[Federal Register Volume 63, Number 140 (Wednesday, July 22, 1998)]
[Notices]
[Pages 39306-39319]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-19435]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40204; File No. 4-208]
RIN 3235-AH51
Proposed Rulemaking Pursuant to Section 11A of the Securities
Exchange Act of 1934 to Amend the Intermarket Trading System (``ITS'')
Plan To Link the PCX Application of the OptiMark System to the ITS
System
AGENCY: Securities and Exchange Commission.
ACTION: Proposed amendments to national market system plan.
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SUMMARY: The Securities and Exchange Commission (``Commission'') is
proposing alternative amendments to the plan governing the operation of
the Intermarket Trading System (``ITS Plan'' or ``Plan'') that was
approved pursuant to Rule 11Aa3-2 under the Securities Exchange Act of
1934, as amended (``Exchange Act'' or ``Act''). The proposed amendments
provide for the linkage of the Pacific Exchange, Inc. (``PCX'')
Application of the OptiMark System to the ITS System.
DATES: Comments should be submitted by August 21, 1998.
ADDRESSES: All comments should be submitted in triplicate and addressed
to Jonathan G. Katz, Secretary, Securities and Exchange Commission,
Mail Stop 6-9, 450 Fifth Street, NW., Washington, DC 20549. Comments
also may be submitted electronically at the following E-mail address:
rule-comments@sec.gov. All comments should refer to File No. 4-208;
this file number should be included in the subject line if E-mail is
used. Comment letters will be available for public inspection and
copying at the Commission's Public Reference Room at the same address.
Electronically submitted comment letters will be posted on the
Commission's web site (http://www.sec.gov).
FOR FURTHER INFORMATION CONTACT:
Katherine A. England, Assistant Director, at (202) 942-0154; Elizabeth
Prout Lefler, Special Counsel, at (202) 942-0170; Heather A. Seidel,
Attorney, at (202) 942-4165; or Christine Richardson, Attorney, at
(202) 942-0748, Office of Market Supervision, Division of Market
Regulation, Securities and Exchange Commission, Mail Stop 10-1, 450
Fifth Street, NW., Washington, DC 20549.
SUPPLEMENTARY INFORMATION: The Commission is proposing, on its own
initiative pursuant to Rule 11Aa3-2 under the Exchange Act,\1\
alternative amendments to the ITS Plan \2\ to link the PCX Application
of the OptiMark System (``PCX Application'') to the ITS System.
Facilitation of this linkage is intended to further the statutory goals
of efficient execution of securities transactions, opportunities for
best execution of customer orders, as well opportunities for investors'
order to be executed without the participation of a dealer. The
Commission is proposing these alternative amendments only after the ITS
Operating Committee (``ITSOC'') was unsuccessful in reaching agreement
on Plan amendments to implement the linkage with the PCX
Application.\3\ The Commission is publishing this proposal for comment
from interested persons.
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\1\ Rule 11Aa3-2 (17 CFR 240.11Aa3-2) establishes procedures for
initiating or approving amendments to national market system plans
such as the ITS Plan. Paragraph (b)(2) of Rule 11Aa3-2 states that
the Commission may propose amendments to an effective national
market system plan by publishing the text thereof together with a
statement of purpose of the amendments. Paragraph (c)(2) requires
the Commission to publish notice of any amendments initiated by the
Commission and provide interested parties an opportunity to submit
written comments. Further, Paragraph (c)(2) of Rule 11Aa3-2 requires
that promulgation of an amendment to an effective national market
system plan initiated by the Commission be by rule.
\2\ ITS is a communications and order routing network linking
eight national securities exchanges and electronic over-the-counter
(``OTC'') market operated by the National Association of Securities
Dealers, Inc. (``NASD''). ITS was designed to facilitate intermarket
trading in exchange-listed equity securities based on current
quotation information emanating from the linked markets. The ITS
Plan governs the use of ITS. Signatories to the ITS Plan are the
American Stock Exchange, Inc. (``Amex''), the Boston Stock Exchange,
Inc. (``BSE''), the Chicago Board Options Exchange, Inc. (``CBOE''),
the Chicago Stock Exchange, Inc. (``CHX''), the Cincinnati Stock
Exchange, Inc. (``CSE''), the NASD, the New York Stock Exchange,
Inc. (``NYSE''), the Pacific Exchange, Inc. (``PCX''), and the
Philadelphia Stock Exchange, Inc. (``Phlx'') (collectively,
``Partcipants'').
\3\ Section 4(c) of the ITS Plan requires a unanimous vote of
approval in order to amend the Plan. The full ITSOC met on June 3,
1998, to vote on amendments proposed by the PCX that are
substantially similar to one alternative being proposed today by the
Commission. The PCX proposed a ``Description Amendment'' and a
``Formula Amendment.'' The NYSE provided alternative proposed
language but did not formally propose the language amendments or
seek a vote on its language. The ITSOC members were divided on the
PCX's amendments. The amendments were not approved.
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I. Background
A. The ITS System
Section 11A(a)(2) of the Exchange Act, adopted by the Securities
Acts Amendments of 1975 (``1975 Amendments''),\4\ directs the
Commission, having due regard for the public interest, the protection
of investors and the maintenance of fair and orderly markets, to use
its authority under the Act to facilitate the establishment of a
national market system (``NMS'') for securities in accordance with the
Congressional findings and objects set forth in Section 11A(a)(1) of
the Act. Among these findings and objectives is the ``linking of all
markets for qualified securities through communication and data
processing facilities.'' \5\
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\4\ Pub. L. No. 94-29 (June 4, 1975).
\5\ Section 11A(a)(1)(D) of the Act, 15 U.S.C. 78k-1(a)(1)(D).
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On January 26, 1978, the Commission issued a statement on the
national market system calling for, among other things, the prompt
development of comprehensive market linkage and order routing systems
to permit the efficient transmission of orders among the various
markets for qualified securities, whether on an exchange or over-the-
counter.\6\ In particular, the Commission stated that an intermarket
order routing system was necessary to ``permit orders for the purchase
and sale of multiply-traded securities to be sent directly from any
qualified market to another such market promptly and efficiently.''\7\
The Commission further stated that ``[t]he need to develop and
implement a new intermarket order routing system to link all qualified
markets could be obviated if participation in the ITS market linkage
currently under development were made available on a reasonable basis
to all qualified markets and if all qualified markets joined that
linkage.''\8\
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\6\ Exchange Act Release No. 14416 (January 26, 1978) (``1978
Statement''), at 26, 43 FR 4354, 4358. Previously, on June 23, 1977,
the Commission had indicated that a national market system would
include those ``regulatory and technological steps [necessary] to
achieve a nationwide interactive market system.'' See Exchange Act
Release No. 13662 (June 23, 1977), at 20, 42 FR 33510, 33512.
\7\ 1978 Statement, supra, note 6, at 4358.
\8\ In this connection, the Commission specifically indicated
that ``qualified markets'' would include not only exchanges but OTC
market makers as well. Id.
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As requested by the Commission, in March 1978, various exchanges
\9\ filed jointly with the Commission a ``Plan for
[[Page 39307]]
the Purpose of Creating and Operating an Intermarket Communications
Linkage,'' now known as the ITS Plan.\10\ On April 14, 1978, the
Commission, noting that ITS might provide the basis for an appropriate
market linkage facility in a national market system, issued a
provisional order, pursuant to Section 11A(a)(3)(B) of the Act,\11\
authorizing the filing exchanges (and any other self-regulatory
organization (``SRO'') that agreed to become a participant in the ITS
Plan) to act jointly in planning, developing, operating and regulating
the ITS in accordance with the terms of the ITS Plan for a period of
120 days.\12\
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\9\ The exchanges involved were Amex, BSE, NYSE, PSE (now the
PCX), and Phlx.
\10\ The ITS Plan is contained in File No. 4-208.
\11\ 15 U.S.C. 78k-l(a)(3)(B).
\12\ See Exchange Act Release No. 14661 (April 14, 1978), 43 FR
17419. In authorizing the implementation of ITS, the Commission
urged those SROs not yet ITS participants to participate in ITS. Id.
at 7 n.15, 43 FR 17421. On August 11, 1978, the Commission extended
ITS authority for an additional period of one year. See Exchange Act
Release No. 15058 (August 11, 1978), 43 FR 36732. In the interim the
ITS Plan had been amended to include the Midwest Stock Exchange
(``MSE'') as a participant. The MSE is now the CHX.
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The ITS Plan was approved on a permanent, indefinite basis on
January 27, 1983.\13\ It contains a number of market integrity
provisions to provide for continuity of transaction prices among the
various market centers. For example, the Plan includes a trade-through
rule.\14\ It also contains a block trade policy, that provides special
rights to any market displaying the best national bid or offer when
block-size transactions are occurring in another market.\15\
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\13\ See Exchange Act Release No. 19456 (January 27, 1983), 48
FR 4938 (February 3, 1983).
\14\ 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 affecting trades
outside the best national quote.
\15\ See ITS Plan, Section 8(d)(iii).
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Furthermore, since its permanent approval, the NASD and CSE have
been added as Participants to the Plan.\16\
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\16\ On April 28, 1981, due to a reluctance of the ITS
Participants, the Commission issued an order requiring the ITS
Participants to implement an automated interface between CAES and
ITS by March 1, 1982, limited to Rule 19c-3 securities, and to
submit proposed amendments to the ITS Plan reflecting the inclusion
of the NASD as an ITS Participant. See Exchange Act Release No.
17744 (April 21, 1981), 46 FR 23856 (April 28, 1981). On March 11,
1982 the Commission delayed the implementation date of the interface
until May 1, 1982 and published its own proposed amendments to the
ITS Plan. See Exchange Act Release No. 18536 (March 11, 1982), 47 FR
10658. Consequently, due to the inability of the ITS Participants to
submit an amendment, on May 12, 1982, the Commission adopted its own
amendments to the ITS Plan, providing for the inclusion of the NASD
in ITS. See Exchange Act Release No. 18713 (May 12, 1982), 47 FR
20413.
Rule 19c-3 under the Act, as adopted, precludes exchange off-
board trading restrictions from applying to securities listed after
April 26, 1979. See Exchange Act Release No. 16888 (June 11, 1980),
45 FR 41125.
In April 1981, the ITS Plan was amended to provide for
participation of the CSE in ITS via a manual interface between ITS
and CSE's automated National Securities Trading System (``NSTS'').
See Exchange Act Release No. 17702 (April 9, 1981). The Plan was
later amended again to provide for automated interface between ITS
and the CSE's NSTS. See Exchange Act Release No. 23365 (June 23,
1986), 51 FR 23865 (July 1, 1986).
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B. Description of the PCX Application
The PCX application \17\ is the computerized facility of the PCX
that receives orders generated by the ``OptiMark System'',\18\ a
patented electronic matching system based on an optimization algorithm
that, on a periodic ``call'' basis, processes certain qualifying
expressions of trading interest called satisfaction profiles
(``Profiles''), including Profiles created from the published
quotations disseminated by the other participants at commencement of
the OptiMark System call reflecting the best bid and offer prices and
associated sizes (``CQS Profiles'').\19\ OptiMark is a screen-based
trading service intended for use by PCX members and their customers.
The OptiMark System will provide automatic order formulation, matching,
and execution capabilities in the equity securities listed or traded on
the PCX (``PCX Securities''). The OptiMark system will be used by PCX
members, in addition to PCX's traditional floor facilities, to buy and
sell PCX Securities.
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\17\ For a more detailed description of the OptiMark System, see
Exchange Act Release No. 39086 (September 17, 1997), 62 FR 50036
(September 24, 1997).
\18\ The OptiMark System was developed by OptiMark Technologies,
Inc. (``OTI''), a computer technology firm located in Durango,
Colorado.
\19\ CQS Profiles are profiles created from the published
quotations disseminated by the other Participants at commencement of
the OptiMark System call reflecting the public best bid and offer
prices and associated sizes. See Proposed ITS Plan Section 1(33A).
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The PCX Application will allow PCX members and their customers to
submit anonymously from their computer terminals Profiles to the
OptiMark System. At specified times during the trading day, the
OptiMark System will conduct certain calculations against the Profiles
to identify specific orders capable of execution (a ``cycle'').\20\ All
orders formulated by the OptiMark System will be executed automatically
on the PCX, except to the extent that they are executed on other market
centers through ITS.
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\20\ Cycles would be based on a computer algorithm that is
designed to measure and rank all relevant mutual satisfaction
outcomes by matching individual coordinates from intersecting Buy
Profiles and Sell Profiles. The matching algorithm of the OptiMark
System is intended to compute optimal trade results from Users based
on their different willingness to trade across a wide range of price
and size.
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II. Discussion
The Commission is proposing, on its own initiative as requested by
PCX,\21\ to amend the ITS Plan, pursuant to Rule 11Aa3-2(b)(2) and
(c)(1) and the Commission's authority under Section 11A(a)(3)(B) of the
Act,\22\ to link the PCX Application of the OptiMark System to the ITS
System. Specifically, the Commission is proposing two alternative ITS
Plan amendments, each of which would incorporate definitions of basic
terms and a description of ITS transactions resulting from the PCX
Application (``PCX Description Amendment'' and ``NYSE Description
Amendment''). In addition, the Commission is proposing two alternative
amendments, each of which would establish a formula limiting the
percentage of outgoing commitments to trade that can be sent from the
PCX Application to ITS (``PCX Formula Amendment'' and ``NYSE Formula
Amendment''). The proposed alternative amendments substantially reflect
amendments presented by the PCX to the ITSOC on June 6, 1998, as well
as amendments submitted to the ITSOC by the NYSE in response to PCX's
proposed amendments.\23\ The Commission has determined to take this
action only after the ITS Participants, despite extended negotiations,
have proven unable to come to agreement regarding the linkage of the
PCX Application to the ITS System. The PCX Application will be ready to
begin operations in September 1998. The Commission believes that this
linkage will further the purposes of Section 11A of the Act \24\ and
the development of a NMS by promoting economically efficient execution
of securities transactions, fair competition among markets, the best
execution of customer orders, and an opportunity for orders to be
executed without the participation of a dealer.
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\21\ See Petition for Rulemaking to Amend the ITS Plan, from PCX
and OptiMark, dated June 9, 1998 (``PCX Rulemaking Petition'').
\22\ 5 U.S.C. 78k-l(a)(3)(B).
\23\ The alternative amendments being proposed by the Commission
substantively reflect those amendments proposed by the PCX and the
NYSE.
\24\ 15 U.S.C. 78k-l.
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The Commission believes that linkage of the PCX Application to the
ITS System will provide a new and potentially more efficient way to
match and execute trading interest. The PCX Application appears
principally
[[Page 39308]]
designed to meet the demands of sophisticated portfolio managers and
other market professionals implementing complex trading strategies.
These market participants often require instantaneous access to the
market, and desire to minimize the market impact of their transactions
through the expression of varied trading interests on a confidential
basis. At the same time, the PCX Application is designed to allow
retail customers, through PCX members Users, to interact with
institutional trading interests.
The Commission believes that PCX is entitled to modify its market
place, subject to Commission approval, to provide a new, innovative
trading system for listed securities. The PCX Application is likely to
promote competition among market centers because it has the potential
to attract new market participants and to increase order flow to the
PCX. By attracting order flow, the PCX Application may provide a new
and enhanced source of liquidity for investors that may lessen order
flow to other less-automated exchanges. The linkage of the PCX
Application to the ITS System should increase the ability of investor
orders to interact directly with other investor orders. Moreover, the
Commission believes that the linking of the PCX Application to the ITS
System should benefit both institutional and retail investors insofar
as their expressions of trading interest will be represented in the
OptiMark System and should be more likely to result in executions.
The Commission has historically encouraged exchanges to integrate
new data communications and trade execution mechanisms into their
markets in furtherance of the development of the NMS.\25\ The
Commission, for example, approved the fully computerized NSTS of the
Cincinnati Stock Exchange, the MAX and SuperMAX Systems of the CHX, the
CAES operated by Nasdaq.\26\ In fact, the PCX Application shares many
of the characteristics of the CHX's Chicago Match System, which was
approved by the Commission in 1994.\27\ The Commission notes that both
the NSTS and CAES are linked with the ITS System.
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\25\ In 1982, when recognizing the Cincinnati Stock Exchange's
NSTS as a permanent program, the Commission stated:
In mandating the development of a NMS, Congress expressly stated
that ``[n]ew data processing and communications techniques create
the opportunity for more efficient market operations.'' . . . In
carrying out Congress' mandate, the Commission has taken an
evolutionary approach by encouraging the securities industry to take
the primary initiative in fashioning trading mechanisms which are
consistent with the goals of a NMS. The Commission believes that, as
a general matter, the industry has responded well to changing
economic and technological demands by attempting to integrate state
of the art data processing and communications technology to develop
many new trading systems which have advanced the objectives of a
NMS. In this respect, the Commission believes that ITS, the NASD's
[National Association of Securities Dealers'] Computer Assisted
Execution System (``CAES'') and the NSTS represent constructive
approaches to integrating trading in physically dispersed locations.
(citations omitted)
Exchange Act Release No. 19315 (December 9, 1982), 47 FR 56236
(December 15, 1982).
\26\ See, e.g., Exchange Act Release No. 19315 (Dec. 9, 1982),
47 FR 56236 (Dec. 15, 1982) (Commission approval to terminate the
NSTS as an experimental program and extend its duration for an
indefinite period of time); Exchange Act Release No. 12451 (May 14,
1976), 41 FR 20932 (May 21, 1976) (Commission approval of the MAX
system to operate on a permanent basis); Exchange Act Release No.
32631 (July 14, 1993), 58 FR 39069 (July 21, 1993) (Commission
approval to operate the SuperMAX system on a permanent basis);
Exchange Act Release No. 17601 (March 4, 1981), 46 FR 16171 (March
11, 1981) (Commission notice of the NASD filing of proposed rule
change for the establishment of CAES); Exchange Act Release No.
17744 (April 21, 1981), 46 FR 23856 (April 28, 1981) Commission
order to implement an automated interface between the ITS and the
CAES); and Exchange Act Release No. 18713 (May 6, 1982), 47 FR 20413
(May 12, 1982) (implementing ITS/CAES interface and operations).
\27\ Exchange Act Release No. 35030 (November 30, 1994), 59 FR
63141 (December 7, 1994). The PCX Application differs from Chicago
Match in that it is a periodic, rather than a unitary, call market.
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The PCX represented in its rule filling for the PCX Application
that the PCX Application would be operated in a manner consistent with
the PCX's intermarket price protection obligations under the ITS
Plan.\28\ The PCX Application would incorporate existing market
interest from each of the ITS Participant markets in the form of CQS
Profiles. All orders generated from a cycle priced inferior to the
quotations of another ITS Participant market would executed on the PCX
only upon submission of appropriate ITS commitments seeking to reach
such better-priced interest. For orders representing matched
coordinates from CQS Profiles and other Profiles, the PCX would send an
ITS commitment reflecting each such order for execution on other market
centers to which the OptiMark System is not directly linked. Under the
PCX Description Amendment, an ITS commitment would be sent immediately
following the matching of the Profiles. Under the NYSE Description
Amendment, before an ITS commitment could be sent, the PCX Application
would first be required to provide the PCX specialist with an
opportunity to trade in place of the pending ITS commitment. Every ITS
commitment would then be sent under the ``give-up'' (an identifying
symbol) of the member User or the Designated Broker, by way of the
traditional PCX linkage to the ITS, in the sequence in which orders are
generated from the cycle. Thus, the Commission preliminarily believes
that the linkage of the PCX Application to the ITS System may be
accomplished in a manner fully consistent with the ITS Plan.
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\28\ See Exchange Act Release No. 39086 (September 17, 1997), 62
FR 50036 (September 24, 1997).
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The Commission understands that certain ITS Participants believe
that adoption of an amendment establishing a percentage formula is
necessary in order to prevent the possibility that ITS, as used by the
PCX members and their customers through the PCX Application, will be
used as an automated order delivery device to obtain cost-free, non-
member access to other market centers. The Participants considered two
formulas, the PCX Formula and the NYSE Formula, in an attempt to
provide a form of ``back-end'' protection that would serve as a
prophylactic measure to address potential access concerns. The
Commission is proposing these as alternative amendments. Although they
differ in specifics, both the PCX Formula Amendment and the NYSE
Formula Amendment would prevent, by establishing a numerical limit, the
PCX Application's linkage to ITS from becoming an automated order
delivery system to other market centers. The proposed percentage
ceilings of each formula amendment vary depending on what types of
trades are included in the formula.
A. Background to the PCX Application Amendment
The Commission approved the PCX's new facility called the PCX
Application of the OptiMark System in September 1997.\29\ With regard
to ITS, the Commission notes that the PCX has consistently taken the
position that no ITS Plan amendments are necessary before the PCX
Application of the OptiMark System is implemented, but that after such
implementation, the PCX Application would be monitored to ensure that
no Plan violations occurred. This position was affirmed by six of the
eight other ITS Participants when the issue was presented to the entire
ITSOC for deliberation on December 11, 1997. Two Participants, the NYSE
and Amex, abstained from voting. Despite the results of the ITSOC vote,
the NYSE continued to express its belief that the PCX Application
requires a Plan amendment that includes certain specific protections to
ensure that the PCX Application will not be used in an improper manner.
The NYSE also
[[Page 39309]]
disagreed with the implication that the ITSOC has the policy-making
authority to interpret provisions of the ITS Plan.
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\29\Id.
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Notwithstanding the NYSE's position, the PCX continued to believe
that an amendment to the ITS Plan prior to the implementation of the
PCX Application was not necessary, however, the PCX indicated that, to
the extent that certain prophylactic protections were deemed necessary
by the ITSOC, the PCX would submit for ITSOC consideration a
description amendment, as well as a formula amendment. On June 3, 1998,
the ITSOC met to consider PCX's proposed amendments to the ITS Plan
regarding the PCX Application of the OptiMark System. The first
amendment, the PCX Description Amendment, contained a definition of
basic terms and a description of ITS transactions resulting from the
PCX Application. The second amendment, the PCX Formula Amendment,
contained a prophylactic protection in the form of a percentage formula
to prevent any potential misuse of the PCX Application. Neither
amendment was approved. The NYSE also submitted its own version of an
NYSE Description Amendment and as NYSE Formula Amendment; however,
these amendments were not presented for a vote to the ITSOC. As a
result of the ITSOC vote, the Commission, on its own initiative, is
proposing in substantially similar form, both the PCX and NYSE
Description Amendments, as well as the PCX and NYSE Formula Amendments,
in order to link the PCX Application to the ITS System.
B. Description of the ITS Amendments
The Commission proposes to add two new terms to Section 1, the
``PCX Application'' and the ``PCX Application Module,'' in subsections
33(a) and 33(b) respectively. Both the PCX and NYSE Description
Amendments propose to add the term, ``PCX Application,'' which refers
to the computerized facility of the PCX (as defined in PCX Rule 15.1)
that will receive orders generated by the OptiMark System.
Specifically, Section 1(33A) provides that the PCX would process orders
received by the PCX Application to permit: (1) Execution on PCX of
orders that reflect a match between contra-side non-CQS Profiles; and
(2) transmission to ITS of those orders reflecting a match between a
non-CQS Profile and a CQS Profile. The two proposed definitions of
``PCX Application'' are similar except for the method by which orders
reflecting a match between a non-CQS Profile and a CQS Profile would be
transmitted to ITS. The PCX Application would not become an ITs
Participant under either proposed definition.
Both the PCX and NYSE Description Amendment provide for identical
definitions of ``PCX Application Module'' to be added to the Plan.
``PCX Application Module''' refers to the computerized subsystem of the
PCX Application that will permit automatic formatting of orders
received from the OptiMark System to ITS commitments. Certain technical
amendments to the existing definitions are also being proposed to
specifically incorporate the proposed operation of the PCX
Application.\30\
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\30\ Both the PCX and NYSE Description Amendments proposed
identical changes with respect to the following: (a) section 1(11)
is being amended to reflect that, in addition to meaning the
floor(s) of an Exchange Participant, the term ``Exchange
(Participant's) Market'' also means the PCX Application of the PCX;
(b) section 1(23) is being amended to provide that ``member,''
member in the market center,'' ``member on the floor'' and ``member
in the Participant'' (and any derivative) are defined to include one
or more PCX members in their use of the PCX Application; (c) section
1(34A) is being amended to state that, in the case of PCX, members
will be able to participate with the regional computer interface by
means of the PCX Application Module; and (d) section 1(34B) to state
that on PCX the entry of commitments to trade and receipt of reports
of executions or cancellations of such commitments will be by means
of the PCX Application Module.
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The Commission is proposing both the PCX's and the NYSE's
Description Amendment to Section 6(a)(ii) of the Plan. In proposing
these alternative amendments, the Commission takes no position with
respect to the need for any Plan amendment. The amendments being
proposed provide a detailed description of four generic scenarios in
which ITS commitments will be automatically generated and sent by means
of the PCX Application Module.\31\ As proposed, the NYSE's Description
Amendment to Section 6(a)(ii) differs from the PCX's version in that
the fourth scenario refers to commitments generated via a transaction
involving one or more commitments to trade at the inferior block trade
price for all of the size associated with the CQS Profile as ``block
policy'' commitments originating from the PCX Application Module. In
contrast, the PCX Description Amendment refers to such commitments as
``trade-through'' commitment. The substantive result is that these
trades would be counted differently in the formula calculation.
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\31\ The NYSE proposed amendment to Section 6(a)(ii) contained
language that, if adopted, would have required a Plan amendment for
any proposal that was developed by a Participant for communicating
with the ITS System in a manner different that described in Section
6(a)(ii) for that Participant. The Commission, however, is not
including this language in the amendments currently being proposed.
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Both the PCX and NYSE Description Amendments distinguish between
(1) ``trade-at'' commitments and (2) ``trade-through'' commitments. For
the specific purposes of the PCX Application, ``trade-at'' commitments
refer to those commitments sent to obtain access to the quotes of other
ITS Participants upon exhausting all available PCX trading interest at
a price superior or equal to the quoted interest. ``Trade-through''
commitments refer to those commitments sent when trades otherwise would
be executed on the PCX at inferior prices--that is, these commitments
are sent to satisfy the away market superior quotes to avoid a
potential violation of the ITS trade-through rule and block trade
policy.
The NYSE Description Amendment to Section 6(a)(ii) also would
require, prior to the PCX Application Module generating a commitment to
trade representing an OptiMark System order, that the PCX process the
order in accordance with proposed Section 8(a)(v) (requiring a probe of
the PCX market--that is, a second exposure of the order to the PCX
floor specialists before an ITS commitment is sent to another market),
and, if possible, execution of the order on the PCX. The PCX
Description Amendment does not contain this requirement. The PCX
believes that, since PCX specialists will be required to enter their
displayed bids and offers into the OptiMark System, a secondary probe
is unnecessary after an order is generated by OptiMark and sent to the
PCX Application.
Finally, the Commission realizes that certain ITS Participants
believe that adoption of an amendment establishing a percentage formula
is necessary in order to prevent the possibility that ITS, as used by
the PCX members and their customers through the PCX Application, will
be used as an order-delivery device to obtain cost-free, non-member
access to other market centers. Therefore, the Commission is proposing
both the PCX Formula Amendment and the NYSE Formula amendment.
Generally, both Amendments add Section 8(h) to describe the operational
parameters of the automated linkage between the PCX Application and
ITS.
The PCX Formula Amendment establishes a percentage formula that
would operate as a ceiling on the volume of ``trade-at'' commitments
generated by the PCX on an automated basis, relative to the total
volume of transactions resulting from the PCX Application (inclusive of
ITS commitments). The percentage would be calculated on a share volume
basis
[[Page 39310]]
for each ``Rolling Calendar Quarter.''\32\ This calculation would look
at the ``trade-at'' commitments sent to and executed by certain
Participants that appropriately notify PCX in advance.\33\ Under the
PCX Formula Amendment, the generation of ``trade-through'' commitments
would be outside the scope of the formula because the PCX does not
believe that it should be penalized for, or prevented from, sending any
``trade-through'' commitments that it is obligated to send in order to
fulfill what it characterizes as its ``best execution obligations as a
national market system participant.''\34\ The ceiling applicable to the
PCX Application is determined in reference to the PCX's historical use
of ITS, but will be higher for the first two phase-in stages. In this
regard, the base percentage ceiling is set at 20%, with the phase-in
ceilings set at 25% and 22.5%, subject to an adjustment in the ceilings
to account for sudden periods of market volatility.
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\32\ ``Rolling Calendar Quarter'' means any three consecutive
calendar months, with the first Rolling Calendar Quarter ending on
the last business day of the first three full calendar months
following the month in which the PCX Application commences
operation.
\33\ Any Participant may notify the PCX, in writing, that it
chooses to have included in the formula the ITS share volume (for
``trade-at''
\34\ See PCX Rulemaking Petition, supra note 21.
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The PCS Formula Amendment also provides that, in the event that the
Percentage of PCX Application ITS Volume exceeds the PCX Application
ceiling for three consecutive rolling calendar quarters, PCX would be
required to stop sending ``trade-at'' commitments that originate from
the PCX Application Module on the first business day of the second
month following the end of the third of such consecutive rolling
calendar quarters. The restrictions would end on the first business day
of the third month following the restriction date.\35\ The PCX Formula
Amendment further provides for a twenty-four-month implementation
period during which the PCX may notify the ITSOC that it will undertake
system adjustments to the PCX Application to ensure future compliance
with the PCX Application ceiling. The PCX would have a minimum of nine
calendar months from the date of notice to implement the proposed
system adjustments. During this implementation period, the restrictions
on sending ITS ``trade-at'' commitments originating from the PCX
Application Module would not apply. Furthermore, the PCX Formula
Amendment would require the PCX to provide the ITSOC with a report each
month, indicating the number of shares for each of the components of
the PCX Application Formula for the previous month, as well as the data
necessary to determine the number of ``trade-through'' commitments
originating from the PCX Application Module. Any Participant may call
for an audit of these reports by a certified public accountant.
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\35\ For example, assume that the percentage of PCX Application
ITS volume exceeded the PCX Application ceiling for the Rolling
Calendar Quarters ending January, February and March of a given
year. The restriction date would be the first business day of May of
that year, which is the first business day of the second month
following March. The restrictions would apply as of that date and
would continue through the end of July (ceasing as of the first
business day of August, which is the first business day of the third
month following May). Nothing would prohibit PCX from sending
``trade-at'' commitments through an acceptable alternative means, in
lieu of utilizing the PCX Application, such as by electing to
participate manually, as permitted under the ITS Plan outside the
scope of Section 8(a)(v) of the Plan.
---------------------------------------------------------------------------
The NYSE Formula Amendment would calculate the percentage ceiling
by dividing (a) ITS executed share volume resulting from PCX
Application-generated automated commitments sent to other Participant
markets by (b) total OptiMark share volume (that is, ITS outgoing
executed share volume plus internal PCX Application executed volume).
The NYSE Formula Amendment also provides for application of the formula
on a rolling calendar quarter basis. Furthermore, the NYSE Formula
Amendment initially would cover only ``trade-at'' commitments. It would
not include ``block trade'' commitments. The formula also would not
initially cover ``trade-through'' commitments, but such commitments
would be included on a prospective basis if the ITS executed share
volume resulting from a cycle evidences that the exclusion of trade-
throughs creates a loophole in the formula. Specifically, the NYSE
Formula Amendment provides that share volume from ``trade-through''
commitments would not be included in the formula unless, for a rolling
calendar quarter, the PCX fails to execute internally at least 75
percent of the volume in those OptiMark calls producing trade-through
commitments. Under the NYSE Formula Amendment, the base percentage
ceiling applicable to the PCX Application would be set at 5%, with the
phase-in ceilings set at 15% and 10%.\36\ The NYSE Formula Amendment
does not provide for adjustments to the ceiling limits to account for
market volatility.
---------------------------------------------------------------------------
\36\ The NYSE Formula Amendment bases these ceiling levels on
the PCX's historical use of ITS for agency business (that is,
excluding activity for the accounts of PCX specialists).
---------------------------------------------------------------------------
The NYSE Formula Amendment provides that, in the event that the
Percentage of PCX Application ITS Volume exceeds the PCX Application
ceiling for three consecutive rolling calendar quarters, PCX would be
required to stop sending ``trade-at'' commitments, as well as ``non-
block-trade-through'' commitments that originate from the PCX
Application Module on the first business day of the second month
following the end of the third of such consecutive rolling calendar
quarters. The restrictions would end on the first business day of the
third month following the restriction date. The restrictions would not
apply to block trade commitments. The NYSE Formula Amendment also
provides for a twenty-four-month implementation period during which the
PCX may notify the ITSOC that it will undertake system adjustments to
the PCX Application to ensure future compliance with the PCX
Application ceiling. The NYSE Formula Amendment also grants the PCX a
minimum of nine calendar months from the date of notice to implement
the proposed system adjustments. During this implementation period, the
restrictions on sending ITS ``trade-at'' commitments originating from
the PCX Application Module would not apply; however, the NYSE Formula
Amendment provides for a ``fail-safe'' mechanism: if the formula
produces a number greater than 30 percent for a rolling calendar
quarter, the restrictions would take effect notwithstanding any grace
periods or other delay. The NYSE Formula Amendment also would require
the PCX to provide the ITSOC with a report each month, indicating the
number of shares for each of the components of the PCX Application
Formula for the previous month, as well as the data necessary to
determine the number of ``trade-through'' commitments originating from
the PCX Application Module. Any Participant may call for an audit of
these reports by a certified public account.
III. Request for Comment
The Commission is soliciting comment on the proposed amendments to
the ITS Plan to link the PCX Application to the ITS System as discussed
above, and also requests comment on specific issues presented by the
proposed linkage. Interested persons are invited to submit written
presentations of views, data and arguments concerning the proposed
amendments to the ITS Plan, including the feasibility of implementing
the proposed changes. The Commission further solicits comments on any
other alternative amendments that
[[Page 39311]]
commenters may feel would better achieve the goals of the federal
securities laws with respect to linking the PCX Application to the ITS.
The NYSE does not believe that the PCX Application complies with
the probing requirement contained in Section 8(a)(v) of the Plan, which
states, in part, that ``[r]easonable efforts to probe the market to
achieve a satisfactory execution there are expected to be taken before
an order is reformatted as a commitment to trade and rerouted to
another market through the System.'' The PCX believes that a
requirement (which it plans to implement) that all specialists on its
floor enter their quotes into the OptiMark System prior to a matching
session satisfies the probing requirement. The Commission is requesting
comment on whether the PCX Application, in light of PCX's requirement,
complies with the ``reasonable'' probing aspect of Section 8(a)(v) of
the Plan. The Commission also seeks comment on whether the PCX's or
NYSE's version of the Description Amendment better meets the objectives
of Section 11A of the Exchange Act, or whether an alternative that
combines features of each version should be adopted.
According to the ITS Plan, ITS is not to be used as ``an order
delivery system whereby all or a substantial portion of orders to buy
and sell System securities which are sent to a particular market are
not executed within that market, but are rerouted to another market
through the System for execution,'' as described in Section 8(a)(v) of
the Plan. The Commission requests comment on the alternative formula
amendments. The Commission may, after considering the comments, adopt
some or all of the components of these formula amendments. The
Commission also is requesting comment on whether it is necessary to
amend the Plan to include a percentage formula in order to satisfy the
requirements of Section 8(a)(v), or whether it would be sufficient for
PCX to integrate OptiMark without a limitation on the amount of
outgoing ITS commitments that are sent from the PCX Application to
another marketplace for execution. If a percentage formula is not
adopted in the Plan at this time, the Commission would expect the PCX
to monitor the amount of outgoing commitments sent to ITS through the
PCX Application in order to ensure that the PCX Application was not
being used as this type of default order delivery system. If the
Commission found that the PCX Application was being used in a manner
inconsistent with this provision, the Commission would then require
that the Plan be amended or that the operation of the PCX Application
be altered in order to resolve the problem.
IV. Costs and Benefits of the Proposed Amendments and Their Effects
on Competition, Efficiency and Capital Formation
Section 23(a)(2) of the Exchange Act requires the Commission, when
promulgating rules under the Exchange Act, to consider the anti-
competitive effects of such rules, if any, and to not adopt any rule
that would impose a burden on competition that is not necessary or
appropriate to further the purposes of the Exchange Act.\37\ The
Commission preliminarily has considered the proposed amendments to the
ITS Plan in light of the standards cited Section 23(a)(2) of the Act
and believes that they would not likely impose any significant burden
on competition not necessary or appropriate in furtherance of the
Exchange Act. The Commission believes that the PCX Application likely
will promote competition among market centers because it has the
potential to attract new market participants and to increase order flow
to the PCX. By attracting order flow, the PCX Application may provide a
new and enhanced source of liquidity for investors.
---------------------------------------------------------------------------
\37\ See 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------
Commenters should consider the proposed rule's effect on
competition, efficiency and capital formation.
For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996, the Commission is also requesting information regarding
the potential impact of the proposed rule on the economy on an annual
basis. If possible, commenters should provide empirical data to support
their views.
The assist the Commission in its evaluation of the costs and
benefits that may result from the proposes amendments, commenters are
requested to provide analysis and data, if possible, relating to costs
and benefits associated with the proposal herein. The Commission
preliminarily believes that the proposed amendments to the ITS Plan to
include the PCX Application of the OptiMark System in the ITS System
will provide a new and potentially more efficient way for the PCX to
match and execute trading interest on behalf of investors. The
Commission is requesting comment on the costs and benefits of the
proposed amendments, and a comparison of the two alternative sets of
amendments, as well as any possible anti-competitive impact of the
proposed amendments. Specifically, the Commission requests commenters
to address whether the proposed amendment would generate the
anticipated benefits or impose any cost on U.S. investors or others.
Comments should be submitted by August 21, 1998.
V. Initial Regulatory Flexibility Analysis
This Initial Regulatory Flexibility Analysis (``IRFA'') has been
prepared in accordance with Section 3 of the Regulatory Flexibility Act
(``RFA'').\38\ It relates to proposed amendments to the ITS Plan to
allow the linkage of the PCX Application of the OptiMark System to ITS.
---------------------------------------------------------------------------
\38\ 5 U.S.C. 603(a).
---------------------------------------------------------------------------
A. Reasons for and Objectives of the Proposed
The Commission preliminarily believes that the Plan should be
amended to add the PCX Application as an approved interface with ITS.
The Commission is proposing the amendments on its own initiative
because, despite prolonged negotiations, the ITS Participants have been
unable to agree on how or whether to amend the Plan to link the PCX
Application to ITS.
The Commission preliminarily believes that this linkage will
further the purposes of Section 11A of the Act \39\ and the development
of a national market system by promoting economically efficient
executions of securities transactions, fair competition among markets,
best execution of customer order, and an opportunity for orders to be
executed without the participation of a dealer.
---------------------------------------------------------------------------
\39\ 15 U.S.C. 78k-1.
---------------------------------------------------------------------------
B. Legal Basis
Section 11A(a)(3)(B) of the Exchange Act authorizes the Commission,
by rule or order, the authorize or require SROs to act jointly with
respect to matters as to which they share authority under the Exchange
Act in planning, developing, operating or regulating a national market
system (or a subsystem thereof) or one or more facilities thereof. It
states explicitly that the Commission not only may approve national
market system facilities in response to an application by SROs, but
also may require SROs to implement such facilities on their own
initiative. Rule 11Aa3-2,\40\ adopted by the Commission under Section
11A, establishes procedures for proposing amendments to national market
system plans such as the ITS Plan. Paragraph (b)(2) states that the
Commission may propose amendments to an effective
[[Page 39312]]
national market system plan by publishing the text of the amendment
together with a statement of purpose of the amendment.
---------------------------------------------------------------------------
\40\ 17 CFR 240.11Aa3-2.
---------------------------------------------------------------------------
C. Small Entities Affected by the Proposed Amendments
The proposal would directly affect the nine Participants of ITS,
none of which are small entities. However, specialists on the exchange
floors who trade ITS securities, floor brokers on exchange floors
placing orders into ITS, and registered ITS/CAES market makers who
trade ITS securities in the third market could be indirectly affected.
Paragraph (c)(1) of Rule 0-10 \41\ states that the term ``small
business'' or ``small organization,'' when referring to a broker-
dealer, means a broker or dealer that: (1) Had total capital (net worth
plus subordinated liabilities) of less than $500,000 in its prior
fiscal year audited financial statements or, if not required to file
such statements, on the last business day of the preceding fiscal year;
and (2) is not affiliated with any person (other than a natural person)
that is not a small business or small organization. The Commission
currently does not have any data on the number of small entities that
could be affected.\42\
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\41\ 17 CFR 240.0-10(c)(1).
\42\ The Commission recently adopted revised definitions of
``small entity.'' See Definitions of ``Small Business'' or ``Small
Organization'' Under the Investment Company Act of 1940, the
Investment Advisers Act of 1940, the Securities Exchange Act of
1934, and the Securities Act of 1933, Exchange Act Release No. 40122
(June 24, 1998). The revision, among other things, expanded the
affiliation standard applicable to broker-dealers, to exclude from
the definition of a small entity many introducing broker-dealers
that clear customer transactions through large firms. Currently,
approximately 1079 of all registered broker-dealers will be
characterized as ``small.'' See revised Rule 0-10(i). [The
Commission estimates there are 8,300 registered broker-dealers.]
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1. ITS Participants
The ITS Participants must comply with the proposed amendments once
the amendments are adopted. The amendments would affect the eight
Participants (other than PCX) in that they would be obliged to accept
all properly transmitted ITS commitments reflecting a match between an
expression of interest from OptiMark and a quote from another
Participant market sent to their markets from the PCX Application by
virtue of PCX being allowed to link the PCX Application to ITS.
2. Specialists, Floor Brokers, and Market Makers
Specialists who trade ITS securities on exchange floors, and floor
brokers who enter orders into ITS, would be indirectly affected by the
proposed amendments. Specialists would be required to accept
commitments originating from the PCX Application reflecting a match
between their quote or a floor broker order. Specifically, when a
specialist entered its quote into ITS (or a floor broker entered an
order into ITS) that constituted the best bid or offer for that
security (ITS/BBO), the OptiMark System would match that quote (a ``CQS
Profile'') with any appropriately priced OptiMark expression of
interest (a ``non-CQS profile''), resulting in an ITS commitment being
sent from the PCX Application to the specialist. ITS/CAES market makers
would be similarly affected.
D. Reporting, Recordkeeping, and Other Compliance Requirements
The proposal would not impose any new reporting, recordkeeping, or
other compliance requirements on broker-dealers indirectly affected by
the proposal.
E. Duplicative, Overlapping or Conflicting Federal Rules
The Commission believes that there are no rules that duplicate,
overlap or conflict with, the proposed rules.
F. Significant Alternatives
The RFA directs the Commission to consider significant alternatives
that would accomplish the stated objectives, while minimizing any
significant economic impact on small entities. In connection with the
proposal, the Commission considered the following alternatives: (1) The
establishment of differing compliance or reporting requirements or
timetables that take into account the resources available to small
entities; (2) the clarification, consolidation, or simplification of
compliance and reporting requirements under the Rule for small
entities; (3) the use of performance rather than design standards; and
(4) an exemption from coverage of the Rule, or any part thereof, for
small entities.
The Commission believes that none of the above alternatives is
applicable to the proposed amendments. The ITS Participants are the
only parties that are subject to the requirements of the ITS Plan. The
ITS Participants are all national SROs and, as such, are not ``small
entities.'' The additional recordkeeping and reporting burden is solely
on PCX, which is subject to Exchange Act Rule 11Aa3-1 reporting
requirements, and is not a small entity for purposes of the RFA.
Therefore, having considered the foregoing alternatives in the context
of the proposed amendments, the Commission does not believe they are
applicable to the instant proposal.
G. Solicitation of Comments
The Commission encourages the submission of comments with respect
to any aspect of this IRFA. The Commission requests comment as well as
empirical data on the impact the proposal will have on small broker-
dealers, specialists or market makers that utilize ITS. Comment is
specifically requested on whether broker-dealers that access ITS meet
the revised definition of `'small business'' and on the number of small
entities that would be affected by the proposed amendments and whether
they would be considered small entities for purposes of the RFA. Also,
the Commission is seeking comment on the perceived nature of the impact
of the proposed amendments on these entities. Such comments will be
considered in the preparation of the Final Regulatory Flexibility
Analysis, if the proposed amendments to the ITS Plan are adopted, and
will be placed in the same public file as comments on the proposed
amendments themselves. Comments should be submitted in triplicate to
Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450
Fifth Street, N.W., Washington, D.C. 20549. Comments also may be
submitted electronically at the following E-mail address: comments@sec.gov. All comment letters should refer to File No. 4-208;
this file number should be included on the subject line if E-mail is
used. Comment letters will be available for public inspection and
copying in the Commission's Public Reference Room, 450 Fifth Street,
N.W., Washington, D.C. 20549. Electronically submitted comment letters
also will be posted on the Commission's Internet web site (http://
www.sec.gov).
VI. Commission Authority
Pursuant to Section 11A(a)(3)(B) of the Exchange Act,\43\ the
Commission is proposing changes to the ITS Plan as set forth below.
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\43\ 15 U.S.C. 78k-l(a)(3)(B).
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VII. Description of Proposed Amendments to the ITS Plan
The Commission hereby proposes, on its own initiative, two
alternative sets of amendments to the ITS Plan to provide for the
linking of the PCX Application to the ITS System, pursuant to Rule
11Aa3-2(b)(2) and (c)(1) and the Commission's authority under Section
[[Page 39313]]
11A(a)(3)(B) of the Act.\44\ Below is the text of the amended ITS
Plan.\45\ The first version presented reflects the PCX Description and
Fomula Amendments. The second version presented substantially reflects
the NYSE Description and Formula Amendments. Deleted text is
[bracketed] and new language is italicized.
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\44\ 5 U.S.C. 78k-l(a)(3)(B). Section 11A(a)(3)(B) authorizes
the Commission, in furtherance of its statutory directive to
facilitate the development of a national market system, by rule or
order, to authorize or require self-regulatory organizations to act
jointly with respect to matters as to which they share authority
under the Act in planning, developing, operating, or regulating a
national market system (or subsystem thereof) or one or more of the
facilities thereof.
\45\ The text reflects the latest unofficial compilation of the
ITS Plan supplied by the ITSOC, including all previously
incorporated amendments up to May 30, 1997.
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* * * * *
PCX Version of the Description and Formula Amendments
Section 1 Definitions
* * * * *
(11) ``Exchange (Participant's) Market'' means the floor(s) of an
Exchange Participant, except that, in the case of (a) the CSE,
``Exchange (Participant's) Market'' means in addition to the premises
on which NSTS terminals are located, NSTS and ITS stations located in
the NSTS Supervisory Center [.] and (b) the PCX, ``Exchange
(Participant's) Market'' also means the ``PCX Application.''
* * * * *
(23) ``Member,'' ``members in the market center,'' ``member on the
floor'' and ``member in the Participant'' (and any derivative and
comparable phrases) as applied to (a) the CSE each mean one or more
NSTS Users in their use of NSTS well as more as one or more members
physically on the CSE floor , and (b) the PCX in addition to the PCX
members on the PCX floors, each also mean one or more PCX members in
their use of the PCX Application.
* * * * *
(33A) ``PCX Application'' means the computerized facility of the
PCX, as defined in PCX Rule 15.1, that receives orders generated by the
OptiMark System, a patented electronic matching system based on an
optimization algorithm that, on a periodic ``call'' basis, processes
certain qualifying expressions of trading interest called satisfaction
profiles (``profiles''), including profiles created from the published
quotations disseminated by the other Participants at commencement of
the OptiMark System call reflecting the best bid and offer prices and
associated sizes (``CQS profiles'') and other PCX member profiles
reflecting the bids or offers disseminated by the PCX specialists at
commencement of the OptiMark System call. The orders received by the
PCX Application will be processed by the PCX to permit: (a) in the case
of those orders reflecting a match between contra-side non-CQS
profiles, appropriate execution on the PCX and reporting thereafter in
accordance with applicable PCX rules; and (b) in the case of those
orders reflecting a match between a non-CQS profile and a CQS profile,
appropriate transmission to the System by means of the PCX Application
Module or any other authorized method. The PCX Application is not a
part of the System.
(33B) ``PCX Application Module'' means the computerized subsystem
of the PCX Application that permits automatic formatting of the orders
received from the OptiMark System reflecting a match between a non-CQS
profile and a CQS profile as commitments to trade for transmission
thereafter to the System via the PCX Regional Switch.
(34A) ``RCI'' means the ``Regional Computer Interface,'' the
automated linkage between the System and collectively, the Regional
Switches and the AMEX DBM that, when implemented, will enable members
located on the floors of the AMEX, the BSE, the CHX, the PCX and the
PHLX to participate in the Applications, and, in the case of (a) the
CSE, will enable members to participate by means of the NSTS Switch and
(b) the PCX, will also enable members to participate by means of the
PCX Application Module.
(34B) ``Regional Switch'' means the computerized system of each of
the BSE, the CHX, the PCX and the PHLX that, when implemented, will
replace the original ITS stations on its floor. Each Regional Switch is
not a part of the System, but permits the entry and receipt of System
communications by means of CRT or other terminals, card readers and, in
some instances, associated printers on the floor or the BSE, the CHX,
the PCX or the PHLX, as appropriate (collective ``ITS/Regional
stations''), and, also in the case of the PCX, the entry of commitments
to trade and receipt of reports of executions or cancellations of such
commitments by means of the PCX Application Module.
* * * * *
Section 6 ITS
(a)(ii)
* * * * *
The PCX would then report the trade to the CTA Plan Processor for
dissemination under the CTA Plan at 40\1/8\ (or at the better price)
with the identifier assigned to the PCX.
If a trade involves the PCX Application, the commitment to trade
originating from the PCX may enter the System from the PCX Application
Module through the RCI. In this case, a trade involving the PCX
Application would take place as follows: In the original example,
assume that the stock in question is traded on the NYSE as well as on
the PCX. From time to time, on a periodic call basis, the OptiMark
System matches available profiles (including CQS profiles and other PCX
member profiles reflecting the bids or offers disseminated by the PCX
specialists) in the stock and generates orders capable of immediate
execution. For purposes of this example, assume that at the time an
OptiMark System call commences, the continuously updated quotation
display shows that the NYSE has a displayed best bid of 20 for 10,000
shares and a displayed best offer of 20\1/4\ for 12,000 shares (i.e.,
20-20\1/4\, 100 x 120), representing the ITS BBO, and that all other
Participant Markets' published quotations are disseminated at inferior
prices and that none are greater in size than 100 shares.
The OptiMark System automatically creates the corresponding ``buy''
and ``sell'' CQS profiles reflecting the displayed interest from the
NYSE and includes such profiles in ensuing call. As all profiles at
hand are matched sequentially based on the satisfaction values assigned
to different prices an sizes, a series of orders will be generated and
delivered to the PCX. The PCX Application Module automatically will
format any order reflecting a match with another Participant's
displayed interest (in whole or in part) as a commitment to trade with
such market, and acting on behalf of the responsible PCX member, will
cause such commitment to enter the System (which, in turn, will route
such commitment to the Participant Market). There are four possible
scenarios that illustrate the different types of commitments to trade
originating from the PCX Application Module.
Scenario 1
Upon exhausting all available matches among the non-CQS profiles,
the OptiMark System call finds a match (in whole or in part) between
the remainder of any such profile with the contra-side bid or offer as
reflected in a CQS profile. In Scenario 1, the implementation of the
PCX Application would result in (a) one or more trades reported by the
PCX at a price better than or equal to the CQS profile and (b) one or
more commitments to trade at
[[Page 39314]]
the associated CQS profile price (the commitments generated in this
context referred to as ``trade-at'' commitments originating from the
PCX Application Module).
For example, an OptiMark System call may include a buy member
profile for 20,000 shares at 20\1/4\, a sell member profile for 16,000
shares at 20\1/4\, and the NYSE's CQS sell profile for 12,000 shares at
20\1/4\. The call may result in the generation of (a) orders reflecting
the match between the contra member profiles to buy and sell 16,000
shares at 20\1/4\ for immediate delivery to and execution on the PCX
and (b) an order reflecting the match between the remaining portion of
the member profile to buy 4,000 shares and the NYSE's stated offer at
the price of 20\1/4\ for immediate acceptance by the PCX Application
Module and issuance thereafter of a commitment to buy. If the 20\1/4\
offer is still available when the ``trade-at'' commitment originating
from the PCX Application Module reaches the NYSE, or if a better offer
is available and if the rules of the NYSE permit an execution at that
price, then the NYSE offer would accept the commitment, and an
execution at 20\1/4\ (or at the better price) would take place. The
NYSE would then report the trade to the CTA Processor dissemination
under the CTA Plan at 20\1/4\ (or at the better price) with the
identifier assigned to the NYSE.
Scenario 2
Upon finding no matching potential among the non-CQS profiles, the
OptiMark System call finds a match (in whole or in part) between a PCX
member profile and the contra-side bid or offer as reflected in a CQS
profile. In Scenario 2, the implementation of the PCX Application would
result in (a) no trade reported by the PCX and (b) one or more
commitments to trade at the associated CQS profile price (the
commitments generated in this context also referred to as ``trade-at''
commitments originating from the PCX Application Module).
For example, an OptiMark System call may include a buy member
profile for 20,000 shares at 20\1/4\ with no contra sell profile at
20\1/4\ or lower, except for the NYSE's CQS sell profile for 12,000
shares at 20\1/4\. The call may result in the generation of an order
reflecting the match between the buy member profile and the NYSE's
stated offer of 12,000 shares at 20\1/4\ for immediate acceptance by
the PCX Application Module and issuance thereafter of a commitment to
buy. If the 20\1/4\ offer is still available when the ``trade-at''
commitment originating from the PCX Application Module reaches the
NYSE, or if a better offer is available and if the rules of the NYSE
permit an execution at that price, then the NYSE offer would accept the
commitment, and an execution at 20\1/4\ (or at the better price) would
take place. The NYSE would then report the trade to the CTA Processor
for dissemination under the CTA Plan at 20\1/4\ (or at the better
price) with the identifier assigned to the NYSE.
Scenario 3
Prior to initiating any match among the non-CQS profiles at a price
inferior to any CQS profile that otherwise may result in a potential
``trade-through'' as that term is defined in Exhibit B (Trade-Through
Rule), the OptiMark System call finds a separate match (in whole or in
part) with the contra-side bid or offer as reflected in the CQS
profile. In Scenario 3, the implementation of the PCX Application would
result in (a) one or more trades reported by the PCX at a price
inferior to the CQS profile and (b) one or more commitments to trade at
the superior price of the CQS profile for all of its associated size
(the commitments generated in this context referred to as ``trade-
through'' commitments originating from the PCX Application Module).
For example, an OptiMark System call may include a buy member
profile for 20,000 shares at 20\3/8\, a sell member profile for 1,000
shares at 20\1/4\, another sell member profile for 10,000 shares at
20\3/8\, and the NYSE's CQS sell profile for 12,000 shares at 20\1/4\.
The call may result in the generation of (a) orders reflecting the
matches between the contra member profiles to buy and sell 1,000 shares
at 20\3/8\ and 7,000 shares also at 20\3/8\ for immediate delivery to
an execution on the PCX and (b) an order reflecting the match between
the relevant portion of the member profile to buy 12,000 shares and the
NYSE's stated offer of 12,000 shares at the price of 20\1/4\ for
immediate acceptance by the PCX Application Module and issuance
thereafter a commitment to buy in accordance with Exhibit B (Trade-
Through Rule).
Scenario 4
In connection with any matching potential found among the non-CQS
profiles at a price inferior to any outstanding CQS profile and in a
size that may result in a potential ``block trade'' as that term is
defined in Exhibit C (Block Trade Policy), the OptiMark System call
finds a separate match (in whole or in part) with the contra-side bid
or offer as reflected in the CQS profile at the inferior price
associated with the potential block trade. In Scenario 4, the
implementation of the PCX Application would result in (a) one or more
block trades by the PCX at a price inferior to the CQS profile and (b)
one or more commitments to trade at the inferior block trade price for
all of the size associated with the CQS profile (the commitments
generated in this context also referred to as ``trade-through''
commitments originating from the PCX Application Module).
For example, an OptiMark System call may include a buy member
profile for 22,000 shares at 20\3/8\, a sell member profile for 10,000
shares at 20\3/8\, and the NYSE's CQS sell profile for 12,000 shares at
20\1/4\. The call may result in the generation of (a) orders reflecting
the match between the contra member profiles to buy and sell 10,000
shares at 20\3/8\ for immediate delivery to and execution on the PCX
and (b) an order reflecting the match between the relevant portion of
the member profile to buy 12,000 shares and the NYSE's stated offer of
12,000 shares at the block trade price of 20\3/8\ for immediate
acceptance by the PCX Application Module and issuance thereafter of a
commitment to buy in accordant with Exhibit C (Block Trade Policy).
* * * * *
Section 8 Participants' Implementation Obligations.
* * * * *
(h) Operational Parameters for the PCX Application Automated
Linkage. (i) In order to ensure the proper use of the PCX Application
in a manner consistent with the requirements set forth in Section
8(a)(v) of this Plan, the PCX may send ``trade-at'' commitments
originating from the PCX Application Module (as such ``trade-at''
commitments are described more fully in section 6(a)(ii) in Scenarios 1
and 2) to other Participant Markets only in compliance with the
requirements of this section 8(h).
(ii) For the purpose of this section 8(h):
(A) ``Rolling Calendar Quarter'' means any three consecutive
calendar months, with the first Rolling Calendar Quarter ending on the
last business day of the first three full calendar months following the
month in which the PCX Application commences operation.
(B) ``Percentage of PCX Application ITS Volume'' for a Rolling
Calendar Quarter is defined pursuant to the following formula (the
``PCX Application Formula''), expressed as a percentage:
[GRAPHIC] [TIFF OMITTED] TN22JY98.000
[[Page 39315]]
X = Executed ITS share volume reported pursuant to the CTA Plan by
the Notifying Participants resulting from the acceptance and execution
of ``trade-at'' commitments originating from the PCX Application Module
(as such ``trade-at'' commitments are described more fully in section
6(a)(ii) in Scenarios 1 and 2).
Y = Executed share volume reported pursuant to the CTA Plan by the
PCX resulting from the execution of orders through the PCX Application.
(C) The ``notifying Participant'' means any Participant that
notifies the PCX, in writing, that ``X`` of the PCX Application Formula
should include the ITS share volume reported to the CTA Plan by such
Participant resulting from the acceptance and execution of ``trade-at''
commitments originating from the PCX Application Module. Initial notice
is due prior to the end of the first Rolling Calendar Quarter and will
remain in effect until such notice is withdrawn.
(D) the ``PCX Application Ceiling'' for a Rolling Calendar Quarter
is:
* For the first five consecutive Rolling Calendar Quarters: 25
percent;
* For the second five consecutive Rolling Calendar Quarters: 22.5
percent; and
* For each subsequent Rolling Calendar Quarters: 20 percent;
provided, however, that each of the above-listed percentages shall be
adjusted upward with respect to any given Rolling Calendar Quarter to
include the difference, if any, by which the average Percentage of PCX
Application ITS Volume for the immediately preceding three Rolling
Calendar Quarter fell short of the average PCX Application Ceiling for
the corresponding period of time.
For example, assume that the PCX Application is in the 11th Rolling
Calendar Quarter of its operation. Further assume that the average
Percentage of PCX Application ITS Volume for the 8th, 9th, and 10th
Rolling Calendar Quarter was 18%. The applicable PCX Application
Ceiling for the 11th Rolling Calendar Quarter would be calculated by
adding the difference by which 18% fell short of the average PCX
Application Ceiling over the same period of time--that is, the
difference between 22.5% and 18%--to the initial percentage of 20%. In
this case, the applicable PCX Application Ceiling for the 11th Rolling
Calendar Quarter would be 24.5%, after adjusting the initial percentage
of 20% to add the difference of 4.5%.
(iii) In the event that the Percentage of PCX Application ITS
Volume exceeds the PCX Application Ceiling for three consecutive
Rolling Calendar Quarters, the PCX shall cease sending ``trade-at''
commitments originating from the PCX Application Module (the
prohibition on sending such commitments hereinafter referred to as the
``Restrictions'') on the first business day of the second month
following the end of the third of such consecutive Rolling Calendar
Quarters (the ``Restriction Date''). The Restrictions will end on the
first business day of the third month following the Restriction Date.
For example, assume that the Percentage of PCX Application ITS
Volume exceeds the PCX Application Ceiling for the Rolling Calendar
Quarter ending in January, February and March of a given year. The
Restriction Date would be the first business day of May of that year,
which is the first business day of the second month following March.
The Restrictions would apply as of that date and would continue through
the end of July (ceasing as of the first business day of August, which
is the first business day of the third month following May).
The Restrictions set forth in this subsection 8(h)(iii) shall,
under no circumstances, be construed to apply to the ``trade-through''
commitments originating from PCX Application Module (as such ``trade-
through'' commitments are described more fully in section 6(a)(ii) in
Scenarios 3 and 4). Nothing herein prohibits the PCX from sending any
``trade-at'' commitments through an acceptable alternative means, in
lieu of utilizing the PCX Application Module, such as by electing to
participate manually as permitted under the ITS Plan outside the scope
of section 8(a)(v).
(iv) Notwithstanding subsection 8(h)(iii) above, during the first
24 calendar months following implementation of the PCX Application, the
PCX retains the right to notify the Operating Committee in writing, on
or prior to the Restriction Date, that it will undertake, or cause to
be undertaken, system adjustments to the operation of the PCX
Application in an effort to ensure future compliance with the PCX
Application Ceiling. In the event of such notification, the PCX shall
have, at a minimum, nine calendar months from the date of such notice
(or such longer period as may be approved by the Operating Committee
upon showing of reasonable cause) to implement its proposed system
adjustments (the ``Implementation Period''). During the Implementation
Period, the Restrictions shall not apply. During the next 12 calendar
months following the end of the Implementation Period, if the
Percentage of PCX Application ITS Volume exceeds the PCX Application
Ceiling for any Rolling Calendar Quarter, the Restrictions shall apply
on the first business day of the second month following the end of such
Rolling Calendar Quarter (the ``Subsequent Restriction Date''). In that
event, the Restrictions will end on the first business day of the third
month following the Subsequent Restriction Date.
For example, assume that the Percentage of PCX Application ITS
Volume exceeds the PCX Application Ceiling for the Rolling Calendar
Quarters ending in January, February and March of Year 1 (which fall
within the first 24 calendar months of the operation of the PCX
Application). As in the example above, the Restriction Date would be
the first business day of May of that year, which is the first business
day of the second month following March. The Restrictions would apply
as of that date, unless the PCX notified the Operating Committee, on or
prior to the first business day in May, that it planned to effect
system adjustments in an attempt to ensure future compliance with the
PCX Application Ceiling. Assuming that the PCX provides such
notification on the Restriction Date, the Restrictions would not apply
during the Implementation Period, which would last for, at a minimum,
nine months from the Restriction Date (that is, assuming the minimum
duration, the nine calendar months of May through January of Year 2).
Following the end of the Implementation Period, assume that the
Percentage of PCX Application ITS Volume exceeded the PCX Application
Ceiling for the next Rolling Calendar Quarter (the quarter beginning in
February and ending April or Year 2). In that event, the Subsequent
Restriction Date would be the first business day of June of Year 2,
which is the first business day of the second month following April.
The Restrictions would apply beginning on the day and would continue
through the end of August of Year 2 (ceasing as of the first business
day of September of Year 2, which is the first business day of the
third month following June).
The Restrictions set forth in this subsection 8(h)(iv) shall, under
no circumstances, be construed to apply to the ``trade-through''
commitments originating from the PCX Application Module (as such
``trade-through'' commitments are described more fully in section
6(a)(ii) in Scenarios 3 and 4). Nothing herein prohibits the PCX from
sending any ``trade-at'' commitments through an acceptable alternative
means, in lieu of utilizing the PCX Application Module, such as by
electing to participate manually as permitted
[[Page 39316]]
under the ITS Plan outside the scope of section 8(a)(v).
(v) Reporting and Audits, Each month the PCX shall furnish the
Operating Committee with a report showing the number of shares for each
of the components of the PCX Application Formula for the previous
month, as well as the date necessary to determine the number of
``trade-through'' commitments originating from the PCX Application
Module (as such ``trade-through'' commitments are described more fully
in section 6(a)(ii) in Scenarios 3 and 4). Any one or more Participants
may cause a certified public accountant to audit any one or more such
reports. The requesting Participant(s) shall pay for such audits.
* * * * *
NYSE Version of the Description and Formula Amendments
Section 1 Definitions
* * * * *
(11) ``Exchange (Participant's) Market'' means the floor(s) of an
Exchange Participant, except that, in the case of (a) the CSE,
`'Exchange (Participant's) Market'' means in addition to the premises
on which NSTS terminals are located, NSTS and ITS stations located in
the NSTS Supervisory Center[.], and (b) the PCX ``Exchange
(Participant's) Market'' also means the ``PCX Application.''
* * * * *
(23) ``Member,'' ``member in the market center,'' ``member on the
floor'' and ``member in the Participant'' (and any derivative and
comparable phrases) as applied to (a) the CSE each mean one or more
NSTS Users in their use of NSTS as well as one or more members
physically on the CSE floor, and (b) the PCX, in addition to the PCX
members on the PCX floors, each also mean one or more PCX members in
their use of the PCX Application.
* * * * *
(33A) ``PCX Application'' means the computerized facility of the
PCX, as defined in PCX Rule 15.1, that receives orders generated by the
OptiMark System, a patented electronic matching system based on an
optimization algorithm that, on a periodic ``call'' basis processes
certain qualifying expressions of trading interest called satisfaction
profiles (``profiles''), including profiles created from the published
quotations disseminated by the other Participants at the commencement
of the OptiMark System call reflecting the best bid and offer prices
and associated sizes (``CQS profiles''). The orders received by the PCX
Application will be processed by the PCX to permit: (a) in the case of
those orders reflecting a match between contra-side non-CQS profiles,
appropriate execution on the PCX and reporting thereafter in accordance
with the applicable PCX rules; and (b) in the case of those orders
reflecting a match between a non-CQS profile and a CQS profile (i)
processing pursuant to Section 6(a)(ii)(A); or (ii) transmission to the
System pursuant to Section 6(a)(ii)B).) The PCX Application is not part
of the System.
(33B) ``PCX Application Module'' means the computerized subsystem
of the PCX Application that permits automatic formatting of the orders
received from the OptiMark System reflecting a match between a non-CQS
profile and a CQS profile as commitments to trade for transmission
thereafter to the System via the PCX Regional Switch.
(34A) ``RCI'' means the ``Regional Computer Interface,'' the
automated linkage between the System and, and collectively, the
Regional Switches and the AMEX DBM that, when implemented, will enable
members located on the floors of the AMEX, the BSE, the CHX, the PCX
and the PHLX to participate in the Applications, and, in the case of
(a) the CSE, will enable members to participate by means of the NSTS
Switch and (b) the PCX, also will enable members to participate by
means of the PCX Application Module.
(34B) ``Regional Switch'' means the computerized system of each of
the BSE, the CHX, the PCX and the PHLX that, when implemented, will
replace the original ITS stations on its floor. Each Regional Switch is
not a part of the System, but permits the entry and receipt of System
communications by means of CRT or other terminals, card readers, and,
in some instances, associated printers on the floor or the BSE, the
CHX, the PCX or the PHLX, as appropriate (collectively ``ITS/Regional
stations''), and, also in the case of the PCX, the entry of commitments
to trade and receipt of reports of executions or cancellations of such
commitments by means of the PCX Applications Module.
* * * * *
Section 6 ITS.
* * * * *
(a)(ii) Description of ITS Transactions. Through ITS, a member
located in one Participant Market who wishes to buy (or sell), for
example, 100 shares of a particular common stock that is also traded
through the System by members in one or more other Participant Markets
is able to buy the stock from (or sell stock to) such member(s).
(A) Description Applicable to the AMEX, BSE, CBOE, CHX, NYSE, PHLX
and PCX.
With respect to an ITS transaction involving the AMEX, BSE, CBOE,
CHX, NYSE, PHLX and PCX (other than with respect to transactions
involving the PCX Application Module), for example, assume that a
member firm of the NYSE receives from a customer an order to purchase
100 shares of a given NYSE listed stock that is also traded on the PCX
and the PHLX and sends that order to the NYSE floor for execution.
* * * * *
The PCX would then report the trade to the CTA Processor for
dissemination under the CTA Plan at 40-40\1/8\ (or at the better price)
with the identifier assigned to the PCX.
(B) Description Applicable to the PCX Application
(1) Generation of ITS Commitments
If a trade involves the PCX Application, the commitment to trade
originating from the PCX may enter the System from the PCX Application
Module through the RCI. In this case, a trade involving the PCX
Application would take place as follows: In the original example,
assume that the stock in question is traded on the NYSE as well as on
the PCX. From time to time, on a periodic call basis, the OptiMark
System matches available profiles (including CQS profiles) in the stock
and generates orders capable of immediate execution. For the purposes
of this example, assume that at the time an OptiMark System call
commences, the continuously updated quotation display shows that the
NYSE has a displayed best bid of 20 for 10,000 shares and a displayed
best offer of 20\1/4\ for 12,000 shares (i.e., 20-20\1/4\, 100 x
120), representing the ITS BBO, and that all other Participant Markets'
published quotations are disseminated at inferior prices and that none
are greater in size than 100 shares.
The OptiMark System automatically creates the corresponding ``buy''
and ``sell'' CQS profiles reflecting the displayed interest from the
NYSE and includes such profiles in the ensuing call. As all profiles at
hand are matched sequentially based on the satisfaction values assigned
to different prices and sizes, a series of orders will be generated and
delivered to the PCX. Thereafter, the PCX Application Module
automatically will format any order reflecting a match with another
Participant Market's displayed interest (in whole or in part) as a
commitment to trade with such market, and acting on behalf of the
responsible PCX member,
[[Page 39317]]
will cause such commitment to enter the System (which, in turn, will
route such commitment to the Participant Market). There are four
possible scenarios that illustrate the different types of commitments
to trade originating from the PCX Application Module.
Scenario 1
Upon exhausting all available matches among the non-CQS profiles,
the OptiMark System call finds a match (in whole or in part) between
the remainder of any such profile with the contra-side bid or offer as
reflected in CQS profile. In Scenario 1, the implementation of the PCX
Application would result in (a) one or more trades reported by the PCX
at a price better than or equal to the CQS profile and (b) one or more
commitments to trade at the associated CQS profile price (the
commitments generated in this context referred to as ``trade-at''
commitments originating from the PCX Application Module).
For example, an OptiMark System call may include a buy member
profile for 20,000 shares at 20\1/4\, a PCX sell member profile for
16,000 shares at 20\1/4\, and the NYSE's CQS sell profile for 12,000
shares at 20\1/4\. The call will result in the generation of (a) orders
reflecting the match between the contra member profiles to buy and sell
16,000 shares at 20\1/4\ for immediate delivery to an execution on the
PCX and (b) an order reflecting the match between the remaining portion
of the member profile to buy 4,000 shares and the NYSE's stated offer
at the price of 20\1/4\ for immediate acceptance by the PCX Application
Module and issuance thereafter of a commitment to buy. If the 20\1/4\
offer is still available when the ``trade-at'' commitment originating
from the PCX Application Module reaches the NYSE, or if a better offer
is available and if the rules of the NYSE permit an execution at that
price, then the NYSE offer would accept the commitment, and an
execution at 20\1/4\ (or at the better price) would take place. The
NYSE would then report the trade to the CTA Processor for dissemination
under the CTA Plan at 20\1/4\ (or at the better price) with the
identifier assigned to the NYSE.
Scenario 2
Upon finding no matching potential among the non-CQS profiles, the
OptiMark System call finds a match (in whole or in part) between a PCX
member profile and the contra-side bid or offer as reflected in a CQS
profile. In Scenario 2, the implementation of the PCX Application would
result in (a) no trade reported by the PCX and (b) one or more
commitments to trade at the associated CQS profile price (the
commitments generated in this context also referred to as ``trade-at''
commitments originating from the PCX Application Module).
For example, an OptiMark System call may include buy member profile
for 20,000 shares at 20\1/4\ with no contra sell profile at 20\1/4\ or
lower, except for the NYSE's CQS profile to sell 12,000 shares at 20\1/
4\. The call will result in the generation of an order reflecting the
match between the buy member profile and the NYSE's stated offer of
12,000 shares at 20\1/4\ for immediate acceptance by the PCX
Application Module and issuance thereafter of a commitment to buy. If
the 20\1/4\ offer is still available when the ``trade-at'' commitment
originating from the PCX Application Module reaches the NYSE, or if a
better offer is available and if the rules of the NYSE permit an
execution at that price, then the NYSE offer would accept the
commitment, and an execution at 20\1/4\ (or at the better price) would
take place. The NYSE would then report the trade to the CTA Processor
for dissemination under the CTA Plan at 20\1/4\ (or at the better
price) with the identifier assigned to the NYSE.
Scenario 3
Prior to initiating any potential match among the non-CQS profiles
at a price inferior to any outstanding CQS profile that may result in a
potential ``trade-through'' as that term is defined in Exhibit B
(Trade-Through Rule), the OptiMark System call finds a separate match
(in whole or in part) with the contra-side bid or offer as reflected in
the CQS profile. In Scenario 3, the implementation of the PCX
Application would result in (a) one or more trades reported by the PCX
at a price inferior to the CQS profile and (b) one or more commitments
to trade at the superior price of the CQS profile for all of its
associated size (the commitments generated in this context referred to
as ``trade-through'' commitments originating from the PCX Application
Module).
For example, an OptiMark System call may include a buy member
profile for 20,000 shares at 20\3/8\, a sell member profile for 1,000
shares at 20\1/4\, another sell member profile for 10,000 shares at
20\3/8\, and the NYSE's CQS profile to sell 12,000 shares at 20\1/4\.
The call will result in the generation of (a) orders reflecting the
matches between the contra member profiles to buy and sell 1,000 shares
at 20\3/8\ and 7,000 shares also at 20\3/8\ for immediate delivery to
and execution on the PCX and (b) an order reflecting the match between
the relevant portion of the member profile to buy 12,000 shares and the
NYSE's stated offer 12,000 shares at the price of 20\1/4\ for immediate
acceptance by the PCX Application Module and issuance thereafter of a
commitment to buy in accordance with Exhibit B (Trade-Through Rule).
Scenario 4
In connection with any matching potential found among the non-CQS
profiles at a price inferior to any outstanding CQS profile and in any
size that may result in a potential ``block trade'' as that term is
defined in Exhibit C (Block Trade Policy), the OptiMark System call
finds a separate match (in whole or in part) with the contra-side bid
or offers as reflected in the CQS profile at the inferior price
associated with the potential block trade. In Scenario 4, the
implementation of the PCX Application would result in (a) one or more
block trades reported by the PCX at a price inferior to the CQS profile
and (b) one or more commitments to trade at the inferior block trade
price for all of the size associated with the CQS profile (the
commitments generated in this context referred to as ``block policy''
commitments originating from the PCX Application Module).
For example, an OptiMark system call may include a PCX buy member
profile for 22,000 shares at 20\3/8\, a sell member profile for 10,000
shares at 20\3/8\, and the NYSE's CQS profile to sell 12,000 shares at
20\1/4\. The call will result in the generation of (a) orders
reflecting the match between the contra member profiles to buy and sell
10,000 shares at 20\3/8\ for immediate delivery to and execution on the
PCX and (b) an order reflecting the match between the relevant portion
of the member profile to buy 12,000 shares and the NYSE's stated offer
of 12,000 shares at the block trade price of 20\3/8\ for immediate
acceptance by the PCX Application Module and issuance thereafter of a
commitment to buy in accordance with Exhibit C (Block Trade Policy).
(2) PCX Application Processing/Pricing
Prior to the PCX Application Module generating a commitment to
trade representing an OptiMark system order, the PCX shall process such
order as required by Section 8(a)(v) of the Plan and PCX Rule 15.X,
and, if possible, execute the order on the PCX. If after processing in
accordance with the foregoing Plan provision and PCX rule, any portion
of such order remains, the PCX Application Module will format the
balance of the order into a commitment to trade and, acting on behalf
of the PCX member who represented the
[[Page 39318]]
customer interest in the OptiMark System, send the commitment to the
Participant Market with whose quotation the order had been matched.
Such commitment shall priced at the published contra-side bid of offer
price disseminated by the Participant Market with which the order is
matched, except that in the case of a ``block policy'' commitment, the
price of the commitment shall be the price of the block trade on the
PCX.
(C) Description Applicable to the CSE
With respect to an ITS transaction that [If a trade] involves the
CSE, the commitment to trade or a response thereto destined for or
originating from the CSE will leave and enter the System through a NSTS
Switch. In the [foregoing] example in Section 6(a)(ii)(A) above, a
trade involving the CSE would occur as follows:
* * * * *
The CSE would then report the trade to the CTA Plan Processor for
dissemination under the CTA Plan at the response price with the
identifier assigned to the CSE.
(D) Description Applicable to the NASD
With respect to an ITS transaction that [If a trade] involves the
ITS/CAES Third Market, the commitment to trade or response thereto
destined for or originating with an ITS/CAES Market Maker will leave
and enter the System at the CAES Switch. A trade involving the ITS/CAES
Third Market would take place as follows. In the [original] example in
Section 6(a)(ii)(a) above, assume that the stock in question is also an
ITS/CAES security and that the order is for 300 shares.
* * * * *
Section 8 Participant's Implementation Obligations
(a)(v) Automated Generation of Commitments. Section 6(a)(ii)
describes the approved methods by which each of the Participants is
authorized to send commitments to trade via the System. In addition to
that section, and with respect to the general use of the System (and
when considering possible amendments to the Plan), [T]the Participants
agree that: ITS is not designed to be, and should not be used as, an
order delivery system whereby all or a substantial portion of orders to
buy and sell System securities which are sent to a particular market
are not executed within that market, but are routinely rerouted to
another market through the System for execution. In the normal course,
most orders received within the market of an Exchange Participant are
expected to be executed within the market. Reasonable efforts to probe
the market to achieve a satisfactory execution there are expected to be
taken before the order is reformed as a commitment to trade and
rerouted to another market through the System; provided, however, that
PCX, with respect to an order received from the OptiMark System, shall
not be required to probe the PCX market for an execution therein prior
to the PCX Application Module automatically reformatting a commitment
to trade with respect to such order if the share volume of the
commitment, if executed, would not be included in the ``X variable,''
as that term is used in subsection 8(h)(ii)(B).
* * * * *
(h) Operational Parameters for the PCX Application Automated
Linkage. (i) The PCX may send computer-generated commitments to trade
to other Participant Markets through the PCX Application Module only in
compliance with the requirements of this Section.
(ii) For the purposes of this Section:
(A) ``Rolling Calendar Quarter'' means any three consecutive
calendar months, with the first Rolling Calendar Quarter ending in the
last business day of the first three full calendar months following the
month in which the PCX Application commences operation.
(B) ``Percentage of PCX Application ITS Volume'' for a Rolling
Calendar Quarter is defined pursuant to the following formula (the
``PCX Application Formula'') expressed as a percentage:
X=Executed share volume reported pursuant to the CTA Plan by all
Participant Markets (other than the PCX) (the ``Executed ITS Share
Volume'') resulting from the acceptance and execution of ``trade-at''
commitments originating from the PCX Application Module; provided
however, that if in any Rolling Calendar Quarter the PCX does not
execute in its own market more than 75 percent of the aggregate number
if shares in those calls that produce ``trade-through'' commitments,
then, beginning in the month following such Rolling Calendar Quarter,
this X variable will include the Executed ITS Share Volume resulting
from the acceptance and execution of ``trade-through'' commitments
originating from the PCX Application Module. In that event, the
Executed Share Volume resulting from the acceptance and execution of
``trade-through'' commitments shall continue to be included in this X
variable until, for a Rolling Calendar Quarter, the PCX executes in its
own market at least 75 percent of the aggregate number of shares in
those calls that produce ``trade-through'' commitments (``Trade-at''
and ``trade-through'' commitments are described more fully in Section
6(a)(ii)(B).)
Y=Executed share volume reported pursuant to the CTA Plan by the
PCX resulting from the execution of orders through the PCX Application.
(C) The ``PCX Application Ceiling'' for a Rolling Calendar Quarter
is:
*For the first five consecutive Rolling Calendar Quarters: 15 percent.
*For the second five consecutive Rolling Calendar Quarters: 10 percent.
*For each subsequent Rolling Calendar Quarter: 5 percent.
(iii) In the event that the Percentage of PCX Application ITS
Volume exceeds the PCX Application Ceiling for three consecutive
Rolling Calendar Quarters, the PCX shall cease sending (i) ``trade-at''
commitments and (ii) trade-through commitments, if, at the end of each
third consecutive Rolling Calendar Quarter, the share volume of such
trade-through commitments were included in the ``X variable'' (as that
term is used in subsection 8(h)(ii)(B)) originated from the PCX
Application Module (the prohibition on sending such commitments
hereinafter referred to as the ``Restrictions'') on the first business
day of the second month following the end of the third of such
consecutive Rolling Calendar Quarters (the ``Restriction Date''). The
Restrictions will end on the first business day of the third month
following the Restriction Date.
For example, assume that the Percentage of PCX Application Volume
exceeds the PCX Application Ceiling for the Rolling Calendar Quarters
ending in January, February and March of a given year. The Restriction
Date would be the first business day of May of that year, which is the
first business day of the second month following March. The
Restrictions would apply as of that date and would continue through the
end of July (ceasing as of the first business day of August, which is
the first business day of the third month following May). The
restrictions set forth in this subsection 8(h)(iii) shall not be
construed to apply to the ``trade-through'' commitments except as
provided in the preceding paragraph) or ``block policy'' commitments
originating from the PCX Application Module (as such commitments are
described more fully in Section 6(a)(ii)(B) in Scenarios 3 and 4).
Nothing herein prohibits the PCX from sending any commitments resulting
from orders generated by the OptiMark System pursuant to Section
[[Page 39319]]
6(a)(ii) above in lieu of utilizing the PCX Application Module.
(iv) Notwithstanding subsection 8(h)(iii) above, during the first
24 calendar months following implementation of the PCX Application, the
PCX retains the right to notify the Operating Committee in writing, on
or prior to the Restriction Date, that it will undertake, or cause to
be undertaken, system adjustments to the operation of the PCX
Application in an effort to ensure future compliance with the PCX
Application Ceiling. In the event of such notification, the PCX shall
have, at a minimum, nine calendar months from the date of such notice
(or such longer period as may be approved by all members of the
Operating Committee upon showing of reasonable cause), to implement its
proposed system adjustments (the ``Implementation Period''). During the
Implementation Period, the Restrictions shall not apply. During the
next 12 calendar months following the end of the Implementation Period,
if the Percentage of PCX Application ITS Volume exceeds the PCX
Application Ceiling for any Rolling Calendar Quarter, the Restrictions
shall apply on the first business day of the second month following the
end of such Rolling Calendar Quarter (the ``Subsequent Restriction
Date''). In that event, the Restrictions will end on the first business
day of the third month following the Subsequent Restriction Date.
For example, assume that the Percentage of PCX Application ITS
Volume exceeds the PCX Application Ceiling for the Rolling Calendar
Quarters ending in January, February and March of Year 1 (which fall
within the first 24 calendar months of the operation of the PCX
Application). As in the above example, the Restriction Date would be
the first business day of May of that year, which is the first business
day of the second month following March. The Restrictions would apply
as of that date, unless the PCX notified the Operating Committee, on or
prior to the first business day in May, that it planned to effect
system adjustments in an attempt to ensure future compliance with the
PCX Application Ceiling. Assuming that the PCX provides such
notification on the Restriction Date, the Restrictions would not apply
during the Implementation Period, which would last for at least nine
months from the Restriction Date (that is, assuming the minimum
duration, the nine calendar months of May through January of Year 2).
Following the end of the Implementation Period, assume that the
Percentage of PCX Application ITS Volume exceeded the PCX Application
Ceiling for the next Rolling Calendar (the quarter beginning in
February and ending April of Year 2). In that event, the Subsequent
Restriction Date would be the first business day of June of Year 2,
which is the first business day of the second month following April.
The Restrictions would apply beginning on that day and would continue
through the end of August of Year 2 (ceasing as of the first business
day of September of Year 2, which is the first business day of the
third month following June).
(v) Notwithstanding subsections 8(h) (iii) and (iv) above, if for
any Rolling Calendar Quarter the Percentage of PCX Application ITS
Volume exceeds 30 percent, the Restrictions shall apply as of the first
business day of the second month following the end of such rolling
Calendar Quarter. In that event, the Restrictions shall apply for three
calendar months.
(vi) Each month the PCX shall furnish the Operating Committee with
a report showing the number of shares for each of the components of the
PCX Application Formula for the previous month, as well as the data
necessary to determine if the shares in those calls that produce
``trade-through'' commitments (as such commitments are described more
fully in Section 6(a)(ii)(B) in Scenario 3) originating from the PCX
Application Module are or are not included in the ``X variable'' of the
PCX Application Formula. Any one or more Participants may cause a
certified public accountant to audit any one or more of such reports.
The requesting Participant(s) shall pay for all such audits.
* * * * *
Dated: July 15, 1998.
By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-19435 Filed 7-21-98; 8:45 am]
BILLING CODE 8010-01-M
