[Federal Register Volume 67, Number 247 (Tuesday, December 24, 2002)]
[Notices]
[Pages 78554-78556]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-32322]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47010; File No. SR-PCX-2002-74]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Pacific Exchange, Inc. Relating to New Order Types Called 
``IOC Cross Orders'' and ``PNP Cross Orders'' and Amending PCXE Rule 
7.37

December 16, 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 December 9, 2002, the Pacific Exchange, Inc. (``PCX'') filed with 
the Securities and Exchange 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\ 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 two new order types, an Immediate-or-Cancel (``IOC'') Cross 
Order and a Post No Preference (``PNP'') Cross Order; and (2) amending 
PCXE Rule 7.37 to provide for a limited exemption from the trade-
through restrictions for these new order types. The text of the 
proposed rule change is below. Proposed new text is italicized and 
proposed deleted text is bracketed.

PCX Equities, Inc.--Rule 7: Equities Trading

Orders and Modifiers
    Rule 7.31(a)-(x)--No change.
    (y)-(z)--Reserved.
    (aa) Immediate-or-Cancel (``IOC'') Cross Order. An IOC Cross Order 
is an order that is to be executed in its entirety as a cross 
transaction as soon as such order is received; provided, however, the 
Corporation will cancel an IOC Cross Order at the time of order entry 
if:
    (1) the cross price locks or crosses the BBO; or
    (2) the cross price would cause an execution at a price that trades 
through the NBBO, except as provided in Rule 7.37; or
    (3) the cross price is between the BBO and does not improve the BBO 
by the MPII pursuant to Rule 7.6(a), Commentary .06.
    (bb) PNP (Post No Preference) Cross Order. A Cross Order that is to 
be executed in whole or in part on the Corporation and the portion not 
so executed is to be canceled, without routing any portion of the Cross 
Order to another market center. When the cross price is equal to or 
better than the NBBO and is at the BBO, the relevant portion of the PNP 
Cross Order will be matched first against displayed orders with 
priority in the Arca Book, and then the remainder of the PNP Cross 
Order will be matched. Any unexecuted portion of the PNP Cross will be 
canceled. The Corporation will cancel either the entire PNP Cross Order 
at the time of order entry, or the unexecuted portion of a PNP Cross 
Order at any time during the order execution process, whichever is 
applicable, if:
    (1) the cross price would cause an execution at a price that trades 
through the NBBO, except as provided in Rule 7.37;
    (2) the cross price is between the BBO and does not improve the BBO 
by the MPII pursuant to Rule 7.6(a), Commentary .06.
* * * * *

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 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 designated order types including 
IOC, NOW, PNP, IOC Cross and PNP Cross orders 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 (``ITS Trade-Through 
Exempt Securities''). Orders in ITS 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, 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

    As part of its continuing efforts to enhance participation on the 
ArcaEx facility, the PCX is proposing to adopt two new order types 
called an ``IOC Cross Order'' and a ``PNP Cross Order.'' The PCX 
believes that these new order types will provide ETP Holders \3\ and 
Sponsored Participants \4\ (collectively ``Users'') with more 
flexibility to facilitate cross transactions. The PCX is also proposing 
to amend PCXE Rule 7.37 so that these new order types will be subject 
to the SEC's de minimis exemption from the trade-through restrictions 
of the Intermarket Trading

[[Page 78555]]

System (``ITS'') Plan in certain exchange-traded funds (``ETFs'').\5\
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    \3\ See PCXE Rule 1.1(n).
    \4\ 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).
    \5\ See Securities Exchange Act Release No. 46428 (August 28, 
2002), 67 FR 56607 (September 4, 2002).
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    The PCX proposes to add PCXE Rule 7.31(aa) to define an IOC Cross 
Order. An IOC Cross Order is an order that is to be executed in its 
entirety as a cross transaction as soon as the order is received; 
provided, however, the ArcaEx trading system would cancel an IOC Cross 
Order at the time of order entry if: (i) The cross price locks or 
crosses the BBO; (ii) the cross price would cause an execution at a 
price that trades through the NBBO, except as provided in Rule 7.37 
described below; or (iii) the cross price is between the BBO and does 
not improve the BBO by the minimum price improvement increment 
(``MPII'') pursuant to Rule 7.6(a), Commentary .06.\6\ The PCX believes 
that IOC Cross Orders will help replicate the dynamic of a traditional 
floor-based auction market by which brokers may represent orders with a 
cross-only contingency. Furthermore, the PCX believes that this order 
type responds to the needs of market participants that use indexation 
strategies.
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    \6\ The minimum price improvement increment (``MPII'') on ArcaEx 
is equal to $0.01 or 10% of the NBBO spread, whichever is greater. 
See PCXE Rule 7.6(a), Commentary .06. Under current PCXE rules, the 
MPII requirements must be satisfied in the execution of Cross 
Orders. See PCXE Rule 7.31(s).
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    The PCX also proposes to add PCXE Rule 7.31(bb) to define a PNP 
Cross Order. A PNP Cross Order is a Cross Order \7\ that is to be 
executed in whole or in part on ArcaEx and the portion not so executed 
is to be canceled, without routing any portion of the Cross Order to 
another market center. When the cross price is equal to or better than 
the NBBO and is at the BBO, the relevant portion of the PNP Cross Order 
would be matched first against displayed orders with priority in the 
ArcaEx Book,\8\ and then the remainder of the PNP Cross Order would be 
matched. Any unexecuted portion of the PNP Cross Order would be 
canceled. The ArcaEx trading system would cancel either the entire PNP 
Cross Order at the time of order entry, or the unexecuted portion of a 
PNP Cross Order at any time during the order execution process, 
whichever is applicable, if: (i) The cross price would cause an 
execution at a price that trades through the NBBO, except as provided 
in Rule 7.37; or (ii) the cross price is between the BBO and does not 
improve the BBO by the MPII.
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    \7\ See PCXE Rule 7.31(s) (definition of a ``Cross Order'').
    \8\ 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 PCX's current rules governing the order execution processes for 
orders in the ArcaEx Book are set forth in PCXE Rule 7.37. Currently, 
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 
requirements of this Rule do not apply to orders designated as IOC, 
NOW, and Post No Preference (``PNP'') in securities that are subject to 
an exemption from the trade-through provisions of the ITS Plan pursuant 
to Rule 11Aa3-2(f) under the Act; \9\ provided, however, that any 
resulting executions will be at a price no more than three cents 
($0.03) away from the NBBO displayed in the Consolidated Quote. 
Accordingly, the PCX proposes to amend PCXE Rule 7.37 so that IOC Cross 
and PNP Cross Orders will be subject to the SEC's exemption.
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    \9\ 17 CFR 240.11Aa3-2(f).
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    The PCX believes that the implementation of the aforementioned 
order types will facilitate enhanced order interaction and foster price 
competition. The proposal also promotes a more efficient and effective 
market operation, and enhances the investment choices available to 
investors over a broad range of trading scenarios. Finally, the PCX 
believes that the proposed rule changes will permit the execution of 
cross transactions in a manner consistent with PCXE rules applicable to 
price-time priority, price improvement requirements, and NBBO price 
protection.
    The PCX believes that the proposed rule change is consistent with 
section 6(b) of the Act,\10\ in general, and further the objectives of 
section 6(b)(5),\11\ 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, to remove impediments and perfect the mechanisms of a free 
and open market, and to protect investors and the public interest. In 
addition, the PCX believes that the proposed rule change is consistent 
with provisions of section 11A(a)(1)(B) of the Act,\12\ which states 
that new data processing and communications techniques create the 
opportunity for more efficient and effective market operations.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(5).
    \12\ 15 U.S.C. 78k-1(a)(1)(B).
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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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    A. By order approve such proposed rule change, or
    B. Institute proceedings to determine whether the proposed rule 
change should be disapproved.

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 PCX. All submissions should 
refer to File No. SR-PCX-2002-74 and should be submitted by January 8, 
2003.


[[Page 78556]]


    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. 02-32322 Filed 12-23-02; 8:45 am]
BILLING CODE 8010-01-P