[Federal Register Volume 68, Number 204 (Wednesday, October 22, 2003)]
[Notices]
[Pages 60432-60437]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-26645]



[[Page 60432]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48630; File No. SR-PCX-2003-24]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendments No. 1 and 2 Thereto, by the Pacific Exchange, 
Inc. Relating to Implementation of a Closing Auction for the 
Archipelago Exchange and the Establishment of Two New Order Types

October 15, 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 June 2, 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. On October 7, 2003, the PCX submitted Amendment No. 1 to the 
proposed rule change.\3\ On October 15, 2003, the PCX submitted 
Amendment No. 2 to the proposed rule change.\4\ 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 letter from Peter D. Bloom, Managing Director, 
Regulatory Policy, PCX, to Nancy J. Sanow, Assistant Director, 
Division of Market Regulation, Commission, dated October 6, 2003 
(``Amendment No. 1''). In Amendment No. 1, the PCX submitted a new 
Form 196-4, which replaced the original filing in its entirety.
    \4\ See letter from Peter D. Bloom, Managing Director, 
Regulatory Policy, PCX, to Timothy Fox, Attorney, Division of Market 
Regulation, Commission, dated October 14, 2003 (``Amendment No. 
2''). In Amendment No. 2, the PCX amended proposed PCXE Rule 
7.35(g)(1) to clarify that Halt Auctions would be conducted pursuant 
to proposed PCXE Rules 7.35(g)(2) to (g)(6), and not pursuant to 
PCXE Rules 7.35(b) and (c), as previously cross-referenced. In 
addition, the PCX added the phrase ``and an Indicative Match Price 
does not exist'' to proposed PCXE Rule 7.35(g)(4)(A)(ii) for 
clarity, and to a related description contained Item 3 and Exhibit 1 
to the filing. The PCX added a reference to the Closing Auction in 
Item 3 and Exhibit 1 for clarity. The PCX also made technical 
corrections to PCXE Rule 7.35(d)(1) and proposed PCXE Rule 
7.35(g)(6).
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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 adopt new rules for the implementation of a new 
order auction entitled ``Closing Auction'' for Nasdaq and exchange-
listed securities traded on the Archipelago Exchange (``ArcaEx''), the 
equities trading facility of PCXE. The proposal also introduces two new 
order types called Market-on-Close Order and Limit-on-Close Order that 
would be eligible for execution only during the Closing Auction.
    The text of the proposed rule change, as amended, is below. 
Proposed additions are in italics, and proposed deletions are in 
[brackets].
* * * * *

Exhibit A

Text of the Proposed Rule Change: PCX Equities, Inc.

Rule 1

Definitions
    Rule 1.1(a)-(p)--(No change.)
Imbalance
    (q) For the purposes of the Opening Auction, the Market Order 
Auction, the Closing Auction and the Trading Halt Auction, as the case 
may be, the term ``Imbalance'' shall mean the number of buy or sell 
shares that can not be matched with other shares at the Indicative 
Match Price at any given time.
Indicative Match Price
    (r) For the purposes of the Opening Auction, the Market Order 
Auction, the Closing Auction and the Trading Halt Auction, as the case 
may be, the term ``Indicative Match Price'' shall mean for each 
security (1) the price at which the maximum volume of shares are 
executable; or (2) if there are two or more prices at which the maximum 
volume of shares are executable, the price that is closest to the 
closing price of the previous trading day's normal market hours (or, in 
the case of a Closing Auction or a Trading Halt Auction, the last sale 
during normal market hours), as determined by the [C] consolidated [T] 
tape will establish the opening price (or the closing price in the case 
of a Closing Auction), provided that if such price would trade through 
an eligible Limited Price Order designated for such auction, then the 
opening price will occur at the best price level available where no 
trade through occurs.
Limited Price Order
    (s) The term ``Limited Price Order'' shall mean any order with a 
specified price or prices (e.g., limit orders, Limit-on-Close Orders, 
and Working Orders), other than Stop Orders.
    (t)-(aaa)--(No change.)
* * * * *

Rule 7

Equities Trading
Orders and Modifiers
    Rule 7.31 (a)-(cc)--(No change.)
    (dd) Market-on-Close Order (``MOC''). A Market Order that is to be 
executed only during the Closing Auction.
    (ee) Limit-on-Close Order (``LOC''). A Limited Price Order that is 
to be executed only during the Closing Auction.
* * * * *
Trading Sessions
Rule 7.34
    (a)-(c)--(No change.)
    (d) Orders Permitted in Each Session.
    (1)--(No change.)
    (2)--(No change.)
    (3) During the Late Trading Session:
    (A)--(No change.)
    (B) Users may enter Market-on-Close Orders or Limit-on-Close Orders 
beginning at 4:30 a.m. (Pacific Time) and concluding at 1:02 p.m. 
(Pacific Time) for inclusion in the Closing Auction, except as provided 
in Rule 7.35(e)(3). Market-on-Close Orders and Limit-on-Close Orders 
are eligible for execution only during the Closing Auction.
    (C) Market-on-Close Orders and Limit-on-Close Orders that are not 
executed during the Closing Auction shall be cancelled. Timed Orders 
designated as good from 1:02 pm (Pacific Time) shall not be eligible to 
participate in the Closing Auction.
    (D)[(B)] Market orders and Stop Orders are not eligible for 
execution during the Late Trading Session.
    (E)[(C)] The Directed Order and Tracking Order Processes are not 
available during the Late Trading Session.
    (e)-(f)--(No change).

[Opening Session] Auctions

Rule 7.35
    (a)-(c)--(No change.)
    [(d) Re-Opening After Trading Halts. To re-open trading in a 
security following a trading halt in that security, the Archipelago 
Exchange shall conduct a Trading Halt Auction, as described below:]
    [(1) Re-Opening Time. After trading in a security has been halted, 
the Corporation shall disseminate the estimated time at which trading 
in that security will re-open (the ``Re-Opening Time'').]
    [(2) Publication of Indicative Match Price and Imbalances]
    [(A) Immediately after trading is halted in a security, and various 
times thereafter as determined from time to time by the Corporation, 
the Indicative Match Price of the Trading Halt Auction and the volume 
available to trade at such price, shall be published via electronic 
means as determined from

[[Page 60433]]

time to time by the Corporation. If such a price does not exist (i.e., 
there is an Imbalance of market orders), the Archipelago Exchange shall 
indicate via electronic means that an Indicative Match Price does not 
exist.]
    [(B) Immediately after trading is halted in a security, and various 
times thereafter as determined from time to time by the Corporation, 
the market order Imbalance associated with the Trading Halt Auction, if 
any, shall be published via electronic means as determined from time to 
time by the Corporation.]
    [(C) If the difference between the Indicative Match Price and the 
last price prior to the trading halt, as determined by the Consolidated 
Tape, is equal to or greater than a pre-determined amount, as 
determined from time to time by the Corporation, the Archipelago 
Exchange will assign a ``SIG'' designator to such Indicative Match 
Price and publish such designator via electronic means as determined 
from time to time by the Corporation.]
    [(3) Reduction of Imbalances]
    [(A) Any Imbalance in the Trading Halt Auction may be reduced by 
new orders, entered on the side of the market opposite the Imbalance, 
pursuant to the following priority:]
    [(i) Market orders;]
    [(ii)Limited Price Orders; and]
    [(iii)Auction-Only Limit Orders.]
    [(B) Primary Only Orders may be submitted to the Archipelago 
Exchange during a trading halt. Cleanup Orders are not eligible for 
execution in the Trading Halt Auction.]
    [(C) The Corporation, if it deems such action necessary, will 
disseminate the time, prior to the time that orders are matched 
pursuant to the Trading Halt Auction, at which orders may no longer be 
cancelled.]
    [(D) Interaction with ITS]
    [(i) If a pre-opening indication is required pursuant to the ITS 
Plan, the Corporation will disseminate three minutes prior to the Re-
Opening Time the applicable price range, consisting of the Indicative 
Match Price as one end of the price range and the Indicative Match 
Price plus an amount determined by the Corporation for the higher end 
of the price range.]
    [(ii) The Archipelago Exchange will treat any responses to a pre-
opening indication as an Auction-Only Limit Order.]
    [(E) Other market centers may use private communication connections 
to enter Auction-Only Limit Orders for a Trading Halt Auction.]
    [(4) Determination of Trading Halt Auction Price]
    [(A) For exchange-listed securities:]
    [(i) If there is no Imbalance and no other market center has re-
opened trading in the security, orders will be executed in the Trading 
Halt Auction at the Indicative Match Price as of the Re-Opening Time.]
    [(ii) If an Imbalance exists, or if an equilibrium exists between 
buy market orders and sell market orders, or if another market center 
has re-opened trading in the security, as many buy market orders and 
sell market orders as possible shall be matched, on a time priority 
basis, at the midpoint of the first uncrossed, unlocked NBBO, once an 
NBBO is available.]
    [(B) For A Nasdaq Security:]
    [(i) If there is no Imbalance, orders will be executed in the 
Trading Halt Auction at the Indicative Match Price as of the Re-Opening 
Time.]
    [(ii) If an Imbalance exists, or if an equilibrium exists between 
buy market orders and sell market orders, as many buy market orders and 
sell market orders as possible shall be matched, on a time priority 
basis, once an NBBO is available,]
    [(a) at the midpoint of the NBBO at the Re-Opening Time, provided 
that the NBBO is not crossed; or]
    [(b) at the midpoint of the first uncrossed NBBO after the Re-
Opening Time, in the case in which the NBBO is crossed, but one side of 
the BBO is not crossed by the NBBO; or]
    [(c) at the midpoint of the first uncrossed NBBO after the Re-
Opening Time, in the case in which the NBBO is crossed and where both 
sides of the BBO are crossed by the NBBO; or]
    [(d) at the bid (offer) of the BBO that was crossed prior to the 
Re-Opening Time, in the case in which the BBO is crossed by a market 
participant; or]
    [(C) For those issues for which the Corporation is the primary 
market: Orders will be executed at the Indicative Match Price at the 
Re-Opening Time. If equilibrium exists between buy and sell market 
orders, the match price shall be at the last Corporation sale price in 
the security regardless of the trading session; however, if the last 
Corporation sale price is lower than the BBO, the match price shall be 
the displayed bid in the security, or if the last Corporation sale 
price is higher than the BBO, the match price will be the displayed 
offer in the security.]
    [(5) If any orders are not executed in their entirety during the 
Trading Halt Auction, then such orders shall be executed in accordance 
with Rule 7.37 after the completion of the Trading Halt Auction.]
    [(6) After the completion of the Trading Halt Auction, the 
Archipelago Exchange will re-open for trading the previously halted 
security in accordance with Rule 7.]
    (d) Transition to Core Trading Session.
    (1) 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.
    (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).
    (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.
    [(e) Transition to Core Trading Session.]
    [(1) 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.]
    [(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).]
    [(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.]
    (e) Closing Auction
    (1) Publication of Indicative Match Price and Imbalances
    (A) Beginning at 12:00 pm (Pacific Time), and updated real-time 
thereafter, the Indicative Match Price of the Closing Auction and the 
volume available to trade at such price, and the Imbalance associated 
with the Closing Auction, if any, will be, shall be published via 
electronic means.
    Example 1: (1) Limit-on-Close Order to buy 1000 shares at 50;
    (2) Limit-on-Close Order to sell 5000 shares at 40; and

[[Page 60434]]

    (3) Market-on-Close Order to sell 2000 shares.
    The Archipelago Exchange will publish an Indicative Match Price of 
40, a match volume of 1000 shares, and an Imbalance of 1000 shares.
    Example 2: (1) Market-on-Close Order to buy 3000 shares;
    (2) Market-on-Close Order to sell 1000 shares;
    (3) Limit Order to sell 1000 shares at 41; and
    (4) Limit Order to sell 1000 shares at 41.25.
    The Archipelago Exchange will publish an Indicative Match Price of 
41.25 and a match volume of 3000 shares and will not publish an 
Imbalance.
    (B) If an Indicative Match Price does not exist, the Archipelago 
Exchange shall indicate via electronic means that an Indicative Match 
Price does not exist.
    (C) If the difference between the Indicative Match Price and the 
last sale during normal market hours, as determined by the consolidated 
tape, is equal to or greater than a pre-determined amount, as 
determined from time to time by the Corporation, the Archipelago 
Exchange will assign a ``SIG'' designator to such Indicative Match 
Price and publish such designator via electronic means.
    (2) Reduction of Imbalances
    (A) Any Imbalance in the Closing Auction may be reduced by new 
orders, entered on the side of the market opposite the Imbalance, 
pursuant to the following priority:
    (i) Market-on-Close Orders;
    (ii) Limit orders designated for the Late Trading Session and 
entered prior to the Closing Auction; and
    (iii) Limit-on-Close Orders.
    (B) Between 1:00 pm (Pacific Time) and the conclusion of the 
Closing Auction, Limited Price Orders eligible for the Late Trading 
Session may be cancelled, but Market-on-Close Orders and Limit-on-Close 
Orders may not be cancelled.
    (C) Between 1:00 pm (Pacific Time) and the conclusion of the 
Closing Auction, Market-on-Close Orders and Limit-on-Close Orders may 
not be entered on the same side as the Imbalance. Market-on-Close 
Orders and Limit-on-Close Orders that reduce the Imbalance may be 
entered on the opposite side of the Imbalance, however, any time before 
the Closing Auction. Market-on-Close Orders and Limit-on-Close Orders 
that create equilibrium and thereafter convert the Imbalance from a buy 
to a sell (or convert the Imbalance from a sell to a buy) Imbalance 
will be rejected.
    Example: (1) Limit-on-Close Order to buy 1000 shares; (2) Limit-on-
Close Order to sell 1500 shares, creating an Imbalance of 500 shares on 
the sell side. A Market-on-Close Order or Limit-on-Close Order to buy 
500 shares would be permitted because it achieves equilibrium. However, 
a Market-on-Close Order or Limit-on-Close Order to buy 1000 shares 
would not be permitted as it would inverse the Imbalance of 500 shares 
on the sell side to an Imbalance of 500 shares on the buy side.
    (3) Determination of Closing Auction Price
    (A) If there is no Imbalance, orders will be executed in the 
Closing Auction at the Indicative Match Price as of 1:02 pm (Pacific 
Time).
    (B) If an Imbalance exists, or if equilibrium exists between buy 
Market-on-Close Orders and sell Market-on-Close Orders and an 
Indicative Match Price does not exist, as many buy Market-on-Close 
Orders and sell Market-on-Close Orders as possible shall be matched, on 
a time priority basis:
    (i) At the midpoint of the NBBO at 1:02 pm (Pacific Time), provided 
that the NBBO of the market centers that are still open is not locked 
or crossed; or
    (ii) At the locked price if the NBBO is locked at 1:02 pm (Pacific 
Time); or
    (iii) if the NBBO is crossed at 1:02 pm (Pacific Time) and the 
Archipelago Exchange is a party to the crossed market, at the bid 
(offer) side of the BBO which is crossed with the NBBO; or
    (iv) if the NBBO is crossed at 1:02 pm (Pacific Time) and the 
Archipelago Exchange is not a party to the crossed market, at the last 
sale during the regular market hours as determined by the consolidated 
tape; or
Such executions shall be designated with a modifier to identify them as 
Closing Auction trades. The Market-on-Close Orders that are eligible 
for, but not executed in, the Closing Auction shall be cancelled 
immediately upon conclusion of the Closing Auction.
    [f] [Whenever in the judgment of the Corporation the interests of a 
fair and orderly market so require, the Corporation may adjust the 
timing of the auctions set forth in this Rule.]
    (f) Transition to Late Trading Session. Limited Price Orders 
designated for the Late Trading Session entered before 1:00 pm (Pacific 
Time) shall participate in the Closing Auction. Limited Price Orders 
designated for the Late Trading Session entered after 1:00 pm (Pacific 
Time) shall become eligible for execution at 1:02 pm (Pacific Time) or 
at the conclusion of the Closing Auction, whichever is later.
    (g) Re-Opening After Trading Halts. To re-open trading in a 
security following a trading halt in that security, the Archipelago 
Exchange shall conduct a Trading Halt Auction, as described below:
    (1) Re-Opening Time. After trading in a security has been halted, 
the Archipelago Exchange shall disseminate the estimated time at which 
trading in that security will re-open (the ``Re-Opening Time'').
    (A) For Nasdaq securities and securities that are dually listed on 
both Nasdaq and listed on the Corporation whereby trading in a security 
is halted and thereafter scheduled to reopen prior to 12:55 pm (Pacific 
Time), the Archipelago Exchange will conduct a Halt Auction pursuant to 
the applicable procedures set forth in subsection (g)(2) through (6) of 
this Rule.
    (B) For Nasdaq securities and securities that are dually listed on 
both Nasdaq and listed on the Corporation whereby trading in a security 
is halted and thereafter scheduled to reopen at 12:55 pm (Pacific Time) 
or later, no Closing Auction will occur for that security. Instead, the 
Archipelago Exchange will conduct a Halt Auction pursuant to the 
applicable procedures set forth in subsection (g)(2) through (6) of 
this Rule.
    (2) Publication of Indicative Match Price and Imbalances
    (A) Immediately after trading is halted in a security, and updated 
real-time thereafter, the Indicative Match Price of the Trading Halt 
Auction and the volume available to trade at such price, shall be 
published via electronic means. If such a price does not exist, the 
Archipelago Exchange shall indicate via electronic means that an 
Indicative Match Price does not exist.
    (B) Immediately after trading is halted in a security, and updated 
real-time thereafter, the Imbalance associated with the Trading Halt 
Auction, if any, shall be published via electronic means.
    (C) If the difference between the Indicative Match Price and the 
last price prior to the trading halt, as determined by the Consolidated 
Tape, is equal to or greater than a pre-determined amount, as 
determined from time to time by the Corporation, the Archipelago 
Exchange will assign a ``SIG'' designator to such Indicative Match 
Price and publish such designator via electronic means.
    (3) Reduction of Imbalances
    (A) Any Imbalance in the Trading Halt Auction may be reduced by new 
orders, entered on the side of the market opposite the Imbalance, 
pursuant to the following priority:
    (i) Market Orders; and
    (ii) Limited Price Orders.
    (B) Primary Only Orders may be submitted to the Archipelago 
Exchange during a trading halt. Cleanup Orders

[[Page 60435]]

are not eligible for execution in the Trading Halt Auction.
    (C) The Corporation, if it deems such action necessary, will 
disseminate the time, prior to the time that orders are matched 
pursuant to the Trading Halt Auction, at which orders may no longer be 
cancelled.
    (D) Interaction with ITS
    (i) If a pre-opening indication is required pursuant to the ITS 
Plan, the Corporation will disseminate three minutes prior to the Re-
Opening Time the applicable price range, consisting of the Indicative 
Match Price as one end of the price range and the Indicative Match 
Price plus an amount determined by the Corporation for the higher end 
of the price range.
    (ii) The Archipelago Exchange will treat any responses to a pre-
opening indication as an Auction-Only Limit Order.
    (E) Other market centers may use private communication connections 
to enter Auction-Only Limit Orders for a Trading Halt Auction.
    (4) Determination of Trading Halt Auction Price
    (A) For exchange-listed securities:
    (i) If there is no Imbalance and no other market center has re-
opened trading in the security, orders will be executed in the Trading 
Halt Auction at the Indicative Match Price as of the Re-Opening Time.
    (ii) If an Imbalance exists, or if an equilibrium exists between 
buy market orders and sell market orders and an Indicative Match Price 
does not exist, or if another market center has re-opened trading in 
the security, as many buy market orders and sell market orders as 
possible shall be matched, on a time priority basis, at the midpoint of 
the first uncrossed, unlocked NBBO, once an NBBO is available.
    (B) For Nasdaq securities:
    (i) If there is no Imbalance, orders will be executed in the 
Trading Halt Auction at the Indicative Match Price as of the Re-Opening 
Time.
    (ii) If an Imbalance exists, or if equilibrium exists between buy 
market orders and sell market orders, as many buy market orders and 
sell market orders as possible shall be matched, on a time priority 
basis, once an NBBO is available,
    (a) at the midpoint of the NBBO at the Re-Opening Time, provided 
that the NBBO is not crossed; or
    (b) at the midpoint of the first uncrossed NBBO after the Re-
Opening Time, in the case in which the NBBO is crossed, but one side of 
the BBO is not crossed by the NBBO; or
    (c) at the midpoint of the first uncrossed NBBO after the Re-
Opening Time, in the case in which the NBBO is crossed and where both 
sides of the BBO are crossed by the NBBO; or
    (d) at the bid (offer) of the BBO that was crossed prior to the Re-
Opening Time, in the case in which the BBO is crossed by a market 
participant; or
    (C) For those issues for which the Corporation is the primary 
market: Orders will be executed at the Indicative Match Price at the 
Re-Opening Time. If equilibrium exists between buy and sell Market 
Orders, the match price shall be at the last Corporation sale price in 
the security regardless of the trading session; however, if the last 
Corporation sale price is lower than the BBO, the match price shall be 
the displayed bid in the security, or if the last Corporation sale 
price is higher than the BBO, the match price will be the displayed 
offer in the security.
    (5) If any orders are not executed in their entirety during the 
Trading Halt Auction, then such orders shall be executed in accordance 
with Rule 7.37 after the completion of the Trading Halt Auction.
    (6) After the completion of the Trading Halt Auction, the 
Archipelago Exchange will re-open for trading the previously halted 
security in accordance with Rule 7.
    (h) Whenever in the judgment of the Corporation the interests of a 
fair and orderly market so require, the Corporation may adjust the 
timing of the auctions set forth in this Rule.
* * * * *

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
    The PCX proposes to amend PCXE Rule 7.35 to introduce the Closing 
Auction, which would apply to both Nasdaq and exchange-listed 
securities traded on ArcaEx.\5\ The Closing Auction would take place 
following the Core Trading Session. The Closing Auction would occur at 
1:02 p.m. (Pacific Time). The PCX also proposes to amend PCXE Rule 7.31 
to implement two new order types designated as a Market-on-Close Order 
\6\ and Limit-on-Close Order,\7\ and to amend PCXE Rule 7.34 to clarify 
that these two new order types are eligible for execution during the 
Late Trading Session. Market-on-Close Orders and Limit-on-Close Orders 
would be eligible for execution only during the Closing Auction. Any 
Market-on-Close Order or Limit-on-Close Order that is not executed 
during the Closing Auction would be cancelled. Market-on-Close Orders 
and Limit-on-Close Orders that are designated as Timed Orders \8\ and 
designated as good from 1:02 p.m. (Pacific Time) would not be eligible 
for execution during the Closing Auction.
---------------------------------------------------------------------------

    \5\ See PCXE Rule 1.1(aa) (definition of ``Nasdaq Security'').
    \6\ See proposed PCXE Rule 7.31(dd) (definition of Market-on-
Close Order (``MOC'')).
    \7\ See proposed PCXE Rule 7.31(ee) (definition of Limit-on-
close Order (``LOC'')).
    \8\ See PCXE Rule 1.1(q) (definition of ``Timed Order'').
---------------------------------------------------------------------------

    Under proposed PCXE Rule 7.35(e), ArcaEx would publish the 
Indicative Match Price,\9\ the matched volume and Imbalance relative to 
the Closing Auction.\10\ Accordingly, beginning at 12:00 p.m. (Pacific 
Time), and updated real-time thereafter, the Indicative Match Price of 
the Closing Auction and the volume available to trade at such price, 
and the Imbalance associated with the Closing Auction, if any, would be 
published via electronic means by the PCX. The following are examples 
of the foregoing:

    \9\ See PCXE Rule 1.1(r). Pursuant to this current proposed rule 
change, the definition of ``Indicative Match Price'' in PCXE Rule 
1.1(r) would be changed to reflect the inclusion of the Closing 
Auction.
    \10\ The proposed rule change also provides for the publication 
of the Indicative Match Price and Imbalance following a trading 
halt.

    Example 1: (1) Limit-on-Close Order to buy 1000 shares at 50;
    (2) Limit-on-Close Order to sell 5000 at 40; and
    (3) Market-on-Close Order to sell 2000 shares
    In this example, ArcaEx would publish an Indicative Match Price 
of 40, a match volume of 1000 shares, and an Imbalance of 1000 
shares.
    Example 2: (1) Market-on-Close to buy 3000 shares;
    (2) Market-on-Close to sell 1000 shares;
    (3) Limit Order to sell 1000 shares at 41; and
    (4) Limit Order to sell 1000 shares at 41.25.
    In this example, ArcaEx would publish an Indicative Match Price 
of 41.25 and a match

[[Page 60436]]

volume of 3000 shares, but would not publish an Imbalance.

    If an Indicative Match Price does not exist, ArcaEx would indicate, 
via electronic means, that such a price does not exist.
    If the difference between the Indicative Match Price and the last 
sale during normal market hours, as determined by the consolidated 
tape, were equal to or greater than a predetermined amount, as 
determined from time to time by the PCXE, ArcaEx would assign a ``SIG'' 
designator to the Indicative Match Price and publish the designator via 
electronic means as determined by the PCXE.
    Any Imbalance in the Closing Auction may be reduced by new orders, 
entered on the side of the market opposite the Imbalance, pursuant to 
the following priority: (1) Market-on-Close Orders; (2) Limited Priced 
Orders designated for the Late Trading Session and entered prior to the 
Closing Auction; and (3) Limit-on-Close Orders.
    Between 1:00 p.m. (Pacific Time) and the conclusion of the Closing 
Auction, Limited Price Orders eligible for the Late Trading Session may 
be cancelled, but Market-on-Close Orders and Limit-on-Close Orders may 
not be cancelled. In addition, between 1:00 p.m. (Pacific Time) and the 
conclusion of the Closing Auction, Market-on-Close Orders and Limit-on-
Close Orders that reduce the Imbalance may be entered on the opposite 
side of the Imbalance; however, any time before the Closing Auction, 
Market-on-Close Orders and Limit-on-Close Orders that create 
equilibrium and thereafter increase the Imbalance would be 
rejected.\11\
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    \11\ Market-on-Close Orders and Limit-on-Close Orders that are 
of a size to ``flip'' the Imbalance from a buy to a sell would be 
rejected. The following is an example of the foregoing: (1) Limit-
on-Close Order to buy 1000 shares; (2) Limit-on-Close Order to sell 
1500 shares, creating an Imbalance of 500 shares on the sell side. A 
Market-on-Close Order or Limit-on-Close Order to buy 500 shares 
would be permitted because it achieves equilibrium. However, a 
Market-on-Close Order or Limit-on-Close Order to buy 1000 shares 
would not be permitted as it would inverse the Imbalance of 500 
shares on the sell side to an Imbalance of 500 shares on the buy 
side.
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    ArcaEx would determine the price of the Closing Auction as follows: 
if there is no Imbalance, orders would be executed in the Closing 
Auction at the Indicative Match Price as of 1:02 p.m. (Pacific Time.) 
Conversely, if an Imbalance exists, or if equilibrium exists between 
buy Market-on-Close Orders and sell Market-on-Close Orders and an 
Indicative Match Price does not exist, as many buy Market-on-Close 
Orders and sell Market-on-Close Orders as possible would be matched, on 
a time priority basis as follows: (1) At the midpoint of the NBBO \12\ 
at 1:02 p.m. (Pacific Time), provided that the NBBO of the market 
centers that are still open is not locked or crossed; or (2) at the 
locked price if the NBBO is locked at 1:02 p.m. (Pacific Time); or (3) 
if the NBBO is crossed at 1:02 p.m. (Pacific Time) and ArcaEx is a 
party to the crossed market, at the bid (offer) side of the BBO \13\ 
which is crossed with the NBBO; or (4) if the NBBO is crossed at 1:02 
p.m. (Pacific Time) and ArcaEx is not a party to the crossed market, at 
the last regular sale during market hours as determined by the 
consolidated tape. Such executions would be designated with a modifier 
to identify them as Closing Auction trades. The Market-on-Close Orders 
that are eligible for, but not executed in the Closing Auction, would 
be cancelled immediately upon conclusion of the Closing Auction.
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    \12\ See PCXE Rule 1.1(dd) (definition of ``national best bid or 
offer'' (``NBBO'')).
    \13\ See PCXE Rule 1.1(h) (definition of ``best bid or offer'' 
(``BBO'')).
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    Limited Price Orders designated for the Late Trading Session 
entered before 1 p.m. (Pacific Time) would participate in the Closing 
Auction. Limited Price Orders designated for the Late Trading Session 
entered after 1 p.m. (Pacific Time) would become eligible for execution 
at 1:02 p.m. (Pacific Time) or at the conclusion of the Closing 
Auction, whichever is later.
    Finally, the PCX proposes that in the event a stock is halted and 
scheduled to re-open prior to 12:55 p.m. (Pacific Time), a Halt Auction 
and Closing Auction would be conducted. However, in the event a stock 
is halted and is thereafter scheduled to re-open at 12:55 p.m. (Pacific 
Time) or later, no Closing Auction would occur for that security. 
Instead, a Halt Auction would be conducted.\14\
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    \14\ See proposed PCXE Rule 7.3(g)(1).
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    The proposed rule change, as amended, is intended to expand the 
trading auction process by adding the Closing Auction to the Late 
Trading Session and to clarify the type of orders available for 
execution during the Late Trading Session.
2. Statutory Basis
    The PCX believes that the proposed rule change, as amended, is 
consistent with Section 6(b)\15\ of the Act, in general, and furthers 
the objectives of Section 6(b)(5),\16\ 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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    \15\ 15 U.S.C. 78f(b).
    \16\ 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, as amended, 
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, as amended.

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, as amended; or
    (B) Institute proceedings to determine whether the proposed rule 
change, as amended, 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.

[[Page 60437]]

SR-PCX-2003-24 and should be submitted by November 12, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-26645 Filed 10-21-03; 8:45 am]
BILLING CODE 8010-01-U