[Federal Register Volume 67, Number 249 (Friday, December 27, 2002)]
[Notices]
[Pages 79219-79220]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-32644]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47036; File No. SR-PCX-2002-53]


Self-Regulatory Organizations; Pacific Exchange, Inc.; Order 
Approving Proposed Rule Change Relating to New Order Types

December 19, 2002.

I. Introduction

    On August 5, 2002, the Pacific Exchange, Inc. (``PCX'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change regarding new order types. On September 26, 2002, 
the Exchange's rule proposal was published for comment in the Federal 
Register.\3\ The Commission received no comment letters on the 
proposal. This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 46515 (September 19, 
2002), 67 FR 60709.
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II. Description of the Proposed Rule Change

    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, to: (i) 
Adopt two new order types--a Midpoint Crossing Order and a Midpoint 
Directed Fill; and (ii) add minimum trading differentials for these new 
order types separate from other orders types.
    The two new order types would allow Equity Trading Permit (``ETP'') 
Holders and Sponsored Participants (collectively ``Users'') to receive 
executions priced between the national best bid and offer (``NBBO'') at 
price increments finer than the minimum trading differential permitted 
under the Exchange's current rules.
    A Midpoint Cross Order would be a Cross Order \4\ that is priced at 
the midpoint of the NBBO. If at the time of order entry a locked or 
crossed market exists in the security, the ArcaEx trading system would 
reject the Midpoint Cross Order. A Midpoint Directed Fill would be a 
Directed Fill \5\ that is priced at the

[[Page 79220]]

midpoint of the NBBO. When a locked or crossed market exists in the 
security, the inbound Directed Order would bypass the Directed Order 
Process \6\ and immediately enter the Display Order Process for 
execution.\7\ In the Directed Order Process, the User's Directed Order 
would be executed against a Directed Fill, which is the order of the 
User's designated market maker. Specifically, for a market maker to 
interact with incoming Directed Orders, the market maker must submit a 
standing instruction to ArcaEx for the parameters of a Directed Fill, 
including, but not limited to, the size of the order, the Users who may 
send such market maker a Directed Order, the price improvement 
algorithm and the period of time the instruction is effective. The 
proposed Midpoint Directed Fill would be an additional feature of the 
ArcaEx system's price improvement algorithm, which would enable market 
makers to match automatically against incoming Directed Orders at the 
midpoint price between the NBBO.
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    \4\ 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).
    \5\ See PCXE Rule 7.31(j) (definition of ``Directed Fill'').
    \6\ 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 that 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 has been directed to the a particular market maker 
by the User. See PCXE Rule 7.37(a) (description of ``Directed Order 
Process'').
    \7\ The Display Order Process is the second step in the ArcaEx 
execution algorithm. In this process, the ArcaEx system matches an 
incoming marketable order against orders in the Display Order 
Process at the display price of the resident order for the total 
size available at the that price or for the size of the incoming 
order. See PCXE Rule 7.37(b) (description of ``Display Order 
Process'').
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    The Exchange's current minimum price variation for securities 
traded on the ArcaEx is $0.01. The minimum price improvement increment 
(``MPII'') on ArcaEx is equal to $0.01 or ten percent of the NBBO 
spread, whichever is greater.\8\ Under the proposal, Midpoint Cross 
Orders and Midpoint Directed Fills could receive executions at price 
increments finer than the minimum trading differential currently 
permitted under the Exchange's rules. In order to implement these new 
order types, the Exchange proposes to add interpretive language to 
address situations where the midpoint of the NBBO bid/ask differential 
is a subpenny price (e.g., the midpoint of an NBBO of $20--$20.03 is 
$20.015). In such circumstances, the proposed rule would permit 
Midpoint Cross Orders and Midpoint Directed Fills to be executed and 
reported in increments as small as one-half of the minimum price 
variation (i.e., as $0.005).\9\ Furthermore, in situations where the 
NBBO bid/ask differential is one minimum price variation (i.e., $0.01), 
Midpoint Cross Orders and Midpoint Directed Fills may be executed in 
increments of one-half of the minimum price variation (i.e., as 
$0.005), as an exception to the current MPII. In addition, the Exchange 
proposes minor technical changes to eliminate obsolete references and 
to change the text so that Rule 7.6(a), Commentary .05 would conform to 
Rule 7.6(a), Commentary .03.
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    \8\ See PCXE Rule 7.6(a), Commentary .06. Under current PCXE 
rules, the MPII requirements must be satisfied in the execution of 
Cross Orders and Directed Orders. See PCXE Rules 7.31(j) and (s).
    \9\ See proposed PCXE Rule 7.6(a), Commentary .07.
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III. Discussion

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities exchange 
\10\ and, in particular, the requirements of Section 6 of the Act.\11\ 
Further, the Commission finds that the proposal is consistent with 
Section 6(b)(5) of the Act,\12\ in that the rules have been designed to 
remove impediments to and to perfect the mechanism of a free and open 
market and a national market system, while also protecting investors 
and the public interest.
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    \10\ The Commission has considered the proposal's impact on 
efficiency, competition and capital formation. 15 U.S.C. 78c(f).
    \11\ 15 U.S.C. 78f.
    \12\ 15 U.S.C. 78f(b)(5).
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IV. Conclusion

    It is therfore ordered, pursuant to Section 19(b)(2) of the 
Act,\13\ that the proposed rule change (File No. SR-PCX-2002-53), is 
hereby approved.
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    \13\ Id.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 02-32644 Filed 12-26-02; 8:45 am]
BILLING CODE 8010-01-P