[Federal Register Volume 67, Number 119 (Thursday, June 20, 2002)]
[Notices]
[Pages 42092-42094]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-15575]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46071; File No. SR-PCX-2002-27]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change and Amendment No. 1 Thereto by 
the Pacific Exchange, Inc. To Adopt a New Order Modifier Called ``Timed 
Order'' and To Adopt a New Interpretation Under PCXE Rules 1.1(r) and 
7.37

July 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 20, 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. On June 7, 2002, the PCX filed an amendment to the 
proposed rule change. The Commission is publishing this notice to 
solicit comments from interested persons on the proposed rule change, 
as amended.
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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''), proposes to amend its rules governing the Archipelago 
Exchange (``ArcaEx''), the equities trading facility of PCXE, by: (1) 
Adopting a new order modifier called a ``Timed Order'' for use by ETP 
Holders and Sponsored Participants;\3\ (2) amending its interpretation 
of PCXE Rule 7.37 to clarify the manner in which NOW Orders and Primary 
Only Orders will be treated on the ArcaEx facility when the routing of 
such orders to other market centers or market participants is required; 
(3) clarifying its definition of ``Indicative Match Price'' as it 
relates to the opening auctions; and (4) making several minor technical 
rule changes to correct grammatical or typographical errors. The text 
of the proposed rule change is as follows:
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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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Text of the Proposed Rule Change \4\
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    \4\ New text is italicized and deleted text is in brackets.
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Rule 1--Definitions

Rules 1.1(a)-(q)--No change.

Indicative Match Price

    (r) For the purposes of the Opening Auction, the Market Order 
Auction and the Trading Halt Auction, as the case may be, the term 
``Indicative Match Price'' shall mean for each security (1) the price 
at which the maximum volume of shares are executable; or (2) if there 
are two or more prices at which the maximum volume of shares are 
executable, the price that is closest to the closing price of the 
previous trading day's normal market hours (or, in the case of a 
Trading Halt Auction, the last sale during normal market hours), as 
determined by the Consolidated Tape will establish the opening price, 
provided that if such price would trade through an eligible Limited 
Price Order designated for such auction, then the opening price will 
occur at the best price level available where no trade through occurs.
    (s)-(aaa)--No change.
* * * * *

Rule 7--Equities Trading

Cancellation of [Revisions in] Transactions
    Rule 7.10--No change.
* * * * *

Short Sales

    Rule 7.16(a)-(c)--No change.
    (d) Exceptions. The provisions of subsection (a) hereof shall not 
apply to:
    (1)-(8)--No change.
    (9) Any sale by an underwriter, or any member of a syndicate or 
group participating in the distribution of a security, in connection 
with an over-allotment of securities, or any lay-off sale by such a 
person in connection with a distribution of securities through rights 
or a standby underwriting commitment[.]; or
    (10)--No change.
    (e)-(f)--No change.
* * * * *

Orders and Modifiers

    Rule 7.31(a)-(p)--No change.
    (q) Timed Order. A limit order to buy or sell that is to remain in 
effect until a specified time, after which such order or the portion 
thereof not executed is to be treated as cancelled. The specified time 
interval of such order may remain in effect for one or more consecutive 
trading sessions for that particular day only. [Reserved.]
    (r)-(x)--No change.
* * * * *

Opening Session Auctions

    Rule 7.35(a)-(d)--No change.
    (e) Transition to Core Trading Session.
    (1)--No change.
    (2) Market orders entered after 6:28 am (Pacific Time) and before 
6:30 am (Pacific Time), which are eligible for either the Market Order 
Auction or the Core Trading Session, shall become eligible for 
execution at 6:30 am (Pacific Time) or at the conclusion of the Market 
Order Auction, whichever is later, unless otherwise provided in Rule 
7.35 [7.30](c)(2)(C).
    (3)--No change.
    (f)--No change.
* * * * *

Order Execution

    Rule 7.37. Subject to the restrictions on short sales under Rule 
10a-1 under the Exchange Act, like-priced orders, bids and offers shall 
be matched for execution by following Steps 1 through 5 in this Rule; 
provided, however, for an execution to occur in any Order Process, the 
price must be equal to or better than the NBBO, unless the Archipelago 
Exchange has routed orders to [all] away markets at the NBBO, where 
applicable (however, a User may submit a NOW Order or Primary Only 
Order that may be routed to an away market without consideration of the 
NBBO).
    (a)-(e)--No change.

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 such statements.

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

    On October 25, 2001, the Commission approved the PCX's proposal to

[[Page 42093]]

establish ArcaEx as a new electronic trading facility of PCXE.\5\ 
ArcaEx is a fully electronic securities trading facility for use by ETP 
Holders and their customers. 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 PCX 
and PCXE. ArcaEx commenced operations on March 22, 2002, replacing the 
PCXE's traditional trading floor facilities.
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    \5\ See Securities Exchange Act Release No. 44983 (October 25, 
2001), 66 FR 55225 (November 1, 2001) (SR-PCX-00-25) (hereinafter 
``ArcaEx Approval Order'').
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1. Timed Order Modifier
    As part of its continuing effort to enhance participation in its 
electronic auction market, the PCX proposes to adopt a new order 
modifier, called a ``Timed Order,'' for use by ETP Holders and 
Sponsored Participants (collectively ``Users'') on ArcaEx. The PCX 
proposes to add PCXE Rule 7.31(q) to define a Timed Order. A Timed 
Order is a limit order to buy or sell that is to remain in effect until 
a specified time, after which the order or the portion thereof not 
executed is to be treated as cancelled. The specified time interval of 
the order may remain in effect for one or more consecutive trading 
sessions for that particular day only.\6\
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    \6\ See PCXE Rule 7.34(a) for a description of ArcaEx's trading 
sessions.
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    The PCX believes that the Timed Order modifier would enable a User 
to implement its own customized means for accomplishing the order 
execution. This modifier would be an enhanced alternative to a 
traditional day order in that a shorter time interval could be 
specified for the order to remain in effect, and Users would be able to 
specify in advance when to cancel their outstanding orders. In the 
PCX's view, this would afford Users more flexibility in applying their 
trading strategies. Accordingly, the PCX believes that the proposed 
rule would promote a more efficient and effective market operation, and 
would enhance the investment choices available to investors over a 
broad range of trading scenarios.
2. NOW and Primary Only Orders
    The PCX's current rules governing the order execution processes for 
orders in the ArcaEx Book \7\ are set forth in PCXE Rule 7.37. The 
proposed rule change provides a clarification of PCXE Rule 7.37 as to 
the manner in which NOW Orders and Primary Only Orders (``PO Orders'') 
would be treated through ArcaEx's trading system when the routing of 
those orders to other market centers or market participants is 
required. The first paragraph of PCXE Rule 7.37 states that ``[s]ubject 
to the restrictions on short sales under Rule 10a-1 under the Exchange 
Act, like-priced orders, bids, and offers shall be matched for 
execution by following Steps 1 through 5 in this Rule; provided, 
however, for an execution to occur in any Order Process, the price must 
be equal to or better than the NBBO, unless the Archipelago Exchange 
has routed orders to all away markets at the NBBO.'' With this filing, 
the PCX is proposing to add interpretive language to make it clear that 
a User may submit a NOW Order or PO Order that may be routed away to 
other markets without consideration of the NBBO. The PCX believes that 
this interpretation is fairly implied in its rules that define these 
order types and the terms of the ArcaEx Approval Order.
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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 Rule 7.37 for a 
detailed description of these order execution processes.
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    ArcaEx has been designed to provide its Users with a choice as to 
how they wish to route their orders to away markets. This includes NOW 
Orders and PO Orders, as discussed below. Under PCXE Rule 7.31(v), a 
NOW Order is a Limited Price Order \8\ that is executed in whole or in 
part on the ArcaEx, and the portion not so executed is routed pursuant 
to Rule 7.37(d) \9\ to one or more NOW Recipients for immediate 
execution when received. If a NOW Order is not marketable when 
submitted to ArcaEx, it is cancelled. Similarly, any portion of the 
order that the NOW Recipient does not immediately execute is cancelled. 
NOW Orders may not be Directed Orders.\10\ For purposes of a NOW Order, 
a NOW Recipient means any exchange, ECN or other broker-dealer (i) with 
which ArcaEx maintains an electronic linkage, including ITS, and (ii) 
which provides instantaneous responses to NOW Orders routed from 
ArcaEx. The PCXE designates from time to time those exchanges, ECNs, or 
other broker-dealers that qualify as NOW Recipients.\11\
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    \8\ See PCXE Rule 1.1(s) (``Limited Price Order'' is defined as 
any order with a specified price or prices (e.g., limit orders and 
working orders, other than stop orders).
    \9\ The routing order process is the fifth step of the ArcaEx 
execution algorithm, which involves routing orders away to other 
market centers or market participants and is available only to those 
ETP Holders who have entered into a Routing Agreement. See PCXE Rule 
7.37(d) (description of ``routing order process'').
    \10\ See PCXE Rule 7.31(i) (definition of ``directed order''). 
See also PCXE Rule 7.37(a) (description of ``directed order 
process'').
    \11\ See PCXE Rule 1.1(ff) (definition of ``NOW Recipient'').
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    Similarly, a PO Order modifier enables Users to implement their own 
customized means for accomplishing the order execution. As defined in 
Rule 7.31(x), a PO Order is a market order, for exchange-listed 
securities only, that is to be routed as a market-on-open order to the 
designated primary market for participation in the primary market 
opening or re-opening process. A PO Order bypasses the order-execution 
processes of the ArcaEx Book and is routed directly to the designated 
primary market.
    The PCX believes that the NOW and PO order types involve a routing 
element unique to ArcaEx. These specific orders types allow a User's 
instructions to take precedence over the general requirement that 
orders will be routed to away markets at the NBBO. The PCX believes 
that it is implicit in the current definitions of these alternative 
order types that they will be processed in a manner consistent with the 
User's instructions and, therefore, the order may have to be routed to 
away markets that are not quoting at the NBBO.
3. Indicative Match Price
    ArcaEx operates two auctions during its Opening Session--the 
Opening Auction and the Market Order Auction. Also, to facilitate the 
re-opening of a security following a trading halt in that security, 
ArcaEx will conduct a Trading Halt Auction. \12\ The term ``Indicative 
Match Price'' is applicable to these auctions and is defined in Rule 
1.1(r) to mean ``for each security (1) the price at which the maximum 
volume of shares are executable; or (2) if there are two or more prices 
at which the maximum volume of shares are executable, the price that is 
closest to the closing price of the previous trading day's normal 
market hours, as determined by the Consolidated Tape.'' The PCX 
proposes to amend the definition of the term ``Indicative Match Price'' 
to clarify the process that establishes a single price opening when 
there are two or more prices at which the maximum volume of shares are 
executable.
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    \12\ See PCXE Rule 7.35 for a discussion of the Opening Session 
Auctions and the Trading Halt Auction.
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    Currently, PCXE Rule 1.1(r) provides that if there are two or more 
prices at which the maximum volume of shares

[[Page 42094]]

are executable, the price that is closest to the closing price of the 
previous day's normal trading hours will be used to establish the 
opening price. Since this language may be interpreted to mean that the 
opening trade for the subject auction may occur at a price that trades 
through eligible limited price orders residing in the ArcaEx Book, and 
since such an interpretation would be inconsistent with the PCX's 
priority rules as set forth in PCXE Rule 7.36(a), the PCX proposes to 
add interpretive language to its definition of Indicative Match Price. 
The proposed language would make it explicit that when there are two or 
more prices at which the maximum volume of shares are executable, the 
price that is closest to the closing price of the previous day's normal 
trading hours would be used to establish the opening price, provided 
that if the price would trade through an eligible limited price order 
designated for that auction, then the opening price would occur at the 
best price level available where no trade through occurs. The PCX is 
also proposing to modify PCXE Rule 1.1(r) by adding a parenthetical 
statement to clarify that, in the case of a Trading Halt Auction, the 
last sale during normal market hours will be used for purposes of 
determining the opening price.
    The PCX believes that the proposed rule change will more accurately 
reflect ArcaEx's current opening price methodology, and that it is 
consistent with PCXE's price-time priority rules. Accordingly, the 
ArcaEx system is designed to ensure that limited price orders residing 
in the Arca Book will be executed in strict price-time priority, and 
that those orders will be afforded trade-through protection.
4. Technical Changes
    The PCX proposes to make the following minor technical rule changes 
to correct grammatical or typographical errors:
    (a) Rule 7.10--``Cancellation of Transactions'' is replacing the 
heading entitled ``Cancellation of Revisions in Transactions.''
    (b) Rule 7.16(c)(9)--A semi-colon and the word ``or'' will be 
inserted after the first sentence.
    (c) Rule 7.35(e)--The rule cross-referenced in the text will be 
changed from Rule 7.30(c)(2)(C) to 7.35(c)(2)(C).
    The PCX believes that the proposed rule change is consistent with 
Section 6(b) \13\ of the Act, in general, and furthers the objectives 
of Section 6(b)(5), \14\ in particular, because it is designed to 
promote just and equitable principles of trade, to foster cooperation 
and coordination with persons engaged in facilitating transactions in 
securities, and to remove impediments and perfect the mechanisms of a 
free and open market and to protect investors and the public interest.
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    \13\ 15 U.S.C. 78f(b).
    \14\ 15 U.S.C. 78f(b)(5).
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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 PCX provided the Commission with written notice of its 
intention to file the proposed rule change at least five business days 
before its filing. Moreover, the PCX has designated the proposed rule 
change as one that: (i) Does not significantly affect the protection of 
investors or the public interest; (ii) does not impose any significant 
burden on competition; and (iii) does not become operative for 30 days 
from the date on which it was filed, or such shorter time as the 
Commission may designate. Therefore, the foregoing rule change has 
become effective pursuant to Section 19(b)(3)(A) of the Act \15\ and 
Rule 19b-4(f)(6) thereunder. \16\ At any time within 60 days of the 
filing of Amendment No. 1 to the proposed rule change, the Commission 
may summarily abrogate the rule change if it appears to the Commission 
that the action is necessary or appropriate in the public interest, for 
the protection of investors, or would otherwise further the purposes of 
the Act.
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    \15\ 15 U.S.C. 78s(b)(3)(A).
    \16\ 17 CFR 240.19b-4(f)(6).
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    Under Rule 19b-4(f)(6)(iii) under the Act, \17\ the proposal does 
not become operative for 30 days after the date of its filing, or such 
shorter time as the Commission may designate if consistent with the 
protection of investors and the public interest. The PCX has requested 
that the Commission waive the 30-day operative date so that the PCX can 
implement the proposed rule change as quickly as possible. The 
Commission, consistent with the protection of investors and the public 
interest, has determined to waive the 30-day operative period. \18\
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    \17\ 17 CFR 240.19b-4(f)(6)(iii).
    \18\ For purposes of accelerating the operative date of this 
proposal, the Commission has considered the proposed rule's impact 
on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
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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, as amended, 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. SR-PCX-
2002-27 and should be submitted by July 11, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority. \19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 02-15575 Filed 6-19-02; 8:45 am]
BILLING CODE 8010-01-P