[Federal Register Volume 70, Number 44 (Tuesday, March 8, 2005)]
[Notices]
[Pages 11300-11303]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-933]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51280; File No. SR-PCX-2004-72]


Self-Regulatory Organizations; Pacific Exchange, Inc.; Notice of 
Filing of a Proposed Rule Change and Amendments No. 1 and 2 Thereto 
Relating to Clearly Erroneous Executions on the Archipelago Exchange

March 1, 2005.
    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 July 28, 2004, the Pacific Exchange, Inc. (``PCX'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``SEC'' or 
``Commission'') the proposed rule change as described in items I, II, 
and III, below, which items have been prepared by the Exchange. PCX 
filed Amendment No. 1 to the proposed rule change on December 29, 
2004,\3\ and filed Amendment No. 2 to the proposed rule change on 
February 15, 2005.\4\ The Commission is publishing this notice to 
solicit comment 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 Amendment No. 1, submitted by Tania Blanford, Staff 
Attorney, PCX (``Amendment No. 1''). Amendment No. 1 replaces the 
original filing in its entirety.
    \4\ See Amendment No. 2, submitted by James Draddy, Vice 
President, Equities Regulation, PCX (``Amendment No. 2''). Amendment 
No. 2 replaces the original filing and Amendment No 1 in their 
entirety.
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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 amend its rules governing clearly erroneous 
executions (``CEE'') on the Archipelago Exchange (``ArcaEx''), the 
equities trading facility of PCXE. Specifically, the Exchange proposes 
to combine the provisions of PCXE Rules 7.10 (Cancellation of Revisions 
in Transactions) and PCXE Rule 7.11 (Clearly Erroneous Policy) into one 
resulting rule, PCXE Rule 7.10, ``Clearly Erroneous Executions.'' The 
Exchange also proposes to amend the procedures that an ETP Holder would 
be required to follow when seeking relief for clearly erroneous 
executions. Finally, the Exchange has revised its guideline listing 
factors it may consider in making its determinations regarding CEE. A 
copy of the revised guideline is available at the Exchange's Web site 
(http://www.pacificex.com/legal/legal_home.html).
    The text of the proposed rule change is set forth below. Additions 
are in italics. Deletions are in [brackets].
* * * * *

Rule 7: Equities Trading

Rule 7.10. Clearly Erroneous Executions [Cancellation of Revisions in 
Transactions]

    (a) Definition. For purposes of this Rule, the terms of a 
transaction executed on the Corporation are ``clearly erroneous'' when 
there is an obvious error in any term, such as price, number of shares 
or other unit of trading, or identification of the security. A 
transaction [sale] made in clearly erroneous [demonstrable] error and 
cancelled by both parties may be removed, if the parties do not object, 
subject to the approval of the Corporation. [Disagreements with respect 
thereto shall be referred to the appropriate trading authority of the 
Corporation. A dispute arising on bids, offers or sales, if not settled 
by agreement between the parties interested, shall be settled by the 
Corporation.]
    (b) Request for Corporation Review. An ETP Holder that receives an 
execution on an order that was submitted erroneously to the Corporation 
for its own or customer account may request that the Corporation review 
the transaction under this Rule. Such request for review shall be made 
via telephone, facsimile or e-mail and submitted within fifteen (15) 
minutes of the trade in question. Upon receipt, the counterparty to the 
trade, if any, shall be notified by the Corporation as soon as 
practicable. Thereafter, an Officer of the Corporation or such other 
designee of the Corporation (``Officer'') shall review the transaction 
under dispute and determine whether it is clearly

[[Page 11301]]

erroneous, with a view toward maintaining a fair and orderly market and 
the protection of investors and the public interest. Each party to the 
transaction shall provide, within 30 minutes of the request for review, 
any supporting written information as may be reasonably requested by 
Officer to aid resolution of the matter. Either party to the disputed 
trade may request the supporting written information provided by the 
other party on the matter.
    (c) Review Procedures.
    (1) Unless both parties (or party, in the case of a cross) to the 
disputed transaction agree to withdraw the initial request for review, 
the transaction under dispute shall be reviewed, and a determination 
shall be rendered by the Officer. If the Officer determines that the 
transaction is not clearly erroneous, the Officer shall decline to take 
any action in connection with the completed trade. In the event that 
the Officer determines that the transaction in dispute is clearly 
erroneous, the Officer shall declare the transaction null and void or 
modify one or more of the terms of the transaction to achieve an 
equitable rectification of the error that would place the parties in 
the same position, or as close as possible to the same position that 
they would have been in, had the error not occurred. The parties shall 
be promptly notified of the determination.
    (2) If a party affected by a determination made under this Rule so 
requests within the time permitted below, the Clearly Erroneous 
Execution Panel (``CEE Panel'') will review decisions made by the 
Officer under this Rule, including whether a clearly erroneous 
execution occurred and whether the correct adjustment was made.
    (A) The CEE Panel will be comprised of the PCXE Chief Regulatory 
Officer (``CRO''), or a designee of the CRO, and representatives from 
two (2) ETP Holders.
    (B) The Exchange shall designate at least ten (10) ETP Holder 
representatives to be called upon to serve on the CEE Panel as needed. 
In no case shall a CEE Panel include a person related to a party to the 
trade in question. To the extent reasonably possible, the Exchange 
shall call upon the designated representatives to participate on a CEE 
Panel on an equally frequent basis.
    (3) A request for review on appeal must be made via facsimile or e-
mail within thirty (30) minutes after the party making the appeal is 
given notification of the initial determination being appealed. The CEE 
Panel shall review the facts and render a decision within the time 
frame prescribed by the Corporation.
    (4) The CEE Panel may overturn or modify an action taken by the 
Officer under this Rule. All determinations by the CEE Panel shall 
constitute final action by the Corporation on the matter at issue.
    (d) System Disruption and Malfunctions. In the event of any 
disruption or a malfunction in the use or operation of any electronic 
communications and trading facilities of the Corporation, or 
extraordinary market conditions or other circumstances in which the 
nullification or modification of transactions may be necessary for the 
maintenance of a fair and orderly market or the protection of investors 
and the public interest exist, the Officer, on his or her own motion, 
may review such transactions and declare such transactions arising out 
of the use or operation of such facilities during such period null and 
void or modify the terms of these transactions. Absent extraordinary 
circumstances, any such action of the Officer pursuant to this 
subsection (d) shall be taken within thirty (30) minutes of detection 
of the erroneous transaction. Each ETP Holder involved in the 
transaction shall be notified as soon as practicable, and the ETP 
Holder aggrieved by the action may appeal such action in accordance 
with the provisions of subsection (c)(2)-(4).
    (e) Trade Nullification and Price Adjustments for UTP Securities 
that are Subject of Initial Public Offerings (``IPOs''). Pursuant to 
SEC Rule 12f-2, as amended, the Corporation may extend unlisted trading 
privileges to a security that is the subject of an initial public 
offering when at least one transaction in the subject security has been 
effected on the national securities exchange or association upon which 
the security is listed and the transaction has been reported pursuant 
to an effective transaction reporting plan. A clearly erroneous error 
will be deemed to have occurred in the opening transaction of the 
subject security if the execution price of the opening transaction on 
the Corporation is the lesser of $1.00 or 10% away from the opening 
price on the listing exchange or association. In such circumstances, 
the Officer shall declare the opening transaction null and void or 
adjust the transaction price to the opening price on the listing 
exchange or association. Clearly erroneous executions of subsequent 
transactions of the subject security will be reviewed in the same 
manner as the procedure set forth in (c)(1). Absent extraordinary 
circumstances, any such action of the Officer pursuant to this 
subsection (e) shall be taken in a timely fashion, generally within 
thirty (30) minutes of the detection of the erroneous transaction. Each 
party involved in the transaction shall be notified as soon as 
practicable by the Corporation, and the party aggrieved by the action 
may appeal such action to the PCXE CRO in accordance with the 
provisions of subsection (c)(2)-(4) above.

Rule 7.11. Reserved [Clearly Erroneous Policy]

    [(a) Definition. For the purposes of this Rule, the terms of a 
transaction executed on the Corporation are ``clearly erroneous'' when 
there is an obvious error in any term, such as price, number of shares 
or other unit of trading, or identification of the security.
    (b) Request for Corporation Review. An ETP Holder that receives an 
execution on an order that was submitted erroneously to the Corporation 
for its own or customer account may request that the Corporation review 
the transaction under this Rule. Such request for review shall be made 
via telephone and in writing via facsimile or e-mail. The telephonic 
request should be submitted immediately and the written request should 
be submitted within fifteen (15) minutes of the time the trade in 
question was executed. Once the request has been received, an officer 
of the Corporation designated by the President shall review the 
transaction under dispute and determine whether it is clearly 
erroneous, with a view toward maintaining a fair and orderly market and 
the protection of investors and the public interest. Each party to the 
transaction shall provide, on a timely basis, any supporting written 
information as may be reasonably requested by the designated officer to 
aid resolution of the matter.
    (c) Review Procedures. Unless both parties (or party, in the case 
of a cross) to the disputed transaction agree to withdraw the initial 
written request for review, the transaction under dispute shall be 
reviewed, and a determination shall be rendered by the designated 
Corporation officer. If the officer determines that the transaction is 
not clearly erroneous, the officer shall decline to take any action in 
connection with the completed trade. In the event that the officer 
determines that the transaction in dispute is clearly erroneous, the 
officer shall declare the transaction null and void or modify one or 
more of the terms of the transaction to achieve an equitable 
rectification of the error that would place the parties in the same 
position, or as close as possible to the same position that they

[[Page 11302]]

would have been in, had the error not occurred. The officer shall 
promptly notify the parties of the determination reached and shall 
issue a written resolution of the matter. The ETP Holder aggrieved by 
the officer's determination may appeal such determination in accordance 
with the provisions of Rule 10.13.
    (d) System Disruption and Malfunctions. In the event of any 
disruption or a malfunction in the use or operation of any electronic 
communications and trading facilities of the Corporation, the Chief 
Executive Officer, President, or such other officer designated by the 
Corporation may declare a transaction arising out of the use or 
operation of such facilities during the period of such disruption or 
malfunction null and void or modify the terms of these transactions. 
Absent extraordinary circumstances, any such action of the Chief 
Executive Officer, President or designated Corporation officer pursuant 
to this subsection (d) shall be taken within thirty (30) minutes of 
detection of the erroneous transaction. Each ETP Holder involved in the 
transaction shall be notified as soon as practicable, and the ETP 
Holder aggrieved by the action may appeal such action in accordance 
with the provisions of Rule 10.13.]

Rule 10: Disciplinary Proceedings, Other Hearings, and Appeals

Rule 10.13. Hearings and Review of Decisions by the Corporation

    (a) No change.
    (1)-(4) No change.
    [(5) actions taken by the Corporation pursuant to Rule 7.11;]
    (5) [(6)] Renumbered.
    (6) [(7)] Renumbered.
    (7) [(8)] Renumbered.
    (b)-(m) No change.

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, as 
amended, and discussed any comments it received on the proposed rule 
change, as amended. 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
    The Exchange currently maintains two rules regarding clearly 
erroneous executions: PCXE Rule 7.10 (Cancellation of Revisions in 
Transactions) and PCXE Rule 7.11 (Clearly Erroneous Policy). The 
Exchange now proposes to revise its rules in order to: (i) Combine the 
rules for CEE into one rule, PCXE Rule 7.10, entitled ``Clearly 
Erroneous Executions,'' and (ii) amend the procedures that an ETP 
Holder would be required to follow when seeking relief for clearly 
erroneous executions.
    The Exchange currently utilizes the provision set forth in PCXE 
Rule 7.10 in conjunction with a guideline, which describes the internal 
procedures used to implement PCXE Rule 7.10, as well as the prices at 
which transactions generally may be considered erroneous.\5\ PCXE Rule 
7.11 generally provides policies that the Exchange refers to when 
responding to a claim that an execution resulted in an obvious error. 
The Exchange believes that these distinct rules and guidelines lack 
clarity and may result in inconsistent outcomes. Therefore, the 
Exchange believes that combining the pertinent elements of PCXE Rule 
7.10 (and the related guideline) and PCXE Rule 7.11 is necessary to 
eliminate ongoing confusion regarding the Exchange's policy. The 
Exchange has also revised its guideline to streamline it to a list of 
factors that the Exchange may consider when making its determination 
regarding CEEs.
    The Exchange also proposes the following revisions to its rules 
regarding CEEs.
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    \5\ The current guideline is readily available on the ArcaEx Web 
site at http://www.tradearca.com/traders/erroneous.asp. The Exchange 
notifies the ETP Holders of any changes to the guideline via the 
Weekly Bulletin that is distributed to all ETP Holders and also by 
posting such changes on the ArcaEx Web site.
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    Proposed PCXE Rule 7.10(a)--the Exchange proposes to move the 
Definition provision from current PCXE Rule 7.11(a) to proposed new 
PCXE Rule 7.10(a) without substantive changes. The Exchange also 
proposes to delete the last two sentences of current PCXE Rule 7.10 as 
they are superfluous.
    Proposed PCXE Rule 7.10(b)--the Exchange proposes to move the 
Request for Corporation Review provision from current PCXE Rule 7.11(b) 
to proposed new PCXE Rule 7.10(b) with four minor changes: (i) ETP 
Holders will be permitted to request the review by telephone, facsimile 
or e-mail within 15 minutes of the trade in question instead of being 
required to follow up a telephone request with a facsimile or e-mail; 
(2) the Exchange proposes to include a provision allowing the Officer 
of the Corporation who ordinarily reviews such requests to appoint a 
designee to review the requests in certain circumstances; \6\ (iii) the 
Exchange proposes to change the time frame in which additional 
supporting information is submitted from ``on a timely basis'' to 
``within 30 minutes'' as the Exchange believes it is appropriate to set 
forth an unambiguous timeline for such submissions; and (iv) the 
Exchange proposes to include a provision that would allow either party 
to request the written information provided by the other party on the 
disputed matter.
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    \6\ Examples of such circumstances would include the Officer's 
absence due to illness, vacation time or such other similar 
circumstances. The Exchange represents that the designee of the 
Officer will be an employee of the Corporation with similar stature 
as the Officer, such as a Vice President of Market Management.
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    Proposed PCXE Rule 7.10(c)(1)--the Exchange proposes to move 
current PCXE Rule 7.11(c) to proposed new PCXE Rule 7.10(c)(1). The 
change to this rule is primarily stylistic with the exception of the 
appeals procedure, which will be deleted from this subsection and moved 
to proposed new PCXE Rule 7.10(c)(2)-(4).
    Proposed PCXE Rule 7.10(c)(2)-(4)--The Exchange also proposes new 
PCXE Rule 7.10(c)(2)-(4) to implement a revised appeal process for 
determinations on clearly erroneous executions. Proposed new PCXE Rule 
7.10(c)(2)-(4) allows a party affected by the determination to request 
an appeal to the Clearly Erroneous Execution Panel (``CEE Panel'') to 
review the determination made by the Officer under PCXE Rule 
7.10(c)(1). The CEE Panel will be comprised of the PCXE Chief 
Regulatory Officer (``CRO''), or a designee of the CRO,\7\ and 
representatives from two (2) ETP Holders.\8\ Requests for appeal must 
be made via facsimile or e-mail within

[[Page 11303]]

thirty (30) minutes after the party requesting the appeal is given 
notification of the initial determination. Thereafter, the CEE Panel 
shall review the information and may overturn or modify the action 
taken by the Officer within the time frame prescribed by the 
Corporation. Such determination by the CEE Panel will be considered a 
final action by the Corporation on the matter at issue. All final 
determinations made by the CEE Panel shall be rendered without 
prejudice as to the rights of the parties to the transaction to submit 
their dispute to arbitration. The revised process is intended to 
provide a timely appeal for ETP Holders in place of the lengthy general 
appeal process provided in PCXE Rule 10.13.
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    \7\ The Exchange represents that the designee of the CRO will be 
an employee of the Corporation with similar stature as the CRO, such 
as the VP of Equities Regulation. The Exchange notes that the 
International Securities Exchange designates an Obvious Error Panel 
to independently make appeals decisions and also to overturn or 
modify actions taken by the exchange. See ISE Rule 720.
    \8\ The Exchange shall designate at least ten (10) ETP Holder 
representatives to be called upon to serve on the CEE Panel. In no 
case shall the CEE Panel include a person related to a party to the 
trade in question. To the extent reasonably possible, the Exchange 
shall call upon the designated representatives to participate on a 
CEE Panel on an equally frequent basis.
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    Proposed PCXE Rule 7.10(d)--the Exchange proposes to move current 
PCXE Rule 7.11(d) that governs the procedures for system disruption and 
malfunctions to proposed new PCXE Rule 7.10(d). In addition, the 
Exchange proposes to include ``extraordinary market conditions or other 
circumstances in which the nullification or modification of 
transactions may be necessary'' as another condition in which an 
Officer may act, on its own motion, to review erroneous transactions. 
The Exchange believes that errors due to extraordinary market 
conditions warrant a review irrespective of a complaint by an ETP 
Holder. Such reviews are considered normal industry standard.\9\
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    \9\ See, e.g., NASD Rule 11890(b).
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    Proposed PCXE Rule 7.10(e)--the Exchange proposes new PCXE Rule 
7.10(e) in order to codify the PCXE's current guideline with respect to 
trade nullification and price adjustments for securities that are the 
subject of initial public offerings (``IPOs''). The Exchange believes 
that a separate provision is appropriate because the Exchange's intent 
is to always adjust the price of an opening trade on ArcaEx if it is 
away from the price the issue opens on the listing market. Thus, if the 
price of the trade is either $1.00 or 10% away from the opening price 
on the listing market, the trade would be automatically adjusted to the 
opening price. In such circumstances, the Officer shall declare the 
opening transaction null or adjust the transaction price to the opening 
price on the listed exchange or association. Clearly erroneous 
executions of subsequent trades in the subject security will be 
reviewed in the same manner as those subject to the general guidelines. 
Consistent with the PCXE's general clearly erroneous executions rule 
set forth in proposed new PCXE Rule 7.10, this provision also provides 
an immediate appeal process for determinations.
    Miscellaneous--the Exchange proposes to delete paragraph (a)(5) 
from current PCXE Rule 10.13, which governs the hearings and review of 
decisions by the Corporation. Paragraph (a)(5) states that the 
provisions of PCXE Rule 10.13 apply to actions taken by the Corporation 
pursuant to current PCXE Rule 7.11. This provision would be superceded 
by the immediate appeal process for ETP Holders in proposed new PCXE 
Rule 7.10(c)(2)-(4).
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with section 6(b) \10\ of the Act, in general, and furthers the 
objectives of section 6(b)(5),\11\ 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, and to remove impediments and perfect the 
mechanisms of a free and open market and to protect investors and the 
public interest.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 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

    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 they are 
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-2004-72 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-2004-72. 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 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-2004-72 and should be submitted on or before March 
29, 2005.
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    \12\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-933 Filed 3-7-05; 8:45 am]
BILLING CODE 8010-01-P