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Self-Regulatory Organizations; Pacific Exchange, Inc.; Order Approving Proposed Rule Change Relating to New Order Types

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Start Preamble December 19, 2002.

I. Introduction

On August 5, 2002, the Pacific Exchange, Inc. (“PCX” or “Exchange”) filed with the Securities and Exchange Commission (“Commission”), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”) [1] and Rule 19b-4 thereunder,[2] a proposed rule change regarding new order types. On September 26, 2002, the Exchange's rule proposal was published for comment in the Federal Register.[3] The Commission received no comment letters on the proposal. This order approves the proposed rule change.

II. Description of the Proposed Rule Change

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, to: (i) Adopt two new order types—a Midpoint Crossing Order and a Midpoint Directed Fill; and (ii) add minimum trading differentials for these new order types separate from other orders types.

The two new order types would allow Equity Trading Permit (“ETP”) Holders and Sponsored Participants (collectively “Users”) to receive executions priced between the national best bid and offer (“NBBO”) at price increments finer than the minimum trading differential permitted under the Exchange's current rules.

A Midpoint Cross Order would be a Cross Order [4] 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. A Midpoint Directed Fill would be a Directed Fill [5] that is priced at the Start Printed Page 79220midpoint of the NBBO. When a locked or crossed market exists in the security, the inbound Directed Order would bypass the Directed Order Process [6] and immediately enter the Display Order Process for execution.[7] 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 minimum price variation for securities traded on the ArcaEx is $0.01. The minimum price improvement increment (“MPII”) on ArcaEx is equal to $0.01 or ten percent of the NBBO spread, whichever is greater.[8] Under the proposal, Midpoint Cross Orders and Midpoint Directed Fills could receive executions at price increments finer than the minimum trading differential currently permitted under the Exchange's rules. In order to implement these new order types, the Exchange proposes 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).[9] 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 current MPII. In addition, the Exchange proposes minor technical changes to eliminate obsolete references and to change the text so that Rule 7.6(a), Commentary .05 would conform to Rule 7.6(a), Commentary .03.

III. Discussion

After careful review, the Commission finds that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange [10] and, in particular, the requirements of Section 6 of the Act.[11] Further, the Commission finds that the proposal is consistent with Section 6(b)(5) of the Act,[12] in that the rules have been designed to remove impediments to and to perfect the mechanism of a free and open market and a national market system, while also protecting investors and the public interest.

IV. Conclusion

It is therfore ordered, pursuant to Section 19(b)(2) of the Act,[13] that the proposed rule change (File No. SR-PCX-2002-53), is hereby approved.

Start Signature

For the Commission, by the Division of Market Regulation, pursuant to delegated authority.[14]

J. Lynn Taylor,

Assistant Secretary.

End Signature End Preamble


3.  See Securities Exchange Act Release No. 46515 (September 19, 2002), 67 FR 60709.

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4.  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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5.  See PCXE Rule 7.31(j) (definition of “Directed Fill”).

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

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7.  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 the that price or for the size of the incoming order. See PCXE Rule 7.37(b) (description of “Display Order Process”).

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8.  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).

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9.  See proposed PCXE Rule 7.6(a), Commentary .07.

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10.  The Commission has considered the proposal's impact on efficiency, competition and capital formation. 15 U.S.C. 78c(f).

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[FR Doc. 02-32644 Filed 12-26-02; 8:45 am]