[Federal Register Volume 69, Number 11 (Friday, January 16, 2004)]
[Notices]
[Pages 2642-2643]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-1014]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49053; File No. SR-PCX-2003-63]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Pacific Exchange, Inc. 
Relating to Post-Trade Anonymity to Its ETP Holders

January 12, 2004.
    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 November 12, 2003, the Pacific Exchange, Inc. (``PCX'' or 
``Exchange''), through its wholly-owned subsidiary PCX Equities, Inc. 
(``PCXE''), filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. On 
January 9, 2004, the Exchange submitted Amendment No. 1 to the proposed 
rule change.\3\ 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 Mai S. Shiver, Acting Director of Regulatory 
Policy, PCX, to Nancy Sanow, Assistant Director, Division of Market 
Regulation, Commission, dated January 9, 2004 (``Amendment No. 1''). 
In Amendment No. 1, the PCX explained that it currently has rules in 
place to assure that ETP Holders maintain recordkeeping requirements 
under the Act. The PCX also clarified that under the PCX's current 
procedures for adjusting trades, ETP Holders do not need to know the 
identity of their contra-party in order to adjust an erroneous 
trade.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange is proposing to provide post-trade anonymity to its 
ETP Holders and to modify PCXE Rule 7.41 accordingly. The text of the 
proposed rule changes is available at the PCX and at the Commission.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the PCX included statements 
concerning the purpose of and basis for the proposed rule change, and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
Sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange is proposing to extend anonymity on its Archipelago 
Exchange (``ArcaEx'') through to post settlement. Currently, Users \4\ 
may display and execute orders on an anonymous basis pursuant to PCXE 
Rules 7.36 and 7.37, respectively. Accordingly, during the execution 
process, Users' orders are executed without knowledge of the contra-
party's identity. At the end of the trading day, the contra-party's 
identity on a trade-by-trade basis is revealed to ETP Holders \5\ for 
their respective trades through web-based reports. Therefore, anonymity 
is maintained through execution, but not through the end-of-day 
settlement process.
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    \4\ See PCXE Rule 1.1(yy) for the definition of ``User.''
    \5\ See PCXE Rule 1.1(n) (definition of ``ETP Holder'').
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    The Exchange proposes to modify PCXE Rule 7.41 to clarify that the 
contra-party to the trade will not be revealed except in specific 
instances as discussed below. The Exchange believes that due to 
interest expressed by ETP Holders and the National Association of 
Securities Dealers, Inc.'s recent approval to implement post-trade 
anonymity,\6\ it is essential for ArcaEx to offer its Users anonymity 
through the settlement process. To facilitate this, ArcaEx has worked 
with the National Settlement Clearing Corporation (``NSCC'') to 
accommodate anonymity on a post-trade basis. NSCC will assign ArcaEx 
trades with a unique clearing number. ArcaEx will submit clearing 
records to NSCC, which, pursuant to its rules,\7\ will report trades 
executed on ArcaEx back to its clearing firms utilizing the unique 
clearing number for the contra-party rather than reveal that contra-
party's acronym.
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    \6\ See Securities Exchange Act Release No. 48088 (June 25, 
2003), 68 FR 39605 (July 2, 2003) (SR-NASD-2003-85).
    \7\ See Securities Exchange Act Release No. 48526 (September 23, 
2003), 68 FR 56367 (September 30, 2003) (SR-NSCC-2003-14).
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    To address risk management concerns, ArcaEx will provide ETP 
Holders with intra day concentration reports that reflect, on an 
aggregate basis, the share volume and dollar amount executed by each 
contra-party without identifying the contra-party. In addition, ArcaEx 
will provide the contra-party's identity when required for legal or 
regulatory purposes.

[[Page 2643]]

Furthermore, when NSCC ceases to act for an ETP Holder or the ETP 
Holder's clearing firm, and NSCC determines not to guarantee the 
settlement of the ETP Holder's trade, ArcaEx will reveal the contra-
party's identity.
    The Exchange believes that post-trade anonymity will benefit 
investors because preserving anonymity through settlement limits the 
potential market impact that disclosing the Users' identity may have. 
Specifically, when the contra-party's identity is revealed, Users can 
detect trading patterns and make assumptions about the potential 
direction of the market based on the User's presumed client-base. For 
example, if the User handles large institutional orders and becomes an 
active buyer in the security, others could anticipate such demand and 
adjust their trading strategy accordingly. The Exchange believes that 
his could result in increased costs. The Exchange states that post-
trade anonymity will not compromise an ETP Holder's ability to settle 
an erroneous trade, because under PCXE Rules 7.10-7.11, the trade 
adjustment process is coordinated by the Exchange, without the need for 
contra-parties to know each other's identities.\8\ By eliminating the 
User's identity and mitigating market impact, the Exchange believes 
that it will help Users meet best execution obligations.
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    \8\ See Amendment No. 1.
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2. Statutory Basis
    The Exchange believes that the proposal is consistent with section 
6(b) of the Act,\9\ in general, and section 6(b)(5) of the Act,\10\ in 
particular, in that it will promote just and equitable principles of 
trade; facilitate transactions in securities, remove impediments to and 
perfect the mechanisms of a free and open market and a national market 
system; and protect investors and the public interest.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    Written comments on the proposed rule change were neither solicited 
nor received.

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

    Because the foregoing proposed rule change does not:
    (i) significantly affect the protection of investors or the public 
interest;
    (ii) impose any significant burden on competition; and
    (iii) become operative for 30 days from the date on which it was 
filed, or such shorter time as the Commission may designate, it has 
become effective pursuant to section 19(b)(3)(A) of the Act \11\ and 
Rule 19b-4(f)(6) thereunder.\12\ At any time within 60 days of the 
filing of the proposed rule change, the Commission may summarily 
abrogate such rule change if it appears to the Commission that such 
action is necessary or appropriate in the public interest, for the 
protection of investors, or otherwise in furtherance of the purposes of 
the Act.\13\
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    \11\ 15 U.S.C. 78s(b)(3)(A).
    \12\ 17 CFR 240.19b-4(f)(6).
    \13\ For purposes of determining the effective date of the 
filing and calculating the 60-day abrogation date, the Commission 
considers the period to commence on January 9, 2004, the date PCX 
filed Amendment No. 1.
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the 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. Comments may also be submitted electronically at the 
following e-mail address: [email protected]. All comment letters 
should refer to File No. SR-PCX-2003-63. This file number should be 
included on the subject line if e-mail is used. To help the Commission 
process and review 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 will also be available for 
inspection and copying at the principal office of the PCX. All 
submissions should refer to File No. SR-PCX-2003-63, and should be 
submitted by February 6, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-1014 Filed 1-15-04; 8:45 am]
BILLING CODE 8010-01-P