[Federal Register Volume 70, Number 134 (Thursday, July 14, 2005)]
[Notices]
[Pages 40770-40772]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-3724]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51990; File No. SR-PCX-2005-16]


Self-Regulatory Organizations; Pacific Exchange, Inc.; Notice of 
Filing of Proposed Rule Change and Amendment No. 1 Thereto To Amend Its 
Market Data Rebate Program To Allow Equity Trading Permit Holders To 
Receive Rebates on an Estimated Basis

July 7, 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 February 1, 2005, 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 PCX. On July 5, 
2005, the PCX amended the proposed rule change.\3\ The Commission is 
publishing this notice, as amended, 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.
    \3\ In Amendment No. 1, the PCX amended the purpose section of 
this filing to include examples of how estimated market data rebates 
would be calculated and how estimated market data rebates would be 
distributed.
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    The Exchange proposes to amend its rules governing the Archipelago 
Exchange (``ArcaEx''), the equities trading facility of PCXE. With this 
filing, the Exchange proposes to amend its current market data rebate 
program by allowing Equity Trading Permit Holders (``ETP Holders'') to 
receive market data rebates on an estimated basis when certain 
conditions are met. The text of the proposed rule change is available 
on the PCX's Web site (http://www.pacificex.com/), at the PCX'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, the 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. The 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 PCX proposes to modify the current ArcaEx market data revenue 
sharing program applicable to limit orders posted in ArcaEx in Tape B 
securities \4\ that execute against inbound marketable orders. The 
Exchange proposes to add language to the ArcaEx fee schedule describing 
a new estimated payment option available to qualifying ETP Holders who 
have earned certain Liquidity Provider Credits (the ``Estimated Rebate 
Program''). Under the proposal, ETP Holders would be able to receive 
Liquidity Provider Credit payments on an estimated, monthly basis for 
limit orders posted by such ETP Holder in Tape B securities that 
execute against inbound marketable orders, if certain qualifying 
conditions are met.
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    \4\ Tape B securities include securities that are listed for 
trading on the American Stock Exchange and certain other securities 
that are deemed to be eligible for such listing.
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    Currently, ETP Holders who earn Liquidity Provider Credits for such 
transactions receive payments from the Exchange on a quarterly basis, 
after the Exchange has received its share of market data revenue for 
Tape B from the Consolidated Tape Association (``CTA'') Plan. Under the 
proposed Estimated Rebate Program, eligible ETP Holders would be able 
to receive their share of Liquidity Provider Credits, based on an 
estimate, on a monthly basis before the quarterly revenues from the CTA 
Plan are paid to the Exchange. The amounts to be paid on an estimated 
basis to ETP Holders are calculated by using the tape credit 
percentages specified in the current rebate policy in effect for ArcaEx 
at the time \5\ and applying such

[[Page 40771]]

percentages to the ETP Holder's trading activity for the month in 
question.
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    \5\ The current Liquidity Provider Credit applied to limit 
orders in Tape B securities residing in the ArcaEx Book that execute 
against inbound marketable orders is 50% of tape revenue generated 
for such trade.
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    The process for determining and maintaining eligibility in the 
program is described below.
    Initial Qualification in the Estimated Rebate Program. An ETP 
Holder will qualify for participation in the Estimated Rebate Program 
if, in the three-month period preceding the then-current month, the ETP 
Holder executed at least 250 million Tape B shares through ArcaEx.\6\ 
This threshold is the ``Initial Qualification'' for the Estimated 
Rebate Program. An ETP Holder who has satisfied the Initial 
Qualification will be entitled to enroll in the Estimated Rebate 
Program and receive payments for Liquidity Provider Credits earned in 
the next month.
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    \6\ This figure will exclude QQQ from any trade activity before 
December 1, 2004.
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    Maintenance Level Requirement. After an ETP Holder meets its 
Initial Qualification, it will be required to also meet a certain 
``Maintenance Level'' to continue to qualify for the Estimated Rebate 
Program. The Maintenance Level will be satisfied if an ETP Holder 
executes at least 500 million Tape B Shares during each successive, 
continuous three-month period thereafter. If an ETP Holder who has met 
the Initial Qualification standard fails to sustain its Maintenance 
Level, the ETP Holder would not be eligible to receive estimated 
rebates for the next three months. Instead, the ETP Holder would be 
required to receive rebates as specified under the current rebate 
policy. This three-month period will be referred to as an 
``Ineligibility Period.'' When the Ineligibility Period ends, the ETP 
Holder can attempt to re-qualify for the Estimated Rebate Program by 
meeting the Initial Qualification standard. Trading activity during the 
Ineligibility Period may count toward re-establishing the ETP Holder's 
eligibility in the Estimated Rebate Program.
    Any estimated Liquidity Provider Credits paid to an ETP Holder 
under the Estimated Rebate Program will be reconciled to the ETP 
Holder's actual Liquidity Provider Credit payment due when the Exchange 
receives the actual figures from the CTA Plan at quarter-end. Any 
necessary adjustments will be made with the next payment due to the ETP 
Holder (i.e., the next Estimated Rebate Program payment or current 
rebate policy payment, as applicable).
    Example. An example using hypothetical figures is included below. 
Assume a firm executes one million qualifying trades, totaling 300 
million shares, each month for a period of nine consecutive months. 
After the first three months, the firm is entitled to receive the 
following amounts:

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                                                                                                        Payment
                  Month                          Number of trades              Number of shares         amounts
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January..................................  1 million...................  300 million.................          0
February.................................  1 million...................  300 million.................          0
March....................................  1 million...................  300 million.................          0
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    At the end of the quarter, assume that payments received by the 
Exchange from the CTA plan for the quarter January through March amount 
to $1.00 per print. At this time, the firm would be due $1.5 million 
(i.e., 1 million trades multiplied by $.50, or half of the $1.00 print, 
multiplied by three months). In addition, the firm's level of activity 
would satisfy the Initial Qualification standard, qualifying the firm 
to participate in the Estimated Rebate Program for the next quarter. 
The next three months of firm payments are:

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                                                                                                       Payment
                  Month                          Number of trades             Number of shares         amounts
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April....................................  1 million..................  300 million................          \7\
                                                                                                        $500,000
May......................................  1 million..................  300 million................      500,000
June.....................................  1 million..................  300 million................     500,000
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\7\ The $500,000 figure would be based on the trading totals and print amounts for the most recent quarter,
  i.e., 1 million average trades multiplied by .50, or one-half of one $1.00 print.

    Assume that at the end of the quarter in June the payments received 
from the plan amount to $0.95 per print. At this point, it becomes 
clear that based on its activity levels, the firm should have received 
$475,000 per month (i.e., 1 million trades multiplied by $.475, or one-
half of one print of $.95) for each month in the quarter. Because the 
firm received $500,000 per month in connection with the Estimated 
Rebate Program, its payments for the next quarter will have to be 
adjusted downward $75,000 (i.e., $25,000 for each month). In addition, 
the firm's trading levels for the quarter satisfy the Maintenance Level 
in the Estimated Rebate Program. The firm's adjusted payments for the 
next three months would be:

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                                                                                                        Payment
                  Month                          Number of trades              Number of shares         amounts
----------------------------------------------------------------------------------------------------------------
July.....................................  1 million...................  300 million................    $400,000
August...................................  1 million...................  300 million................     475,000
September................................  1 million...................  300 million................     475,000
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    The $400,000 payment in July is based on a $475,000 estimated 
payment (i.e., 1 million trades multiplied by $.475, or one-half of a 
print of $.95), minus the extra $75,000 received by the firm in the 
April through June time period.

[[Page 40772]]

    The rationale for the proposed changes in this filing is to make 
the pricing for executions on the ArcaEx more competitive. The Exchange 
evaluated the economics of modifying its current market data rebate 
structure and determined that it was feasible and appropriate, given 
the costs involved and competitive concerns.
2. Statutory Basis
    The PCX believes that the proposed rule change is consistent with 
the provisions of Section 6(b) of the Act,\8\ in general, and with 
Section 6(b)(5) of the Act,\9\ in particular, in that it is designed to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in facilitating transactions in 
securities, and to remove impediments to and perfect the mechanisms of 
a free and open market and a national market system.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The PCX 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

    No written comments were solicited or 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 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-2005-16 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-9303.
    All submissions should refer to File Number SR-PCX-2005-16. 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 Room. Copies of such 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-
NYSE-2005-16 and should be submitted on or before August 4, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. E5-3724 Filed 7-13-05; 8:45 am]
BILLING CODE 8010-01-P