[Federal Register Volume 68, Number 19 (Wednesday, January 29, 2003)]
[Notices]
[Pages 4527-4532]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-1978]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47223; File No. SR-PCX-2002-75]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Pacific Exchange, Inc., Through Its Subsidiary PCX 
Equities, Inc., Relating to New Order Types and To Amend PCXE Rule 7.37

January 21, 2003.
    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'' or 
``Exchange''), through its subsidiary, PCX Equities, Inc. (``PCXE''), 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in items I, II, and III below, which 
items have been prepared by the PCX. On January 15, 2003, the Exchange 
filed Amendment No. 1 to the proposed rule change.\3\ The Commission is 
publishing this notice to solicit comments on the proposed rule change, 
as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, the Exchange submitted a new form 19b-4, 
which replaced the original filing in its entirety.
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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, PCXE, proposes to 
amend its rules governing the Archipelago Exchange, the equities 
trading facility of PCXE, by: (1) Adopting several new order types to 
accommodate the trading of securities listed on the Nasdaq Stock 
Market, Inc., on an unlisted trading privileges (``UTP'') basis; (2) 
amending PCXE rule 7.37 to provide for a limited exemption from the 
trade-through restrictions for some of these new order types; (3) 
amending certain provisions of the Working Order Process to reflect the 
unique operational requirements of two proposed order types; and (4) 
making several minor technical rule changes to conform to the Nasdaq 
UTP Plan, which extends UTP to Nasdaq SmallCap securities. The text of 
the proposed rule change follows:
    Additions are italicized; deletions are in [brackets].
PCX Equities, Inc.
Rule 1 Definitions
    Rule 1.1(a)-(z)--No change.

Nasdaq[/NM] Security

    (aa) The term ``Nasdaq[/NM] Security'' shall mean any security (i) 
designated as an eligible [national market system] security pursuant to 
the ``Nasdaq Unlisted Trading Privileges Plan'', as amended, [NASD's 
``National Market System Securities Designation Plan with respect to 
Nasdaq Securities,''] filed with and approved by the Commission 
pursuant to SEC rule 11Aa2-1 under the Exchange Act and (ii) that is 
either listed on the Corporation pursuant to rule 5 or as to which 
unlisted trading privileges have been granted pursuant to section 12(f) 
of the Exchange Act.
    Rule 1.1 (bb)-(hh)--No change.

OTC/UTP Plan

    (ii) The term ``OTC/UTP Plan'' shall mean the Nasdaq Unlisted 
Trading

[[Page 4528]]

Privileges [National Market/Unlisted Trading System/Unlisted Trading 
Privileges] Plan, as from time to time amended according to its 
provisions.

OTC/UTP Listing [Primary] Market

    (jj) The term ``OTC/UTP Listing [Primary] Market'' for a Nasdaq[/
NM] Security means the OTC/UTP Participant's Market on which the Nasdaq 
Security is listed. If the Nasdaq Security is dually listed, OTC/UTP 
Listing Market shall mean the OTC/UTP Participant's Market on which the 
Nasdaq Security is listed that also has the highest number of the 
average of the reported transactions and reported share volume for the 
preceding 12-month period. The OTC/UTP Listing Market for dually-listed 
Nasdaq Securities shall be determined at the beginning of each calendar 
quarter. [Nasdaq; provided, however, that if for any 12-month period 
the number of reported transactions and the reported share volume in a 
Nasdaq/NM Security in any other OTC/UTP Participant's market exceeds 
50% of the aggregate reported transactions and reported share volume of 
all OTC/UTP Participants in such security, then that OTC/UTP 
Participant's market shall be the OTC/UTP Primary Market.]

OTC/UTP Regulatory Halt

    (kk) The term ``OTC/UTP Regulatory Halt'' means a trade suspension 
or halt called by the OTC/UTP Listing [Primary] Market for the purpose 
of dissemination of material news.
* * * * *
Rule 7 Equities Trading
Trading in Nasdaq[/NM] Securities
    Rule 7.18(a) Access.
    (1) The Corporation shall permit each Nasdaq Market Maker, acting 
in its capacity as a market maker, telephone access, or such other 
access as may be established between the Corporation and the Nasdaq 
System (collectively, ``approved access''), to the Corporation for each 
Nasdaq[/NM] Security in which such market maker is registered as a 
market maker. Such approved access shall include appropriate procedures 
to assure the timely response to communications received through 
telephone or other approved access.
    (2) Nasdaq Market Makers may use such approved access to transmit 
orders for execution on the Corporation. Market Makers, via the 
facilities of the Corporation, may send orders via approved access to 
any Nasdaq Market Maker in each Nasdaq[/NM] security in which it 
displays quotations.
    (3)--No change.
    (4) No Market Maker shall permit the imposition of any access or 
execution fee, or any other fee or charge, with respect to transactions 
in Nasdaq[/NM] Securities effected with Nasdaq Market Makers that are 
communicated to the Corporation through telephone access.
    (b)--No change.
    (c) OTC/UTP Regulatory Halts. Whenever, in the exercise of its 
regulatory function, the OTC/UTP Listing [Primary] Market for a 
Nasdaq[/NM] Security determines that an OTC/UTP Regulatory Halt is 
appropriate, the Corporation shall halt or suspend trading in that 
security until the notification by the OTC/UTP Listing [Primary] Market 
that the halt or suspension is no longer in effect. The Corporation 
will assume that adequate publication or dissemination has occurred 
upon the expiration of one hour after initial publication in a national 
news dissemination service of the information that gave rise to an OTC/
UTP Regulatory Halt and may, at its discretion, reopen trading at that 
time, notwithstanding notification from the OTC/UTP Listing [Primary] 
Market that the halt or suspension is no longer in effect.
    (d) Applicability. The following rules of the Corporation will not 
be applicable to transactions on the Corporation in Nasdaq[/NM] 
Securities: rules 7.16, 7.55-7.57.
* * * * *
    Orders and Modifiers
    Rule 7.31(a)--(c)--No change.
    (d) Inside Limit Order. A Limit Order, which, if routed away 
pursuant to rule 7.37(d), will be routed to the market participant with 
the best displayed price. Any unfilled portion of the order will not be 
routed to the next best price level until all quotes at the current 
best bid or offer are exhausted. If the order is no longer marketable 
it will be ranked in the Arca Book pursuant to rule 7.36. [Reserved.]
    (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. The 
NBBO price protection provision set forth in rule 7.37 will not apply 
to immediate-or-cancel orders in Nasdaq securities.
    (f)--(g)--No change.
    (h) Working Order. Any order with a conditional or undisplayed 
price and/or size designated as a ``Working Order'' by the Corporation, 
including, without limitation:
    (1)--No change.
    (2) Discretionary Order. An order to buy or sell a stated amount of 
a security at a specified, undisplayed price (the ``discretionary 
price''), in addition to at a specified, displayed price (``displayed 
price.'')
    (A) Passive Discretionary Order. A Discretionary Order may be 
designated as a Passive Discretionary Order and such order will be 
routed pursuant to rule 7.37(d) only if the displayed price is 
marketable against an away market participant.
    (i) For Passive Discretionary Orders in exchange-listed securities, 
if the discretionary price is marketable, such order will only interact 
with trading interest in the Arca Book pursuant to rule 7.37(b)(2) and 
will not be routed away. A Passive Discretionary Order for ITS Trade-
Through Exempt Securities will be permitted to trade at a price no more 
than three cents ($0.03) away from the NBBO displayed in the 
Consolidated Quote.
    (ii) For Passive Discretionary Orders in Nasdaq securities, if the 
discretionary price can be matched against orders in the Arca Book, 
such order will intereact with trading interest in the Arca Book 
pursuant to 7.37(b)(2). The NBBO price protection provision set forth 
in rule 7.37 will not apply to Passive Discretionary Orders in Nasdaq 
securities.
    (B) Discretion Limit Order. A Discretionary Order may be designated 
as a Discretion Limit Order for Nasdaq securities only. If the 
discretionary price of a Discretion Limit Order can be matched against 
trading interest in the Arca Book, then such order will be executed at 
the discretionary price or better. If the discretionary price of a 
Discretion Limit Order can be matched against an away market 
participant, then such order will be routed pursuant to rule 7.37(d) 
but only if the displayed share size of the Discretion Limit Order is 
equal to or less than the displayed share size of the away market 
participant. The NBBO price protection provision set forth in rule 7.37 
will not apply to Discretion Limit Orders in Nasdaq securities.
    (3) Reserve Order. A limit order with a portion of the size 
displayed and with a reserve portion of the size (``reserve size'') 
that is not displayed on the Corporation.
    (A) Sweep Reserve Order. A Reserve Order may be designated as a 
Sweep Reserve Order. Based upon a User's instruction, if the displayed 
price of a Sweep Reserve Order is marketable

[[Page 4529]]

against an away market participant(s), then such order will be routed 
(i) serially as component orders, such that each component corresponds 
to the displayed price, or (ii) only once in its entirety, including 
both the displayed and reserve portions.
    (B) Random Reserve Order. A Reserve Order designated as a Random 
Reserve Order will have a random reserve value which, as a range of 
round lots, will vary the displayed size of the Reserve Order. A random 
reserve value set to zero will permit the displayed size of the Reserve 
Order to vary to within 20% of the original specified displayed size.
    (i)--(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 ITS 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. The NBBO price protection 
provision set forth in rule 7.37 will not apply to NOW Orders in Nasdaq 
securities.
    (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 ITS 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 NBBO price protection provision set forth in Rule 7.37 will not 
apply to PNP Orders in Nasdaq securities.
    (x)--(z)--No change.
    (aa)--(bb)--Reserved.
    (cc) Pegged Order. A limit order to buy or sell a stated amount of 
a security at a display price set to track the current bid or ask of 
the NBBO in an amount specified by the User. The associated price of 
each Pegged Order that is updated will be assigned a new entry time 
with priority in accordance with rule 7.36(a). A Pegged Order may be 
designated as a Reserve Order or Discretionary Order.
* * * * *
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, Passive Discretionary, Discretion Limit (except for 
exchange-listed securities), IOC Cross and PNP Cross orders in Nasdaq 
securities or 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)--No change.
    (b)(1)--No change.
    (2) Step 3: Working Order Process.
    (A) An incoming marketable order shall be matched for execution 
against orders in the Working Order Process in the following manner:
    (i)--(iii)--No change.
    (iv) Determination of a Passive Discretionary Order's Execution 
Price.
    (a) For Nasdaq Securities, if the BBO is outside the NBBO and a 
Passive Discretionary Order(s) within the Working Order Process has a 
discretionary price worse than the NBBO, then the incoming order will 
execute against such Passive Discretionary Order(s) at the price of the 
incoming order or the displayed price of the Discretionary Order(s), 
whichever is better.
    (b) For Nasdaq Securities, if the BBO is outside the NBBO and a 
Passive Discretionary Order(s) within the Working Order Process has a 
discretionary price equal to or better than the NBBO, then the incoming 
order will execute against such Passive Discretionary Order(s) pursuant 
to subsection (2)(A)(ii) above.
    (c) For ITS Trade-Through Exempt Securities (as defined in Rule 
7.37), if the BBO is outside the NBBO and a Passive Discretionary 
Order(s) within the Working Order Process has a discretionary price 
worse than the NBBO by three cents ($0.03) or less, the incoming order 
will execute against such Passive Discretionary Order(s) at the price 
of the incoming order or the displayed price of the Discretionary 
Orders(s), whichever is better.
    (v)--No change.
    (B) An incoming order that is not marketable shall be matched for 
execution against orders in the Working Order Process in the following 
manner:
    (i)--(ii)--No change.
    (C) With the exception of Passive Discretionary Orders and 
Discretion Limit Orders, [I]if any change in the NBBO or other 
available away trading interest would cause a potential match between 
the away order and an order in the Working Order Process, a commitment 
to trade shall be sent to that market center or market participant 
pursuant to Step 5 below after having proceeded through Step 4.
    (i) Passive Discretionary Orders will be routed away only if the 
displayed price is marketable against an away market participant.
    (ii) Discretion Limit Orders will be routed away only if the 
displayed share size of the Discretion Limit Order is equal to or less 
than the displayed share size of the away market participant.
    (c)--(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, Nasdaq 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. 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

Purpose
    1. Proposed New Order Types
    As part of its ongoing preparation for the trading of Nasdaq 
securities on the Archipelago Exchange (``ArcaEx'')

[[Page 4530]]

facility pursuant to UTP,\4\ PCX proposes to adopt several new order 
types, which are currently in use on the Archipelago electronic 
communication network (``ECN'').\5\ These proposed order types will 
apply to both Nasdaq and listed securities traded on ArcaEx.\6\ The 
Exchange believes that these order types will provide ETP Holders \7\ 
and Sponsored Participants \8\ (collectively ``Users'') greater 
flexibility in determining how their orders will be executed. The 
proposed order types are discussed below.
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    \4\ The Nasdaq UTP Plan was initially approved in 1990. See 
Securities Exchange Act Release No. 28146 (June 26, 1990), 55 FR 
27919 (July 6, 1990) (S7-24-89). It has subsequently been amended on 
several occasions to, among other things, admit new Participants. 
See also Securities Exchange Act Release No. 46381 (August 19, 
2002), 67 FR 54687 (August 23, 2002) (S7-24-89) (Order approving 
most recent amendments to Nasdaq UTP Plan, the 13th Amendment).
    \5\ The broker-dealer commonly referred to as the Archipelago 
ECN is Archipelago Securities, a wholly owned subsidiary of 
Archipelago Holdings LLC and a member of the NASD. The ECN function 
will cease to operate as such once all the Nasdaq securities have 
been transferred to ArcaEx.
    \6\ The proposed Discretion Limit order type will apply to 
Nasdaq securities only. See proposed PCXE rule 7.31(h)(2)(B).
    \7\ See PCXE rule 1.1(n).
    \8\ 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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    a. Inside Limit Order
    An Inside Limit Order is a limit order that is to be executed in 
whole or in part on ArcaEx, and the portion not so executed would be 
routed pursuant to rule 7.37(d) to the market participant \9\ with the 
best displayed price. Any unfilled portion of the order would not be 
routed to the next best price level until all quotes at the current 
best bid or offer are exhausted. For example, after having proceeded 
through the four order execution processes of the ArcaEx Book,\10\ 
there remains an unexecuted portion of an Inside Limit Order to buy at 
a price of 12.50. ArcaEx would route the order to the away market 
participant with the best displayed offer. Suppose the best displayed 
offer by other market participants is Market A at 12.45, Market B at 
12.46, Market C at 12.47, and Market D at 12.50. The Inside Limit Order 
would be routed first to Market A at 12.45. The balance of the Inside 
Limit Order would not be routed to the next price level (i.e., Market B 
at 12.46) until the current offer is exhausted. Each successive number 
of shares remaining (if any) would be routed at the next price level in 
the same manner. If the Inside Limit Order is no longer marketable it 
would be ranked in the Arca Book pursuant to rule 7.36.
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    \9\ See PCXE rule 1.1(w) (definition of ``market participant'').
    \10\ 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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    b. Discretionary Orders
    Currently, a User can submit a Discretionary Order, which is an 
order to buy or sell a stated amount of a security at a specified, 
undisplayed price (the ``discretionary price''), as well as at a 
specified, displayed price. The undisplayed prices of a Discretionary 
Order are represented in the Working Order Process \11\ and can be 
matched with orders on the other side of the market under prescribed 
conditions. Since the Discretionary Order type allows a User to 
represent a single order at multiple price points, investors are able 
to express their trading interest more accurately than is possible with 
traditional order types. The Exchange is proposing to adopt two new 
variations of the Discretionary Order called a ``Passive Discretionary 
Order'' and a ``Discretion Limit Order,'' which would provide Users 
with more flexibility when such orders are routed to away market 
participants. A summary of these proposed order types is discussed 
below.
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    \11\ The Working Order Process is the third step in the ArcaEx 
execution algorithm. Working Orders are defined to include any order 
with a conditional or undisplayed price and/or size, including All-
or-None, Discretionary, and Reserve Orders. See PCXE rule 7.37(b)(2) 
(description of ``Working Order Process'').
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    i. Passive Discretionary
    The Exchange proposes to add PCXE rule 7.31(h)(2)(A) to define a 
Passive Discretionary Order. A Discretionary Order may be designated as 
a Passive Discretionary Order and such order would be routed pursuant 
to rule 7.37(d) only if the displayed price is marketable against an 
away market participant. If the discretionary price of a Passive 
Discretionary Order were marketable, such order would only interact 
with trading interest in the ArcaEx Book pursuant to rule 7.37(b)(2) 
and would not be routed away. Under the proposal, the Passive 
Discretionary order type will be available for exchange-listed and 
Nasdaq securities. For Passive Discretionary Orders in exchange-listed 
securities, if the discretionary price is marketable, such order will 
only interact with trading interest in the ArcaEx Book pursuant to rule 
7.37(b)(2) and will not be routed away. A Passive Discretionary Order 
for ITS 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. For Passive 
Discretionary Orders in Nasdaq securities, if the discretionary price 
can be matched against orders in the ArcaEx Book, then such order will 
interact with trading interest in the ArcaEx Book pursuant to 
7.37(b)(2). The NBBO price protection provision set forth in rule 7.37 
will not apply to Passive Discretionary Orders in Nasdaq securities.
    To illustrate how this order type is processed by the ArcaEx 
trading system, suppose that a User submits a Passive Discretionary 
Order to buy 1000 shares at 12.48 (discretion to 12.50). After first 
attempting to match the order with available trading interest in the 
ArcaEx Book (up to a price of 12.50), ArcaEx would route the order to 
an away market participant, but only if the offer published by the 
market participant is equal to or less than the displayed price of 
12.48. In the event that a Passive Discretionary Order routed from 
ArcaEx to another market participant is not executed in its entirety at 
the other market participant's quote, ArcaEx would attempt to match the 
residual against trading interest in the ArcaEx Book pursuant to rule 
7.37. Finally, if the Passive Discretionary Order is no longer 
marketable it would be ranked in the ArcaEx Book pursuant to rule 7.36.
    ii. Discretion Limit
    The Exchange also proposes to add PCXE rule 7.31(h)(2)(B) to define 
a Discretion Limit Order. A Discretionary Order may be designated as a 
Discretion Limit Order for Nasdaq securities only. If the discretionary 
price of a Discretion Limit Order could be matched against trading 
interest in the ArcaEx Book, then such order would be executed at the 
discretionary price or better against the displayed share size of 
available trading interest in the ArcaEx Book, regardless of size. If 
the discretionary price of a Discretion Limit Order could be matched 
against an away market participant, then such order would be routed 
pursuant to rule 7.37(d) but only if the displayed share size of the 
Discretion Limit Order is equal to or less than the displayed share 
size of the away market participant. As discussed in more detail in 
section 2 below, the Exchange is proposing that the NBBO price 
protection provision set forth in rule 7.37 will not apply to 
Discretion Limit Orders.
    c. Reserve Orders
    Under current PCXE rule 7.31(h)(3), a Reserve Order is a limit 
order with a portion of the size displayed and with a reserve portion 
of the size (``reserve size'') that is not displayed on the

[[Page 4531]]

ArcaEx Book. For example, a User could submit a Reserve Order to buy 
5000 shares of XYZ security at 20 with a request that 1000 shares are 
displayed and 4000 shares, as the reserve size, are not displayed. With 
this filing, the Exchange is proposing to adopt two new variations of 
the Reserve Order called a ``Sweep Reserve Order'' and a ``Random 
Reserve Order.'' These proposed order types would be ranked and 
maintained in the Display Order Process \12\ and/or Working Order 
Process of the ArcaEx Book according to price-time priority and would 
be processed for internal matches in a manner no different than a 
standard Reserve Order pursuant to PCXE rule 7.37(b)(2). The proposed 
rule change regarding Sweep Reserve Orders merely provides a 
clarification as to the manner in which such orders would be treated 
through ArcaEx's trading system when the routing of these orders to 
other market participants is required. In the case of a Random Reserve 
Order, the proposed rule change would allow a User to define the 
original display quantity and a random reserve value that would be used 
to determine the displayed quantity within a defined range each time it 
is replenished. These proposed order types are discussed separately 
below.
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    \12\ 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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    i. Sweep Reserve Order
    Under proposed PCXE rule 7.31(h)(3)(A), a Reserve Order may be 
designated as a Sweep Reserve Order. Based upon a User's instruction, 
if the displayed price of a Sweep Reserve Order is marketable against 
an away market participant(s), then such order will be routed (i) 
serially as component orders, such that each component corresponds to 
the displayed price, or (ii) only once in its entirety, including both 
the displayed and reserve portions. The Exchange believes that this 
rule change codifies current order routing methodology, and that the 
proposed Sweep Reserve Order type is clearly implied in current PCXE 
rule 7.37(d)(2)(A)(ii).
    ii. Random Reserve Order
    The Exchange proposes to add PCXE rule 7.31(h)(3)(B) to define a 
Random Reserve Order. Under the rule proposal, a User could define not 
only a display and reserve quantity, but also a random reserve delta 
that could be used to determine the displayed quantity within a defined 
range each time it is replenished in a random amount (rounded to the 
nearest round lot). Users are required to display at least 100 shares 
for all Reserve Orders including Random Reserve Orders. The following 
examples illustrate the use of the Random Reserve Order.
    Suppose a User entered a Random Reserve Order for 10,000 shares 
with a display quantity of 2000 shares and a random reserve delta of 
200 shares. This order would randomly display orders at 1800 (200 
shares less than the original display quantity), 1900 (100 shares less 
than the original display quantity), 2000, 2100 (100 shares more than 
the original display quantity) or 2200 shares (200 shares more than the 
original display quantity) each time the displayed portion of the order 
is replenished. If the User does not specify the random reserve delta 
or the random reserve delta is set to zero, the ArcaEx system would 
assign the displayed size of the Reserve Order to vary to within 20% of 
the original specified displayed size. In the example above, the 
displayed amount would fall within a 400-share range (i.e., 20% of 2000 
shares is 400 shares).
    Should a User enter a Random Reserve Order with a display amount of 
500 shares or less and a random reserve delta that is unspecified or 
set to zero, the order would be handled as a regular Reserve Order. 
Suppose a User entered a Random Reserve Order with a display amount of 
100 shares, a reserve amount of 1,000 shares, and a random reserve of 
zero. The ArcaEx system would treat this order as a regular Reserve 
Order and the display quantity will be refreshed at the original 
displayed size (100 shares), i.e., the ArcaEx system would not vary the 
display quantity for this order.
    d. Pegged Orders
    The Exchange is proposing to modify the ArcaEx trading system to 
accept Pegged Orders. A Pegged Order is a limit order to buy or sell a 
stated amount of a security at a display price set to track the current 
bid or ask of the NBBO in an amount specified by the User.\13\ The 
tracking of the relevant Consolidated Quote information for Pegged 
Orders would occur on a real-time basis in a dynamic fashion. The 
associated price of each Pegged Order that is updated would be assigned 
a new entry time with priority in accordance with rule 7.36(a). A 
Pegged Order may be designated as a Reserve Order or Discretionary 
Order and would be subject to the applicable order execution rules. 
Finally, Pegged Orders are only eligible during the Core Session.
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    \13\ See proposed PCXE rule 7.31(cc) (definition of ``Pegged 
Order'').
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    2. Amendment to PCXE Rule 7.37
    The Exchange's current rules governing the order execution 
processes for orders in the ArcaEx Book 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 requirements of this rule do not apply to orders 
designated as Immediate-or-Cancel (``IOC''), NOW and Post No Preference 
(``PNP'') in certain exchange-traded funds (``ETFs'') that are subject 
to the Commission's order granting a de minimis exemption from the 
trade-through restrictions of the Intermarket Trading System (``ITS'') 
Plan; 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.\14\ The current proposal would also broaden 
this exception to include Passive Discretionary, IOC Cross and PNP 
Cross order types.\15\ The definition for a Passive Discretionary Order 
includes a provision clarifying the application of the Commission's de 
minimis exemption order. The Exchange is also proposing that the 
aforementioned NBBO price protection restriction would not apply to 
certain existing order types (IOC, NOW and PNP orders) and proposed new 
order types (Passive Discretionary, Discretion Limit, IOC Cross and PNP 
Cross) \16\ in Nasdaq securities. The definition for IOC, NOW, PNP, 
Passive Discretionary and Discretion Limit order types \17\ includes a 
provision clarifying that the NBBO price protection requirement set 
forth in rule 7.37 will not apply to these order types in Nasdaq 
securities. Unlike the market for listed securities, there is no 
linkage between participants in the Nasdaq UTP Plan and, therefore, no 
rules that prohibit a participant from trading through another 
participant's quote.\18\ Consequently, the Exchange believes that it 
would not be praticable to attempt to provide such orders with 
intermarket price protection. The

[[Page 4532]]

Exchange also believes that these proposed orders are sophisticated 
types of orders, and persons using these orders will understand the 
benefits and limitations of their use. Moreover, such orders are still 
subject to a broker's duty of best execution for its customer.
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    \14\ See Securities Exchange Act Release No. 46428 (August 28, 
2002), 67 FR 56607 (September 4, 2002) (Order Pursuant to Section 
11A of the Act and Rule 11Aa3-2(f) thereunder Granting a De Minimus 
Exemption for Transactions in Certain ETFs from the ITS Trade-
Through Provisions. See also Securities Exchange Act Release No. 
46684 (October 17, 2002), 67 FR 65618 (October 25, 2002) (SR-PCX-
2002-69).
    \15\ The Exchange notes that it has filed a separate proposed 
rule change relating to IOC Cross and PNP Cross Orders. See 
Securities Exchange Act Release No. 47010 (December 16, 2002), 67 FR 
78554 (December 24, 2002) (SR-PCX-2002-74).
    \16\ Id.
    \17\ See generally PCXE rule 7.31.
    \18\ See note 1, supra.
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    3. Working Order Process
    The Exchange proposes the following conforming changes to certain 
provisions of the Working Order Process set forth in PCXE rule 
7.37(b)(2):
    a. Current PCXE Rule 7.37(b)(2)(C)--This section has been modified 
to clarify the conditions in which a Passive Discretionary Order and 
Discretion Limit Order would be routed to an away market participant's 
quote. Passive Discretionary Orders would be routed away only if the 
displayed price is marketable against an away market participant. 
Discretion Limit Orders would be routed away only if the displayed 
share size of such order is equal to or less than the displayed share 
size of the away market participant.
    b. Proposed PCXE Rule 7.37(b)(2)(A)(iv)--Several pricing scenarios 
have been added to the Working Order Process regarding incoming 
marketable orders that could be matched against a Passive Discretionary 
Order. First, for Nasdaq securities, if the BBO is outside the NBBO and 
a Passive Discretionary Order(s) within the Working Order Process has a 
discretionary price worse than the NBBO, then the incoming order would 
execute against such Passive Discretionary Order(s) at the price of the 
incoming order or the displayed price of the Discretionary Order(s), 
whichever is better. Second, for Nasdaq securities, if the BBO is 
outside the NBBO and a Passive Discretionary Order(s) within the 
Working Order Process has a discretionary price equal to or better than 
the NBBO, then the incoming order would execute against such Passive 
Discretionary Order(s) pursuant to current rule 7.37(b)(2)(A)(ii). 
Finally, for ITS Trade-Through Exempt Securities (as defined in rule 
7.37), if the BBO is outside the NBBO and a Passive Discretionary 
Order(s) within the Working Order Process has a discretionary price 
worse than the NBBO by three cents ($0.03) or less, the incoming order 
would execute against such Passive Discretionary Order(s) at the price 
of the incoming order or the displayed price of the Discretionary 
Orders(s), whichever is better.
    4. Technical Changes
    Minor technical changes have been made throughout PCXE rules 1.1 
and 7.18 to conform to the Nasdaq UTP Plan, which extends UTP to Nasdaq 
SmallCap securities. Accordingly, the Exchange is proposing to delete 
references to the term ``Nasdaq/NM Security'' and replacing it with 
``Nasdaq Security.'' In addition, several definitions contained in rule 
1.1 are being amended to reflect the change in name of the Nasdaq UTP 
Plan. Finally, current PCXE rule 1.1(jj), which defines the term ``OTC/
UTP Primary Market,'' is being amended to reflect that the Listing 
Market, rather than the Primary Market, would have the authority to 
call a Regulatory Halt pursuant to PCXE rule 7.18(c). A definition of 
``OTC/UTP Listing Market'' is being adopted from the Nasdaq UTP 
Plan.\19\
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    \19\ Id.
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    The Exchange 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 provides market participants with greater 
flexibility in determining how their orders would be executed.
Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with section 6(b) of the Act, \20\ in general, and further the 
objectives of section 6(b)(5),\21\ 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. In addition, the Exchange believes that the proposed 
rule change is consistent with provisions of section 11A(a)(1)(B) of 
the Act,\22\ which states that new data processing and communications 
techniques create the opportunity for more efficient and effective 
market operations.
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    \20\ 15 U.S.C. 78f(b).
    \21\ 15 U.S.C. 78f(b)(5).
    \22\ 15 U.S.C. 78k-1(a)(1)(B).
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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

    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 PCX 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, 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 such 
filings will also be available for inspection and copying at the 
principal office of the PCX. All submissions should refer to File No. 
SR-PCX-2002-75 and should be submitted by February 19, 2003.

    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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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-1978 Filed 1-28-03; 8:45 am]
BILLING CODE 8010-01-P