[Federal Register Volume 67, Number 119 (Thursday, June 20, 2002)]
[Notices]
[Pages 42089-42092]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-15573]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46070; File No. SR-PCX-2002-28]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Pacific Exchange, Inc. 
Relating to Changes to the PCX's Schedule of Fees and Charges for 
Exchange Services

June 12, 2002.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on May 29, 2002, the Pacific Exchange, Inc. (``PCX'') filed with the 
Securities and Exchange Commission (``Commission'') the proposed rule 
change as described in Items I, II and III below, which the PCX has 
prepared. The Commission is publishing this notice to solicit comments 
on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The PCX, through its wholly owned subsidiary PCX Equities, Inc. 
(``PCXE''), is proposing to modify its fee schedule for services 
provided to Equities

[[Page 42090]]

Trading Permit (``ETP'') Holders and Sponsored Participants \3\ on the 
Archipelago Exchange (``ArcaEx''), the equities trading facility of 
PCXE. The text of the proposed rule change is available at the PCX and 
at the Commission.
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    \3\ A ``Sponsored Participant'' means ``a person which has 
entered into a sponsorship arrangement with a Sponsoring ETP Holder 
pursuant to [PCXE] Rule 7.29.'' See PCXE Rule 1.1(tt).
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II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the PCX included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it had received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The PCX has prepared summaries, set forth in sections A, 
B, and C below, of the most significant aspects of the statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    The PCX, through its wholly owned subsidiary PCXE, proposes to 
amend its fees charged to ETP Holders and Sponsored Participants 
(collectively ``Users'') that access the ArcaEx trading facility to: 
(1) Reduce the per-share transaction fee charged to Users that take 
liquidity from the ArcaEx Book; (2) increase the per-share transaction 
fee for orders that are routed away and executed by another market 
center or participant; (3) clarify the application of the current odd-
lot transaction fee; (4) introduce a liquidity provider transaction 
credit for Users; (5) increase the amount of the per-share transaction 
credit provided to registered market makers for any ``Q Orders'' \4\ 
executed against Users' orders; (6) adopt a new per-share transaction 
fee for processing ArcaEx market makers' ``drop copies'' \5\ of their 
trades executed on other market centers; (7) introduce a mechanism for 
sharing market data revenue with Users; and (8) establish User 
connectivity fees for ArcaEx. The proposed changes to the PCX's 
Schedule of Fees and Charges are discussed below.
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    \4\ Q Orders are limit orders that a market maker submits to 
ArcaEx in securities in which the market maker is registered to 
trade. See PCXE Rule 7.31(k).
    \5\ A ``drop copy'' is an electronic report of a transaction for 
a market maker's account that is executed on another market center 
and that has been prepared for informational purposes (e.g., market 
maker inventory tracking, surveillance audit trail).
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    On October 25, 2001, the Commission approved the PCX's proposed 
rule change to establish ArcaEx as a new electronic trading facility of 
PCXE.\6\ ArcaEx is a fully electronic securities trading facility for 
use by ETP Holders and their customers. The PCX and PCXE are 
responsible for all regulatory functions related to the facility, and 
Archipelago Exchange, L.L.C., a subsidiary of Archipelago Holdings, 
L.L.C., is responsible for the business of the facility to the extent 
that these activities are not inconsistent with the regulatory and 
oversight functions of the PCX and PCXE. ArcaEx commenced operations on 
March 22, 2002, replacing the PCXE's traditional trading floor 
facilities.
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    \6\ See Securities Exchange Act Release No. 44983 (October 25, 
2001), 66 FR 55225 (November 1, 2001) (SR-PCX-00-25).
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Summary of Proposed Fee Changes
Transactions Fees
    The PCX currently charges all Users a transaction fee of $0.003 per 
share for orders that extract liquidity by responding to, and executing 
against, orders residing in the ArcaEx Book.\7\ The PCX is proposing to 
reduce this transaction fee to $0.002 per share, but it will continue 
to apply the current fee of $0.003 per share for transactions executed 
in Exchange-Traded Fund shares (``ETFs''). The PCX believes that this 
fee change will provide incentives for increasing order flow to ArcaEx 
and will attract resting limit orders into the ArcaEx Book, which will 
help promote liquidity, transparency, and in turn, price discovery. The 
PCX notes that the following items continue to be excluded from this 
fee: (1) Directed orders, regardless of account type, that are matched 
within the directed order process; \8\ (2) directed orders for the 
account of a retail public customer that are executed partially or in 
their entirety via the other order processes; \9\ (3) orders executed 
in the Opening Auction and the Market Order Auction; \10\ (4) cross 
orders; \11\ (5) commitments received through the Intermarket Trading 
System (``ITS''); and (6) participants in the Nasdaq/National Market 
System/Unlisted Trading Privileges Plan (``Plan'') that transmit orders 
via telephone.\12\
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    \7\ ArcaEx maintains an electronic file of orders, called the 
ArcaEx Book, through which orders are displayed and matched. The 
ArcaEx Book is divided into four components, called processes--the 
directed order process, the display order process, the working order 
process, and the tracking order process. See PCXE Rules 7.36 and 
7.37 for a detailed description of these order execution processes.
    \8\ The directed order process is the first step in the ArcaEx 
execution algorithm. Through this process, Users may direct an order 
to a market maker with whom they have a relationship and the market 
maker may execute the order. To access this process, the User must 
submit a directed order, which is a market or limit order to buy or 
sell that the User directs to the a particular market maker. See 
PCXE Rule 7.37(a) (description of the directed order process).
    \9\ If a retail public customer order has not been executed in 
its entirety after progressing through the directed order, display 
order, working order, and tracking order processes, the remaining 
portion of such order, if eligible, will be routed to another market 
center or participant. Any executed portion of that order will be 
subject to the proposed transaction fee of $0.004 per share, as 
discussed below.
    \10\ See PCXE Rules 7.35(b) and (c) for a detailed description 
of the Opening Auction and the Market Order Auction, respectively.
    \11\ A cross order is defined as a two-sided order with 
instructions to match the identified buy-side with the identified 
sell-side at a specified price (the cross price), subject to price 
improvement requirements. See PCXE Rule 7.31(s).
    \12\ See Joint Self-Regulatory Organization Plan Governing the 
Collection, Consolidation and Dissemination of Quotation and 
Transaction Information for Exchange-Listed Nasdaq/National Market 
System Securities Traded on Exchanges on an Unlisted Trading 
Privilege Basis, Section IX (``Market Access'').
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    The PCX is also proposing to increase from $0.003 to $0.004 the 
per-share transaction fee charged to any unfilled or residual portion 
of a User's order (including a retail public customer order)\13\ that 
is routed away via ArcaEx and executed by another market center or 
participant. The PCX believes that this fee is reasonable and is 
structured to allocate fairly the costs of operating the ArcaEx 
facility. Consistent with the terms of the ITS Plan, the PCX will not 
apply this transaction fee for commitments sent through ITS.
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    \13\ See footnote 9, supra.
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Odd and Mixed Lots
    The PCX proposes to amend its fee schedule to clarify that all odd-
lot orders (including the odd-lot portion of a mixed lot) are subject 
to the $0.03 per-share transaction fee. This fee is not restricted to 
inbound odd-lot orders as incorrectly reflected in the current fee 
schedule. The PCX notes that odd-lot orders that are created as a 
result of a partial fill of a round lot will continue to be excluded 
from this fee.
Market Maker Transaction Credits
    Currently, registered market makers receive a credit of $0.001 per 
share for any Q Orders they have entered that are executed against 
Users' orders.\14\ The PCX is proposing to increase this credit

[[Page 42091]]

to $0.0015 per share. This increase in credit is designed to provide an 
additional incentive to firms to become market makers and to build 
liquidity in the ArcaEx Book, which will foster price competition and 
order interaction.
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    \14\ The current $0.002 per share credit that is provided to any 
market maker that executes against an odd-lot order in the Odd Lot 
Tracking Order Process will remain in effect.
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Market Maker ``Drop Copy'' Processing Fee
    The PCX is proposing to adopt a new $0.001 per-share fee for 
processing ArcaEx market makers' drop copies \15\ of their transactions 
executed on other market centers. In addition, the PCX is clarifying 
that such off-board trades are not eligible for the market maker 
transaction credit or User transaction credit. The PCX believes that 
this fee is reasonable and is structured to allocate fairly the costs 
of operating the ArcaEx facility.
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    \15\ See footnote 5, supra.
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User Transaction Credit
    The PCX is proposing to establish a transaction credit for Users 
who provide liquidity in the ArcaEx Book. Under the proposal, a User 
that enters a resting limit order into the Book that is subsequently 
executed against an incoming marketable order in a listed equity 
security that is traded on ArcaEx (on an unlisted or listed basis) will 
receive a credit of $0.001 per share. In the case of an ETF, a User 
that provides liquidity will receive a transaction credit of $0.002 per 
share. This credit is designed to enhance market efficiency and 
fairness by offering incentives to market participants that provide 
liquidity through ArcaEx. Any credit received by a User will be applied 
to reduce any charges payable to ArcaEx. Any remaining balance may be 
paid directly to the User.
Market Data Revenue Sharing Credit
    The PCX proposes to share a portion of its gross revenues derived 
from market data fees (i.e., tape revenue) with (i) any User that 
provides liquidity by entering a resting limit order into the ArcaEx 
Book that is then executed against an incoming marketable order within 
the display order, working order, or tracking order processes; (ii) any 
market maker that executes against a directed order within the directed 
order process; \16\ and (iii) any User that represents all of one side 
and all or a portion of the other side of a cross-order execution.\17\ 
Under the proposal, any User that meets the requirements stated in 
subsection (i), above, will receive a 50 percent tape revenue credit 
per qualifying transaction that is reported over the Consolidated Tape 
Association's Network. Any User that meets the requirements stated in 
subsections (ii) and (iii), above, will receive a 100 percent tape 
revenue credit per qualifying transaction. This proposal is similar to 
tape revenue sharing programs already established by Nasdaq and various 
exchanges.\18\ The proposed tape revenue credit is intended to create 
additional incentives to participants to provide liquidity on the 
ArcaEx facility.
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    \16\ See footnote 8, supra.
    \17\ See footnote 11, supra.
    \18\ See, e.g., Securities Exchange Act Release No. 45642 (March 
26, 2002), 67 FR 15436 (April 1, 2002) (SR-CSE-2002-03); Securities 
Exchange Act Release No. 45342 (January 28, 2002), 67 FR 5019 
(February 1, 2002) (SR-NASD-2001-96); Securities Exchange Act 
Release No. 41238 (March 31, 1999), 64 FR 17204 (April 8, 1999) (SR-
CSE-99-03); Securities Exchange Act Release No. 40591 (October 22, 
1998), 63 FR 58078 (October 29, 1998) (SR-BSE-98-9).
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    The proposed market data revenue sharing credit will become 
operative on a pilot basis, commencing on June 1, 2002 and ending on 
June 28, 2002. During the pilot period, the PCX will assess the effect 
of the rule change on market participants and may file additional 
changes to the level or structure of its fees.
User Connectivity Fees
    Users are able to route orders to the ArcaEx trading facility via 
RealTick, a proprietary front-end workstation, or the FIX application 
programming interface. Currently, the PCX does not charge Users for the 
costs incurred in establishing the initial line connection (this 
includes one router and one circuit) to the ArcaEx trading facility. 
The PCX is now proposing to adopt an initial connectivity fee that 
would consist of a variable pass-through charge that Users would pay 
for access to the system. These charges relate to the hardware, 
software, and network costs associated with connecting to the system. 
Users would pay the actual charges incurred by the Archipelago 
Exchange, L.L.C., the operator of the ArcaEx facility, or the service 
provider retained for the work being performed. The PCX notes that 
Users that wish to obtain redundant or additional connections would 
continue to be assessed this variable pass-through charge. The PCX also 
proposes to charge Users that access the ArcaEx trading system via the 
RealTick interface a monthly fee of $300 for each workstation.
    The PCX believes that the proposed rule change is consistent with 
section 6(b) of the Act, \19\ in general, and section 6(b)(4) of the 
Act,\20\ in particular, in that it provides for the equitable 
allocation of reasonable dues, fees, and other charges among PCX 
members.
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    \19\ 15 U.S.C. 78f(b).
    \20\ 15 U.S.C. 78f(b)(4).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The PCX does not believe that the proposed rule change will impose 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.
    C. Self-Regulatory Organization's Statement on Comments on the 
Proposed Rule Change Received from Members, Participants, or Others
    The PCX neither solicited nor received written comments on the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The proposed rule change establishes or changes a due, fee or other 
charge, and therefore has become effective pursuant to section 
19(b)(3)(A) of the Act \21\ and Rule 19b-4(f)(2) thereunder.\22\ At any 
time within 60 days of the filing of the proposed rule change, the 
Commission may summarily abrogate the rule change if it appears to the 
Commission that such action is necessary or appropriate in the public 
interest, for the protection of investors, or otherwise in furtherance 
of the purposes of the Act.
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    \21\ 15 U.S.C. 78s(b)(3)(A).
    \22\ 17 CFR 240.19b-4(f)(2).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change 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 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for inspection and copying in the 
Commission's Public Reference Room. Copies of the filing will also be 
available for inspection and copying at the principal office of the 
PCX. All submissions should refer to File No.

[[Page 42092]]

SR-PCX-2002-28 and should be submitted by July 11, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\23\
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    \23\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 02-15573 Filed 6-19-02; 8:45 am]
BILLING CODE 8010-01-P