[Federal Register Volume 70, Number 187 (Wednesday, September 28, 2005)]
[Notices]
[Pages 56762-56764]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-5247]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52472; File No. SR-PCX-2005-73]


Self-Regulatory Organizations; Pacific Exchange, Inc.; Notice of 
Filing of Proposed Rule Change and Amendment No. 1 Thereto Relating to 
the Establishment of a Portfolio Crossing Service

September 20, 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 June 7, 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 September 14, 2005, the PCX 
filed Amendment No. 1 to the proposed rule change.\3\ 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    \3\ Amendment No. 1 replaced and superseded the original filing.
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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 establish a new transaction and trade 
reporting mechanism for Equity Trading Permit Holders (``ETP Holders'') 
to allow the execution and reporting of portfolio trades in equity 
securities.
    The text of the proposed rule change, as amended, is available on 
PCX's Web site (http://www.pacificex.com), at the PCX's principal 
office, and at the Commission's Public Reference Room.

[[Page 56763]]

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 PCX is proposing to implement a new Portfolio 
Crossing Service (``PCS'') which would allow ETP Holders \4\ to execute 
and report portfolio trading activity conducted as principal in equity 
securities. The proposed rule change would provide a new forum for 
trade execution and reporting within ArcaEx. In order to use PCS, ETP 
Holders would input a basket of individual cross orders each with a 
basket number identifier tying it to the other orders in the basket. 
These baskets of individual cross orders would not interact with orders 
residing in the ArcaEx facility. Further, each side of an individual 
coupled order in a basket entered into PCS would execute without regard 
to the priority of other orders entered into PCS.
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    \4\ See PCXE Rule 1.1(n).
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    A. Submitting Orders into PCS. 1. Timing of Submission. ETP Holders 
would be able to submit eligible cross orders in equity securities into 
PCS at any time trading occurs on the Exchange (currently, 1 a.m. 
Pacific Time to 5 p.m. Pacific Time). However, as described more fully 
below, these orders would be held by ArcaEx and would not execute until 
at least one minute after the close of trading on the Exchange, i.e., 
5:01 p.m. Pacific Time. If an ETP Holder attempted to submit orders 
into PCS outside of the time period described above, the submission 
would be rejected. ETP Holders would be able to cancel any basket of 
orders entered into PCS at any time before 5 p.m. Pacific Time.
    2. Orders Eligible for Submission. Orders would be eligible for 
submission to PCS only if they are part of a qualifying portfolio 
basket trade. To be eligible for PCS, orders must be part of a basket 
of individual cross orders \5\ comprised of at least 15 securities and 
with a total market value of at least $1,000,000. All symbols eligible 
for trading on ArcaEx would be eligible for trading on PCS. A basket of 
orders which meets the standards above, as described in proposed in 
Rule 7.65, is referred to as a ``PCS Order.'' Each individual component 
of a PCS Order must be appended with a basket number identifier tying 
it to the other order components of the PCS Order. This identifier 
would be used to distinguish the individual components of any PCS Order 
from a Rule 7.31(s) Cross Order destined for ArcaEx.
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    \5\ PCXE Rule 7.31(s) defines the Cross Order type with respect 
to trading on ArcaEx. Proposed rule 7.31(ii) establishes the new 
``PCS Order.'' Each individual component of a PCS Order would 
closely resemble the Cross Order type used for trading in ArcaEx 
with respect to the mechanics for order entry. However, the 
individual coupled orders which are part of a PCS Order basket would 
also possess a unique basket number identifying the component as 
part of a PCS Order.
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    B. Execution of Orders in PCS. As discussed above, ETP Holders may 
enter PCS Orders at any time during the Exchange's trading day.\6\ When 
the Exchange receives a PCS Order, it would hold such order until the 
end of trading, currently 5 p.m. Pacific Time. All PCS Orders received 
during any particular trading day would be executed simultaneously in 
PCS at least one minute after the close of trading on the Exchange but 
in no event later than 8:59 p.m. Pacific Time. Each individual order 
component of a PCS Order would not interact with other PCS Orders or 
other orders residing in the Arca book \7\ in any way. As set forth in 
the proposed rules, PCS would not be subject to many trading rules 
applicable to normal trading on ArcaEx.\8\
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    \6\ The New York Stock Exchange's (``NYSE'') Crossing Session II 
is another after hours session which allows member firms the ability 
to cross program trades. NYSE's Crossing Session II, however, does 
not accept orders until after the close of regular trading.
    \7\ See PCXE Rule 1.1(a).
    \8\ For example, because executions in PCS would occur after 8 
p.m. ET but before 8 a.m. ET, PCS trades would not be subject to 
short sale price tests under the SEC's pilot program. See Securities 
Exchange Act Release Nos. 50104 (July 28, 2004), 69 FR 48032 (August 
6, 2004); and 50747 (November 29, 2004), 69 FR 70480 (December 6, 
2004).
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    Trading halts occurring during the normal market hours in one or 
more individual stocks would not affect the execution of PCS Orders. 
However, if there is a market-wide halt in a symbol (e.g., a halt 
initiated pursuant to PCXE circuit breaker rules) that is still in 
effect at 1 p.m. Pacific Time, the Exchange would halt trading in such 
symbol through its PCS.
    C. Trade Reporting in PCS. The Exchange would handle trade 
reporting for PCS executions in one of two different ways, depending on 
whether a particular PCS component execution involved exchange-listed 
or Nasdaq securities. With respect to exchange listed securities, the 
Exchange would not disseminate last sale reports in the individual 
exchange-listed stocks that comprise the component order executions in 
PCS. Instead, PCS executions in exchange-listed securities would be 
transmitted to SIAC for publication on the ``tape'' on an aggregate 
basis.\9\ The system would calculate the total shares and total dollar 
amounts of all exchange-listed symbols executed in PCS in any 
particular trading day. The Exchange would then transmit this total as 
an administrative message over the high speed line to SIAC. The 
Exchange would not consolidate the exchange-listed volume attributable 
to PCS with the volume in those securities occurring in the non-PCS 
trading session occurring on ArcaEx. With respect to Nasdaq-listed 
securities, the Exchange would report symbols individually to Nasdaq as 
regular transactions as of the following morning.\10\ This reporting 
procedure mirrors the current ArcaEx trade reporting practice for 
Nasdaq trades occurring after 3:30 p.m. Pacific Time.
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    \9\ The Securities Industry Automation Corporation (``SIAC'') is 
the information processor for exchange-listed securities. ArcaEx 
would coordinate with SIAC to ensure it would be able to receive 
messages from ArcaEx reflecting aggregate PCS executions.
    \10\ Nasdaq is the securities information processor for Nasdaq-
listed securities. Section 11 of the Nasdaq Unlisted Trading 
Privileges Plan deals with trade reporting for Nasdaq securities 
after 6:30 p.m. Eastern Time.
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    All PCS executions, whether exchange-listed or Nasdaq securities, 
will be ``covered sales'' occurring on the Exchange for the purposes of 
Section 31 of the Act. The Exchange will report PCS activity to the 
Commission in Part II of Form R31.
    D. Commission Approval of Similar SRO Trading Sessions. In the 
past, the Commission has approved the creation of crossing sessions 
operated by other self-regulatory organizations which provide for 
alternative execution and reporting services for exchange member 
portfolio trades.\11\ For example, the

[[Page 56764]]

NYSE has operated its Crossing Session II, which allows for the 
execution and reporting of crosses of multiple-stock aggregate-price 
buy and sell orders, for over thirteen years.\12\ In the Commission's 
NYSE CS II Approval Order, the Commission explained its rationale for 
approving the NYSE's proposed rules: ``the Commission believes that CS 
II would benefit the investing public by offering members the 
opportunity to enter crossing portfolio orders with their customers 
after-hours to be executed against each other.'' \13\ In the NYSE CS II 
Approval Order, the Commission invited other exchanges to offer similar 
services to compete with the Crossing Session II, stating, ``if the 
regional exchanges or the NASD desire to compete with the OHT [Off-
Hours Trading] facility, they could provide a similar service.''
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    \11\ See Securities Exchange Act Release No. 29237 (May 24, 
1991), 56 FR 24853 (May 31, 1991) (order approving SR-NYSE-90-52 and 
SR-NYSE-90-53, the ``NYSE CS II Approval Order''). See also 
Securities Exchange Act Release No. 38077 (December 23, 1996), 61 FR 
69124 (December 31, 1996) (order approving SR-Amex-96-43, a rule 
proposal to establish an Amex trading session to execute, after 
normal trading hours, certain aggregate-price basket trade orders).
    \12\ See NYSE CS II Approval Order. SR-NYSE-90-53, which was 
NYSE's proposing release for its Crossing Session II, can be found 
at Securities Exchange Act Release No. 28640 (November 21, 1990), 55 
FR 49739 (November 30, 1990) (``NYSE CS II Proposing Release'').
    \13\ See NYSE CS II Approval Order at 13. In the NYSE CS II 
Proposing Release, the NYSE offered an additional rationale: ``[T]he 
Exchange is trying to respond to the significant increase in 
overseas trading of listed stocks due to the export of orders from 
the United States resulting from structural and regulatory factors. 
In particular, the development of trading strategies involving the 
contemporaneous execution of multiple stocks at a single, aggregate 
price, often in conjunction with index options and futures, has 
resulted in a demand for their execution that will supplement the 
single-stock execution facilities traditionally offered by the 
NYSE.'' See NYSE CS II Proposing Release at 2. The Commission stated 
that the establishment of a portfolio trade facility ``could help to 
recapture overseas trades of U.S. stocks by providing a mechanism by 
which portfolio trades arranged off the floor can be effected in an 
exchange trading system.'' See NYSE CS II Approval Order at 13. The 
Commission felt that such a service would help to protect the 
investing public and benefit the marketplace overall given that the 
services would bring ``institutional trades that currently are being 
exported overseas for execution within the purview of U.S. 
regulatory bodies.'' See NYSE CS II Approval Order at 13.
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    The Exchange, in this filing, seeks to establish a service to 
compete with the NYSE Crossing Session II. The Exchange believes that 
its proposed PCS would benefit the investing public by offering ETP 
Holders the opportunity to enter crossing portfolio orders to be 
executed against each other and would therefore provide investors and 
ETP Holders with greater opportunities for executing large portfolio 
trades.
    Request for Exemptive Relief. In connection with the Exchange's 
request for approval of the proposed PCS, the Exchange is also 
requesting exemptive relief in a separate letter from Rule 11Aa3-1 
under the Act in connection with trades executed through ArcaEx's PCS. 
In summary, the Exchange requests exemptive relief from the requirement 
in Rule 11Aa3-1 that the Exchange disseminate on a consolidated basis 
trading volume for each of the component securities executed on the 
Exchange's PCS. In addition, the Exchange has requested clarification 
from the Commission with respect to the application of Rule 10a-1 under 
the Exchange Act and Regulation SHO.
2. Statutory Basis
    The Exchange believes that the proposed rule change, as amended, is 
consistent with Section 6(b) of the Act,\14\ in general, and furthers 
the objectives of Section 6(b)(5) of the Act,\15\ 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 mechanism of a free and open market and a national market system.
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    \14\ 15 U.S.C. 78f(b).
    \15\ 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, 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-2005-73 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-2005-73. 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-
2005-73 and should be submitted on or before October 19, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
 [FR Doc. E5-5247 Filed 9-27-05; 8:45 am]
BILLING CODE 8010-01-P