[Federal Register Volume 69, Number 144 (Wednesday, July 28, 2004)]
[Notices]
[Pages 45104-45106]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-17111]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50054; File No. SR-PCX-2004-49]


Self-Regulatory Organizations; Pacific Exchange, Inc.; Notice of 
Filing of a Proposed Rule Change To Amend Its Rules Governing the 
Archipelago Exchange by Adding a New Order Modifier Entitled ``Don't 
Arb Me''

July 21, 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 June 3, 2004, 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. The Commission is publishing 
this notice to solicit comments on the proposed rule change from 
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange is proposing to amend its rules governing the 
Archipelago Exchange (``ArcaEx''), the equities trading facility of 
PCXE, to add a new order type entitled the ``Don't Arb Me'' modifier. 
The ``Don't Arb Me'' modifier will increase processing capability for 
orders in exchange-listed securities that are traded-through by an away 
market block trade. The text of the proposed rule change appears below. 
New text is in italics.
* * * * *

Rule 7 Equities Trading

Orders and Modifiers

Rule 7.31 Orders and Modifiers
* * * * *
    (dd) Don't Arb Me Modifier. A limit order in which the Corporation 
will re-price the order at the block price subsequent to the limit 
order being traded-through by another market center's block trade. The 
order shall be ranked in the Arca Book pursuant to Rule 7.36 and 
assigned a new time price priority as of the time of each reposting. 
This modifier will apply only to exchange-listed securities.
* * * * *

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 Exchange 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
    As part of its continuing efforts to enhance participation on the 
ArcaEx facility, the PCX is proposing to include an additional 
processing capability for orders in exchange-listed securities in 
situations when an order is traded-through by another market's block 
trade. The Exchange believes that such capability will protect ArcaEx 
orders from being arbitraged by other market centers.
    Currently, PCXE Rule 7.56 (``ITS Trade-Throughs and Locked 
Markets'') describes the interaction between markets in exchange-listed 
securities when an order in the ArcaEx Book is traded-through. This 
rule specifies that block trades \3\ are generally exempted from the 
trade-through rule.\4\ Pursuant to the Intermarket Trading System 
(``ITS'') Plan and PCXE rules, an ETP Holder that trades through 
another market with a block trade is obligated to send a commitment to 
the market center it traded through at the block price,

[[Page 45105]]

unless one of the inapplicability conditions apply.\5\
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    \3\ See PCXE Rule 7.57 (``Block Trade Policy''). Block trades 
are trades in excess of 10,000 shares or $200,000; effected at a 
price outside the bid or offer displayed from another ITS 
participating market center; and involves either a cross of block 
size or any other transaction of block size that is not the result 
of an execution at the current bid or offer on the Corporation.
    \4\ See PCXE Rule 7.56, Commentary .01.
    \5\ See PCXE Rule 7.57(c) (creating carve outs to the obligation 
to send commitments).
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    According to the PCX, the rules permit away markets to send 
commitments to execute against ArcaEx superior quotes/prices after the 
away market trades through ArcaEx at inferior block prices. 
Specifically, an away market may send orders to execute at the superior 
ArcaEx price during the time period after the away market executes a 
block trade through ArcaEx, but before it sends the required ITS 
commitment to trade in response to the block trade-through. According 
to the Exchange, this enables away markets to execute at ArcaEx's 
superior price in order to arbitrage against the inferior block price.
    An example of this scenario under the current rules is as follows:
     ArcaEx's best bid is 7,000 at $41.50.
     An away market puts up a block trade in the same symbol 
for 10,000 at $41.25.
     In the intervening timeframe before the away market sends 
a commitment at $41.25, away market participants send sell orders to 
execute against ArcaEx's quote at $41.50 and subsequently trade at 
$41.25 thereby arbitraging the $0.25 spread and taking advantage of 
ArcaEx's superior price.
    The Exchange believes that the ``Don't Arb Me'' modifier is 
designed to protect better-priced ArcaEx orders from being taken 
advantage of in these circumstances. The new modifier would, in the 
instance of a block trade-through, immediately re-price the ArcaEx 
order at the block price. The order would then be displayed in the 
ArcaEx book pursuant to PCXE Rule 7.36 and assigned a new time, price 
priority as of the time of each reposting. The example below is an 
illustration of how the ``Don't Arb Me'' modifier will operate:
     Client sends an order to Buy 7,000 at $41.50 with the 
Don't Arb Me modifier.
     ArcaEx displays Buy 7,000 at $41.50.
     Away market sends a block trade to the tape in the same 
symbol for 10,000 at $41.25.
     ArcaEx immediately cancels the buy 7,000 at $41.50 and 
posts 7,000 at $41.25 with new time priority.
     An order is submitted to ArcaEx that trades with the 7,000 
Buy order (at 41.25).
    The Exchange believes that the implementation of the ``Don't Arb 
Me'' modifier will facilitate enhanced order interaction and foster 
price competition. According to the Exchange, the proposal promotes 
increased efficiency and effectiveness in its market operation, and 
enhances the investment choices available to investors over a broad 
range of trading scenarios. The Exchange notes that the ``Don't Arb 
Me'' modifier was created in response to ArcaEx participants' requests 
for additional functionality to deal with the problems described above.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with section 6(b) of the Act,\6\ in general, and further the objectives 
of section 6(b)(5) of the Act,\7\ in particular, because it is designed 
to promote just and equitable principles of trade, to foster 
cooperation and coordination with persons engaged in facilitating 
transactions in securities, to remove impediments to and perfect the 
mechanisms of a free and open market and a national market system, and 
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) \8\ of the Act, which states that new data 
processing and communications techniques create the opportunity for 
more efficient and effective market operations.
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    \6\ 15 U.S.C. 78f(b).
    \7\ 15 U.S.C. 78f(b)(5).
    \8\ 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 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 were neither solicited nor received with respect 
to the proposed rule change.

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 Exchange 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);
     Send an e-mail to [email protected]. Please include 
File Number SR-PCX-2004-49 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-2004-49. 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 Room. Copies of the 
filing also will be available for inspection and copying at the 
principal office of the 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-2004-49 and should be submitted on or before August 
18, 2004.


[[Page 45106]]


    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-17111 Filed 7-27-04; 8:45 am]
BILLING CODE 8010-01-P