[Federal Register Volume 68, Number 58 (Wednesday, March 26, 2003)]
[Notices]
[Pages 14735-14737]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-7227]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47549; File No. SR-PCX-2003-04]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Pacific Exchange, Inc. To 
Amend its Fee Schedule for Services Provided to ETP Holders and 
Sponsored Participants That Trade Nasdaq Securities on the Archipelago 
Exchange

March 20, 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 January 30, 2003, the Pacific Exchange, Inc. (``PCX'' or 
``Exchange''), through its wholly owned 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 Exchange. On March 
19, 2003, the Exchange amended the proposal.\3\ The PCX has designated 
this proposal as one establishing or changing a due, fee, or other 
charge imposed by the PCX under section 19(b)(3)(A)(ii) of the Act,\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, as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See March 18, 2003 letter from Rhonda Y. Jones, Regulatory 
Policy, PCX, to Joseph P. Morra, Special Counsel, Division of Market 
Regulation, SEC, and attachments (``Amendment No. 1''). Amendment 
No. 1 replaces and supersedes the original proposed rule change in 
its entirety. For purposes of calculating the 60-day abrogation 
period, the Commission considers the period to have commenced on 
March 19, 2003, the date the PCX filed Amendment No. 1. See section 
19(b)(3)(C) of the Act, 15 U.S.C. 78s(b)(3)(C).
    \4\ 15 U.S.C. 78s(b)(3)(A)(ii).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange, through PCXE, proposes to amend its fee schedule for 
services provided to ETP Holders and Sponsored Participants that trade 
Nasdaq securities on the Archipelago Exchange, the equities trading 
facility of PCXE. The text of the proposed rule change is available at 
the PCX and at the Commission.

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 its proposal and discussed any 
comments it received regarding the proposal. 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
    The Exchange proposes to amend the fees charged to ETP Holders \5\ 
and Sponsored Participants \6\ (collectively ``Users'') that access the 
ArcaEx trading facility to include certain fees and credits for Nasdaq 
securities. ArcaEx is scheduled to begin trading Nasdaq securities 
pursuant to unlisted trading privileges \7\ in the early first quarter 
of 2003. The Exchange proposes to adopt fees for Nasdaq securities that 
parallel the Exchange's rate structure for exchange-listed securities.
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    \5\ See PCXE Rule 1.1(n).
    \6\ 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).
    \7\ See Joint Self-Regulatory Organization Plan Governing the 
Collection, Consolidation and Dissemination of Quotation and 
Transaction Information for Nasdaq-Listed Securities Traded on 
Exchanges (``Nasdaq UTP Plan''). The participants in the Nasdaq UTP 
Plan are the National Association of Securities Dealers, Inc. 
(``NASD''), the American Stock Exchange LLC (``Amex''), the Boston 
Stock Exchange, Inc. (``BSE''), the Chicago Stock Exchange, Inc. 
(``CHX''), the Cincinnati Stock Exchange, Inc. (``CSE''), the 
Pacific Exchange, Inc. (``PCX''), and the Philadelphia Stock 
Exchange, Inc. (``Phlx''). Eligible securities under the Nasdaq UTP 
Plan are defined in section III.B.
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Trade-Related Charges
    (a) Transaction Fees. The PCX currently charges all Users a 
transaction fee of $0.003 per share for orders in exchange-listed 
securities that extract liquidity by responding to, and executing 
against, orders residing in the ArcaEx Book (``Book'').\8\ The Exchange 
proposes to charge this same transaction fee to Users for orders in 
Nasdaq securities. The Exchange believes that this proposed fee will 
provide incentives for increasing order flow to ArcaEx, and will have 
the effect of attracting resting limit orders into the Book, which will 
help promote liquidity, transparency, and in turn, price discovery. The 
Exchange notes that the following items continue to be excluded from 
this fee: (i) Directed Orders, regardless of account type, that are 
matched within the Directed Order Process;\9\ (ii) Directed Orders for 
the account of a retail public customer that are executed partially or 
in their entirety via the other Order processes;\10\ (iii) orders 
executed in the Opening Auction and the Market Order Auction;\11\ (iv) 
Cross Orders;\12\ and (v) participants in the Nasdaq UTP Plan that 
transmit orders via telephone.\13\
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    \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 Rules 7.36 and 
7.37 for a detailed description of these order execution processes.
    \9\ 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 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 a particular Market Maker by the 
User. See PCXE Rule 7.37(a)(description of ``Directed Order 
Process'').
    \10\ If a retail public customer order has not been executed in 
its entirety after progressing through the Directed Order, Display 
Order, Working Order, and Tracking Order processes, the remaining 
portion of such order, if eligible, will be routed to another market 
center or participant. Any executed portion of that order will be 
subject to the proposed transaction fee of $0.004 per share.
    \11\ See PCXE Rules 7.35(b) and (c) for a detailed description 
of the Opening Auction and the Market Order Auction, respectively.
    \12\ 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).
    \13\ See footnote 7, supra.
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    The PCX also proposes to charge a transaction fee of $0.004 per 
share for any unfilled or residual portion of a User's order in Nasdaq 
securities (including a retail public customer

[[Page 14736]]

order)\14\ that is routed away via ArcaEx and executed by another 
market center or participant. The proposed transaction fee of $0.004 
per share is the same amount that is currently applied to orders in 
exchange-listed securities that are routed away and executed by another 
market center or participant. The Exchange believes that this fee is 
reasonable and is structured to allocate fairly the costs of operating 
the ArcaEx facility.
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    \14\ See footnote 10, supra.
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    (b) Odd and Mixed Lots. The Exchange proposes to charge all odd-lot 
orders executed in Nasdaq securities (including the odd-lot portion of 
a mixed lot) a $0.03 per share transaction fee for orders that extract 
liquidity by responding to, and executing against, orders residing in 
the ArcaEx Book. In addition, the PCX proposes to adopt a $0.03 per 
share transaction fee for orders in Nasdaq securities that are routed 
away and executed by another market center or participant. These 
proposed transaction fees for Nasdaq securities are of the same amount 
as currently applied to odd-lot orders in exchange-listed securities. 
The PCX notes that odd-lot orders that are created as a result of a 
partial fill of a round lot will be excluded from these fees.
Market Maker Transaction Credits
    The Exchange proposes to increase the level of the transaction 
credit paid to Market Makers who provide liquidity in exchange-listed 
securities. Currently, Market Makers who enter Q Orders \15\ in 
exchange-listed securities that are subsequently executed against 
incoming marketable orders, earn a credit of $0.0015 per share.\16\ The 
Exchange proposes to increase the level of the transaction credit for 
exchange-listed securities from $0.0015 to $0.0025 per share.\17\ The 
Exchange is also proposing to establish a $0.002 credit per share for 
Nasdaq securities. In addition, $0.02 per share will be credited to any 
Market Maker that executes against an odd-lot order in a Nasdaq 
security during the Odd Lot Tracking Process.\18\ These credits are 
intended to provide an additional incentive to firms to become Market 
Makers in exchange-listed and Nasdaq securities and to build liquidity 
in the Book, which will foster price competition and order interaction.
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    \15\ Q Orders are limit orders that are submitted to ArcaEx by a 
Market Maker in those securities in which the Market Maker is 
registered to trade. See PCXE Rule 7.31(k).
    \16\ The transaction credit applied to orders in Exchange-Traded 
Funds (``ETFs'') and American Depositary Receipts (``ADRs'') is 
currently $0.002 per share.
    \17\ The current $0.02 per share credit that is provided to any 
Market Maker that executes against an odd-lot order in the Odd Lot 
Tracking Order Process will remain in effect.
    \18\ The Tracking Order Process is the fourth step of the ArcaEx 
execution algorithm. If the unfilled marketable order (or portion of 
an order) that enters the Tracking Order Process is an odd lot, such 
order will be executed against a Market Maker that is registered as 
an Odd Lot Dealer. See PCXE Rules 7.31(g) and 7.37(c).
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Other Fees, Charges and Credits
    (a) User Transaction Credit. PCX proposes to establish a 
transaction credit for Users who provide liquidity in the Book in 
Nasdaq securities. Under the proposal, a User that enters a resting 
limit order into the Book that is subsequently executed against an 
incoming marketable order in a Nasdaq security will receive a credit of 
$0.002 per share. This credit is designed to enhance market efficiency 
and fairness by offering incentives to market participants that provide 
liquidity through ArcaEx. Any credit received by a User will be applied 
to reduce any charges payable to ArcaEx. Any remaining balance may be 
paid directly to the User.
    (b) ``Drop Copy'' Processing Fee. The PCX currently charges Market 
Makers a $0.001 per share fee for processing ``drop copies''\19\ of 
their transactions executed on other market centers. The Exchange 
proposes to broaden the application of this fee to include any ETP 
Holders that want to receive drop copies of such off-board 
transactions. The current fee of $0.001 per share will remain in effect 
and will apply to such off-board transactions in exchange-listed and 
Nasdaq securities. In addition, the Exchange notes that Market Maker 
transactions that are subject to this fee will continue to be 
ineligible to receive the Market Maker Transaction Credit or User 
Transaction Credit. The Exchange believes that this fee is reasonable 
and is structured to allocate fairly the costs of operating the ArcaEx 
facility.
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    \19\ Under the current fee schedule, a ``drop copy'' is an 
electronic report of a transaction for a Market Maker's account that 
is executed on another market center and that has been prepared for 
informational purposes (e.g., Market Maker inventory tracking, 
surveillance audit trail). Market Maker transactions that are 
subject to this fee will not be eligible to receive the Market Maker 
Transaction Credit or User Transaction Credit.
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2. Statutory Basis
    The Exchange believes the proposal is consistent with section 6(b) 
of the Act,\20\ in general, and section 6(b)(4) of the Act,\21\ in 
particular, in that it provides for the equitable allocation of 
reasonable dues, fees and other charges among its members.
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    \20\ 15 U.S.C. 78f(b).
    \21\ 15 U.S.C. 78f(b)(4).
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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 proposed rule change has become effective pursuant to section 
19(b)(3)(A)(ii) of the Act \22\ and subparagraph (f)(2) of Rule 19b-4 
thereunder,\23\ because it establishes or changes a due, fee, or other 
charge. At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.
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    \22\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \23\ 17 CFR 240.19b-4(f)(2).
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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 proposal 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 filing will also be available for 
inspection and copying at the principal office of the PCX. All 
submissions should refer to file number SR-PCX-2003-04 and should be 
submitted by April 16, 2003.


[[Page 14737]]


    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\24\
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    \24\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-7227 Filed 3-25-03; 8:45 am]
BILLING CODE 8010-01-P