[Federal Register Volume 67, Number 207 (Friday, October 25, 2002)]
[Notices]
[Pages 65618-65620]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-27226]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46684; File No. SR-PCX-2002-69]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Pacific Exchange, Inc. To 
Adopt a New Interpretation Under PCXE Rule 7.37 in Securities Subject 
to the ITS Plan Exemption

October 17, 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 October 15, 2002, the Pacific Exchange, Inc. (``PCX'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by PCX. PCX 
filed the proposed rule change pursuant to Section 19(b)(3)(A) of the 
Act \3\ and Rule 19b-4(f)(6) thereunder,\4\ which renders the proposal 
effective upon filing with the Commission. 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.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange, through its wholly owned subsidiary PCX Equities, 
Inc. (``PCXE''), proposes to amend certain rules governing the 
Archipelago Exchange (``ArcaEx''), the equities trading facility of 
PCXE, to conform to the Commission's order granting a de minimis 
exemption from the trade-through restrictions of the Intermarket 
Trading System (``ITS'') Plan in certain exchange-traded funds 
(``ETFs''). Below is the text of the proposed rule change. New text is 
in italics, while deletions appear in [brackets].
* * * * *

PCX Equities, Inc.

Rule 7--Equities Trading Orders and Modifiers
    Rule 7.31(a)-(d)--No change.
    (e) Immediate-or-Cancel Order. A market or limit order that is to 
be executed in whole or in part as soon as such order is received, and 
the portion not so executed is to be treated as canceled. An immediate-
or-cancel order for Trade-Through Exempt Securities (as defined in Rule 
7.37) will be permitted to trade at a price no more than three cents 
($0.03) away from the NBBO displayed in the Consolidated Quote.
    (f)-(u)--No change.
    (v) NOW Order. A Limited Price Order that is to be executed in 
whole or in part on the Corporation, and the portion not so executed 
shall be routed pursuant to Rule 7.37(d) only to one or more NOW 
Recipients for immediate execution as soon as the order is received by 
the NOW Recipient. Any portion not immediately executed by the NOW 
Recipient shall be cancelled. If a NOW Order is not marketable when it 
is submitted to the Corporation, it shall be cancelled. NOW Orders may 
not be Directed Orders. NOW Orders for Trade-Through Exempt Securities 
(as defined in Rule 7.37) may be routed and executed at a price that is 
no more than three cents ($0.03) away from the NBBO displayed in the 
Consolidated Quote.
    (w) PNP Order (Post No Preference). A limit order to buy or sell 
that is to be executed in whole or in part on the Corporation, and the 
portion not so executed is to be ranked in the Arca Book, without 
routing any portion of the order to another market center; provided, 
however, the Corporation shall cancel a PNP Order that would lock or 
cross the NBBO. PNP Orders for Trade-Through Exempt Securities (as 
defined in Rule 7.37) will not be canceled at the time of order entry 
if such orders would lock or cross the NBBO. PNP Orders in Trade-
Through Exempt Securities may be executed at a price no more than three 
cents ($0.03) away from the NBBO displayed in the Consolidated Quote.
    (x)--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). This rule will not apply to securities that are subject to an 
exemption from the Commission under SEC Rule 11Aa3-2(f) to the trade-
through provisions of the ITS Plan (``Trade-Through Exempt 
Securities''). Orders in Trade-Through Exempt Securities designated as 
IOC, NOW and PNP orders will be effected at a price no more than three 
cents ($0.03) away from the best bid and offer quoted in CQS.
    (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, PCX included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it 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

1. Purpose
    On August 28, 2002, the Securities and Exchange Commission issued 
an order granting a de minimis exemption from the trade-through 
restrictions of the Intermarket Trading System (``ITS'') Plan in 
exchange-traded funds (``ETFs'') tracking the Nasdaq-100 Index 
(``QQQ''), the Standard & Poor's 500 Index

[[Page 65619]]

(``SPY''), and the Dow Jones Industrial Average (``DIA'') (the 
``Order'').\5\ The exemption became operative on September 4, 2002, and 
covers transactions in the aforementioned ETFs that are executed no 
more than three cents ($0.03) away from the national best bid and offer 
(``NBBO'') displayed in the Consolidated Quote. As a result of the 
Commission's Order, the Exchange proposes to make conforming changes to 
certain rules governing the ArcaEx trading facility. The proposed rule 
changes are summarized below.
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    \5\ See Securities Exchange Act Release No. 46428 (August 28, 
2002), 67 FR 56607 (September 27, 2002).
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    The Exchange's current rules governing the order execution 
processes for orders in the ArcaEx Book \6\ are set forth in PCXE Rule 
7.37. Presently, Rule 7.37 provides, in part, that for an execution to 
occur in any Order Process, the price must be equal to or better than 
the NBBO. The Exchange is proposing to add interpretive language to 
make it clear to ETP Holders and Sponsored Participants (collectively 
``Users'') that the requirements of this Rule will not apply to orders 
designated as Immediate-or-Cancel (``IOC''), NOW and Post No Preference 
(``PNP'') in securities that are subject to an exemption from the 
Commission under SEC Rule 11Aa3-2(f) to the trade-through provisions of 
the ITS Plan, provided, however, that any resulting executions will be 
at a price no more than three cents $0.03 away from the national best 
bid and offer (``NBBO'') displayed in the Consolidated Quote.
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    \6\ 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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    The Exchange is also proposing to amend the definitions of certain 
order types, as follows: First, the Exchange is proposing to modify the 
definition of the IOC Order as set forth in PCXE Rule 7.31(e) by adding 
the following text: ``An immediate-or-cancel order for Trade-Through 
Exempt Securities (as defined in Rule 7.37) will be permitted to trade 
at a price no more than three cents ($0.03) away from the NBBO 
displayed in the Consolidated Quote.'' Second, the Exchange is 
proposing to amend Rule 7.31(v) relating to NOW Orders by adding the 
following text: ``NOW Orders for Trade-Through Exempt Securities (as 
defined in Rule 7.37) may be routed and executed at a price that is no 
more than three cents ($0.03) away from the NBBO displayed in the 
Consolidated Quote.'' Finally, the Exchange proposes to amend the 
definition of the PNP Order as set forth in PCXE Rule 7.31(w) by adding 
the following text: ``PNP Orders for Trade-Through Exempt Securities 
(as defined in Rule 7.37) will not be canceled at the time of order 
entry if such orders would lock or cross the NBBO. PNP Orders in Trade-
Through Exempt Securities may be executed at a price no more than three 
cents ($0.03) away from the NBBO displayed in the Consolidated Quote.''
    The Exchange believes that these proposed rule changes are 
consistent with the terms and spirit of the Commission's Order and will 
allow market participants to benefit from this exemption.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) \7\ of the Act, in general, and further the 
objectives of Section 6(b)(5),\8\ 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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    \7\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange 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

    Written comments on the proposed rule change were neither solicited 
nor received.

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

    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 \9\ and Rule 19b-4(f)(6) thereunder.\10\ 
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 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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    \9\ 15 U.S.C. 78s(b)(3)(A).
    \10\ 17 CFR 240.19b-4(f)(6).
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    Pursuant to Rule 19b-4(f)(6)(iii) under the Act,\11\ the proposal 
may 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, and the self-
regulatory organization must file notice of its intent to file the 
proposed rule change at least five business days beforehand. The PCX 
has requested that the Commission waive the five-day pre-filing 
requirement and the 30-day operative delay so that the proposed rule 
change will become immediately effective upon filing.
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    \11\ 17 CFR 240.19b-4(f)(6)(iii).
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    The Commission believes that waiving the five-day pre-filing 
provision and the 30-day operative delay is consistent with the 
protection of investors and the public interest.\12\ Waiving the pre-
filing requirement and accelerating the operative date will provide 
investors increased liquidity and increased choice of execution venues 
while limiting the possibility that investors will receive 
significantly inferior prices. For these reasons, the Commission 
designates that the proposed rule change as effective and operative 
immediately.
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    \12\ 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 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

[[Page 65620]]

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 PCX. All 
submissions should refer to File No. PCX-2002-69 and should be 
submitted by November 15, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-27226 Filed 10-24-02; 8:45 am]
BILLING CODE 8010-01-P