[Federal Register Volume 68, Number 177 (Friday, September 12, 2003)]
[Notices]
[Pages 53770-53773]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-23289]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48456; File No. SR-PCX-2003-45]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Pacific Exchange, Inc. 
Relating to the Processing of Market Orders Prior to the Opening of the 
Primary Market

September 8, 2003.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934

[[Page 53771]]

(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on August 26, 2003, the Pacific Exchange, Inc. (``PCX'') submitted to 
the Securities and Exchange Commission (``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\ 17 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. With this 
filing, PCX proposes to amend its rules related to Market Order 
processing for exchange-listed securities and Nasdaq securities.\3\ 
Specifically, the proposed rule change would set forth: (1) The 
processing of Market Orders for exchange-listed securities and Market 
Orders for Nasdaq securities during the Market Order Auction (``MOA'') 
and transition to the Core Trading Session; \4\ and (2) the 
circumstances under which Market Orders for exchange-listed securities 
would be converted into Primary Only Orders (``PO Orders'') \5\ 
following the conclusion of the MOA.
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    \3\ See PCXE Rule 1.1(aa) for the definition of ``Nasdaq 
Security.''
    \4\ ArcaEx operates three trading sessions each day the PCXE is 
opened for business. The trading sessions are: (1) Opening Session; 
(2) the Core Session; and (3) the Late Trading Session. See PCXE 
Rule 7.34(a). The MOA occurs during the Opening Session. See PCXE 
Rule 7.34(a)(2) and PCXE Rule 7.35(c) for a detailed discussion of 
the Market Order Auction.
    \5\ For exchange-listed securities only, a PO Order is ``a 
market order that is to be routed as a market order to the primary 
market. Such PO Orders may be entered until a cut-off time as 
determined from time to time by the Corporation* * *'' See PCXE Rule 
7.31(x).
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    The text of the proposed rule change is below. Proposed additions 
are in italics and proposed deletions are in [brackets].
PCX Equities, Inc.
Rule 7; Equities Trading; Opening Session Auctions
Rule 7.35(a)-(d)--(No change.)
Rule 7.35(e) Transition to Core Trading Session.

    (1) For exchange-listed securities:
    (A) Limited Price Orders entered before 6:28 am (Pacific Time) 
shall participate in the Market Order Auction. Limited Price Orders 
designated for the Core Trading Session entered after 6:28 am (Pacific 
Time) shall become eligible for execution at 6:30 am (Pacific Time) or 
at the conclusion of the Market Order Auction, whichever is later.
    (B) [(2)] Market orders entered after 6:28 am (Pacific Time) and 
before 6:30 am (Pacific Time), which are eligible for either the Market 
Order Auction or the Core Trading Session, shall become eligible for 
execution at 6:30 am (Pacific Time) or at the conclusion of the Market 
Order Auction, whichever is later, unless otherwise provided in Rule 
7.35(c)(2)(C), Rule 7.35(e)(1)(E) or Rule 7.35(e)(1)(F).
    (C) [(3)] Stop Orders entered before or during the Opening Session 
become eligible for execution at 6:30 am (Pacific Time) or at the 
conclusion of the Market Order Auction, whichever is later.
    (D) Market orders entered before 6:28 am (Pacific Time), but 
unmatched during the Market Order Auction, shall be converted into PO 
Orders at 6:30 am (Pacific Time) or at the conclusion of the Market 
Order Auction, whichever is later, and thereafter routed to the primary 
market for execution.
    (E) Market orders entered on the same side of the Imbalance between 
6:28 am (Pacific Time) and the conclusion of the Market Order Auction 
are eligible for the Market Order Auction and shall be converted into 
PO Orders at 6:30 am (Pacific Time) or at the conclusion of the Market 
Order Auction, whichever is later, and thereafter routed to the primary 
market for execution.
    (F) If no Imbalance exists between 6:28 am (Pacific Time) and the 
conclusion of the Market Order Auction, any market orders entered 
during that time are ineligible for the Market Order Auction and shall 
be converted into PO Orders at 6:30 am (Pacific Time) or at the 
conclusion of the Market Order Auction, whichever is later, and 
thereafter routed to the primary market for execution.
    (G) Market orders entered at 6:30 am (Pacific Time) or at the 
conclusion of the Market Order Auction, whichever comes later, but 
before the primary market has opened, shall be converted into PO Orders 
and thereafter routed to the primary market for execution.
    (2) For Nasdaq securities:
    (A) Limited Price Orders entered before 6:28 am (Pacific Time) 
shall participate in the Market Order Auction. Limited Price Orders 
designated for the Core Trading Session entered after 6:28 am (Pacific 
Time) shall become eligible for execution at 6:30 am (Pacific Time) or 
at the conclusion of the Market Order Auction, whichever is later.
    (B) Market orders entered after 6:28 am (Pacific Time) and before 
6:30 am (Pacific Time), which is eligible for either the Market Order 
Auction or the Core Trading Session, shall become eligible for 
execution at 6:30 am (Pacific Time) or at the conclusion of the Market 
Order Auction, whichever is later, unless otherwise provided in Rule 
7.35(c)(2)(C), Rule 7.35(e)(1)(E) or Rule 7.35(e)(1)(F).
    (C) Stop Orders entered before or during the Opening Session become 
eligible for execution at 6:30 am (Pacific Time) or at the conclusion 
of the Market Order Auction, whichever is later.
    (D) Market orders entered before 6:28 am (Pacific Time), but 
unmatched during the Market Order Auction, shall become eligible for 
execution in the Core Trading Session at 6:30 am (Pacific Time) or at 
the conclusion of the Market Order Auction, whichever is later.
    (E) Market orders entered on the same side of the Imbalance between 
6:28 am (Pacific Time) and the conclusion of the Market Order Auction 
are ineligible for the Market Order Auction and shall be queued until 
6:30 am (Pacific Time) or at the conclusion of the Market Order 
Auction, whichever is later, at which time the queued market orders 
shall become eligible for execution during the Core Trading Session.
    (F) If no Imbalance exists between 6:28 am (Pacific Time) and the 
conclusion of the Market Order Auction, any market orders entered 
during that time shall be queued until 6:30 am (Pacific Time) or at the 
conclusion of the Market Order Auction, whichever is later, at which 
time those market orders shall become eligible for execution during the 
Core Trading Session.
    (f)--(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

1. Purpose
    With this filing, PCX proposes to amend its rules related to Market 
Order

[[Page 53772]]

processing of exchange-listed securities and Nasdaq securities. 
Specifically, PCX intends to amend PCXE 7.35(e) to set forth the 
treatment of Market Orders following the MOA and during the transition 
to the Core Trading Session.
a. Exchange-listed Securities
    Currently, Market Orders for exchange-listed securities that are 
entered on the same side of the Imbalance \6\ during the time period 
6:28 a.m. to 6:30 a.m. (Pacific Time) (hereinafter referred to as the 
``Core Freeze'') are queued for execution and released into the market 
following the MOA. Accordingly, at the conclusion of the MOA (6:30 a.m. 
Pacific Time), the orders are released for execution in the ArcaEx 
system even though the primary markets (New York Stock Exchange and 
American Stock Exchange) are not open. This may result in trades being 
executed at prices outside of normal parameters. Currently, in such 
circumstances, the PCXE will either modify or cancel the execution 
price of a transaction that results from a ``Clearly Erroneous'' 
execution in accordance with PCXE Rules 7.10 and 7.11.
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    \6\ See PCXE Rule 1.1(q) and PCXE Rule 1.1(r) for a definition 
of the terms ``Imbalance' and ``Indicative Match Price,'' 
respectively.
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    In order to prevent the Market Orders for exchange-listed 
securities from executing at disparate prices and subsequently printing 
the erroneous prices to the consolidated tape, the PCX now proposes to 
amend PCXE Rule 7.35(e) to state that Market Orders that are entered on 
the same side of the Imbalance during the Core Freeze will be converted 
into PO Orders at 6:30 am (Pacific Time) or at the conclusion of the 
MOA, whichever is later, and thereafter routed to the primary market 
for execution. Once the primary market has opened, those orders would 
be processed in a manner consistent with how those order types are 
currently processed during the Core Trading Session.\7\
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    \7\ Once routed to an away market, the orders will be subject to 
the applicable trading rules of the relevant primary market.
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    Likewise, if no Imbalance exists during the Core Freeze, any Market 
Orders for exchange-listed securities entered during that time are 
ineligible for the MOA. Instead, those Market Orders will also be 
converted into PO Orders at 6:30 am (Pacific Time) or at the conclusion 
of the MOA, whichever is later, and thereafter routed to the primary 
market for execution.
    Additionally, Market Orders for exchange-listed securities that 
are: (1) Entered before 6:28 a.m. (Pacific Time) but unmatched during 
the MOA; or (2) are entered at 6:30 a.m. (Pacific Time) or at the 
conclusion of the MOA, whichever is later, but before the primary 
market has opened, shall be converted into a PO Order and thereafter 
routed to the primary market for execution.
b. Nasdaq Securities
    The PCX proposes to amend PCXE Rule 7.35(e) to provide for 
additional criteria for processing Market Orders for Nasdaq securities. 
Accordingly, Market Orders for Nasdaq securities entered before 6:28 
a.m. (Pacific Time) but unmatched during the MOA, shall become eligible 
for execution at 6:30 a.m. (Pacific Time) or at the conclusion of the 
MOA, whichever is later.
    Market Orders for Nasdaq securities entered on the same side of the 
Imbalance during the Core Freeze, are ineligible for the MOA and shall 
be queued until 6:30 a.m. (Pacific Time) or the conclusion of the MOA, 
whichever is later, at which time the queued Market Orders shall become 
eligible for execution during the Core Trading Session.
    Finally, if no Imbalance exists during the Core Freeze, any Market 
Orders for Nasdaq securities entered during that time shall be queued 
until 6:30 a.m. (Pacific Time) or at the conclusion of the MOA, 
whichever is later, at which time those Market Orders shall become 
eligible for execution during the Core Trading Session.
2. Statutory Basis
    The PCX believes that the proposed rule change is consistent with 
Section 6(b) \8\ of the Act, in general, and furthers the objectives of 
Section 6(b)(5),\9\ in particular, because it is designed to promote 
just and equitable principals 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.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
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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 concerning 
the proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing proposed rule change effects a change in an 
existing order-entry or trading system of a self-regulatory 
organization that: (i) Does not significantly affect the protection of 
investors or the public interest; (ii) does not impose any significant 
burden on competition; and (iii) does not have the effect of limiting 
the access to or availability of the system, it has become effective 
pursuant to Section 19(b)(3)(A) \10\ of the Act and Rule 19b-4(f)(5) 
\11\ thereunder,
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    \10\ 15 U.S.C. 78s(b)(3)(A).
    \11\ 17 CFR 19b-4(f)(5).
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    At any time within 60 days after the filing of the proposed rule 
change, the Commission may summarily abrogate the 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.

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 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-2003-45 and should be submitted by October 3, 
2003.


[[Page 53773]]


    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-23289 Filed 9-11-03; 8:45 am]
BILLING CODE 8010-01-U