[Federal Register Volume 70, Number 32 (Thursday, February 17, 2005)]
[Notices]
[Pages 8123-8125]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-654]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51184; File No. SR-PCX-2004-129]


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 Minimum Price 
Improvement Standards

February 10, 2005.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934

[[Page 8124]]

(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on December 29, 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 and 
II below, which Items have been prepared by the Exchange. On January 
24, 2005, PCX amended the proposal.\3\ The Commission is publishing 
this notice and order to solicit comments on the proposed rule change, 
as amended, from interested persons and to approve the proposal on an 
accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In the amendment (``Amendment No. 1''), PCX made technical 
changes to the proposed rule text.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    PCX, through its wholly owned subsidiary, PCX Equities, Inc. 
(``PCXE''), proposes to modify Commentary .05 to PCXE Rule 7.6(a) to 
provide for order entry and trading of securities in sub-penny 
increments. The Exchange also proposes to modify Commentary .01 to PCXE 
Rule 6.16 to clarify that, for all securities traded pursuant to 
Commentary .05 to PCXE Rule 7.6(a), the minimum amount of price 
improvement necessary to execute an incoming marketable order on a 
proprietary basis is $0.01. The text of the proposed rule change is 
available on the Exchange's Web site (http://www.pacificex.com), at the 
Exchange's principal office, and at the Commission's Public Reference 
Room.

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 III 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 its 
Archipelago Exchange (``ArcaEx'') facility, PCX is proposing to extend 
its request for exemptive relief for rounding sub-penny quotes and 
trades to securities that are priced greater than $1.00. PCX has 
requested this extension until June 30, 2005. Recently, PCX was granted 
exemptive relief for rounding sub-penny prices for securities priced 
less than $1.00.\4\ In accordance with that exemption, Commentary .05 
to PCXE Rule 7.6(a) was modified to reflect a sub-penny minimum price 
variation for securities priced less than $1.00 on a pilot basis 
through September 30, 2005. The Exchange proposes adding to this 
commentary to allow for order entry and execution in increments smaller 
than $0.01 for Nasdaq National Market (``NNM''), SmallCap, and 
exchange-listed securities. In addition, the Exchange acknowledges the 
Commission's concern that allowing trading in sub-penny increments 
could permit ArcaEx ETP Holders to trade ahead of customers by 
improving upon the quoted price in sub-penny increments.\5\ 
Accordingly, the Exchange is also proposing to revise PCXE Rule 6.16 by 
providing that 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 letter from David S. Shillman, Associate Director, 
Division of Market Regulation (``Division''), Commission, to Mai S. 
Shiver, Director of Regulatory Policy, PCX, dated September 24, 
2004.
    \5\ See PCXE Rule 1.1(n).
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    In conjunction with this proposal, the Exchange has requested 
exemptive relief that would permit, through June 30, 2005, ArcaEx's ETP 
Holders to provide for order entry and trading of securities traded on 
ArcaEx (NNM securities, SmallCap securities, and exchange-listed 
securities) that are executed and reported in sub-penny increments, 
while vendors that disseminate ArcaEx quotation information do so in 
penny increments.\6\
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    \6\ See letter from Mai Shiver, Director of Regulatory Policy, 
PCX, to Annette Nazareth, Director, Division, Commission, dated 
December 28, 2004. In this letter, the Exchange requested exemptive 
relief from Rules 11 Ac1-1, 11 Ac1-2, and 11 Ac1-4 to allow ArcaEx, 
its ETP Holders, and vendors that disseminate ArcaEx quotation 
information to round sub-penny quotes to the nearest penny increment 
(up, for orders to sell; down, for orders to buy) for display 
purposes, while such quotes may be entered and executed in 
increments less than $0.01.
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    Further, to advance the Commission's review, and as a condition to 
the exemptive relief sought, the Exchange has agreed to provide the 
Commission with monthly reports on its activity in sub-penny 
increments. Such information will include reported volume of orders 
received and executed in sub-penny increments (in terms of both trades 
and shares), the execution price points, and the nature of the sub-
penny orders received and executed (i.e., agency, principal, or 
otherwise).
    The Exchange believes that allowing sub-penny executions on ArcaEx 
in certain securities would afford ETP Holders with trading 
opportunities that are consistent with those available at competing 
exchanges such as the National Stock Exchange and the Chicago Stock 
Exchange.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\7\ in general, and furthers the 
objectives of Section 6(b)(5),\8\ 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 to protect investors and the 
public interest.
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    \7\ 15 U.S.C. 78f(b).
    \8\ 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 would 
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, as amended, 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-2004-129 on the subject line.

[[Page 8125]]

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-2004-129. 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-2004-129 
and should be submitted on or before March 10, 2005.

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.\9\ 
In particular, the Commission believes that the proposal is consistent 
with Section 6(b)(5) of the Act,\10\ which requires that the rules of 
an exchange be designed to promote just and equitable principles of 
trade and, in general, to protect investors and the public interest.
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    \9\ In approving the proposed rule, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \10\ 15 U.S.C. 78f(b)(5).
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    Simultaneous with this order, the Commission is approving an 
exemption until June 30, 2005, from Rules 11 Ac1-1, 11 Ac1-2, and 11 
Ac1-4 under the Act \11\ that permits ArcaEx, ETP Holders of ArcaEx, 
and vendors that disseminate ArcaEx quote information to enter, 
execute, and report quotations in exchange-listed, NNM, and SmallCap 
securities in increments less than $0.01, although such quotations will 
be disseminated in rounded, penny increments without a rounding 
identifier.\12\ The changes to Commentary .05 to PCXE Rule 7.6(a) 
incorporate the terms of that Commission exemption into PCXE's rules. 
The changes to Commentary .01 to PCXE Rule 6.16 provide that an ETP 
Holder must price-improve an incoming marketable order by at least 
$0.01 when holding an unexecuted customer limit order otherwise due an 
execution pursuant to PCXE Rule 6.16(a). This is an important investor 
protection because an ETP Holder will be prohibited from stepping ahead 
of a customer limit order by a sub-penny amount even though sub-penny 
orders generally may be entered on ArcaEx. The Commission notes that it 
previously has approved an identical price improvement standard on 
other exchanges.\13\
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    \11\ 17 CFR 240.11 Ac1-1, 240.11 Ac1-2, and 240.11 Ac1-4.
    \12\ See letter from David S. Shillman, Associate Director, 
Division, Commission, to Mai S. Shiver, Director of Regulatory 
Policy, PCX, dated February 10, 2005.
    \13\ See Securities Exchange Act Release No. 44164 (April 6, 
2001), 66 FR 19263 (April 13, 2001) (approving penny price 
improvement increment on Chicago Stock Exchange); Securities 
Exchange Act Release No. 46274 (July 29, 2002), 67 FR 50743 (August 
5, 2002) (same for Cincinnati--now National--Stock Exchange).
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    The Commission finds good cause for approving this proposal before 
the thirtieth day after the publication of notice thereof in the 
Federal Register. Accelerated approval will provide protection for 
customer limit orders simultaneous with the effectiveness of the 
Commission exemption that permits sub-penny quoting, for a limited 
period, on ArcaEx.

V. Conclusion

    It Is Therefore Ordered, pursuant to Section 19(b)(2) of the 
Act,\14\ that the proposed rule change, as amended (SR-PCX-2004-129), 
is hereby approved on an accelerated basis.
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    \14\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR.200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-654 Filed 2-16-05; 8:45 am]
BILLING CODE 8010-01-P