[Federal Register Volume 68, Number 240 (Monday, December 15, 2003)]
[Notices]
[Pages 69748-69753]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-30838]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48883; File No. SR-PCX-2003-24]


Self-Regulatory Organizations; Pacific Exchange, Inc.; Order 
Approving Proposed Rule Change and Amendments No. 1 and 2 and Notice of 
Filing and Order Granting Accelerated Approval to Amendment No. 3 
Relating to the Implementation of a Closing Auction for the Archipelago 
Exchange and the Establishment of Market-on-Close and Limit-on-Close 
Order Types

December 4, 2003.

I. Introduction

    On June 2, 2003, the Pacific Exchange, Inc. (``PCX'') filed with 
the Securities and Exchange Commission (``Commission''), pursuant to 
Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') \1\ 
and Rule 19b-4 thereunder,\2\ a proposed rule change to establish a 
Closing Auction and create Market-on-Close (``MOC'') and Limit-on-Close 
(``LOC'') order types. 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 proposed 
rule change, as amended, was published for comment in the Federal 
Register on October 22, 2003.\5\ On December 2, 2003 the PCX submitted 
Amendment No. 3 to the proposed rule change.\6\
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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 19b-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).
    \5\ Securities Exchange Act Release No. 48630 (October 15, 
2003), 68 FR 60432.
    \6\ See letter from Mai Shiver, Acting Director, Regulatory 
Policy, PCX, to Timothy Fox, Division of Market Regulation, 
Commission, dated December 1, 2003 (``Amendment No. 3''). In 
Amendment No. 3, the PCX withdrew the Amendment No. 3 that it filed 
with the Commission on November 19, 2003 and provided that this 
revised Amendment No. 3 and Exhibit A thereto, replace the original 
rule text, as amended by Amendments No. 1 and 2. Further, the PCX 
proposed to incorporate rule text relating to the publication of the 
Total Imbalance and Market Imbalance that the Commission recently 
approved. See Securities Exchange Act Release No. 48767 (November 
10, 2003), 68 FR 65337 (November 19, 2003) (SR-PCX-2003-48). In 
addition, Amendment No. 3 clarifies that PCX will publish MOC orders 
that are not matched for execution as the Market Imbalance prior to 
the Closing Auction. The PCX also proposed to move the Closing 
Auction from the Late Trading Session to the Core Session, and to 
change the Closing Auction's start time from 1:02 pm Pacific Time to 
1:00 Pacific time. Further, the Amendment clarified that MOC and LOC 
orders are eligible for execution during the Closing Auction.
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    The Commission received no comments on the proposal. This order 
approves the proposed rule change, as amended by Amendment No. 1 and 
Amendment No. 2, and issues notice of, and grants accelerated approval 
to, Amendment No. 3.
    The text of the proposed rule change, as amended, is below. 
Proposed additions are in italics, and proposed deletions are in 
[brackets].
* * * * *

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,
    (1) the term ``Imbalance'' shall mean the number of buy or sell 
shares that cannot be matched with other shares at the Indicative Match 
Price at any given time.
    (A) the term ``Total Imbalance'' shall mean the net Imbalance of 
buy (sell) orders at the Indicative Match Price for all orders that are 
eligible for execution during the applicable auction.
    (B) the term ``Market Imbalance'' shall mean:
    (i) as it relates to the Market Order Auction, the imbalance of any 
remaining buy (sell) Market Orders that are not matched for execution 
during the applicable auction.
    (ii) as it relates to the Closing Auction, the imbalance of any 
remaining buy (sell) Market-on-Close Orders that are not matched for 
execution during the applicable auction.

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.
    (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.)
    (A)-(H)--(No change.)
    (2) During the Core Trading Session[,]:
    (A) M[m]arket O[o]rders, Stop Orders, NOW Orders, PNP Orders and 
orders eligible for the Directed Order, Display Order, Working Order 
and Tracking Order Processes are eligible for entry into and execution 
on the Archipelago Exchange.
    (B) Users may enter Market-on-Close Orders, Limit-on-Close Orders, 
and

[[Page 69749]]

Limited Price Orders beginning at 4:30 am (Pacific Time) and concluding 
at 1:00 pm (Pacific Time) for inclusion in the Closing Auction, except 
as provided in Rule 7.35(e)(2). Market-on-Close Orders and Limit-on-
Close Orders are eligible for execution only during the Closing 
Auction. Market Orders are not eligible for execution in 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 1:00 pm (Pacific Time) shall not be eligible to 
participate in the Closing Auction.
    (3)--(No change.)
    (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 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

[[Page 69750]]

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. The Imbalance shall include both the Total Imbalance 
and Market Imbalance.
    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
    (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, a Market Imbalance of 1,000 shares 
and a Total Imbalance of 6,000 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 Consolidated Tape last sale was 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 entered prior to the Closing Auction; and
    (iii) Limit-on-Close Orders.
    (B) Between 12:58 pm (Pacific Time) and the conclusion of the 
Closing Auction, Limited Price Orders may be cancelled, but Market-on-
Close Orders and Limit-on-Close Orders may not be cancelled.
    (C) Between 12:58 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 1:00 p.m. (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 as follows:
    (i) At the midpoint of the NBBO at 1:00 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 1:00 pm (Pacific 
Time); or
    (iii) if the NBBO is crossed at 1:00 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 1:00 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.
    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) 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 (f)(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 (f)(2) through (6) of 
this Rule.
    (2) Publication of Indicative Match Price and Imbalances

[[Page 69751]]

    (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 Market Imbalance and Total 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 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.
    (g) 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. Description of the Proposed Rule Change

    The PCX, through its wholly-owned subsidiary PCXE, proposes to 
introduce the Closing Auction, which would apply to both Nasdaq and 
exchange-listed securities traded on ArcaEx. The Closing Auction would 
take place at the end of the Core Trading Session. As originally 
proposed, the Closing Auction would occur at 1:02 pm (Pacific Time). In 
Amendment No. 3, the PCX proposes to change the Closing Auction Time to 
1:00 pm (Pacific Time). The PCX also proposes to implement two new 
order types, designated as a MOC Order \7\ and a LOC Order,\8\ which 
would be eligible for execution only during the Closing Auction. In 
Amendment No. 3, the PCX clarified that these two order types would 
occur during the Core Trading Session.
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    \7\ See proposed PCXE Rule 7.31(dd) (definition of MOC Order).
    \8\ See proposed PCXE Rule 7.31(ee) (definition of LOC Order).
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    Before the start of the Closing Auction, ArcaEx would publish the 
Indicative Match Price,\9\ the volume of MOC and LOC orders that have 
been matched for execution, as well as the Market Imbalance and Total 
Imbalance relative to the Closing Auction.\10\ In Amendment No. 3, the 
PCX amended the definition of ``Market Imbalance'' to clarify that MOC 
order that are not yet matched for execution would be published as the 
``Market Imbalance'' during the time leading up to the Closing Auction. 
Accordingly, beginning at 12:00 pm (Pacific Time), and updated on real-
time basis thereafter, the Indicative Match Price of the Closing 
Auction and the volume available to trade at such price, along with the 
Market Imbalance and Total Imbalance associated with the Closing 
Auction, if any, would be published via electronic means by ArcaEx.
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    \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.
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    If the difference between the Indicative Match Price and the last 
sale during normal market hours, as determined by the consolidated 
tape,

[[Page 69752]]

were equal to or greater than a predetermined amount, as determined 
from time to time by the PCXE, ArcaEx would assign a designator to 
identify it as significant (``SIG'') to the Indicative Match Price and 
publish the designator via electronic means as determined by the PCXE.
    Any Imbalance in the Closing Auction would be reduced by new 
orders, entered on the side of the market opposite the Imbalance, 
pursuant to the following priority: (1) MOC Orders; (2) Limited Priced 
Orders entered prior to the Closing Auction; and (3) LOC Orders.
    Between 12:58 pm (Pacific Time) and the conclusion of the Closing 
Auction, Limited Price Orders eligible for the Late Trading Session may 
be cancelled, but MOC Orders and LOC Orders may not be cancelled.\11\ 
In addition, between 12:58 pm (Pacific Time) and the conclusion of the 
Closing Auction, MOC Orders and LOC Orders that reduce the Imbalance 
may be entered on the opposite side of the Imbalance.\12\ However, any 
time before the Closing Auction, MOC Orders and LOC Orders that create 
equilibrium and thereafter increase the Imbalance would be 
rejected.\13\ 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 1:00 pm (Pacific 
Time).\14\ Conversely, if an Imbalance exists, or if equilibrium exists 
between buy MOC Orders and sell MOC Orders and an Indicative Match 
Price does not exist, as many buy MOC Orders and sell MOC Orders as 
possible would be matched, on a time priority basis, as follows: (1) At 
the midpoint of the national best bid or offer (``NBBO'')\15\ at 1:00 
pm (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 1:00 pm (Pacific Time); or (3) if the NBBO is 
crossed at 1:00 pm (Pacific Time) and ArcaEx is a party to the crossed 
market, at the bid (offer) side of the best bid or offer (``BBO'')\16\ 
which is crossed with the NBBO; or (4) if the NBBO is crossed at 1:00 
pm (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.\17\ Such executions would be designated with a 
modifier to identify them as Closing Auction trades. The MOC 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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    \11\ In Amendment No. 3, the PCX changed the relevant time from 
1:00 pm (Pacific Time) to 12:58 pm (Pacific Time).
    \12\ Id.
    \13\ MOC Orders and LOC Orders that are of a size to ``flip'' 
the Imbalance from a buy to a sell would be rejected. For example, 
assume: (1) LOC Order to buy 1000 shares; (2) LOC Order to sell 1500 
shares, creating an Imbalance of 500 shares on the sell side. A MOC 
Order or LOC Order to buy 500 shares would be permitted because it 
achieves equilibrium. However, a MOC Order or LOC Order to buy 1000 
shares would not be permitted as it would invert the Imbalance of 
500 shares on the sell side to an Imbalance of 500 shares on the buy 
side.
    \14\ In Amendment No. 3, the PCX changed the relevant time from 
1:02 pm (Pacific Time) to 1:00 pm (Pacific Time).
    \15\ See PCXE Rule 1.1(dd) (definition of NBBO).
    \16\ See PCXE Rule 1.1(h) (definition of BBO).
    \17\ See supra note14.
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    Finally, the PCX proposes that in the event that trading in a stock 
is halted and scheduled to re-open prior to 12:55 pm (Pacific Time), a 
Halt Auction and Closing Auction would be conducted. However, in the 
event that trading in a stock is halted and is thereafter scheduled to 
re-open at 12:55 pm (Pacific Time) or later, no Closing Auction would 
occur for that security. Instead, only a Halt Auction would be 
conducted.\18\
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    \18\ See proposed PCXE Rule 7.35(f)(1).
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III. Discussion

    The Commission finds that the proposed rule change, as amended, is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities exchange 
\19\ and, in particular, the requirements of Section 6(b) of the Act 
\20\ and the rules and regulations thereunder. The Commission finds 
that the rule change, as amended, is consistent with Section 6(b)(5) of 
the Act,\21\ which requires, among other things, that the rules of the 
PCX be designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to foster 
cooperation and coordination with persons engaged in regulation, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, and, in general, to protect investors and the public interest.
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    \19\ In approving this proposed rule change the Commission notes 
that it has considered the proposed rule's impact on efficiency, 
competition, and capital formation. 15 U.S.C. 78c(f).
    \20\ 15 U.S.C. 78f(b).
    \21\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that this proposed rule change should 
provide ArcaEx Users with an order type that is already available on a 
number of other exchanges.\22\ The Commission further believes that 
publishing the Match Volume, Indicative Match Price, the Market 
Imbalance and Total Imbalance may provide market participants with an 
additional source of closing price information for Nasdaq and exchange-
listed securities in addition to the information disseminated by 
markets, which should enhance intermarket competition by enabling 
market participants to assess and compare pricing among different 
markets. In addition, the Commission believes, based upon experience of 
other exchanges such as the NYSE and Amex, that publishing this 
information before the Closing Auction should reduce the volatility 
that may arise from the liquidation of stock positions at the end of 
the day, particularly on the days when some stock index options, stock 
index futures, and options on stock index futures expire or settle 
concurrently.\23\ The Commission further believes that publishing a 
Total Imbalance and Market Imbalance following a Trading Halt in a 
given security will increase the information available to Users when 
making investment decisions.
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    \22\ See American Stock Exchange (``Amex'') Rule 131(e), Boston 
Stock Exchange Ch. II, Section 22, Chicago Stock Exchange Article 
XX, Rule 44, and New York Stock Exchange (``NYSE'') Rule 123C.
    \23\ See Securities Exchange Act Release No. 40094 (June 15, 
1998), 63 FR 33975 (June 22, 1998) (SR-NYSE-97-36) (Order approving 
a revision to the NYSE's policy for entry of MOC and LOC orders and 
publication of imbalances); Securities Exchange Act Release No. 
40123 (June 24, 1998), 63 FR 38230 (July 15, 1998) (SR-Amex-98-10) 
(Order approving the establishment of LOC orders on the Amex).
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    The Commission finds good cause, pursuant to Section 19(b)(2) of 
the Act, for approving Amendment No. 3 prior to the thirtieth day after 
the date of publication of notice thereof in the Federal Register. In 
Amendment No. 3, the PCX proposed to incorporate rule text relating to 
Total Imbalance and Market Imbalance publications that the Commission 
recently approved.\24\ In addition, Amendment No. 3 clarified that PCX 
would publish MOC orders that are not matched for execution as the 
Market Imbalance prior to the Closing Auction, move the Closing Auction 
from the Late Trading Session to the Core Session, and change its start 
time from 1:02 pm Pacific Time to 1:00 Pacific time. The Amendment 
further clarified that MOC and LOC orders are eligible for execution 
during the Closing Auction. The Commission believes that Amendment No. 
3 does not raise any new regulatory issues. Further, the

[[Page 69753]]

Commission notes that the original proposal, which was published for 
the full comment period, elicited no public comment. Accordingly, the 
Commission believes that there is good cause, consistent with Section 
19(b)(2) of the Act,\25\ to approve Amendment No. 3 to the PCX's 
proposed rule change on an accelerated basis.
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    \24\ See Securities Exchange Act Release No. 48767 (November 10, 
2003), 68 FR 65337 (November 19, 2003) (SR-PCX-2003-48).
    \25\ 15 U.S.C. 78s(b)(2).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 3, including whether Amendment No. 3 
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. Comments 
may also be submitted electronically at the following e-mail address: 
[email protected]. All comment letters should refer to File No. SR-
PCX-2003-24. This file number should be included on the subject line if 
e-mail is used. To help the Commission process and review your comments 
more efficiently, comments should be sent in hardcopy or by e-mail but 
not by both methods. 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 also will be available for 
inspection and copying at the principal office of the PCX. All 
submissions should refer to File No. SR-PCX-2003-24 and should be 
submitted by [insert date 21 days from date of publication].

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\26\ that the proposed rule change, (File No. SR-PCX-2003-24), as 
amended by Amendments No. 1 and 2, is approved, and Amendment No. 3 is 
approved on an accelerated basis.
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    \26\ Id.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\27\
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    \27\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-30838 Filed 12-12-03; 8:45 am]
BILLING CODE 8010-01-P