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Notice

Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change by the Pacific Exchange, Inc., to Amend the PCX's Market Data Revenue Sharing Program for Tape A Securities Traded on the Archipelago Exchange

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Start Preamble November 8, 2002.

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 October 4, 2002, 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 Start Printed Page 69795III below, which Items have been prepared by PCXE. 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

The PCX, through PCXE, proposes to modify its market data revenue sharing program for Tape A securities traded on the Archipelago Exchange (“ArcaEx”), the equities trading facility of PCXE. The text of the proposed rule change is available at the PCX 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 Exchange 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 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

The PCX proposes to amend its fee schedule for services provided to ETP Holders [3] and Sponsored Participants [4] (collectively “Users”) on the ArcaEx by increasing the level of the transaction credits paid to Users with respect to transactions in issues listed on the New York Stock Exchange (“Tape A” securities) that are traded on ArcaEx.

Background

On May 28, 2002, the Exchange filed with the Commission a proposed rule change to implement, on a pilot basis through June 28, 2002, a mechanism for sharing market data revenue with Users on ArcaEx.[5] The proposed rule change was effective upon filing, and the PCXE implemented the program on June 1, 2002. On June 27, 2002, the Exchange filed with the Commission a proposed rule change to extend the market data revenue pilot program through August 30, 2002.[6] On July 2, 2002, the Commission summarily abrogated the PCX's proposed rule change and certain proposed rule changes of the National Association of Securities Dealers, Inc. and the Cincinnati Stock Exchange relating to market data revenue sharing.[7] Accordingly, on July 9, 2002, the PCX filed with the Commission a proposed rule change to reinstate its market data revenue sharing program, and to reduce the level of the transaction credits paid to Users with respect to transactions in issues listed on the American Stock Exchange (“Tape B” securities).[8] On August 6, 2002, the PCX filed a similar proposed rule change to reinstate its market data revenue sharing program for Tape A securities.[9] Both SR-PCX-2002-42 and SR-PCX-2002-56 were effective upon filing with the Commission. The PCX subsequently amended its Tape A revenue sharing program on September 30, 2002, reducing the transaction credits from 50% to 40% per qualifying transaction.[10]

With the instant proposed rule change, the Exchange proposes to modify its Tape A market data revenue sharing program by increasing the level of the transaction credits paid to Users with respect to transactions in such securities from 40% to 50%. No other changes are proposed at this time.

Summary of Proposed Changes

Under the current market data revenue sharing program for Tape A securities, the Exchange shares 40% of its gross revenues derived from related market data fees with (i) any User that provides liquidity in a Tape A security by entering a resting limit order into the ArcaEx Book that is then executed against an incoming marketable order within the Display Order, Working Order, or Tracking Order processes; (ii) any Market Maker that executes against a Directed Order in a Tape A security within the Directed Order Process;[11] and (iii) any User that represents all of one side and all or a portion of the other side of a Cross Order [12] execution in a Tape A security. The Exchange is seeking to increase the level of the transaction credits from 40% to 50% (per qualifying transaction) that will be paid to a User that meets the requirements stated above. The proposed increase in the Tape A revenue credit is intended to create additional incentives to market participants to provide liquidity on the ArcaEx facility.

2. Statutory Basis

The Exchange believes the proposed rule change is consistent with section 6(b) [13] of the Act, in general, and furthers the objectives of section 6(b)(5),[14] in particular, in that 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.

The Exchange also believes that the proposal is consistent with section 6(b)(4)[15] of the Act, in that it provides for the equitable allocation of reasonable dues, fees and other charges among its members.

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 Start Printed Page 69796longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the PCX 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

On July 2, 2002, the Commission issued an Order abrogating certain proposed rule changes relating to market data revenue sharing programs.[16] In that Order, the Commission expressed concern that the subject proposed rule changes raised “serious questions as to whether they are consistent with the Act and with the protection of investors.” Specifically, the Commission questioned the effect of market data rebates on the accuracy of market data, and on the regulatory functions of self-regulatory organizations.

The Commission now solicits comment on the instant proposed rule change, and in general, on (1) market data fees; (2) the collection of market data fees; (3) the distribution of market data rebates; (4) the effect of market data revenue sharing programs on the accuracy of market data; and (5) the impact of market data revenue sharing programs on the regulatory functions of self-regulatory organizations.

Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposal 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 will also be available for inspection and copying at the principal office of the Exchange. All submissions should refer to file number SR-PCX-2002-62, and should be submitted by December 10, 2002.

Start Signature

For the Commission, by the Division of Market Regulation, pursuant to delegated authority.[17]

Margaret H. McFarland,

Deputy Secretary.

End Signature End Preamble

Footnotes

3.  See PCXE Rule 1.1(n).

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4.  A “Sponsored Participant” is “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).

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5.  See Securities Exchange Act Release No. 46070 (June 12, 2002), 67 FR 42089 (June 20, 2002) (SR-PCX-2002-28).

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6.  See SR-PCX-2002-37.

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7.  See Securities Exchange Act Release No. 46159 (July 2, 2002), 67 FR 45775 (July 10, 2002) (File Nos. SR-PCX-2002-37, SR-NASD-2002-61, SR-NASD-2002-68, and Sr-CSE-2002-06) (Order of Summary Abrogation).

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8.  See Securities Exchange Act Release No. 46293 (August 1, 2002), 67 FR 51314 (August 7, 2002) (SR-PCX-2002-42).

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9.  See File No. SR-PCX-2002-56.

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10.  See File No. SR-PCX-2002-61.

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11.  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 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 the particular market maker by the User. See PCXE Rule 7.37(a) (description of “Directed Order Process”).

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12.  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).

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16.  Securities Exchange Act Release No. 46159 (July 2, 2002), 67 FR 45775 (July 10, 2002)(File Nos. SR-NASD-2002-61, SR-NASD-2002-68, SR-CSE-2002-06, and SR-PCX-2002-37) (Order of Summary Abrogation).

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[FR Doc. 02-29241 Filed 11-18-02; 8:45 am]

BILLING CODE 8010-01-P