SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
SECURITIES EXCHANGE ACT OF 1934
Rel. No. 39765 / March 17, 1998
Admin. Proc. File No. 3-9237
:
In the Matter of the Application of :
:
INTERACTIVE BROKERS LLC :
:
For Review of Action Taken by the :
:
PACIFIC EXCHANGE, INC. :
:
OPINION OF THE COMMISSION
REGISTERED SECURITIES EXCHANGE -- PROHIBITION OR LIMITATION OF ACCESS
TO SERVICES
A stock exchange restricted electronic access of its members to
trading crowds without a valid rule permitting it to do so.
Held, that the restrictions are set aside and the exchange is
ordered to permit its members to have electronic access to
trading crowds unless such a rule is adopted.
APPEARANCES:
David C. Bohan and Melissa Crawford, of Jenner & Block, for
Interactive Brokers LLC.
John C. Katovich, Michael D. Pierson, and Kathryn L. Beck, for Pacific
Exchange, Inc.
Appeal filed: February 4, 1997
Last brief filed: May 22, 1997
I.
Interactive Brokers LLC ("IB") appeals the decision of the Pacific
Exchange, Inc. ("PCX") <(1)> to restrict IB's use of hand-held
<(1)>/ In March 1997, while this appeal was pending,
respondent changed its name from "Pacific Stock Exchange
Incorporated" to "Pacific Exchange, Inc." Securities
(continued...)
======END OF PAGE 1======
proprietary brokerage order routing terminals ("hand-helds") in the trading
crowds for PCX options. We base our findings on an independent review of
the record.
II.
In September 1995, the PCX Options Floor Trading Committee ("OFTC")
established a "Hand-Held Computer Study Program for Floor Brokers" ("Pilot
Program" or "Program"), allowing the use of hand-helds in index options
trading crowds for one year. <(1)> The OFTC later expanded the Program
to allow the use of hand-helds in equity options trading crowds as well.
In September 1996, the OFTC extended the Pilot Program for six more months,
but stated that the Program would terminate once PCX s own proprietary
hand-held technology had been developed.
Later that same month, the PCX Board of Governors ("PCX Board")
adopted a "formal [p]olicy" with regard to hand-helds and other wireless
systems, which expressly superseded "all previous notices that [had] been
distributed" regarding the use of hand-helds by PCX floor brokers. In this
policy statement, the PCX Board noted that the Pilot Program had been
extended by the OFTC until March 26, 1997, and warned PCX member firms that
any hand-held system that was incompatible with any existing system or was
"in any other way disruptive to the [trading floor] environment . . .
[was] at risk of being removed."
On October 14, 1996, an IB floor broker accepted an order via a hand-
held from Timber Hill Inc., a broker-dealer affiliated with IB, after which
the OFTC voted to prohibit Pilot Program participants, including IB, from
taking orders from broker-dealers on hand-helds. <(1)> IB sought from
the OFTC an emergency stay of its decision to prohibit the use of hand-
helds to take orders from broker-dealers. The OFTC denied IB s request for
a stay and also prohibited IB from further participating in the Pilot
Program, based on its belief that IB floor brokers were not complying with
its directive that orders not be taken on hand-helds from broker-dealers.
<(1)>(...continued)
Exchange Act Release No. 38403 (March 14, 1997), 64 SEC
Docket 278; Securities Exchange Act Release No. 38364 (March
4, 1997), 64 SEC Docket 37, 38.
<(1)>/ The Pilot Program was not submitted to the Commission
as a proposed rule change pursuant to Section 19(b) of the
Securities Exchange Act of 1934.
<(1)>/ The OFTC apparently was concerned that IB was accepting
two-sided limit orders from broker-dealers, effectively
allowing these off-floor broker-dealers to make markets in
the options in question without being subject to the
obligations of PCX-registered market makers (e.g., the
obligation to continue making markets even in times of
market stress).
======END OF PAGE 2======
IB then petitioned the PCX Executive Committee to stay the OFTC s decisions
prohibiting the use of hand-helds to take orders from broker-dealers and
expelling IB from the Pilot Program. The PCX Executive Committee denied
IB s request to stay its expulsion from the Pilot Program, and referred the
other matters to the PCX Board Appeals Committee.
In December 1996, PCX filed with us, pursuant to Section 19(b) of the
Securities Exchange Act of 1934 ("Exchange Act"), a proposed rule change
establishing a pilot program for the use of "hand-held computers" by PCX
floor brokers. The proposed rule provided, in pertinent part, that the
"only orders that [f]loor [b]rokers may receive over hand-held computers
are non-broker-dealer customer orders."
One month later, PCX withdrew its initial rule filing and submitted a
new proposed rule, "proposing to adopt a formal policy governing the use .
. . of any proprietary brokerage order routing terminals" on the PCX
options floor. The revised rule filing provided that hand-helds "may be
used to receive brokerage orders only, . . . and may not be used to perform
a market making function," but did not prohibit expressly the taking of
orders from broker-dealers. Moreover, the proposed rule specifically
stated that a party would not be deemed to be engaging in market making if
it entered two-sided limit orders "on occasion." PCX s January 1997 rule
filing currently is pending.
In an opinion dated January 23, 1997, the PCX Board Appeals Committee
held that IB s appeal and request for stay were moot, given that PCX's rule
filing with this Commission had "in practice put a halt to the use of
[hand-helds]" on the PCX floor, and further held that no PCX floor broker,
including IB, could use hand-helds on the PCX floor until we had acted upon
the PCX rule filing. IB applied to us for review of this decision and
moved that we stay the PCX decisions suspending the Pilot Program,
expelling IB from the Pilot Program, and otherwise restricting IB's use of
hand-helds in trading crowds. We denied IB s stay request. <(1)>
<(1)>/ Interactive Brokers LLC, Admin. Proc. File No. 3-9237
(Feb. 19, 1997) (order denying stay).
IB has moved, pursuant to our Rule of Practice 452, to
adduce additional evidence, and has attached to its motion
the documents with which it wishes to supplement the record.
While PCX has not opposed IB s motion, IB does not set forth
reasonable grounds for its failure to adduce such evidence
previously, as required by Rule of Practice 452. Therefore,
we hereby deny IB s motion to adduce additional evidence.
We also note that IB attached to its April 7, 1997, brief
filed with us a copy of the comment letter which it sent to
us in connection with the PCX rule filing. PCX has objected
to the attachment of this document to IB s brief as an
improper motion to adduce additional evidence, and has asked
that the document be stricken from the record. While IB s
(continued...)
======END OF PAGE 3======
III.
IB argues that the restrictions that PCX has placed on its use of
hand-helds in trading crowds constitute an unlawful prohibition or
limitation of access to services, under Section 19 of the Exchange Act.
That section provides that any action by a self-regulatory organization
("SRO"), such as PCX, that "prohibits or limits any person in respect to
access to services offered by such [SRO]" is subject to our review.
<(1)> In reviewing any such prohibition or limitation of access to
services by an SRO we consider whether the specific grounds on which such
prohibition or limitation is based exist in fact, such prohibition or
limitation is in accordance with SRO rules, and such rules are, and were
applied in a manner, consistent with the purposes of the Exchange Act.
<(1)> If we do not make such a finding, or if we find that the
alleged prohibition or limitation of access imposes any unnecessary or
inappropriate burden on competition we set aside the action of the SRO.
<(1)>
As an essential part of its role as an SRO, PCX provides to its
members a market for securities trading. PCX has limited or prohibited
access to this service by (1) using the Pilot Program to create limitations
on the use of hand-helds in PCX trading crowds (e.g., use of hand-helds was
permitted by the OFTC only on a "case-by-case basis"), (2) limiting the use
of hand-helds in PCX trading crowds to the taking of orders from non-
broker-dealers, and (3) expelling IB from the Pilot Program and effectively
prohibiting IB's use of hand-helds in PCX trading
crowds. <(1)>
In determining whether a prohibition or limitation is in accordance
with SRO rules, we must bear in mind that SRO rules, with few exceptions,
<(1)>(...continued)
comment letter is a part of the public record relating to
the PCX rule filing, it is not material to our disposition
of this matter and we have not considered it in rendering
this opinion.
<(1)>/ Exchange Act 19(d)(1), 15 U.S.C. 78s(d)(1).
<(1)>/ Exchange Act 19(f), 15 U.S.C. 78s(f).
<(1)>/ Id.
<(1)>/ PCX argues that it has not limited IB s access to its
services, stating that, while IB may not use hand-held
computers in trading crowds, it may continue to walk orders
from its trading booth to the trading crowd and execute them
by open outcry, as does every other PCX floor trader. While
we acknowledge that IB has not been denied access entirely
to PCX trading crowds, that access undeniably has been
limited by PCX's restrictions on the use of hand-helds in
trading crowds.
======END OF PAGE 4======
must be filed with and approved by this Commission before they become
effective. <(1)> The Pilot Program has not been approved by us.
Moreover, it does not fall within one of the recognized exceptions to the
rule-filing requirement of Exchange Act Section 19(b). <(1)> The
Pilot Program cannot reasonably and fairly be implied by any existing PCX
rule, in that it contains specific limitations on the use of hand-helds not
apparent from existing rules. <(1)> The Pilot Program also is not
concerned solely with PCX s administration. Therefore, the Pilot Program
is not now, and never was, an effective or valid PCX rule.
Because PCX's restrictions on the use of hand-helds in PCX trading
crowds were not imposed pursuant to a valid PCX rule, we must set aside the
restrictions as not "in accordance with" PCX rules and order PCX to allow
IB and other members to use hand-held technology in PCX trading crowds.
<(1)> Of course, any use of hand-helds by PCX members in PCX trading
crowds must comply with all relevant laws, regulations, and valid PCX
rules.
Moreover, contrary to the holding of the PCX Board Appeals Committee,
the fact that PCX has filed with us a proposed rule change relating to the
<(1)>/ Exchange Act 19(b)(1), 15 U.S.C. 78s(b)(1);
Exchange Act 3(a)(27), 15 U.S.C. 78c(a)(27). See also
Exchange Act 19(b)(3)(A), 15 U.S.C. 78s(b)(3)(A);
Exchange Act Rule 19b-4(e), 17 C.F.R. 240.19b-4(e)
(outlining the circumstances under which a rule can become
effective without Commission approval).
Exceptions are made for any stated policy, practice, or
interpretation that (1) is "reasonably and fairly implied"
by an existing SRO rule, or (2) is "concerned solely with
the administration" of the SRO and "is not a stated policy,
practice, or interpretation with respect to the meaning,
administration, or enforcement of an existing [SRO] rule."
Exchange Act Rule 19b-4(c), 17 C.F.R. 240.19b-4(c).
<(1)>/ See supra n.9.
<(1)>/ See Exchange Act Rel. No. 17258 (October 30, 1980), 21
SEC Docket 347, 359-60 ("a stated policy, practice, or
interpretation that prescribes extensive and specific
limitations on particular types of . . . conduct that are
not apparent from the face of the existing rule is not
'reasonably and fairly implied' by the rule").
<(1)>/ Exchange Act 19(f), 15 U.S.C. 78s(f). See also
William J. Higgins, 48 S.E.C. 713, 730 (1987).
======END OF PAGE 5======
use of hand-helds in trading crowds does not render moot IB s appeal.
<(1)> This rule change, if approved, may become relevant to IB s use
of hand-helds in PCX trading crowds, but no existing PCX rule appears to
prohibit, limit, or
<(1)>/ PCX argues alternatively that IB s appeal is moot
because the Pilot Program already has expired, and,
therefore, no relief can be granted by this Commission to
IB. We disagree. The relief we grant IB is not inclusion
in the Pilot Program, but, rather, is to set aside the
restrictions that PCX has imposed upon the use of hand-helds
on the PCX floor.
======END OF PAGE 6======
otherwise restrict IB s use of hand-held proprietary brokerage order
routing terminals in PCX trading crowds. <(1)>
An appropriate order will issue. <(1)>
By the Commission (Chairman LEVITT and Commissioners JOHNSON, HUNT,
and UNGER); Commissioner CAREY not participating.
Jonathan G. Katz
Secretary
<(1)>/ Our determination should not be viewed as indicating
that the filing of a proposed rule change can never render
an appeal moot. See Blinder, Robinson & Co., Inc., Exchange
Act Rel. No. 29496 (July 29, 1991), 49 SEC Docket 717, 718
(noting that an administrative agency has substantial
discretion to determine whether the resolution of an issue
before it is precluded by mootness).
On December 2, 1997, while this appeal was pending, IB
relinquished the lease of its PCX seat. PCX argues that
this lease termination moots IB s appeal. We disagree. As
noted, we have considerable discretion in determining
whether an appeal is moot. Id. IB has represented to us
that it intends to reapply for PCX membership should it
prevail in this appeal. Further, because this controversy
is capable of repetition and because important policy
questions are implicated, we have an interest in clarifying
the issues presented in this appeal. See Beatrice J. Feins,
51 S.E.C. 918, 920 n.8 (1993) (where a stock exchange denied
a member permission to transfer to the applicant his
membership, held that applicant s appeal for denial of
access of exchange services was not moot, notwithstanding
that the exchange member had transferred his membership to a
third party in the interim).
<(1)>/ All of the contentions made by the parties have been
considered. Their arguments are rejected or sustained to
the extent that they are inconsistent or in accord with the
views expressed in this opinion.
Given the grounds for our disposition of this case, we do
not address numerous arguments made by IB in its Briefs.
Our failure expressly to address those arguments should not
be construed as an endorsement by this Commission of any of
those arguments.
======END OF PAGE 7======
======END OF PAGE 8======
UNITED STATES OF AMERICA
before the
SECURITIES AND EXCHANGE COMMISSION
SECURITIES EXCHANGE ACT OF 1934
Rel. No.
Admin. Proc. File No. 3-9237
:
In the Matter of the Application of :
:
INTERACTIVE BROKERS LLC :
:
For Review of Action Taken by the :
:
PACIFIC EXCHANGE, INC. :
:
ORDER DISMISSING PROCEEDING
On the basis of the Commission's opinion issued this day, it is
ORDERED that the opinion of the Pacific Exchange, Inc. in this matter
be, and it hereby is, set aside; and it is
FURTHER ORDERED that the Pacific Exchange, Inc. be, and it hereby is,
required to allow its members to use hand-held proprietary brokerage order
routing terminals in its trading crowds, subject to all applicable laws,
regulations, and rules.
By the Commission.
Jonathan G. Katz
Secretary
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