On March 1, 1999, the Pacific Exchange, Inc. (“PCX” or “Exchange”) filed with the Securities and Exchange Commission (“Commission” or “SEC”), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”)  and Rule 19b-4 thereunder, a proposed rule change to implement a competing specialist program. The Start Printed Page 31201Exchange amended the proposed rule on April 22, 1999.
The Commission published notice of the proposed rule change in the Federal Register on April 30, 1999. The Commission received nine comments. The Exchange filed a second amendment on May 8, 2000. For the reasons discussed below, the Commission is approving the proposed rule change as amended.
II. Description of the Proposal
The Exchange proposes to implement a competing specialist program to allow multiple specialists to make markets in equity securities traded on the Exchange. Currently, two specialists continuously make markets in most equity securities traded on the Exchange. The proposal would allow one or more competing specialists to make markets in a security, in addition to the existing “regular specialists.”  Like regular specialists, competing specialists in a security will be required to make a two-sided market and will be subject to the rights and responsibilities of regular specialists, subject to certain exceptions discussed below. By allowing additional specialists to make markets in the most actively traded stocks, the Exchange expects that its competing specialist proposal will attract additional order flow to the Exchange. The Exchange also believes that a competing specialist program will result in greater competition, tighter bid-ask spreads, and greater depth and liquidity on the PCX.
A. PCX's Current Order Routing Procedures
Currently, the P/COAST trading system  typically sends incoming orders to a particular specialist based on arrangements that the specialist has made with the firm that sent the order to the exchange. If a firm has not designated a particular specialist to receive the order, the Exchange sends the order to one of the two regular specialists on an alternating basis. A specialist may execute market orders it receives against the specialist's own account, unless the Exchange's Consolidated Limit Order Book (“CLOB”) contains a limit order that is priced at the National Best Bid or Offer (“NBBO”). If the CLOB contains a limit order priced at the NBBO, and a specialist receives a market or marketable limit order that would match against the order that has priority on the CLOB, the specialist typically must execute the incoming order against the CLOB order, unless the specialist retains the order by executing the order against its own account at a price better than the order that has priority on the CLOB. Other than requiring a specialist to give priority to CLOB orders, the existing system permits a specialist to execute its designated order flow at the NBBO or better whether or not the specialist's quoted bid or offer was priced at the NBBO when it received the order.
B. Proposed Order Routing Procedures
Under the Exchange's competing specialist proposal, if one specialist disseminates a bid or offer at the NBBO that has time priority on the Exchange, and another specialist (a “contra specialist”) in that security receives a market or marketable limit order that would match against the first specialist's bid or offer, then the specialist with time priority at the NBBO would have the right to execute the incoming market or marketable limit order, unless the specialist that receives the order executes the entire order at a price better than the NBBO. If multiple specialists are quoting at the NBBO, then each of those specialists' quotes must be filled in time priority sequence before a specialist without time priority can execute an order against its own account at the NBBO, unless the specialist who receives the order provides price improvement. As today, a specialist could not execute an order against its own account at the NBBO until eligible orders in the CLOB priced at the NBBO are filled. The priority provisions would apply to trading in all securities that have more than one specialist on the PCX, including all securities in which two regular specialists make a market, whether or not one or more competing specialists also trades the security.
To implement these changes, PCX proposes to modify Rule 7.19(e)(1), which governs priority of bids and offers. The rule currently provides, among other things, that bids and offers that are made first at a particular price are entitled to priority, and that a member may maintain priority by giving the order to a specialist. The existing language reflects a time when floor brokers played a more active role on the Exchange than is currently the case. The proposed rule change would add language stating that specialist bids and offers must always yield to agency orders represented at the same price, unless otherwise excepted by the rules of the “Corporation,” meaning PCX Equities, Inc. The Exchange states that the exception refers to odd lot orders, orders that provide for settlement other than in three days (non-regular way) and conditional orders (such as all-or-Start Printed Page 31202none orders, stop orders and market-on-close orders).
The Exchange also proposes to add new Rule 7.19(c)(2), governing priority among specialists. The rule would provide that if two or more specialists are quoting at the NBBO and there are no agency orders being represented at that price, the earliest specialist bid or offer at that price will have time priority and be eligible for an execution first up to its specified size. If no specialists are quoting at the NBBO, a specialist representing an order may execute that order at the NBBO or better.
In addition, the Exchange proposes to change other rules to describe how the P/COAST system will route orders in the competing specialist environment. An addition to Rule 7.70(a), which generally describes P/COAST, states that the Corporation will route orders to a specialist in accordance with arrangements that the customer has made with that specialist. Absent such arrangements, the Corporation will alternate orders between the two regular specialists. The Exchange also proposes to add new Rule 7.70(h) to explain that the P/COAST system will provide that specialists who are quoting with time priority at the NBBO will have the right to execute incoming orders at the NBBO, up to the size of their quote. A specialist designated to receive an order, however, could retain the order even if the specialist's quote did not have priority at the NBBO, if the specialist improve the price. The Exchange estimates that it will implement this change to P/COAST by September 29, 2000.
C. Other Provisions of the Competing Specialist Program
The Exchange proposes to describe the competing specialist program by replacing the existing text of Rule 7.30(a) with new language. Specifically, proposed Rule 7.30(a)(1) would provide that only registered specialists may act as competing specialists. Similarly, proposed Rule 7.30(a)(3) would provide that all applicant competing specialists must be registered as ETP Holders or ETP Firms with the Corporation, must meet capital requirements set forth in the Commission's and the Corporation's rules, must conform to all other performance requirements and standards set forth in the rules of the Corporation, and are subject to all the rules and policies applicable to a regular specialist, unless otherwise indicated. The Commission notes that applicable rules include, among other things, Rule 7.24(a), which makes a specialist responsible for the execution of all orders that he has accepted. Proposed Rule 7.30(a)(3) also would provide that applicants who control, are controlled by, or are under common control with another person engaged in a securities or related business must have and maintain appropriate information barriers as approved by a self-regulatory organization.
Proposed Rule 7.30(a)(2) would provide that applications for registration as a competing specialist must be directed to the Corporation in writing and must list in order of preference the issue(s) in which the applicant intends to compete. The Corporation would consider several factors when reviewing an application: financial capability; adequacy of staffing; performance evaluations; whether the allocation would increase competition in the issue and/or increase order flow to the Corporation; and any objections of the regular specialists in the issue.  Proposed Rule 7.30(a)(4) also states that applicant organizations must demonstrate to the Corporation that they have adequate staffing.
Proposed Rule 7.30(a)(5) would provide that order flow not specifically designated for a competing specialist must be routed to a regular specialist, but that an ETP Firm affiliated with a specialist in an issue must designate all PCX order flow in that issue to that specialist. Commentary .01 to proposed Rule 7.30(a) explains that this is designated to prevent ETP Firms affiliated with a specialist from routing non-profitable orders to another (unaffiliated) specialist when market conditions are unfavorable.
Proposed Rule 7.30(a)(6) would provide that if a firm wishes to withdraw from acting as a competing specialist in a security, it must notify the Corporation at least three business days prior to the desired effective date of such withdrawal, except when notice is not practicable. Also, proposed Rule 7.30(a)(7) would provide that any competing specialist that withdraws its registration in an issue will be barred from applying to compete in that same issue for a period of 90 days following the effective date of withdrawal.
Proposed Rule 7.30(a)(8) would provide that competing specialists must cooperate with the regular specialists regarding openings and reopenings to ensure that they are unitary.
Proposed Rule 7.30(a)(9) would require that if a competing specialist receives a limit order that is not immediately executable, the competing specialist must enter the order into the CLOB and execute it according to the Corporation's rules on time priority. Start Printed Page 31203This rule reiterates certain of the order routing principles discussed above, and clarifies that they apply to competing specialists as well as regular specialists. Commentary .02 to proposed Rule 7.30(a) further states that incoming orders are first executed against any matching limit orders on the Corporation, that all market and marketable limit orders are exposed to a specialist for possible price improvement before execution, and that specialists may execute their designated order flow unless there is a matching limit order eligible for execution on the Corporation, or another specialist has a bid or offer with time priority at the NBBO.
Proposed Rule 7.30(a)(10) would provide that all suspensions of trading must be coordinated through a regular specialist. The exchange is also codifying the role of competing specialists in trading halts in an amendment to Rule 7.46(b). Rule 7.46(b)(1) currently provides, in part, that when the flow of orders in a security traded on both floors does not allow either specialist to maintain an orderly market in such security, either specialist may suspend trading, and the specialist who suspends trading must notify the specialist on the other floor who shall also suspend trading. Rule 7.46(b)(2) contains similar provisions for securities traded only on one floor. The Exchange is proposing to amend both rules to require notification of all specialists trading the security. The Exchange also is proposing to add a commentary to the rule stating that competing specialists in an issue may not suspend trading, and that all suspensions of trading must be coordinated through a regular specialist. Finally, the Exchange proposes to extend its rules on circuit breakers, codified in Rule 7.47(a)-(b), to competing specialists.
The Exchange is also proposing to add Rule 7.30(a)(11), which would provide that the registration of any competing specialist may be suspended or terminated by the Corporation upon a determination of any substantial or continued failure by that competing specialist to engage in dealing in accordance with the bylaws, rules and procedures of the Corporation.
Under proposed Rule 7.30(a)(12), the Corporation will establish an effective date for competition to commence, but the Corporation will limit competition during the initial phase as follows: (a) any registered specialist may apply to become a competing specialist in a number of issues, not to exceed ten, that has been previously established for the program by the Board of Directors; (b) the Board of Directors will determine the total number of competing specialists permitted on the Corporation; and (c) the Corporation will conduct a quarterly review of each competing specialist, and in conducting such reviews, the Corporation may consider, among other things, the five factors that it considers when reviewing an application for registration as a competing specialist.
Proposed Rule 7.30(a)(13) would provide that once the program has operated for one year, the Corporation will evaluate it and make a recommendation to the Board of Directors as to whether to continue the program or to modify its terms.
III. Summary of Comments
The Commission received nine comment letters, all of which were from individuals associated with PCX firms, and all of which were favorable. The commenters stated that the proposal would encourage quote competition, improve execution speed and quality, improve customer service, and provide additional competition to the primary market.
After having carefully reviewed the proposal, the Commission finds that the proposed rule change is consistent with the requirements of Sections 6(b)(5) and 11A of the Act. Section 6(b)(5) requires, among other things, that the rules of an exchange be designed to promote just and equitable principles of trade, to reflect the mechanism of a free and open market and a national market system, and to protect investors and the public interest. Section 11A of the Act promotes, among other things, the development of a national market system for securities to assure economically efficient execution of securities transactions, and fair competition among brokers and dealers, among exchange markets, and markets other than exchange markets.
The Commission finds that the proposal is consistent with those sections of the Act. The proposal has the potential to enhance competition and increase liquidity by permitting multiple specialists to compete for order flow on the Exchange, which may lead to enhanced opportunities for price improvement and improved services for customers.
In 1996, the Commission granted permanent approval to the Boston Stock Exchange's (“BSE's”) competing specialist program. The BSE's program is similar to the PCX's proposal in that both programs permit multiple specialists to make markets in a security, and both programs restrict a specialist's ability to execute its designated order flow if customer orders have priority on the exchange's consolidated limit order book or if other specialists are quoting with time priority at the NBBO. The Commission approved the BSE competing specialist program on the grounds that the BSE's program was designed to improve market making and increase liquidity and competition on BSE's trading floor. The Commission also recognized that although the BSE program had the potential to increase internalization of orders, it was not necessarily inconsistent with a broker-dealer's duty to seek best execution of customer limit orders. The Commission emphasized, however, that broker-dealers could not Start Printed Page 31204automatically route their order flow to an affiliated BSE specialist without engaging in a regular and rigorous evaluation of execution quality.
The Commission similarly finds that the PCX proposal has the potential to enhance competition consistent with Sections 6(b)(5) and 11A of the Act. Permitting additional specialists to make markets in each stock on the PCX could potentially bring increased liquidity to the Exchange and could allow additional customer limit orders to benefit from the protections provided by the CLOB. Moreover, the PCX proposal's order routing provisions should give specialists an incentive to improve their quotations by providing that a specialist quoting with time priority at the NBBO would execute incoming orders unless the designated specialist retains the order by providing price improvement. Finally, allowing additional specialists to make markets on the PCX should also promote competition among PCX specialists in the rates of price improvement they provide, and in the quality of their limit order execution guarantees and other services.
The Commission reiterates that while an automated order routing environment is not necessarily inconsistent with the achievement of best execution, broker-dealers choosing where to automatically route orders must assess periodically the quality of competing markets to assure that order flow is directed to markets providing the most advantageous terms for their customers' orders. Thus, a broker-dealer may not simply employ default order routing to an affiliated PCX specialist without undertaking such an evaluation on an ongoing basis. A broker-dealer sending orders to the PCX must satisfy itself that its routing decision is consistent with its best execution obligations, irrespective of the firm's desire to internalize order flow through an affiliated PCX specialist. To reach this conclusion, the broker-dealer must rigorously and regularly examine the executions likely to be obtained for customer orders in the different markets trading the security, in addition to any other relevant considerations in routing customer orders.
Several other proposed rule changes govern the operations and responsibilities of competing specialists. The Commission finds that those proposed rules would promote fair and orderly markets by providing that competing specialists meet all requirements applicable to specialists on the exchange, that competing specialists follow all rules applicable to regular specialists (with certain exceptions), that competing specialists maintain barriers against the disclosure of information to affiliates, and that they cooperate with regular specialists during openings, suspensions, and reopenings of trading.
The remaining proposed rule changes govern the qualifications and selection of competing specialists and the implementation of the competing specialist program. The Commission finds that those proposed rule changes set forth reasonable requirements that will permit the Exchange to implement the program in a fair and efficient manner. The proposed rule changes would permit the Exchange to evaluate applications to serve as competing specialist using factors that are relevant and appropriate (e.g., financial capability, adequacy of staffing, and performance evaluations) to the question of whether an applicant is capable of making a market in a stock and whether adding specialists to a stock will benefit the public. The proposed rules should also promote specialist continuity and minimize disruptions to the PCX market by restricting a firm's ability to repeatedly start and cease making markets as a competing specialist in a security. The proposed rules set forth a phase-in plan that should help the Exchange implement the competing specialist program with a minimum of disruption to existing operations.
The Commission believes it is consistent with the Act to allow the PCX to implement its competing specialist program on a permanent basis. Nevertheless, Commission approval of the PCX's competing specialist program is not a determination by the Commission that mere default routing by a firm to its affiliated competing specialist is consistent with a firm's best execution obligations. As noted above, a broker-dealer associated with a competing specialist must still ensure that its order routing decisions are consistent with its best execution obligations and assess periodically the quality of competing markets to assure that order flow is directed to markets providing the most advantageous terms for its customers' orders.
The Commission finds good cause for approving Amendment No. 2 prior to the thirtieth day after the date of publication of notice thereof in the Federal Register. Amendment No. 2 renumbered several rules, made necessary technical changes to reflect the recent approved restructuring of PCX's equities trading, and clarified aspects of the proposed amendments to the Exchange's priority rules. The amendment eliminated a proposed commentary to the priority rules that provided for specialists to manually intervene with orders, because the commentary is unnecessary in light of P/COAST improvements that the Exchange is implementing. The amendment modified proposed competing specialist rules to state that all firms affiliated with specialists must send their PCX orders to that specialist (not just firms affiliated with competing specialists). The amendment also clarified that firms whose applications to serve as competing specialists are denied would have the right of appeal. Finally, Amendment No. 2 sets forth the Exchange's commitment to reprogram the P/COAST system within eighteen months of the competing specialist program's approval, so that the P/COAST system would route incoming orders directly to a specialist who is quoting at the NBBO with time priority. Those modifications were clarifying in nature and did not change the substance of the Exchange's proposal, as it was published in the Notice.
V. Solicitation of Comments
Interested persons are invited to submit written data, views, and arguments concerning Amendment No. 2, including whether it is consistent with the Act. Persons making written submissions should file six copies thereof with the Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. Copies of the submission, all subsequent amendments, all written Start Printed Page 31205statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for inspection and copying in the Commission's Public Reference Room. Copies of such filing will also be available for inspection and copying at the principal office of the Exchange. All submissions should refer to File No. SR-PCX-99-07 and should be submitted by June 6, 2000.
It is therefore ordered, pursuant to section 19(b)(2) of the Act, that the proposed rule change SR-PCX-99-07, including Amendment No. 2, is approved.Start Signature
For the Commission, by the Division of Market Regulation, pursuant to delegated authority.
Margaret H. McFarland,
3. See Letter from Michael Pierson, Director, Regulatory Policy, PCX, to Michael Walinskas, Deputy Associate Director, Division of Market Regulation (“Division”), Commission, dated April 22, 1999 (“Amendment No. 1”). Amendment No. 1 made numerous technical and descriptive changes to the filing.Back to Citation
4. Securities Exchange Act Release No. 41327 (April 22, 1999), 64 FR 23370 (April 30, 1999) (“Notice”).Back to Citation
5. See Letter from Michael Pierson, Director, Regulatory Policy, PCX, to Belinda Blaine, Associate Director, Division, Commission, dated May 8, 2000 (“Amendment No. 2”). Amendment No. 2 made technical changes to reflect PCX's recent restructuring of its equity trading system and rules, discussed recent technology upgrades relevant to this filing, and made clarifying changes to certain rules.Back to Citation
6. Under the proposal, a “regular specialist” is a specialist registered with the PCX in a security, other than a competing specialist in that security. Although PCX rules do not specify a minimum number of regular specialists in a security, as a practical matter there must be at least one regular specialist in a security because regular specialists have certain duties not shared by competing specialists.Back to Citation
7. P/COAST, the “Pacific Computerized Order Access System,” is the Exchange's communication, order routing, and execution system for equity securities. See Rule 7.70.Back to Citation
8. Firms may also send orders to floor brokers for representation on the exchange. Currently, floor brokers are not required to enter orders they receive into the P/COAST system, and they can direct orders they represent to either specialist post handling that security.Back to Citation
9. The Exchange has proposed changing several rules to reflect its implementation of the CLOB. See Securities Exchange Act Release No. 41304 (April 16, 1999), 64 FR 22888 (April 28, 1999).Back to Citation
10. Under certain limited circumstances, a specialist can execute an order against its own account even if a same-priced or better-priced order is on the CLOB. For example, because an all-or-none order in the CLOB that is priced at or better than the NBBO cannot execute against an incoming market order that is smaller than the all-or-none order, a specialist may execute the market order against its own account.Back to Citation
11. In the Notice, Rule 7.19(c)(1) was identified as Rule 5.8(c). PCX renumbered its equity trading rules as part of a restructuring plan that the Commission recently approved. See Securities Exchange Act Release No. 42759 (May 5, 2000).Back to Citation
12. Under the PCX equities trading restructuring plan, the Exchange is delegating the responsibility to operate PCX's equities trading system to PCX Equities, Inc. Rule 1.1(f) of the revised rules states that the term “Corporation” means PCX Equities, Inc.
Amendment No. 2 modified the language of several rules published in the Notice to replace references to the “Exchange” with references to the “Corporation.”
Under the restructuring plan, firms that trade equities on PCX now may hold Equity Trading Privileges (“ETP)” or Automated System Access Privileges. Accordingly, Amendment No. 2 also replaced references to “member” or “firm” with references to “ETP Holder” or “ETP Firm.”Back to Citation
13. The proposed rule change would also remove a reference to individual floors. The filing further proposes eliminating a reference to the “specialist's book” that is inconsistent with the Exchange's use of a CLOB.Back to Citation
14. But see Rule 7.70, discussed below.Back to Citation
15. Proposed Commentary .02 to these rules defines the term “NBBO” as the national best bid or offer made by an Intermarket Trading System (“ITS”) participant. As set forth in the Notice, proposed Commentary .03 to these rule provided for specialists to manually intervene with orders to assure that the priority rules would be maintained, until the Exchange reprogrammed the P/COAST system to implement the priority rules. Amendment No. 2 eliminated proposed Commentary .03, which is now unnecessary.Back to Citation
16. In the Notice, Rule 7.70(a) was identified as Rule 5.25(a).Back to Citation
17. But see note 36.Back to Citation
18. In the Notice, Rule 7.70(h) was identified as Rule 5.25(h).Back to Citation
19. Amendment No. 2 clarified Rule 7.70(a) by stating that non-designated orders would alternate among the two regular specialists. The amendment also changed proposed Rule 7.70(h) to eliminate an outdated reference to specialists interacting with orders by using electronic orders or by vocalizing bids and offers, to eliminate the inference that a specialist who has time priority at the NBBO could retain priority when increasing the size of its quote, to make a clarifying change, and to eliminate language suggesting that the rule described a “future modification” of P/COAST.Back to Citation
20. See Amemdment No. 2. The Exchange further states that it will not permit specialists to act as competing specialists until the Exchange has implemented this systems change.Back to Citation
21. In the Notice, Rule 7.30(a) was identified as Rule 5.35(a).Back to Citation
22. As proposed in the Notice, several portions of Rule 7.30(a) (identified as Rule 5.35(a) in the Notice) would have delegated certain responsibilities regarding competing specialists to the Exchange's Equity Floor Trading Committee (“EFTC”). Amendment 2 replaced reference to the EFTC with references to the “Corporation.” Amendment No. 2 also replaced references to the Exchange's Board of Governors with references to the Corporation's Board of Directors.Back to Citation
23. In Amendment No. 2, the Exchange added language to Rule 7.30(a)(2) stating that the denial of an application to register as a competing specialist may be appealed pursuant to Rule 10.14(a), which provides a right of appeal if the Corporation denies an application to serve as a specialist.Back to Citation
24. As originally published in the Notice, proposed Rule 7.30(a)(5) (identified as Rule 5.35(a)(5) in the Notice) and Commentary .01 only applied to firms affiliated with competing specialists. Amendment No. 2 modified the proposal to also encompass firms affiliated with regular specialists.Back to Citation
25. As discussed above, however, Rule 7.19(c)(2), would provide that if another specialist is quoting at the NBBO and clearly has established priority on the PCX, then that specialist would have priority to fill the order.Back to Citation
26. Competing specialists who wish to use ITS to send preopening indications of interest to the primary market in a security must send those preopening indications through a regular specialist who is an ITS Coordinator. During trading hours, competing specialists at times will be able to send outbound ITS commitments and execute incoming ITS commitments independently and without the need for a regular specialist to clear the activity; at other times an ITS Coordinator will need to be involved. See Securities Exchange Act Release No. 42708 (April 20, 2000), 65 FR 25780 (May 3, 2000). The Exchange states that competing specialists will not be permitted to act as an ITS Coordinator.Back to Citation
27. In the Notice, Rule 7.46(b) was identified as Rule 5.31(b).Back to Citation
28. Amendment No. 2 revised a reference to the constitution and rules of the Exchange.Back to Citation
29. The purpose of these reviews is to assure that the new program will be operated appropriately, particularly in its early phase, so that any problems can be identified and corrected.Back to Citation
30. In the Notice, the Exchange proposed deleting older rules for competing specialists, which were codified as Rules 5.35(a)-(i). The Exchange had not applied those rules since approximately 1977. The Exchange recently deleted those rules as part of its equity trading rule restructuring.Back to Citation
31. See Letters from: Harvey Cloyd, President, Harvey Cloyd & Co., dated April 27, 1999; Daniel Turner, President, Rubicon Securities, Inc., dated April 27, 1999; David Hultman, Vice President, D.A. Davidson & Co., dated May 6, 1999 (“Hultman/Davidson letter”); Thomas Stephenson, received May 14, 1999; Walter Reinsdorf, D.A. Davidson & Co., dated May 20, 1999 (“Reinsdorf/Davidson letter”); Arnold Staloff, President, Bloom Staloff, dated may 28, 1999; Ronald Melville, Ronald E. Melville, Inc., dated May 25, 1999; Dennis LoPresti, Senior Vice President, Wedbush Morgan Securities, dated May 26, 1999; and David Gale, President, Delta Dividend Group, Inc., dated June 16, 1999.
Four of the letters were virtually identical, stating that the proposal would encourage quote competition without interfering with specialists' efforts to achieve price improvement, would result in faster executions due to increased liquidity, and would allow the PCX to keep pressure on the primary market. See Wedbush Morgan letter, Melville letter, Bloom Staloff letter, Reinsdorf/Davidson letter. Other commenters emphasized that the proposal would promote the quality of executions. See Delta letter, Stephenson letter. Other commenters said that the proposal would allow specialists to provide improved service to customers and add depth to the national market system. See Hultman/Davidson letter, Rubicon letter, Cloyd letter.Back to Citation
32. In approving this rule, the Commission has considered the proposed rule's impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).Back to Citation
35. Securities Exchange Act Release No. 37045 (March 29, 1996), 61 FR 15318 (April 5, 1996).Back to Citation
36. The Commission finds that it is generally appropriate for the Exchange to route non-designated orders to a regular specialist, given that regular specialists have market making responsibilities not shared by the competing specialists. That provision is subject to the requirement that a specialist quoting with time priority at the NBBO has a right to execute incoming orders, regardless of which specialist was designated to receive the order, absent price improvement.
The Commission notes that the Exchange has committed to implement systems changes, within eighteen months of the Commission's approval of this program, so that incoming orders will be automatically routed to the specialist with time priority at the NBBO.Back to Citation
37. The Commission recognizes that the proposed competing specialist program has the potential to increase internalization. The Commission will monitor the impact of the competing specialist program as part of its ongoing review of market fragmentation. See Securities Exchange Act Release No. 42450 (February 23, 2000), 65 FR 10577 (February 28, 2000).Back to Citation
38. The Commission expects that the Exchange will consider all permissible factors in assessing applicants and will not be unduly influenced by objections of the regular specialist in the issue. Indeed, the Exchange may not reject an application to be a competing specialist solely because of the objections of the regular specialist in the issue.Back to Citation
[FR Doc. 00-12272 Filed 5-15-00; 8:45 am]
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