August 24, 1998
Jonathan G. Katz
Secretary
U.S. Securities and Exchange Commission
(Mail Stop 6-9)
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: File No. 4-208; Proposed Rulemaking to Amend the Intermarket Trading System Plan to Link the PCX Application of the OptiMark System
Dear Mr. Katz:
OptiMark Technologies, Inc. ("OTI") appreciates the opportunity to provide the Securities and Exchange Commission ("Commission" or "SEC") with comments on the proposed amendments to the Intermarket Trading System ("ITS") Plan relating to the PCX Application of the OptiMark System ("PCX Application"). 1 Over the past three years, together with Pacific Exchange, Inc. ("PCX"), we have invested a significant amount of resources in building the technological infrastructure for the PCX Application, an advanced electronic trading system for the PCX members and their customers. The PCX will make available the PCX Application as an exchange facility later this year. 2 Our wholly-owned subsidiary, OptiMark Services, Inc. ("OSI"), will be responsible for operating portions of the PCX Application for the PCX and delivering the trading service in OSI’s role as a facility manager for computer operations. 3
The Release, which consists of alternative proposals to implement an electronic linkage between the PCX Application and ITS, represents a critical step in the Commission's ongoing effort to build an efficient and effective national market system ("NMS") through improved investor access to publicly displayed prices. Two years ago, the Commission adopted the Order Handling Rules, which called for improved operation of the public quotation system. 4 More recently, the Commission proposed to expand the scope of the Order Handling Rules to require enhanced access to all published bids and offers. 5 Indeed, as noted by the Commission itself, the ability of investors to access public quotations -- no matter where such quotations may originate from -- is an "essential element of the NMS." 6
As described more fully in the Petition, the PCX Application is designed to achieve that very NMS objective by providing efficient and effective access to publicly displayed prices through ITS. 7 By means of "commitments to trade" sent from the PCX, the PCX members and their customers will be able to interact with the quotes of other participating markets. Such "non-member" access to the publicly displayed prices of "away" markets is precisely what Congress intended the NMS to accomplish and what ITS is, in fact, designed to facilitate. As stated in the ITS Plan, "ITS presupposes that through the consolidated quotation system, each member in each Exchange Market . . . can easily obtain, for each security that he is permitted to trade through the System, the best bid price and the best offer price from among the bid and offer prices then being furnished to the Participant Market." 8 The central functionality of ITS is to enable each such member to send a "commitment to trade" anywhere in the NMS to buy (sell) a security at the publicly displayed price to achieve the best execution of customer orders.
This operative principle of ITS is consistent with the Commission's long-held view that bids and offers in the public quotation system belong to the investing public, not any particular market participant that collects and disseminates such information. No market participant -- whether organized as an exchange (such as the New York Stock Exchange) or operating as a broker-dealer trading system (such as an ECN) -- should be allowed to limit public access to those quotations originating from its market. As recently emphasized in the ATS Release, the ability to access publicly displayed prices across different markets is a key to achieving the best execution of customer orders.
Of course, having such ability to access public quotations through a specific communications linkage is inherently different from having access to any particular market. By its very design, ITS can only provide access to publicly displayed prices -- nothing less and nothing more. 9 As used by the PCX members and their customers through the PCX Application, ITS simply will allow more efficient and effective access to the bids and offers in the public quotation system emanating from outside the PCX. In this regard, the electronic entry of "commitments to trade" into ITS represents a useful application in the "new data processing and communications techniques" that must be encouraged by the Commission, not discouraged, consistent with the Congressional mandate under Section 11A of the Exchange Act. Clearly, increased use of ITS will benefit the investing public by facilitating more inter-market transactions at the published bid and offer prices.
In short, the Commission should adopt an amendment to the ITS Plan that would provide for maximum investor interaction with information in the public quotation system. It should reject any proposal that would limit or otherwise delay the operation of the proposed linkage between the PCX Application and ITS. Indeed, any Plan amendment that imposes barriers on cross-market access to publicly displayed prices in the NMS would seriously undermine the Commission’s current efforts to modernize the regulatory framework and promote greater market integration and competition. We urge that the Commission adopt an amendment in support of the PCX Application that would clearly establish the Commission’s ongoing commitment to building efficient and effective market linkages and investor access. Such a step would lay the proper foundation for the future of the nation’s securities markets in the new millennium.
We thank the Commission for the opportunity to comment on these important public policy considerations. If you have any questions on our comments, please contact the undersigned.
Sincerely,
John C. Katovich
Senior Vice President and General Counsel
cc: Chairman Levitt
Commissioner Johnson
Commissioner Hunt
Commissioner Carey
Commissioner Unger
Richard R. Lindsey, Director, Division of Market Regulation
Robert L.D. Colby, Deputy Director, Division of Market Regulation
Belinda Blaine, Associate Director, Division of Market Regulation
-[1]- See Securities Exchange Act Rel. No. 40204 (July 15, 1998), 63 Fed. Reg. 39306 (July 22, 1998) ("Release").
-[2]- The Commission previously approved the PCX’s proposal to operate the PCX Application under Section 19(b) of the Securities Exchange Act of 1934 ("Exchange Act"). See Exchange Act Rel. No. 39086 (Sep. 17, 1997), 62 Fed. Reg. 50036 (Sep. 24, 1997) ("Approval Order").
-[3]- OSI, together with PCX, filed a petition dated June 9, 1998, requesting the Commission to initiate rulemaking to amend the Intermarket Trading System Plan ("Petition").
-[4]- See Exchange Act Rel. No. 37619A (Sep. 6, 1996), 61 Fed. Reg. 48290 (Sep. 12, 1996) (requiring public display of, and public access to, certain orders entered into electronic communications networks ("ECNs")).
-[5]- See Exchange Act Rel. No. 39884 (Apr. 21, 1998), 63 Fed. Reg. 23504, 23517 (Apr. 29, 1998) (agreeing with public commentaries that "requiring alternative trading systems to display prices in the public quotation system would not go far enough to facilitate the best execution of customer orders without a mechanism to access orders at those prices.") ("ATS Release").
-[6]- See id .
-[7]- We hereby incorporate by reference the analysis of the PCX's position contained in the Petition and various Exhibits attached thereto.
-[8]- See ITS Plan, Section 6(a)(i)(A).
-[9]- No matter how fast or how many "commitments to trade" are entered into the system, their execution depends on the availability of the subject bid or offer in the receiving market. By contrast, orders (as distinguished from "commitments to trade") are entitled to price and time priority and exposed to other trading interest for execution.