[Federal Register Volume 70, Number 145 (Friday, July 29, 2005)]
[Notices]
[Pages 43924-43926]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-4024]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52103; File No. SR-PCX-2005-58]


Self-Regulatory Organizations; Pacific Exchange, Inc.; Notice of 
Filing of Proposed Rule Change and Amendments Nos. 1 and 2 Thereto 
Relating to Market Order Auction

July 21, 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 April 22, 2005, the Pacific Exchange, Inc. (``PCX'' or 
``Exchange''), through its wholly owned subsidiary PCX Equities, Inc. 
(``PCXE'' or the ``Corporation''), 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 PCX. On June 27, 2005, the Exchange amended the proposed rule change 
(``Amendment No. 1'').\3\ On July 8, 2005, the Exchange further amended 
the proposed rule change (``Amendment No. 2'').\4\ The Commission is 
publishing this notice to solicit comments 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\ In Amendment No. 1, the Exchange made clarifying changes to 
the definition of Indicative Match Price and the purpose section and 
rule text describing the market auction procedure.
    \4\ In Amendment No. 2, the Exchange made clarifying changes to 
the purpose section and the rule text describing the market auction 
procedure.
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I. Self-Regulatory Organization's Statement of the Terms of 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 modify its Market Order Auction. The 
text of the proposed rule change, as amended, is available on the PCX 
Web site (http://www.pacificex.com), at the PCX's Office of the 
Secretary 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 Exchange included statements 
concerning the purpose of, and basis for, the proposed rule change, as 
amended. 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 Exchange is proposing to modify its Market Order 
Auction procedures. In conjunction with these modifications, the 
Exchange seeks to clarify the existing Indicative Match Price 
definition as defined in PCXE Rule 1.1(r) and also modify the Market 
Order Auction rules as described in PCXE Rule 7.35. Further, the 
Exchange proposes to implement price collars in order to improve the 
Market Order Auction pricing mechanism.
Indicative Match Price Changes
    Currently, PCXE Rule 1.1(r) describes the Indicative Match Price 
which generally determines the price at which orders eligible for 
execution in the ArcaEx auctions \5\ are executed. This proposal seeks 
to clarify the existing Indicative Match Price functionality by 
indicating that the Indicative Match Price is the best price (that 
which is closest to the NBBO) at which the maximum volume of shares are 
executable in the respective auction.
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    \5\ See PCXE Rule 7.35 for a description of the Opening Auction, 
Market Order Auction, Closing Auction, and Trading Halt Auction.
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    In addition, the Exchange seeks to implement a price collar 
proposal based on a similar standard currently in place for ArcaEx's 
Closing Auction which was filed on an immediately effective basis.\6\ 
To improve the pricing mechanism, ArcaEx proposes to implement price 
collars that would limit the price at which the Indicative Match Price 
could be established. The price collars would be determined by PCX and 
communicated to ETP Holders via the ArcaEx Web site. Initially, these 
price collar thresholds would be consistent with the PCXE Demonstrable 
Erroneous Execution Policy.\7\ That is, generally the Indicative Match 
Price would not be permitted to be greater than $1.00 or 10% away from 
the consolidated last sale price. PCXE would use the pre-established 
price collars to limit the Market Order Auction Indicative Match Price. 
PCXE would not have any discretion to modify the auction process and 
the calculation of the Indicative Match Price other than to change the 
threshold parameters with prior written notice to ETP Holders.
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    \6\ See Securities Exchange Act Release No. 50108 (July 28, 
2004); 69 FR 47195 (August 4, 2004) (SR-PCX-2004-66). The Commission 
clarified this sentence to indicate that this standard was filed on 
an immediately effective basis. Telephone Conference among Bridget 
Farrell, Director, Strategy, ArcaEx and Ann Leddy, Special Counsel, 
Division of Market Regulation (``Division''), Commission and Mitra 
Mehr, Attorney, Division, Commission on July 15, 2005.
    \7\ See ArcaEx Web site (http://www.arcaex.com), Orders and 
Execution policy, Erroneous Execution Policy. Any changes to the 
thresholds of the price collars will be communicated to ETP Holders 
with reasonable notice prior to the Market Order Auction.
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    Following is an example of how the Market Order Auction price 
collars would function for exchange-listed securities for which the 
Corporation is the primary market and all exchange-listed exchange 
traded funds:

Consolidated last sale price: 12.00
ArcaEx Orders:
Buy 50,000 Market Order
Sell 30,000 Auction-Only Limit Order @ 12.50
Sell 20,000 Limit Order @ 13.01

    Market Order Auction results: Indicative Match Price = 12.50; 
Matched Volume = 30,000; Total Imbalance = 20,000. The 20,000 limit 
sell order at 13.01 is outside of the price collar and will not be used 
to determine the Indicative Match Price.
Market Order Auction Changes
    This proposal also seeks to modify the Market Order Auction 
functionality and PCXE Rule 7.35(c) such that the functionality would 
differ depending on the type of security. There would be three 
categories of securities applicable to this proposal: (1) Exchange-
listed securities, excluding: (i) exchange-listed securities for which 
the Corporation is the primary market; and (ii) all exchange-listed 
exchange traded funds; (2) exchange-listed securities for which the 
Corporation is the primary market and all exchange-listed exchange-
traded funds; and (3) Nasdaq-listed securities.\8\
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    \8\ This category includes the QQQQ, which is a Nasdaq-listed 
exchange traded fund.
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    With respect to category (1) described above, currently the 
Exchange conducts a Market Order Auction of such securities which is 
based upon the types of orders eligible for execution where the auction 
price could be based on the Indicative Match Price or the midpoint of 
the first uncrossed NBBO after 6:30 a.m. (Pacific Time). The Exchange 
proposes to modify this functionality and would not conduct a Market 
Order Auction, but rather would route all market orders to the primary 
market until the first opening print on the primary market. All limit 
orders and

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any market orders after the first primary opening print would be 
processed pursuant to PCXE Rule 7.37.\9\
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    \9\ PCXE Rule 7.37 describes ArcaEx's execution processes 
including the Directed Order Process, Display Order Process, Working 
Order Process, and Tracking Order Process.
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    Regarding category (2) described above, currently the Exchange 
conducts a Market Order Auction of such securities which is based upon 
the types of orders eligible for execution where the auction price 
could be based on the Indicative Match Price or the midpoint of the 
first uncrossed NBBO after 6:30 a.m. (Pacific Time). The Exchange 
proposes to maintain its existing Market Order Auction functionality 
for exchange-listed securities for which the Corporation is the primary 
market and all exchange-listed exchange-traded funds. In this filing, 
the Exchange seeks to clarify the existing rule language associated 
with the Market Order Auction. Such changes do not result in any 
functionality changes, but rather would refine the rule text to be 
clearer and more consistent with existing functionality. Specifically, 
the Exchange proposes to clarify PCXE Rule 7.35(c)(3) which describes 
the determination of the Market Order Auction Price. The clarifying 
changes would more clearly describe the pricing process as follows:
    (1) In the instance in which there are limit orders eligible for 
execution in the Market Order Auction, the Indicative Match Price would 
determine the auction price.
    (2) In the instance in which there are no limit orders eligible for 
execution in the Market Order Auction:
    (i) In the case of exchange-listed exchange traded funds for which 
the Corporation is not the primary market, as many buy market orders 
and sell market orders as possible would be matched and executed at the 
midpoint of the first uncrossed NBBO after 6:30 a.m. (Pacific Time), 
once available; or
    (ii) In the case of exchange-listed securities, including exchange-
listed exchange traded funds, for which the Corporation is the primary 
market, market orders would be rejected.
    The Market Orders that are eligible for, but not executed in the 
Market Order Auction, would become eligible for execution in the Core 
Trading Session immediately upon conclusion of the Market Order 
Auction.
    Lastly, with respect to category (3) described above, currently the 
Exchange conducts a Market Order Auction of such securities which is 
based upon the types of orders eligible for execution where the auction 
price could be based on the Indicative Match Price or the midpoint of 
the first uncrossed NBBO after 6:30 a.m. (Pacific Time). The Exchange 
proposes for Nasdaq-listed securities to match and execute as many 
market orders as possible at the midpoint of the first uncrossed NBBO 
after 6:30 a.m. (Pacific Time). Limit orders and any remaining market 
order interest in Nasdaq-listed securities would be ranked in price/
time priority as described in PCXE Rule 7.36 and processed pursuant to 
PCXE Rule 7.37.
    The Exchange believes that clarifying the Market Order Auction 
pricing mechanism would help ensure that ETP Holders and investors 
understand how orders in the auction will be priced. In particular for 
those types of securities (i.e., exchange-listed securities for which 
the Corporation is not the primary market excluding exchange traded 
funds and Nasdaq-listed securities) in which the Exchange may not have 
sufficient liquidity on the Arca Book at the open to execute the Market 
Order Auction at a price that is substantially close to the opening 
price on the primary market, the Exchange seeks to provide its ETP 
Holders with the opportunity to have those orders execute at the 
primary markets' prices. Further, implementing price collars would help 
ensure that when ArcaEx conducts a Market Order Auction, the auction 
would execute at prices within range of where the stock is currently 
trading.
2. Statutory Basis
    The Exchange believes that the proposed rule change, as amended, is 
consistent with Section 6(b) \10\ of the Act, in general, and furthers 
the objectives of Section 6(b)(5),\11\ in particular, in that it is 
designed to prevent fraudulent and manipulative acts and practices, 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 to and perfect the mechanisms of 
a free and open market and a national market system. The Exchange 
believes that clarifying and improving the Market Order Auction pricing 
mechanism as described in this filing should result in a clearer 
understanding of how orders will be priced at the open and may provide 
greater assurance that orders will be priced at prices that are 
substantially close to where the stock is trading.
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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, as 
amended, 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, as amended, 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 self-regulatory organization consents, the Commission will:
    (A) By order approve such proposed rule change, as amended, or
    (B) Institute proceedings to determine whether the proposed rule 
change, as amended, 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, 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-2005-58 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-2005-58. 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

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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 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-2005-58 and should be 
submitted on or before August 19, 2005. 

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-4024 Filed 7-28-05; 8:45 am]
BILLING CODE 8010-01-P