[Federal Register Volume 70, Number 182 (Wednesday, September 21, 2005)]
[Notices]
[Pages 55441-55443]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-18762]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52436; File No. SR-PCX-2005-53]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment Nos. 1 and 2 Thereto by the Pacific Exchange, Inc. 
To Create a New Order Type--Passive Liquidity Orders--for Use in the 
ArcaEx Trading Facility of the PCX

September 14, 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 15, 2005, the Pacific Exchange, Inc. (``PCX'' or ``Exchange'') 
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 June 3, 2005, the PCX filed 
Amendment No. 1 to the proposed rule change.\3\ On August 26, 2005, the 
PCX filed Amendment No. 2 to the proposed rule change.\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\ Amendment No. 1, which replaced the original filing, made 
technical and clarifying changes to the proposed rule change.
    \4\ Amendment No. 2, which replaced Amendment No. 1, clarified 
the execution priority of Passive Liquidity orders in PCXE Rule 
7.37, as compared to other orders that are part of the Display Order 
Process and the Working Order Processes, and as compared to Directed 
Fills in the Display Order Process. In addition, Amendment No. 2 
made other technical and clarifying changes to the proposed rule 
change.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The PCX, through its wholly-owned subsidiary PCX Equities, Inc. 
(``PCXE''), proposes to amend its rules governing the Archipelago 
Exchange (``ArcaEx''), the equities trading facility of PCXE. With this 
filing, the Exchange proposes to add one new order type, the Passive 
Liquidity Order (``PL Order''). The changes described in this rule 
proposal would add new Rule 7.31(h)(4) and amend existing Rule 7.37(b).
    The text of the proposed rule change, as amended, appears below. 
Additions are in italics. Deleted items are in brackets.
* * * * *

[[Page 55442]]

Rule 7
Equities Trading
    Rule 7.31(a)-(g)--No Change
    (h) Working Order. Any order with a conditional or undisplayed 
price and/or size designated as a ``Working Order'' by the Corporation, 
including, without limitation:
    (1)-(3)--No Change
    (4) Passive Liquidity Order. An order to buy or sell a stated 
amount of a security at a specified, undisplayed price. Passive 
Liquidity Orders will be executed in the Working Order Process after 
all other Working Orders except undisplayed discretionary order 
interest. Passive Liquidity Orders with a price superior to that of 
Directed Fills will have price priority and will execute ahead of 
inferior priced Directed Fills in the Directed Order Process. Passive 
Liquidity Orders with a price superior to that of displayed orders will 
have price priority and will execute ahead of inferior priced displayed 
orders in the Display Order Process.
* * * * *
    Rule 7.37
    (a) Step 1: Directed Order Process. During Core Trading Hours only, 
orders may be matched and executed in the Directed Order Process as 
follows:
    (1) If a User submits a marketable Directed Order to the 
Archipelago Exchange and the User's designated Market Maker has a 
standing instruction for a Directed Fill to the Archipelago Exchange, 
the Directed Order shall be executed against the Directed Fill of the 
designated Market Maker, unless there is a Passive Liquidity Order as 
defined in PCXE Rule 7.31(h) with a price superior to that of the 
Directed Fill, in which case the Passive Liquidity Order will have 
price priority and will execute ahead of inferior priced Directed Fills 
in the Directed Order Process.
    (2)-(4)--No Change.
    (b) If an incoming marketable order has not been executed in its 
entirety pursuant to paragraph (a) of this Rule, any remaining part of 
the order shall be routed to the Display Order Process.
    (1) Step 2: Display Order Process.
    (A) An incoming marketable order shall first attempt to be matched 
for execution against orders in the Display Order Process at the 
display price of the resident order for the total amount of stock 
available at that price or for the size of the incoming order, 
whichever is smaller. Passive Liquidity Orders as defined in PCXE Rule 
7.31(h) with a price superior to that of displayed orders will have 
price priority and will execute ahead of inferior priced displayed 
orders in the Display Order Process. For the purposes of this 
subsection, the size of an incoming Reserve Order includes the 
displayed and reserve size, and the size of the portion of the Reserve 
Order resident in the Display Order Process is equal to its displayed 
size. If the incoming marketable order has not been executed in its 
entirety, the remaining part of the order shall be routed to the 
Working Order Process.
    (B)--No Change.
    Rule 7.37(b)(2)
    (2) Step 3: Working Order Process.
    (A) An incoming marketable order shall be matched for execution 
against orders in the Working Order Process in the following manner:
    (i) An incoming marketable order shall be matched against orders 
within the Working Order Process in the order of their ranking, at the 
price of the displayed portion (or in the case of an All-or-None Order, 
at the limit price or in the case of a Passive Liquidity Order, at its 
price), for the total amount of stock available at that price or for 
the size of the incoming order, whichever is smaller.
    Rule 7.37(b)(2)(A)(ii)-(d)--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, 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
    As part of its continuing efforts to enhance participation on the 
ArcaEx facility, the Exchange proposes to add a new order type for use 
by Users.\5\ The new order type, the PL Order, is an order to buy or 
sell a stated amount of a security at a specified, undisplayed price.
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    \5\ See PCXE Rule 1.1(yy) for the definition of ``User.''
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    PL Order Type Features
    A PL Order would be an order to buy or sell a stated amount of a 
security at a specified, undisplayed price. PL Orders must be entered 
with a volume of at least 200 shares and will only be permitted in 
round lot denominations. ArcaEx pegging, reserve, and discretionary 
functionality will not be available to modify PL Orders.\6\ PL Orders 
will not route out of ArcaEx to other market centers and will not 
execute against incoming orders sent via the Intermarket Trading 
System.
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    \6\ More specifically, the pegging functionality will not be 
available for PL Orders in that the Passive Liquidity Order price 
will not automatically track the NBBO. See PCXE Rule 7.31(cc). 
Further, reserve functionality, meaning undisplayed size, and 
discretionary functionality, meaning undisplayed prices, will not be 
available for PL Orders since the Passive Liquidity Order price and 
size are undisplayed by definition.
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    PL Order Execution Priority in ArcaEx
    ArcaEx maintains an electronic file of orders called the Arca 
book.\7\ The Arca book is divided into three components: the Display 
Order Process, the Working Order Process and the Tracking Order 
Process.\8\ Arca ranks and maintains limit orders in the Arca book 
according to price/time priority and generally affords priority to 
displayed orders in the Display Process and prices over undisplayed 
orders in the Working Order Process, sizes and prices.
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    \7\ See PCXE Rule 1.1(a).
    \8\ The Directed Order Process, as set forth in PCXE Rule 7.37, 
precedes the Display, Working, and Tracking Order Processes, but is 
not operable at this time on ArcaEx. ArcaEx intends to implement a 
new Directed Process in a future filing.
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    PL Orders would be executed in the Working Order Process after all 
other orders including reserve orders and the display portion of 
discretionary orders at a particular price level. PL Orders would, 
however, take precedence over undisplayed discretionary order interest. 
PL Orders with a price superior to that of Directed Fills would have 
price priority and would execute ahead of inferior priced Directed 
Fills in the Directed Order Process. Also, PL Orders with a price 
superior to that of displayed orders would have price priority and 
would execute ahead of inferior priced displayed orders in the Display 
Order Process.
    The Exchange believes that the implementation of the aforementioned 
rule changes relating to ArcaEx order processing would enhance order 
execution opportunities on ArcaEx. The Exchange believes that the 
proposed order type would allow for additional opportunities for 
liquidity providers to passively interact with interest in the Arca 
book.
2. Statutory Basis
    The Exchange believes that the proposed rule change, as amended, is 
consistent with Section 6(b) of the Act,\9\ in general, and furthers 
the objectives of

[[Page 55443]]

Section 6(b)(1) of the Act,\10\ 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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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(1).
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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

    The Exchange requested that the proposed rule change be given 
expedited review and accelerated approval pursuant to Section 19(b)(2) 
of the Act. The Exchange believes that the proposed rule proposal is 
consistent with the requirements of Section 6(b)(5) of the Act and the 
rules and regulations thereunder applicable to a national securities 
exchange. In particular, the Exchange believes that its proposal to 
implement the PL Order adds significant value to investors and Users, 
will enhance available order interaction opportunities, and does not 
raise any new regulatory issues. Accordingly, the Exchange believes 
that its proposal will facilitate transactions in securities, remove 
impediments to and perfect the mechanism of a free and open market and 
a national system, and, in general, protect investors and the public 
interest.
    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, 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-2005-53 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-9303.
    All submissions should refer to File Number SR-PCX-2005-53. 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, Station 
Place, 100 F Street, NE., Washington, DC 20549. 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-
2005-53 and should be submitted on or before October 12, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 05-18762 Filed 9-20-05; 8:45 am]
BILLING CODE 8010-01-P