[Federal Register Volume 69, Number 189 (Thursday, September 30, 2004)]
[Notices]
[Pages 58570-58572]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-21883]



[[Page 58570]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50441; File No. SR-PCX-2003-71]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change and Amendment No. 
1 Thereto by the Pacific Exchange, Inc., Relating to Trading Securities 
Valued at Less Than $1.00 in Subpenny Increments

September 24, 2004.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 
1934, (the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby 
given that on December 22, 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 and 
II below, which Items have been prepared by the Exchange. On September 
15, 2004, the Exchange submitted Amendment No. 1 to the proposal.\3\ 
The Commission is publishing this notice to solicit comments on the 
proposed rule change, as amended, from interested persons. As discussed 
below, the Commission is granting accelerated approval of the proposed 
rule change, as amended, for a pilot period.
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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, Director, Regulatory Policy, 
PCX, to Nancy J. Sanow, Assistant Director, Division of Market 
Regulation (``Division''), Commission, dated September 15, 2004.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to modify the interpretation to PCXE Rule 
7.6(a) to provide for order entry and trading of securities that are 
priced less than $1.00 to be entered, executed and reported in subpenny 
increments.

I. 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 III below. The Exchange has prepared summaries, set forth in 
Sections A, B, and C below, of the most significant aspects of such 
statements.
    The text of the proposed rule change is set forth in Exhibit A 
hereto.

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 
Archipelago Exchange (``ArcaEx'') facility, the PCX is proposing, on a 
pilot basis through September 30, 2005, to permit trading of securities 
that are priced at less than $1.00 to be traded in increments of 
$0.001. Currently, interpretation .05 to PCXE Rule 7.6(a) stipulates 
that the minimum price variation for quoting and entry of orders traded 
on ArcaEx is $0.01. The Exchange proposes modifying this interpretation 
to allow for order entry in increments of $0.001 for Nasdaq National 
Market (``NNM''), Nasdaq Small Cap, and exchange-listed securities that 
are priced less than $1.00. In addition, the Exchange acknowledges the 
Commission's concern that allowing trading in $0.001 increments in 
securities priced less than $1.00 could permit ArcaEx ETP Holders to 
trade ahead of customers whose limit orders are at the national best 
bid or offer (``NBBO'') in those securities by improving upon the 
quoted price in $0.001 increments.\4\ Accordingly, the Exchange is also 
proposing to modify PCXE Rule 6.16, which governs trading ahead of 
customers' limit orders. The Exchange proposes to add a Commentary to 
PCXE Rule 6.16 to indicate that, during the term of this pilot, for 
securities priced less than $1.00, the minimum amount of price 
improvement necessary to execute an incoming marketable order on a 
proprietary basis by an ETP Holder when holding an unexecuted customer 
limit order otherwise due an execution pursuant to PCXE Rule 6.16 in 
that same security is $0.01.
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    \4\ See PCXE Rule 1.1(n).
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    In conjunction with this proposed filing, the Exchange has 
requested exemptive relief that would permit, on a one-year pilot basis 
through September 30, 2005, ArcaEx's ETP Holders to provide for order 
entry and trading of securities traded on ArcaEx (NNM securities, Small 
Cap Securities, and exchange-listed securities) that are priced less 
than $1.00 to be entered, executed and reported in increments of 
$0.001, while ArcaEx and vendors that disseminate ArcaEx quotation 
information report and disseminate quotes for those securities in penny 
increments.\5\
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    \5\ See letter from Mai Shiver, Director, Regulatory Policy, 
PCX, to Annette L. Nazareth, Director, Division, Commission, dated 
September 15, 2004, regarding Subpenny Trading Increment for 
Securities Priced Less Than $1.00 (``Exemptive Request''). In this 
letter, the Exchange requested exemptive relief from Rules 11Ac-1, 
11Ac1-2 and 11Ac1-4 to allow ArcaEx, its ETP Holders, and vendors 
that disseminate ArcaEx quotation information to round quotes for 
securities priced less than $1.00 to the nearest penny increment 
(up, for orders to sell, or down, for orders to buy) for display 
purposes, while such quotes may be entered and executed in 
increments of $0.001.
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    Further, to advance the Commission's review, and as a condition to 
the exemption relief sought, the Exchange has agreed to provide the 
Commission with monthly reports on its activity in subpenny increments. 
Such information will include reported volume of orders received and 
executed in subpenny increments (in terms of both trades and shares), 
the execution price points, and the nature of the subpenny orders 
received and executed (i.e., agency, principal, or otherwise).\6\
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    \6\ The Nasdaq Stock Market, Chicago Stock Exchange, Inc., and 
National Stock Exchange, Inc., who have all received similar 
exemptive relief from the Commission, have also agreed to provide 
the Commission with similar monthly reports on their subpenny 
trading activity as a condition to receiving such relief.
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    The Exchange believes that allowing executions on ArcaEx in 
securities priced less than $1.00 would enable investors to sell the 
security in the event it becomes necessary, e.g., where delisting 
proceedings have been announced or are imminent. The limited number of 
price points in low priced stocks necessitates the ability to trade in 
smaller increments.\7\ Also, because the securities subject to this 
proposal are limited to those that meet ArcaEx's listing standards or 
are eligible for trading pursuant to the unlisted trading privileges, 
there are few (less than 1%) that will be impacted by this proposal. 
Moreover, the Exchange also has the ability to execute in subpennies 
under certain circumstances \8\ and this proposal, although it relates 
to all order types, is a limited extension of that

[[Page 58571]]

same principle restricted to securities priced less than $1.00.
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    \7\ See Securities Exchange Act Release No. 49325 (February 26, 
2004), 69 FR 11125 (March 9, 2004). The Exchange notes that the 
Regulation NMS proposal's limitation on subpenny trading would 
exclude securities priced below $1.00. The Exchange understands that 
the Commission's proposed Regulation NMS may have an impact on this 
pilot program. Accordingly, the Exchange has stated that it will 
undertake to work with the Commission to ensure that the pilot 
program would be consistent with the rules and regulations that may 
be adopted by the Commission in connection with its Regulation NMS 
proposal.
    \8\ See PCXE Rule 7.6(a), Commentary .07, ArcaEx is able to 
execute Midpoint Cross Orders and Directed Fills in increments 
smaller than the minimum price variation i.e., in subpennies.
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) \9\ of the Act, in general, and furthers the 
objectives of Section 6(b)(5),\10\ 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, to remove impediments 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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    \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. 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-2003-71 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-2003-71. 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 the 
Exchange. 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-
2003-71 and should be submitted on or before October 21, 2004.

IV. Commission's Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    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.\11\ In particular, the Commission finds that the proposed 
rule change is consistent with Section 6(b)(5) \12\ of the Act, which 
requires that an exchange's rules be designed to promote just and 
equitable principles of trade, 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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    \11\ In approving this proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
    \12\ 15 U.S.C. 78f(b)(5).
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    Simultaneous with the filing of this proposal, the Commission 
received a request for exemptive relief submitted by the Exchange that 
would allow the ArcaEx, ArcaEx ETP holders, and vendors that 
disseminate ArcaEx quote information to display and disseminate their 
quotes for securities priced less than $1.00 in penny increments 
without a rounding identifier, while ArcaEx ETP Holders provide for 
order entry and trading in subpenny increments.\13\ By letter dated 
September 21, 2004, the Division, pursuant to delegated authority under 
Rules 11Ac1-1(e),\14\ 11Ac1-2(g),\15\ and 11Ac1-4(d) \16\ under the 
Act, granted a conditional temporary exemption to ArcaEx, ArcaEx ETP 
Holders, and vendors that disseminate ArcaEx quote information to 
permit them to display and disseminate their quotes for securities 
priced less than $1.00 in rounded, penny increments without a rounding 
identifier.\17\ The exemption expires September 30, 2005. The 
Commission notes that the Nasdaq Stock Market, Chicago Stock Exchange, 
Inc., and National Stock Exchange, Inc. currently trade in subpennies 
pursuant to similar exemptive and no-action relief from the Commission. 
Unlike these other exchanges whose subpenny trading is not restricted 
to a particular price level, the Commission notes that the PCX, by this 
proposed rule change, is seeking to allow subpenny trading on ArcaEx 
only in securities priced less than $1.00, which the Exchange has 
represented is fewer than one percent of all securities traded on 
ArcaEx. The Commission also notes that, as part of the proposed rule 
change, the Exchange is amending its rule relating to trading ahead of 
customer orders to require ArcaEx ETP Holders to improve on their 
customers' subpenny quotes by a full penny in order to trade of such 
customer orders. The Commission believes that the proposed rule change 
should allow for additional liquidity at the less than $1.00 price 
level, while providing protection to customer limit orders in the 
subpenny trading environment by helping to ensure that such orders will 
continue to have access to market liquidity ahead of ArcaEx ETP 
Holders' orders in appropriate circumstances.\18\
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    \13\ See Exemptive Request, supra note 5.
    \14\ 17 CFR 240.11Ac1-1(e).
    \15\ 17 CFR 240.11Ac1-2(g).
    \16\ 17 CFR 240.11Ac1-4(d).
    \17\ See letter from David S. Shillman, Associate Director, 
Division, Commission, to Mai S. Shiver, Director, Regulatory Policy, 
PCX (September 24, 2004) (``Exemptive Relief Letter''). The relief 
granted to PCX is expressly conditioned upon providing the 
Commission with data specified in the Exemptive Relief Letter. The 
Commission intends to reconsider the position expressed in its 
letter before the expiration of the exemption on September 30, 2005.
    \18\ The Commission notes that the approval of this proposal in 
no way prejudges or determines what action the Commission may take 
with respect to any part of the Regulation NMS proposal.
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    Accordingly, the Commission finds good cause, pursuant to Section 
19(b)(2) \19\ of the Act, for approving the proposed rule change, as 
amended, on a pilot basis through September 30, 2005, prior to the 
thirtieth day after the

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date of publication of notice thereof in the Federal Register.
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    \19\ 15 U.S.C. 78s(b)(2).
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V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\20\ that the proposed rule change (SR-PCX-2003-71), as amended, is 
hereby approved on an accelerated basis until September 30, 2005.
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    \20\ Id.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.

Exhibit A

Proposed new text is italicized.

Rule 7--Equities Trading

Trading Differentials

Trading Ahead of Customer Limit Orders
    Rule 6.16(a)-(d)--No change.

Commentary:

    .01 For all securities that are priced less than $1.00 that are 
traded pursuant to the pilot program under Commentary .05 of PCXE Rule 
7.6(a) with a minimum price variation of $0.001, the minimum amount of 
price improvement necessary to execute an incoming marketable order on 
a proprietary basis by an ETP Holder when holding an unexecuted 
customer limit order otherwise due an execution pursuant to Rule 
6.16(a) in that same security is $0.01.
    Rule 7.6(a)--No change.

Commentary:

    .01-.04--No change.
    .05 The minimum price variation (``MPV'') for quoting and entry of 
orders in equity securities traded on the Archipelago Exchange is 
$0.01, with the exception of securities that are priced less than $1.00 
in which case, on a pilot basis through September 30, 2005, the MPV for 
order entry will be $0.001.
    .06-.07--No change.
[FR Doc. 04-21883 Filed 9-29-04; 8:45 am]
BILLING CODE 8010-01-P