[Federal Register Volume 68, Number 129 (Monday, July 7, 2003)]
[Notices]
[Page 40318]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-17054]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48106; File No. SR-PCX-2002-62]


Self Regulatory Organizations; The Pacific Exchange, Inc.; Order 
Granting Approval to Proposed Rule Change To Amend the PCX's Market 
Data Revenue Sharing Program for Tape A Securities Traded on the 
Archipelago Exchange

June 27, 2003.
    On October 4, 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\ a proposed rule change to modify its 
market data revenue sharing program for Tape A securities by increasing 
the level of the transaction credits paid with respect to transactions 
in Tape A securities from 40% to 50% for Users (as defined in the 
notice) that meet certain requirements. The proposed rule change, as 
amended, was published for notice and comment in the Federal Register 
on November 19, 2002.\2\ The Commission received two comments on the 
proposal.\3\ On May 12, 2003, the PCX responded to the comment 
letters.\4\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ See Securities Exchange Act Release No. 46805 (November 8, 
2002), 67 FR 69794.
    \3\ See December 10, 2002 letter from Darla C. Stuckey, 
Corporate Secretary, The New York Stock Exchange, Inc. (``NYSE''), 
to Jonathan G. Katz, Secretary, Commission (``NYSE Letter''); 
December 20, 2002 letter from W. Hardy Callcott, Senior Vice 
President and General Counsel, Charles Schwab & Co., Inc., to 
Jonathan G. Katz, Secretary, Commission (``Schwab Letter''). The 
Schwab Letter comments generally on market data revenue sharing, and 
does not specifically address the PCX's proposal to increase the 
percentage of market data revenue sharing in Tape A securities from 
40% to 50%. The NYSE Letter incorporates by reference comments filed 
in previous proposed rule changes on the subject of market data 
revenue sharing programs, and further objects to the proposed rule 
change because the NYSE believes the proposal (1) ``would cause NYSE 
to fund even more PCX payment for [order] flow than it currently 
does, which payments withdraw orders from the auction for reasons 
other than best execution''; (2) would present conflict of interest 
problems for PCX broker-dealers, thereby undermining the discharge 
of best execution obligations; and (3) ``would provide incentives 
for markets to purchase prints of trades not executed through their 
facilities,'' skewing the perception of a particular market's 
liquidity'' which would result in that market receiving market data 
revenue in contravention of the Consolidated Tape Association Plan.
    \4\ See May 12, 2002 letter from Kathryn L. Beck, Senior Vice 
President, General Counsel, Corporate Secretary, and Chief 
Regulatory Officer, PCX, to Joseph Morra, Special Counsel, Division 
of Market Regulation, Commission (``PCX Response Letter''). The PCX 
limited its response to the concerns raised in the NYSE Letter. In 
short, the PCX (1) stated it does not pay for order flow, and does 
not fund its market data revenue sharing program directly or 
indirectly; (2) denied that the market data revenue sharing program 
conflicts with broker-dealers' best execution obligations; and (3) 
states that the PCX cannot print trades that are executed elsewhere.
    The NYSE Letter, the Schwab Letter, and the PCX Response Letter 
are available in the Public Reference Room.
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    The PCX proposes to modify its Tape A market data revenue sharing 
program by increasing the percentage of transaction credits from 40% to 
50%, a percentage that is consistent with similar market data revenue 
sharing programs operated by other self-regulatory organizations.\5\ As 
set forth in its July 2, 2002 Order of Summary Abrogation (``Abrogation 
Order''),\6\ the Commission will continue to examine the issues 
surrounding market data fees, the distribution of market data rebates, 
and the impact of market data revenue sharing programs on both the 
accuracy of market data and on the regulatory functions of self-
regulatory organizations. In the interim, the Commission believes it is 
reasonable to allow the PCX to operate market data revenue sharing 
programs that place the PCX on substantially similar footing as other 
self-regulatory organizations.
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    \5\ See e.g., Securities Exchange Act Release No. 46911 
(November 26, 2002), 67 FR 72251 (December 4, 2002)(SR-BSE-2002-10).
    \6\ Securities Exchange Act Release No. 46159 (July 2, 2002), 67 
FR 45775 (July 10, 2002)(File Nos. SR-NASD-2002-61, SR-NASD-2002-68, 
SR-CSE-2002-06, and SR-PCX-2002-37)(Order of Summary Abrogation).
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    Thus, after careful review of the proposed rule change, the comment 
letters, and the PCX Response Letter, 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 \7\ and, in particular, the requirements of section 
6 of the Act \8\ and the rules and regulations thereunder. The 
Commission finds specifically that the proposed rule change is 
consistent with section 6(b)(5) of the Act,\9\ in that it is designed 
to promote just and equitable principles of trade, to foster 
cooperation and coordination with persons engaged in regulating 
securities transactions, and to remove impediments to and perfect the 
mechanism of a free and open market and a national market system.
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    \7\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \8\ 15 U.S.C. 78f.
    \9\ 15 U.S.C. 78f(b)(5).
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    The decision to allow the PCX to increase the percentage of 
transaction credits available from 40% to 50%, however, is narrowly 
drawn, and should not be construed as resolving the issues raised in 
the Abrogation Order, and does not suggest what, if any, future actions 
the Commission may take with regard to market data revenue sharing 
programs.
    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\10\ that the proposed rule change (SR-PCX-2002-62), be, and it 
hereby is, approved.
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    \10\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-17054 Filed 7-3-03; 8:45 am]
BILLING CODE 8010-01-P