[Federal Register Volume 69, Number 100 (Monday, May 24, 2004)]
[Notices]
[Pages 29609-29611]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-11648]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49713; File No. SR-PCX-2004-12]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment Nos. 1, 2, and 3 Thereto by the Pacific Exchange, 
Inc. Creating an Additional Processing Capability for PNP Orders Called 
``PNP Plus''

May 17, 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 February 23, 2004 the Pacific Exchange, Inc. (``PCX'' or 
``Exchange'') 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 PCX. On April 23, 
2004, the PCX submitted Amendment No. 1 to the proposed rule change.\3\ 
On April 28, 2004, the PCX submitted Amendment No. 2 to the proposed 
rule change.\4\ On May 11, 2004, the PCX submitted Amendment No. 3 to 
the proposed rule change.\5\ 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 Steven B. Matlin, Senior Attorney, 
Regulatory Policy, PCX, to Nancy J. Sanow, Assistant Director, 
Division of Market Regulation (``Division''), Commission, dated 
April 22, 2004 (``Amendment No. 1''). Amendment No. 1 superseded and 
replaced the original rule filing in its entirety. In Amendment No. 
1, the PCX changed the proposal to make Post No Preference (``PNP'') 
Plus Order election an order-by-order designation, made conforming 
and clarifying changes in the rule text and provided an example of 
how a PNP Plus Order would be processed.
    \4\ See letter from Steven B. Matlin, Senior Attorney, 
Regulatory Policy, PCX, to Nancy J. Sanow, Assistant Director, 
Division, Commission, dated April 27, 2004 (``Amendment No. 2''). In 
Amendment No. 2, the PCX corrected typographical errors and made 
clarifying changes in the rule text.
    \5\ See letter from Steven B. Matlin, Senior Attorney, 
Regulatory Policy, PCX, to Nancy J. Sanow, Assistant Director, 
Division, Commission, dated May 10, 2004 (``Amendment No. 3''). In 
Amendment No. 3, the PCX made a clarifying edit to the rule text.
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I. Self-Regulatory Organization's Statement of the Terms of the 
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, by adding 
additional processing capability for PNP Orders.
    The text of the proposed rule change appears below. Proposed new 
language is in italics.
* * * * *
PCX Equities, Inc.
Rule 7
Equities Trading
Orders and Modifiers
Rule 7.31. Orders and Modifiers
    (w) PNP Order (Post No Preference). A limit order to buy or sell 
that is to be executed in whole or in part on the Corporation, and the 
portion not so executed is to be ranked in the Arca Book, without 
routing any portion of the order to another market center; provided, 
however, the Corporation shall cancel a PNP Order that would lock or 
cross the NBBO. PNP Orders for Trade-Through Exempt Securities (as 
defined in Rule 7.37) will not be canceled at the time of order entry 
if such orders would lock or cross the NBBO. PNP Orders in ITS Trade-
Through Exempt Securities may be executed at a price no more than three 
cents ($0.03) away from the NBBO displayed in the Consolidated Quote. 
The NBBO price protection provision set forth in Rule 7.37 will not 
apply to PNP Orders in Nasdaq securities.

[[Page 29610]]

    (1) PNP Plus. A PNP Order designated as PNP Plus will be 
automatically re-priced by the Corporation as a penny greater than the 
national best bid (for sell orders) or a penny lower than the national 
best offer (for buy orders) for any or all of the order that remains 
unexecuted and would otherwise lock or cross the NBBO should it be 
displayed in the Arca Book. The re-priced order will then be posted in 
the Arca Book. The PNP Plus order will continue to be re-priced at a 
penny greater than the national best bid (for sell orders) or penny 
lower than the national best offer (for buy orders) and re-posted in 
the Arca Book, with each change in the NBBO, until such time as the 
NBBO has moved to a price where the original price of the PNP Order no 
longer would result in a locked or crossed market, at which time the 
PNP Order will revert to the original price of such order. PNP Orders 
designated as PNP Plus shall be ranked in the Arca Book pursuant to 
Rule 7.36 and assigned a new price time priority as of the time of each 
reposting.
* * * * *

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

    In its filing with the Commission, 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. 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
    As part of its continuing efforts to enhance participation on 
ArcaEx, PCX proposes to adopt additional processing capability for PNP 
Orders \6\ called ``PNP Plus.'' The Exchange believes that this new 
functionality would provide ETP Holders and Sponsored Participants with 
increased opportunities for executing PNP Orders while seeking to 
prevent locking or crossing the national best bid or offer (``NBBO'').
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    \6\ See PCXE Rule 7.31(w) for the definition of ``PNP Orders.''
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    The Exchange's current rules governing PNP Orders are set forth in 
PCXE Rule 7.31. Presently, PCXE Rule 7.31 provides that a PNP Order is 
a limit order that executes within the ArcaEx Book without routing to 
another market center. The unexecuted portion of the order is then 
posted in the Arca Book pursuant to PCXE Rule 7.36. In the case where 
posting an order in whole or in part would otherwise lock or cross the 
national best bid or offer, the PNP Order or portion thereof currently 
is rejected back to the customer.\7\
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    \7\ Currently, under PCXE Rule 7.31(w), PNP Orders for Trade-
Through Exempt Securities (as defined in PCXE Rule 7.37) are not 
cancelled if such orders would lock or cross the NBBO.
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    The Exchange proposes to add additional processing capability that 
may be selected on an order-by-order basis designated as PNP Plus. 
Specifically, PNP Plus provides that, when posting a PNP Order or 
portion thereof would otherwise result in locking or crossing the 
national market, the PNP Order would automatically be re-priced to be a 
penny greater than the national best bid (for sell orders) and a penny 
lower than the national best offer (for buy orders) so as to avoid 
locking or crossing the national market. The order would then be posted 
in the Arca Book pursuant to PCXE Rule 7.36 and assigned a new price 
time priority as of the time of each re-posting. The order would 
continue to be re-priced and re-posted, with each change in the NBBO, 
until such time that the national market moves such that the original 
price of the PNP Order would no longer lock or cross the NBBO. The PNP 
Order would then automatically be re-priced back to its original limit 
price and be re-posted in the Arca Book with a new price time priority. 
The PNP Plus order would not be re-priced in the instance when the 
order becomes locked or crossed by another market.
    Following is an example of the PNP Plus functionality:

PNP Plus Example

NBBO = 20.00 to 20.03 500C (NSX) x 500T (NASDAQ) + 200P (ArcaEx)
ArcaEx Book = 15.00 to 20.03 600 x 200
Order 1 - PNP Plus Buy 1,000 @ 20.06
200 trades at 20.03 leaving 800 shares of the PNP Plus Order
PNP Plus is quoted as 800 to buy at 20.02.
New NBBO = 20.02 to 20.03 800P (ArcaEx) x 500T (NASDAQ)

NBBO changes to 20.02 to 20.05 800P (ArcaEx) x 200N (NYSE)
Order 1 PNP Plus re-quotes to 20.04 bid (to re-price at $.01 from the 
NBBO) making the NBBO 20.04 to 20.05
Order 2 - Limit Buy 9,000 @ 20.04
NBBO becomes 20.04 to 20.05 9,800P (ArcaEx) x 200N (NYSE)
NBBO changes to 20.07 to 20.10 200N (NYSE) x 200N (NYSE)
Order 1 PNP Plus re-quotes to 20.06 bid (original price)
ArcaEx Book Priority
1. Order 1 - PNP Plus Buy 800 @ 20.06
2. Order 2 - Limit Buy 9,000 @ 20.04

    The Exchange believes that the implementation of this order type 
would facilitate enhanced order interaction and foster price 
competition. The Exchange also believes that the proposal would promote 
a more efficient and effective market operation and enhance the 
investment choices available to investors over a broad range of trading 
scenarios. Finally, the Exchange believes that the proposed rule change 
would permit increased execution opportunities of PNP Orders and will 
prevent locking or crossing the national best bid or offer.
2. Statutory Basis
    The Exchange 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 principles of trade, to foster 
cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, to remove impediments to and 
perfect the mechanisms of a free and open market and a national market 
system, and, in general, to protect investors and the public interest. 
In addition, the Exchange believes that the proposed rule change is 
consistent with provisions of Section 11A(a)(1)(B) of the Act,\10\ 
which states that new data processing and communications techniques 
create the opportunity for more efficient and effective market 
operations.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
    \10\ 15 U.S.C. 78k-1(a)(1)(B).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change, as 
amended, will result in 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 were neither solicited nor received.

[[Page 29611]]

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 self-regulatory organization consents, the Commission will:

    (A) By order approve such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change 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 is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number SR-PCX-2004-12 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609.
    All submissions should refer to File Number SR-PCX-2004-12. 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, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). 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 Section, 450 Fifth 
Street, NW., Washington, DC 20549. Copies of such filing also will be 
available for inspection and copying at the principal office of PCX. 
All comments received will be posted without change; the Commission 
does not edit personal identifying information from submissions. You 
should submit only information that you wish to make available 
publicly. All submissions should refer to File Number SR-PCX-2004-12 
and should be submitted on or before June 14, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 04-11648 Filed 5-21-04; 8:45 am]
BILLING CODE 8010-01-P