[Federal Register: November 15, 2004 (Volume 69, Number 219)]
[Notices]
[Page 65670-65672]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr15no04-119]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-50645; File No. SR-PCX-2004-59]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change and Amendment Nos. 1 and 2 Thereto by the Pacific Exchange, Inc.
Relating to a New Order Modifier Entitled ``Proactive if Locked
Reserve''
November 5, 2004.
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 July 1, 2004, 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 III below, which
items have been prepared by the PCX. On October 26, 2004, the PCX
submitted Amendment No. 1 to the proposed rule change.\3\ On October
28, 2004, the PCX submitted 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\ See letter from Steven B. Matlin, Senior Counsel, Regulatory
Policy, PCX, to Nancy J. Sanow, Assistant Director, Division of
Market Regulation (``Division''), Commission, dated October 25, 2004
and accompanying Form 19b-4 (``Amendment No. 1''). Amendment No. 1
replaced and superceded the originally filed proposed rule change.
\4\ See letter from Steven B. Matlin, Senior Counsel, Regulatory
Policy, PCX, to Nancy J. Sanow, Assistant Director, Division,
Commission, dated October 25, 2004 (``Amendment No. 2''). Amendment
No. 2 made technical corrections to the proposed rule text of the
proposed rule change, as amended.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The PCX proposes to amend its rules governing the Archipelago
Exchange (``ArcaEx''), the equities trading facility of PCXE, by adding
new processing capability for ArcaEx Reserve Orders in situations where
a Reserve Order in an exchange-listed security is locked by another
market. Below is the text of the proposed rule change. Proposed new
language is italicized; proposed deletions are in [brackets].
* * * * *
Rule 7
Equities Trading
Orders and Modifiers
* * * * *
Rule 7.31 Orders and Modifiers
* * * * *
(hh) Proactive if Locked Reserve. A Reserve Order that will route
to another market center pursuant to PCXE Rule 7.37(d) for the away
market's displayed size up to such reserve amount in the instance in
which the other market center has locked the order and the locking
market has not resolved the locked market situation in a timely manner
based upon average response times from ITS Participants. In the event
that the order routed from the Archipelago Exchange to the other market
center is not executed in its entirety, the Archipelago Exchange shall
post the order or portion thereof in the ArcaEx Book. Proactive if
Locked Reserve will apply only to exchange-listed securities.
* * * * *
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, as
amended, and discussed any comments it received
[[Page 65671]]
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 states that, as part of its continuing efforts to enhance
participation on the ArcaEx facility, it is proposing to include
additional processing capability for ArcaEx Reserve Orders in exchange-
listed securities. The new order modifier would be entitled ``Proactive
if Locked Reserve'' and would be utilized when a Reserve Order in an
exchange-listed security is locked by another market and the offending
market has not shipped a commitment or moved their quote to clear the
lock.
Currently, PCXE Rule 7.56 describes interaction between markets in
exchange-listed securities when an order in the ArcaEx Book is locked
by an away market. Specifically, the ITS Plan and the provisions of
this rule require that, in locked market situations, upon receiving a
locked market complaint, the offending market shall either ship a
commitment to trade to the market that was locked or move its quote so
as to unlock the market.\5\ The Exchange states that, in many cases,
however, away markets that lock or cross ArcaEx do not adequately
respond to complaints or do not move quotes to unlock or uncross the
market. The proposed Proactive if Locked Reserve order modifier is
designed to address this issue.
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\5\ See ITS Plan Exhibit B, Section (d).
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Under the proposed rule change, Equity Trading Permit Holders
(``ETP Holders'') using the Proactive if Locked Reserve modifier would
be able to request, for exchange-listed securities, that the away
market's displayed size up to the reserve amount for a Reserve Order
\6\ be shipped to an away market when the Reserve Order has been locked
(or crossed) by the away market and there has been no resolution of the
locked (or crossed) market by the offending away market. According to
the Exchange, if the away market does not promptly respond to a locked
market complaint as provided for under the ITS Plan, ArcaEx would
proactively ship commitments to the offending market under the
Proactive if Locked Reserve process.\7\
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\6\ Reserve Orders, defined in PCXE Rule 7.31, are limit orders
with a portion of the size displayed and with a reserve portion of
the size not displayed.
\7\ See ITS Plan Exhibit B, Section (d).
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For example, assume ArcaEx posts a Reserve order with a Proactive
if Locked Reserve Modifier for 50,000 Buy at 30.10, with 1,000 shares
displayed and 49,000 shares in reserve. An away market subsequently
locks this quote by offering 10,000 shares at 30.10. ArcaEx would first
send an ITS complaint to the offending away market, indicating that the
away market has locked a quote on ArcaEx. ArcaEx would simultaneously
begin to monitor the time elapsing before receiving a response to its
complaint. If the away market does not respond within a sufficient
amount of time based upon average response times from ITS Participants,
ArcaEx would ship 10,000 shares of the 49,000 shares in reserve to the
away market (i.e., the away market's displayed quote) from the ArcaEx
Reserve order at 30.10. In the above example, ArcaEx would ship as many
shares as it had in reserve for the order with a Proactive if Locked
Reserve Modifier to match the away market's displayed quote.
Accordingly, if the away market was offering 50,000 shares at 30.10
instead of 10,000 shares, ArcaEx would ship all 49,000 shares in the
Reserve order while keeping the 1,000 shares displayed.
The proposed Proactive if Locked Reserve modifier is utilized only
if the offending market does not respond to the ArcaEx ITS complaint
within an acceptable time period, based upon average response times
from ITS Participants. If the away market declines the ArcaEx
commitment, ArcaEx would post the declined total back to the Reserve
order,\8\ for example, showing 1,000 shares Buy at 30.10 with a reserve
amount of 49,000 shares. If the order is executed by the away market,
and ArcaEx remains locked (or crossed), ArcaEx would ship the away
market's display amount from the reserve portion of the Reserve Order
to the offending market again, until the order is depleted. The display
portion of the Reserve Order, however, will continue to be displayed
and will not ship to the away market.
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\8\ The Exchange states that any portion of an order which is
sent to an away market and declined would re-enter ArcaEx as part of
the original Reserve Order with its original time priority in
accordance with PCXE Rule 7.36. To the extent the Reserve Order is
executed in its entirety in the interim, the portion of the order
that was sent to an away market and declined would establish a new
time priority upon re-posting in the Arca Book pursuant to PCXE Rule
7.36.
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Furthermore, in the instance where a limit order in the Arca Book
that is at the same price as, but superior in time to, the Proactive if
Locked Reserve Order is locked by an away market, ArcaEx would follow
the aforementioned procedures. Specifically, ArcaEx would first send an
ITS complaint to the offending away market indicating that the away
market locked the ArcaEx limit order. If the away market does not
respond within a sufficient amount of time based upon average response
times from ITS Participants, ArcaEx would ship from the Proactive if
Locked Reserve Order the away market's displayed size up to the reserve
amount. The limit order and display portion of the Proactive if Locked
Reserve Order would continue to be displayed. Any portion of the
Proactive if Locked Reserve Order that is sent to the away market and
subsequently declined would be re-posted in the Arca Book pursuant to
the description above.
The PCX believes that the proactive shipping of commitments
facilitated by the proposed Proactive if Locked Reserve modifier will
mitigate locked or crossed markets, prevent unresponsive away markets
from delaying executions, and provide increased opportunities for
executing orders. The Exchange believes that the Proactive if Locked
Reserve modifier will therefore aid enhanced order interaction and
foster price competition. The PCX believes that the proposal also
promotes a more efficient and effective market operation, and enhances
the investment choices available to investors over a broad range of
trading scenarios.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with section 6(b) of the Act \9\ in general, and furthers the
objectives of section 6(b)(5) of the Act \10\ 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 mechanism of a free and open market, and, in general, to
protect investors and the public interest.
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\9\ 15 U.S.C. 78f(b).
\10\ 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.
[[Page 65672]]
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; 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. 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 rule-comments@sec.gov. Please include
File Number SR-PCX-2004-59 on the subject line.
Paper Comments
Send paper comments in triplicate to Jonathan G. Katz,
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW.,
Washington, DC 20549-0609.
All submissions should refer to File Number SR-PCX-2004-59. 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, 450 Fifth
Street, NW., 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-
2004-59 and should be submitted on or before December 6, 2004.
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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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E4-3159 Filed 11-12-04; 8:45 am]
BILLING CODE 8010-01-P