Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”)  and Rule 19b-4 thereunder, notice is hereby given that on August 5, 2002, 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 PCX. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons.
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 the Archipelago Exchange, the equities trading facility of PCXE, by: (1) Adopting two new order types—a Midpoint Crossing Order and a Midpoint Directed Fill; and (2) adding interpretive language to the Trading Differentials under PCXE Rule 7.6 to provide for separate minimum trading differentials for these new order types. The Exchange's proposed rule change would permit the aforementioned order types to receive an execution under specified circumstances at price increments finer than the minimum trading differential permitted under the Start Printed Page 60710Exchange's current rules for other transactions on the Archipelago Exchange. The text of the rule change is available at the Office of the Secretary of the Exchange and at the Commission.
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
The Archipelago Exchange trading facility (“ArcaEx”) commenced operations on March 22, 2002, replacing the PCXE's traditional trading floor facilities. As part of its continuing effort to enhance participation in its electronic auction market, the Exchange proposes to adopt two new order types called a “Midpoint Cross Order” and a “Midpoint Directed Fill,” which would permit Equity Trading Permit (“ETP”) Holders  and Sponsored Participants  (collectively “Users”) to receive executions priced between the NBBO at price increments finer than the minimum trading differential permitted under the Exchange's current rules.
The Exchange proposes to add PCXE Rule 7.31(y) to define a Midpoint Cross Order. A Midpoint Cross Order is a Cross Order  that is priced at the midpoint of the NBBO. If at the time of order entry a locked or crossed market exists in the security, the ArcaEx trading system would reject the Midpoint Cross Order. The Exchange also proposes to add PCXE Rule 7.31(z) to define a Midpoint Directed Fill. A Midpoint Directed Fill is a Directed Fill  that is priced at the midpoint of the NBBO. When a locked or crossed market exists in the security, the inbound Directed Order would bypass the Directed Order Process  and immediately enter the Display Order Process for execution. In the Directed Order Process, the User's Directed Order would be executed against a Directed Fill, which is the order of the User's designated market maker. Specifically, for a market maker to interact with incoming Directed Orders, the market maker must submit a standing instruction to ArcaEx for the parameters of a Directed Fill, including, but not limited to, the size of the order, the Users who may send such market maker a Directed Order, the price improvement algorithm and the period of time the instruction is effective. The proposed Midpoint Directed Fill would be an additional feature of the ArcaEx system's price improvement algorithm, which would enable market makers to match automatically against incoming Directed Orders at the midpoint price between the NBBO.
The Exchange's current rules governing minimum price variations and minimum price improvement increments (“MPII”)  for securities traded on the ArcaEx are set forth in PCXE Rule 7.6. The PCXE's current minimum price variation and MPII is $0.01. The proposed rule change provides an exception to PCXE Rule 7.6 that would permit Midpoint Cross Orders and Midpoint Directed Fills to receive executions at price increments finer than the minimum trading differential permitted under the Exchange's rules. In order to implement these new order types, the Exchange is proposing to add interpretive language to address situations where the midpoint of the NBBO bid/ask differential is a subpenny price (e.g., the midpoint of an NBBO of $20-$20.03 is $20.015). In such circumstances, the proposed rule would permit Midpoint Cross Orders and Midpoint Directed Fills to be executed and reported in increments as small as one-half of the minimum price variation (i.e., as $0.005). Furthermore, in situations where the NBBO bid/ask differential is one minimum price variation (i.e., $0.01), Midpoint Cross Orders and Midpoint Directed Fills may be executed in increments of one-half of the minimum price variation (i.e., as $0.005), as an exception to the MPII as prescribed in current PCXE Rule 7.6(a), Commentary .06.
The Exchange is also making minor technical changes to Rule 7.6(a), Commentary .05 by eliminating obsolete references and making changes to the text so that the rule will conform to a parallel rule as set forth in Rule 7.6(a), Commentary .03. Users of ArcaEx have requested a midpoint-pricing mechanism for Cross Orders and Directed Fills so that a midpoint trade can take place in odd-spread markets and $0.01 markets, as described above. To achieve this, the PCX proposes to allow such order types designated for midpoint pricing to be executed at finer trading differentials than $0.01. The PCX believes that a finer trading differential for executions of Midpoint Cross Orders and Midpoint Directed Fills will facilitate enhanced order interaction and foster price competition. Accordingly, the Exchange believes that the proposal promotes a more efficient and effective market operation, and enhances the investment choices available to investors over a broad range of trading scenarios.
The Exchange notes that the proposal to trade at finer price increments applies only to Midpoint Cross Orders and Midpoint Directed Orders. The rule change is not intended to permit Users to generally display quotes, enter orders, or execute trades in price increments less than $0.01. In other words, trades resulting from the midpoint-pricing mechanism may be executed on the basis of $0.005 increments; however, it will still not be possible to enter orders, bids, or offers in $0.005 increments. Start Printed Page 60711
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent with Section 6(b) of the Act, in general, and further the objectives of Section 6(b)(5), in particular, because it is designed 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 and perfect the mechanisms of a free and open market and to protect investors and the public interest. In addition, the Exchange believes that the proposed rule change is consistent with provisions of Section 11A(a)(1)(B) of the Act, which states that new data processing and communications techniques create the opportunity for more efficient and effective market operations.
B. Self-Regulatory Organization's Statement on Burden on Competition
The PCX believes that the proposed rule change does not 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. Persons making written submissions should file six copies thereof with the Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. 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 PCX. All submissions should refer to File No. SR-PCX-2002-53 and should be submitted by October 17, 2002.Start Signature
For the Commission, by the Division of Market Regulation, pursuant to delegated authority.
Margaret H. McFarland,
3. See Securities Exchange Act Release No. 44983 (October 25, 2001), 66 FR 55225 (November 1, 2001), File No. SR-PCX-00-25 (ArcaEx Approval Order).Back to Citation
4. See PCXE Rule 1.1(n).Back to Citation
5. A “Sponsored Participant” means “a person which has entered into a sponsorship arrangement with a Sponsoring ETP Holder pursuant to [PCXE] Rule 7.29.” See PCXE Rule 1.1(tt).Back to Citation
6. A Cross Order is defined as a two-sided order with instructions to match the identified buy-side with the identified sell-side at a specified price (the cross price), subject to price improvement requirements. See PCXE Rule 7.31(s).Back to Citation
7. See PCXE Rule 7.31(j) (definition of “Directed Fill”).Back to Citation
8. The Directed Order Process is the first step in the ArcaEx execution algorithm. Through this Process, Users may direct an order to a Market Maker with whom that they have a relationship and the Market Maker may execute the order. To access this process, the User must submit a Directed Order, which is a market or limit order to buy or sell that has been directed to a particular market maker by the User. See PCXE Rule 7.37(a) (description of “Directed Order Process”).Back to Citation
9. The Display Order Process is the second step in the ArcaEx execution algorithm. In this process, the ArcaEx system matches an incoming marketable order against orders in the Display Order Process at the display price of the resident order for the total size available at that price or for the size of the incoming order. See PCXE Rule 7.37(b) (description of “Display Order Process”).Back to Citation
10. The minimum price improvement increment (“MPII”) on ArcaEx is equal to $0.01 or 10% of the NBBO spread, whichever is greater. See PCXE Rule 7.6(a), Commentary .06. Under current PCXE rules, the MPII requirements must be satisfied in the execution of Cross Orders and Directed Orders. See PCXE Rules 7.31(j) and (s).Back to Citation
11. See proposed PCXE Rule 7.6(a), Commentary .07.Back to Citation
12. Users that use indexation strategies are particularly interested in using the midpoint-pricing feature. Also, the Exchange believes that the quotation spreads (the difference between the highest bid quotation and the lowest offer quotation) in the most liquid Nasdaq securities are $0.01 for a substantial majority of the trading day.Back to Citation
[FR Doc. 02-24411 Filed 9-25-02; 8:45 am]
BILLING CODE 8010-01-P