minute) time period as specified in the ITS Plan. The Exchange
envisions sending ITS commitments resulting from the PCX Application in
the way other ITS commitments are sent currently from the PCX.
Accordingly, ITS commitments resulting from the PCX Application will
not be distinguishable from other ITS commitments.
The operation of the PCX Application will not amend the existing
Exchange rules for handling traditional trading interest on the equity
trading floor. Market orders routed from members will continue to be
executed in the same manner. Similarly, ITS commitments received from
other ITS participating market centers will be executed against the
Exchange's prevailing quotations as specified under the ITS Plan. As
for limit orders, the PCX Specialists and floor brokers will be
afforded an additional (but not alternative) opportunity to fill such
interest through the PCX Application. To the extent that the Exchange
Specialists and floor brokers submit Profiles to the OptiMark System
based on customer interest in their books, the handling of any such
Profiles and any resulting trade executions through the PCX Application
will be fully consistent with the parameters under which public limit
orders are filled currently.
Morover, the PCX Specialists will continue to be responsible for
their books to the same degree as they are now. Accordingly, if a
Specialist elects not to reflect any customer limit order in the
OptiMark System, it will remain accountable for execution at or any
more favorable price through the PCX Application, just as it currently
is held responsible under similar circumstances. In such a case,
consistent with the Exchange's existing floor procedures an practices,
the Specialist will be required to satisfy or cause to be satisfied the
customer limit order so held, either at the limit price specified, or
at any better price at which the Specialist's proprietary interest was
satisfied utilizing the PCX Application.
Similarly, the operation of the PCX Application will be fully
consistent with the Exchange's intermarket price protection obligations
under the ITS Plan. As described above, the OptiMark System
incorporates existing market interest emanating from each of the ITS
participant markets to which it is not directly linked in the form of
CQS Profiles. Because of the rules of priority for considering
potential matches between buy coordinates and sell coordinates from any
Profiles (including CQS Profiles), all Orders that are priced inferior
to the quotations of another market center will be generated and
executed on the PCX only upon submission of appropriate ITS commitments
seeking to reach such better-priced interest. As a result, the
execution of any such Orders on the PCX will not violate the trade-
through rule under the ITS Plan.
All Users will be informed of executions that take place against
the Profiles that they submitted for their own or customer accounts
promptly after the trades occur. If an ITS commitment resulting from
the PCX Application is canceled or only partially filled, the OptiMark
System will notify the relevant User and restore to the Profile the
volume of the security represented by the unfilled Order. All such
reports will be sent electronically, using the same telecommunications
linkage and protocols that were used to submit the Profiles initially.
Unless specified otherwise by non-member Users in advance, executions
will not be reported to relevant Designated Brokers until after the
close of the trading day in order to limit market impact and other such
adverse effects of non-member Users' trading.
Clearance and Settlement
Transactions in the PCX Securities resulting from the PCX
Application, including any ITS commitment that has been sent to another
market center and accepted, generally will clear and settle in the same
way as other transactions occurring on the Exchange floor, all in
accordance with established securities industry practices and through
established securities industry systems. All Orders generated by the
OptiMark System that are executed on the PCX or another market center
through ITS will be each reported and entered into the comparison
system on a locked-in basis. Orders generated by the OptiMark System on
behalf of a member User and the resulting transactions will be cleared
and settled, using that member User's mnemonic (or its clearing
broker's mnemonic as may be applicable). Orders generated by the
OptiMark system on behalf of a non-member User and the resulting
transactions will be cleared and settled, using the appropriate
Designated Broker's mnemonic (or its clearing broker's mnemonic as may
be applicable).
In no event will the Exchange or any operator, administrator or
licensor of the Optimark system be responsible for any User's failure
to pay for the PCX Securities purchased or to deliver the PCX
Securities sold. Neither OTI nor OSI will be deemed to be a party to or
a participant in, as principal or as agent, any trade or transaction
entered into or otherwise conducted by users while using the OptiMark
System for the purposes of clearance and settlement.
Hours of Operation
The PCX Application will be initially available for execution of
Orders and routings of ITS commitments during the regular PCX hours
after the opening and prior to the closing.\9\ In the event of a
suspension in trading of a security listed or traded on the Exchange,
the Exchange will suspend the related trading activities respecting
that security through the PCX Application. In addition, the trading
activities through the PCX Application respecting all of the PCX
Securities will halt whenever the Chairman or, in the Chairman's
absence, Chief Operating Officer, or other PCX Officer(s) as the
Chairman may designate, determines that market conditions warrant such
a market-wide halt pursuant to the Exchange's Policy Statement on
Market Closings. The
[[Page 33454]]
Exchange may suspend the trading activities through the PCX Application
relating to one or more PCX Securities at any time upon consultation
with OptiMark Technologies, Inc. if deemed necessary and proper to
preserve system capacity and integrity.
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\9\ The Exchange's hours are currently 6:30 a.m. (P.T.) to 1:50
p.m. (P.T.).
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Audit Trail and Surveillance
The Exchange will maintain, or cause to be maintained, the detailed
audit trail of each transaction resulting from the PCX Application,
including time sequenced records of Profiles submitted to the OptiMark
System, Orders resulting from a Cycle, and their execution and
reporting through the PCX facilities. Such data will be stored and
preserved for a period of not less than three years, the first two
years in an easily accessible place, to assure that the Exchange has
sufficient information for exercising its regulatory oversight. In this
regard, the Exchange will apply appropriate equity trading surveillance
procedures to monitor transactions resulting from the PCX Application.
System Capacity and Integrity
The Exchange believes that the PCX Interfaces and the Optimark
System will provide sufficient capacity to handle the volume of data
reasonably anticipated for the PCX Application. The Exchange will have
in place security procedures designed to prevent unauthorized access to
the PCX Application. The Exchange will assure that reasonsable security
procedures are in place to safeguard the PCX Interfaces. The Exchange
will obtain similar assurances from OTI and OSI that reasonable
security procedures are in place to safeguard the OptiMark System and
to protect against threats to the proper functioning of the OptiMark
System including any networks used by the OptiMark System. The Exchange
will also obtain appropriate assurances that proper system reliability
and system capacity exists to ensure the integrity of the data handled
and timely response of the OptiMark host computers in connection with
the PCX Application.
Fees for the PCX Application
Transaction resulting from the PCX Application will be subject to
the Exchange's customary assessment of transaction charges and the
Commission's exchange transaction fee under section 31 of the Act. As a
sponsor of the OptiMark System within the meaning of Rule 17a-23 under
the Act, OSI will be compensated by way of usual and customary
commissions, on a cents-per-share-filled basis, for delivering to Users
the computerized, screen-based trading service made available from the
OptiMark System and offered hereby as a PCX facility. OSI will be paid
commissions on a regular basis with respect to the transactions
effected by a member User for its own or customer accounts. With
respect to the transactions effected by a non-member User, OSI will be
paid commissions on a regular basis with respect to the transactions
effected by a member User for its own or customer accounts. With
respect to the transactions effected by a non-member User, OSI will be
paid commissions on a similar basis from the relevant Designated
Broker.
3. Applicability of New and Existing PCX Rules
The PCX Application is generally designed to ensure compliance with
existing PCX Rules and with other rules and regulations to the extent
that they are deemed appropriate. In addition, the Application would be
subject to new rules that set forth the operation of the PCX
Application as described above.
4. Justification
The Exchange believes that the proposed rule change is consistent
with the provisions of Section 6(b)(5) of the Act in that the PCX
Application is a faciltity that is designed to promote just and
equitable principles of trade and to protect investors and the public
interest, and is not designed to permit unfair discrimination between
customers, issuers, brokers or dealers. In addition, the PCX believes
that the proposed rule change is consistent with provisions of Section
11A(a)(1)(B) of Act, which states that new data processing and
communications techniques create the opportunity for more efficient and
effective market operations.
B. Self-Regulatory Organization's Statement on Burden on Competition
The PCX does not believe that the proposed rule change will result
in or impose any burden on competition that is not necessary or
appropriate in furtherance of the purposes of the Act, as amended.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
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 oranziation 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, NW., Washington, DC 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. 552, will be available for inspection and copying at the
Commission's Public Reference Section, 450 Fifth Street, NW.,
Washington, DC 20549. Copies of such filing will also be available for
inspection and copying at the principal office of the Exchange. All
submissions should refer to File No. SR-PCX-97-18 and should be
submitted by July 10, 1997.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\10\
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\10\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-16084 Filed 6-18-97; 8:45 am]
BILLING CODE 8010-01-M
