Federal Register: January 29, 2003 (Volume 68, Number 19)
DOCID: FR Doc 03-1978
SECURITIES AND EXCHANGE COMMISSION
Securities and Exchange Commission
DOCUMENT ID: [Release No. 34-47223; File No. SR-PCX-2002-75]
NOTICE: NOTICES
ACTION: Self-regulatory organizations; proposed rule changes:
SUBJECT CATEGORY:
Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change by the Pacific Exchange, Inc., Through Its Subsidiary PCX Equities, Inc., Relating to New Order Types and To Amend PCXE Rule 7.37
DOCUMENT SUMMARY:
January 21, 2003.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and rule 19b4 thereunder,\2\ notice is hereby given that
on December 9, 2002, the Pacific Exchange, Inc. (``PCX'' or
``Exchange''), through its 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 January 15, 2003, the Exchange
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.
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b4.
\3\ In Amendment No. 1, the Exchange submitted a new form 19b4, which replaced the original filing in its entirety.
I. SelfRegulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change
The PCX, through its wholly owned subsidiary, PCXE, proposes to amend its rules governing the Archipelago Exchange, the equities trading facility of PCXE, by: (1) Adopting several new order types to accommodate the trading of securities listed on the Nasdaq Stock Market, Inc., on an unlisted trading privileges (``UTP'') basis; (2) amending PCXE rule 7.37 to provide for a limited exemption from the tradethrough restrictions for some of these new order types; (3) amending certain provisions of the Working Order Process to reflect the unique operational requirements of two proposed order types; and (4) making several minor technical rule changes to conform to the Nasdaq UTP Plan, which extends UTP to Nasdaq SmallCap securities. The text of the proposed rule change follows:
Additions are italicized; deletions are in [brackets]. PCX Equities, Inc.
Rule 1 Definitions
Rule 1.1(a)(z)No change.
Nasdaq[/NM] Security
(aa) The term ``Nasdaq[/NM] Security'' shall mean any security (i)
designated as an eligible [national market system] security pursuant to
the ``Nasdaq Unlisted Trading Privileges Plan'', as amended, [NASD's
``National Market System Securities Designation Plan with respect to
Nasdaq Securities,''] filed with and approved by the Commission
pursuant to SEC rule 11Aa21 under the Exchange Act and (ii) that is
either listed on the Corporation pursuant to rule 5 or as to which
unlisted trading privileges have been granted pursuant to section 12(f) of the Exchange Act.
Rule 1.1 (bb)(hh)No change.
OTC/UTP Plan
(ii) The term ``OTC/UTP Plan'' shall mean the Nasdaq Unlisted Trading
[[Page 4528]]
Privileges [National Market/Unlisted Trading System/Unlisted Trading
Privileges] Plan, as from time to time amended according to its provisions.
OTC/UTP Listing [Primary] Market
(jj) The term ``OTC/UTP Listing [Primary] Market'' for a Nasdaq[/
NM] Security means the OTC/UTP Participant's Market on which the Nasdaq
Security is listed. If the Nasdaq Security is dually listed, OTC/UTP
Listing Market shall mean the OTC/UTP Participant's Market on which the
Nasdaq Security is listed that also has the highest number of the
average of the reported transactions and reported share volume for the
preceding 12month period. The OTC/UTP Listing Market for duallylisted
Nasdaq Securities shall be determined at the beginning of each calendar
quarter. [Nasdaq; provided, however, that if for any 12month period
the number of reported transactions and the reported share volume in a
Nasdaq/NM Security in any other OTC/UTP Participant's market exceeds
50% of the aggregate reported transactions and reported share volume of
all OTC/UTP Participants in such security, then that OTC/UTP Participant's market shall be the OTC/UTP Primary Market.]
OTC/UTP Regulatory Halt
(kk) The term ``OTC/UTP Regulatory Halt'' means a trade suspension
or halt called by the OTC/UTP Listing [Primary] Market for the purpose of dissemination of material news.
* * * * *
Rule 7 Equities Trading
Trading in Nasdaq[/NM] Securities
Rule 7.18(a) Access.
(1) The Corporation shall permit each Nasdaq Market Maker, acting
in its capacity as a market maker, telephone access, or such other
access as may be established between the Corporation and the Nasdaq
System (collectively, ``approved access''), to the Corporation for each
Nasdaq[/NM] Security in which such market maker is registered as a
market maker. Such approved access shall include appropriate procedures
to assure the timely response to communications received through telephone or other approved access.
(2) Nasdaq Market Makers may use such approved access to transmit
orders for execution on the Corporation. Market Makers, via the
facilities of the Corporation, may send orders via approved access to
any Nasdaq Market Maker in each Nasdaq[/NM] security in which it displays quotations.
(3)No change.
(4) No Market Maker shall permit the imposition of any access or
execution fee, or any other fee or charge, with respect to transactions
in Nasdaq[/NM] Securities effected with Nasdaq Market Makers that are communicated to the Corporation through telephone access.
(b)No change.
(c) OTC/UTP Regulatory Halts. Whenever, in the exercise of its
regulatory function, the OTC/UTP Listing [Primary] Market for a
Nasdaq[/NM] Security determines that an OTC/UTP Regulatory Halt is
appropriate, the Corporation shall halt or suspend trading in that
security until the notification by the OTC/UTP Listing [Primary] Market
that the halt or suspension is no longer in effect. The Corporation
will assume that adequate publication or dissemination has occurred
upon the expiration of one hour after initial publication in a national
news dissemination service of the information that gave rise to an OTC/
UTP Regulatory Halt and may, at its discretion, reopen trading at that
time, notwithstanding notification from the OTC/UTP Listing [Primary] Market that the halt or suspension is no longer in effect.
(d) Applicability. The following rules of the Corporation will not
be applicable to transactions on the Corporation in Nasdaq[/NM] Securities: rules 7.16, 7.557.57.
* * * * *
Orders and Modifiers
Rule 7.31(a)(c)No change.
(d) Inside Limit Order. A Limit Order, which, if routed away
pursuant to rule 7.37(d), will be routed to the market participant with
the best displayed price. Any unfilled portion of the order will not be
routed to the next best price level until all quotes at the current
best bid or offer are exhausted. If the order is no longer marketable
it will be ranked in the Arca Book pursuant to rule 7.36. [Reserved.]
(e) ImmediateorCancel Order. A market or limit order that is to
be executed in whole or in part as soon as such order is received, and
the portion not so executed is to be treated as canceled. An immediate
orcancel order for TradeThrough Exempt Securities (as defined in rule
7.37) will be permitted to trade at a price no more than three cents
($0.03) away from the NBBO displayed in the Consolidated Quote. The
NBBO price protection provision set forth in rule 7.37 will not apply to immediateorcancel orders in Nasdaq securities.
(f)(g)No change.
(h) Working Order. Any order with a conditional or undisplayed
price and/or size designated as a ``Working Order'' by the Corporation, including, without limitation:
(1)No change.
(2) Discretionary Order. An order to buy or sell a stated amount of
a security at a specified, undisplayed price (the ``discretionary
price''), in addition to at a specified, displayed price (``displayed price.'')
(A) Passive Discretionary Order. A Discretionary Order may be
designated as a Passive Discretionary Order and such order will be
routed pursuant to rule 7.37(d) only if the displayed price is marketable against an away market participant.
(i) For Passive Discretionary Orders in exchangelisted securities,
if the discretionary price is marketable, such order will only interact
with trading interest in the Arca Book pursuant to rule 7.37(b)(2) and
will not be routed away. A Passive Discretionary Order for ITS Trade
Through Exempt Securities will be permitted to trade at a price no more
than three cents ($0.03) away from the NBBO displayed in the Consolidated Quote.
(ii) For Passive Discretionary Orders in Nasdaq securities, if the
discretionary price can be matched against orders in the Arca Book,
such order will intereact with trading interest in the Arca Book
pursuant to 7.37(b)(2). The NBBO price protection provision set forth
in rule 7.37 will not apply to Passive Discretionary Orders in Nasdaq securities.
(B) Discretion Limit Order. A Discretionary Order may be designated
as a Discretion Limit Order for Nasdaq securities only. If the
discretionary price of a Discretion Limit Order can be matched against
trading interest in the Arca Book, then such order will be executed at
the discretionary price or better. If the discretionary price of a
Discretion Limit Order can be matched against an away market
participant, then such order will be routed pursuant to rule 7.37(d)
but only if the displayed share size of the Discretion Limit Order is
equal to or less than the displayed share size of the away market
participant. The NBBO price protection provision set forth in rule 7.37
will not apply to Discretion Limit Orders in Nasdaq securities.
(3) Reserve Order. A limit order with a portion of the size
displayed and with a reserve portion of the size (``reserve size'') that is not displayed on the Corporation.
(A) Sweep Reserve Order. A Reserve Order may be designated as a
Sweep Reserve Order. Based upon a User's instruction, if the displayed price of a Sweep Reserve Order is marketable
[[Page 4529]]
against an away market participant(s), then such order will be routed
(i) serially as component orders, such that each component corresponds
to the displayed price, or (ii) only once in its entirety, including both the displayed and reserve portions.
(B) Random Reserve Order. A Reserve Order designated as a Random
Reserve Order will have a random reserve value which, as a range of
round lots, will vary the displayed size of the Reserve Order. A random
reserve value set to zero will permit the displayed size of the Reserve
Order to vary to within 20% of the original specified displayed size. (i)(u)No change.
(v) NOW Order. A Limited Price Order that is to be executed in
whole or in part on the Corporation, and the portion not so executed
shall be routed pursuant to rule 7.37(d) only to one or more NOW
Recipients for immediate execution as soon as the order is received by
the NOW Recipient. Any portion not immediately executed by the NOW
Recipient shall be cancelled. If a NOW Order is not marketable when it
is submitted to the Corporation, it shall be cancelled. NOW Orders may
not be Directed Orders. NOW Orders for ITS TradeThrough Exempt
Securities (as defined in rule 7.37) may be routed and executed at a
price that is no more than three cents ($0.03) away from the NBBO
displayed in the Consolidated Quote. The NBBO price protection
provision set forth in rule 7.37 will not apply to NOW Orders in Nasdaq securities.
(w) PNP Order (Post No Preference). A limit order to buy or sell
that is to be executed in whole or in part on the Corporation, and the
portion not so executed is to be ranked in the Arca Book, without
routing any portion of the order to another market center; provided,
however, the Corporation shall cancel a PNP Order that would lock or
cross the NBBO. PNP Orders for TradeThrough Exempt Securities (as
defined in rule 7.37) will not be canceled at the time of order entry
if such orders would lock or cross the NBBO. PNP Orders in ITS Trade
Through Exempt Securities may be executed at a price no more than three
cents ($0.03) away from the NBBO displayed in the Consolidated Quote.
The NBBO price protection provision set forth in Rule 7.37 will not apply to PNP Orders in Nasdaq securities.
(x)(z)No change.
(aa)(bb)Reserved.
(cc) Pegged Order. A limit order to buy or sell a stated amount of
a security at a display price set to track the current bid or ask of
the NBBO in an amount specified by the User. The associated price of
each Pegged Order that is updated will be assigned a new entry time
with priority in accordance with rule 7.36(a). A Pegged Order may be designated as a Reserve Order or Discretionary Order.
* * * * *
Order Execution
Rule 7.37. Subject to the restrictions on short sales under rule
10a1 under the Exchange Act, likepriced orders, bids and offers shall
be matched for execution by following Steps 1 through 5 in this rule;
provided, however, for an execution to occur in any Order Process, the
price must be equal to or better than the NBBO, unless the Archipelago
Exchange has routed orders to away markets at the NBBO, where
applicable (however, a User may submit a NOW Order or Primary Only
Order that may be routed to an away market without consideration of the
NBBO). This rule will not apply to designated order types including
IOC, NOW, PNP, Passive Discretionary, Discretion Limit (except for
exchangelisted securities), IOC Cross and PNP Cross orders in Nasdaq
securities or securities that are subject to an exemption from the
Commission under SEC rule 11Aa32(f) to the tradethrough provisions of
the ITS Plan (``ITS TradeThrough Exempt Securities''). Orders in ITS
TradeThrough Exempt Securities [designated as IOC, NOW and PNP orders]
will be effected at a price no more than three cents ($0.03) away from the best bid and offer quoted in CQS.
(a)No change.
(b)(1)No change.
(2) Step 3: Working Order Process.
(A) An incoming marketable order shall be matched for execution
against orders in the Working Order Process in the following manner: (i)(iii)No change.
(iv) Determination of a Passive Discretionary Order's Execution Price.
(a) For Nasdaq Securities, if the BBO is outside the NBBO and a
Passive Discretionary Order(s) within the Working Order Process has a
discretionary price worse than the NBBO, then the incoming order will
execute against such Passive Discretionary Order(s) at the price of the
incoming order or the displayed price of the Discretionary Order(s), whichever is better.
(b) For Nasdaq Securities, if the BBO is outside the NBBO and a
Passive Discretionary Order(s) within the Working Order Process has a
discretionary price equal to or better than the NBBO, then the incoming
order will execute against such Passive Discretionary Order(s) pursuant to subsection (2)(A)(ii) above.
(c) For ITS TradeThrough Exempt Securities (as defined in Rule
7.37), if the BBO is outside the NBBO and a Passive Discretionary
Order(s) within the Working Order Process has a discretionary price
worse than the NBBO by three cents ($0.03) or less, the incoming order
will execute against such Passive Discretionary Order(s) at the price
of the incoming order or the displayed price of the Discretionary Orders(s), whichever is better.
(v)No change.
(B) An incoming order that is not marketable shall be matched for
execution against orders in the Working Order Process in the following manner:
(i)(ii)No change.
(C) With the exception of Passive Discretionary Orders and
Discretion Limit Orders, [I]if any change in the NBBO or other
available away trading interest would cause a potential match between
the away order and an order in the Working Order Process, a commitment
to trade shall be sent to that market center or market participant
pursuant to Step 5 below after having proceeded through Step 4.
(i) Passive Discretionary Orders will be routed away only if the
displayed price is marketable against an away market participant.
(ii) Discretion Limit Orders will be routed away only if the
displayed share size of the Discretion Limit Order is equal to or less
than the displayed share size of the away market participant. (c)(e)No change.
II. SelfRegulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, Nasdaq 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. PCX has prepared summaries, set forth in sections A, B,
and C below, of the most significant aspects of such statements.
A. SelfRegulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
Purpose
1. Proposed New Order Types
As part of its ongoing preparation for the trading of Nasdaq securities on the Archipelago Exchange (``ArcaEx'')
[[Page 4530]]
facility pursuant to UTP,\4\ PCX proposes to adopt several new order
types, which are currently in use on the Archipelago electronic
communication network (``ECN'').\5\ These proposed order types will
apply to both Nasdaq and listed securities traded on ArcaEx.\6\ The
Exchange believes that these order types will provide ETP Holders \7\
and Sponsored Participants \8\ (collectively ``Users'') greater
flexibility in determining how their orders will be executed. The proposed order types are discussed below.
\4\ The Nasdaq UTP Plan was initially approved in 1990. See
Securities Exchange Act Release No. 28146 (June 26, 1990), 55 FR
27919 (July 6, 1990) (S72489). It has subsequently been amended on
several occasions to, among other things, admit new Participants.
See also Securities Exchange Act Release No. 46381 (August 19,
2002), 67 FR 54687 (August 23, 2002) (S72489) (Order approving
most recent amendments to Nasdaq UTP Plan, the 13th Amendment).
\5\ The brokerdealer commonly referred to as the Archipelago
ECN is Archipelago Securities, a wholly owned subsidiary of
Archipelago Holdings LLC and a member of the NASD. The ECN function
will cease to operate as such once all the Nasdaq securities have been transferred to ArcaEx.
\6\ The proposed Discretion Limit order type will apply to
Nasdaq securities only. See proposed PCXE rule 7.31(h)(2)(B). \7\ See PCXE rule 1.1(n).
\8\ 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).
a. Inside Limit Order
An Inside Limit Order is a limit order that is to be executed in
whole or in part on ArcaEx, and the portion not so executed would be
routed pursuant to rule 7.37(d) to the market participant \9\ with the
best displayed price. Any unfilled portion of the order would not be
routed to the next best price level until all quotes at the current
best bid or offer are exhausted. For example, after having proceeded
through the four order execution processes of the ArcaEx Book,\10\
there remains an unexecuted portion of an Inside Limit Order to buy at
a price of 12.50. ArcaEx would route the order to the away market
participant with the best displayed offer. Suppose the best displayed
offer by other market participants is Market A at 12.45, Market B at
12.46, Market C at 12.47, and Market D at 12.50. The Inside Limit Order
would be routed first to Market A at 12.45. The balance of the Inside
Limit Order would not be routed to the next price level (i.e., Market B
at 12.46) until the current offer is exhausted. Each successive number
of shares remaining (if any) would be routed at the next price level in
the same manner. If the Inside Limit Order is no longer marketable it would be ranked in the Arca Book pursuant to rule 7.36.
\9\ See PCXE rule 1.1(w) (definition of ``market participant'').
\10\ ArcaEx maintains an electronic file of orders, called the
ArcaEx Book, through which orders are displayed and matched. The
ArcaEx Book is divided into four components, called processesthe
Directed Order Process, the Display Order Process, the Working Order
Process, and the Tracking Order Process. See PCXE rule 7.37 for a detailed description of these order execution processes.
b. Discretionary Orders
Currently, a User can submit a Discretionary Order, which is an
order to buy or sell a stated amount of a security at a specified,
undisplayed price (the ``discretionary price''), as well as at a
specified, displayed price. The undisplayed prices of a Discretionary
Order are represented in the Working Order Process \11\ and can be
matched with orders on the other side of the market under prescribed
conditions. Since the Discretionary Order type allows a User to
represent a single order at multiple price points, investors are able
to express their trading interest more accurately than is possible with
traditional order types. The Exchange is proposing to adopt two new
variations of the Discretionary Order called a ``Passive Discretionary
Order'' and a ``Discretion Limit Order,'' which would provide Users
with more flexibility when such orders are routed to away market
participants. A summary of these proposed order types is discussed below.
\11\ The Working Order Process is the third step in the ArcaEx
execution algorithm. Working Orders are defined to include any order
with a conditional or undisplayed price and/or size, including All
orNone, Discretionary, and Reserve Orders. See PCXE rule 7.37(b)(2) (description of ``Working Order Process'').
i. Passive Discretionary
The Exchange proposes to add PCXE rule 7.31(h)(2)(A) to define a Passive Discretionary Order. A Discretionary Order may be designated as a Passive Discretionary Order and such order would be routed pursuant to rule 7.37(d) only if the displayed price is marketable against an away market participant. If the discretionary price of a Passive Discretionary Order were marketable, such order would only interact with trading interest in the ArcaEx Book pursuant to rule 7.37(b)(2) and would not be routed away. Under the proposal, the Passive Discretionary order type will be available for exchangelisted and Nasdaq securities. For Passive Discretionary Orders in exchangelisted securities, if the discretionary price is marketable, such order will only interact with trading interest in the ArcaEx Book pursuant to rule 7.37(b)(2) and will not be routed away. A Passive Discretionary Order for ITS TradeThrough Exempt Securities (as defined in rule 7.37) will be permitted to trade at a price no more than three cents ($0.03) away from the NBBO displayed in the Consolidated Quote. For Passive Discretionary Orders in Nasdaq securities, if the discretionary price can be matched against orders in the ArcaEx Book, then such order will interact with trading interest in the ArcaEx Book pursuant to 7.37(b)(2). The NBBO price protection provision set forth in rule 7.37 will not apply to Passive Discretionary Orders in Nasdaq securities.
To illustrate how this order type is processed by the ArcaEx trading system, suppose that a User submits a Passive Discretionary Order to buy 1000 shares at 12.48 (discretion to 12.50). After first attempting to match the order with available trading interest in the ArcaEx Book (up to a price of 12.50), ArcaEx would route the order to an away market participant, but only if the offer published by the market participant is equal to or less than the displayed price of 12.48. In the event that a Passive Discretionary Order routed from ArcaEx to another market participant is not executed in its entirety at the other market participant's quote, ArcaEx would attempt to match the residual against trading interest in the ArcaEx Book pursuant to rule 7.37. Finally, if the Passive Discretionary Order is no longer marketable it would be ranked in the ArcaEx Book pursuant to rule 7.36.
ii. Discretion Limit
The Exchange also proposes to add PCXE rule 7.31(h)(2)(B) to define
a Discretion Limit Order. A Discretionary Order may be designated as a
Discretion Limit Order for Nasdaq securities only. If the discretionary
price of a Discretion Limit Order could be matched against trading
interest in the ArcaEx Book, then such order would be executed at the
discretionary price or better against the displayed share size of
available trading interest in the ArcaEx Book, regardless of size. If
the discretionary price of a Discretion Limit Order could be matched
against an away market participant, then such order would be routed
pursuant to rule 7.37(d) but only if the displayed share size of the
Discretion Limit Order is equal to or less than the displayed share
size of the away market participant. As discussed in more detail in
section 2 below, the Exchange is proposing that the NBBO price
protection provision set forth in rule 7.37 will not apply to Discretion Limit Orders.
c. Reserve Orders
Under current PCXE rule 7.31(h)(3), a Reserve Order is a limit
order with a portion of the size displayed and with a reserve portion
of the size (``reserve size'') that is not displayed on the [[Page 4531]]
ArcaEx Book. For example, a User could submit a Reserve Order to buy
5000 shares of XYZ security at 20 with a request that 1000 shares are
displayed and 4000 shares, as the reserve size, are not displayed. With
this filing, the Exchange is proposing to adopt two new variations of
the Reserve Order called a ``Sweep Reserve Order'' and a ``Random
Reserve Order.'' These proposed order types would be ranked and
maintained in the Display Order Process \12\ and/or Working Order
Process of the ArcaEx Book according to pricetime priority and would
be processed for internal matches in a manner no different than a
standard Reserve Order pursuant to PCXE rule 7.37(b)(2). The proposed
rule change regarding Sweep Reserve Orders merely provides a
clarification as to the manner in which such orders would be treated
through ArcaEx's trading system when the routing of these orders to
other market participants is required. In the case of a Random Reserve
Order, the proposed rule change would allow a User to define the
original display quantity and a random reserve value that would be used
to determine the displayed quantity within a defined range each time it
is replenished. These proposed order types are discussed separately below.
\12\ 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'').
i. Sweep Reserve Order
Under proposed PCXE rule 7.31(h)(3)(A), a Reserve Order may be
designated as a Sweep Reserve Order. Based upon a User's instruction,
if the displayed price of a Sweep Reserve Order is marketable against
an away market participant(s), then such order will be routed (i)
serially as component orders, such that each component corresponds to
the displayed price, or (ii) only once in its entirety, including both
the displayed and reserve portions. The Exchange believes that this
rule change codifies current order routing methodology, and that the
proposed Sweep Reserve Order type is clearly implied in current PCXE rule 7.37(d)(2)(A)(ii).
ii. Random Reserve Order
The Exchange proposes to add PCXE rule 7.31(h)(3)(B) to define a Random Reserve Order. Under the rule proposal, a User could define not only a display and reserve quantity, but also a random reserve delta that could be used to determine the displayed quantity within a defined range each time it is replenished in a random amount (rounded to the nearest round lot). Users are required to display at least 100 shares for all Reserve Orders including Random Reserve Orders. The following examples illustrate the use of the Random Reserve Order.
Suppose a User entered a Random Reserve Order for 10,000 shares with a display quantity of 2000 shares and a random reserve delta of 200 shares. This order would randomly display orders at 1800 (200 shares less than the original display quantity), 1900 (100 shares less than the original display quantity), 2000, 2100 (100 shares more than the original display quantity) or 2200 shares (200 shares more than the original display quantity) each time the displayed portion of the order is replenished. If the User does not specify the random reserve delta or the random reserve delta is set to zero, the ArcaEx system would assign the displayed size of the Reserve Order to vary to within 20% of the original specified displayed size. In the example above, the displayed amount would fall within a 400share range (i.e., 20% of 2000 shares is 400 shares).
Should a User enter a Random Reserve Order with a display amount of
500 shares or less and a random reserve delta that is unspecified or
set to zero, the order would be handled as a regular Reserve Order.
Suppose a User entered a Random Reserve Order with a display amount of
100 shares, a reserve amount of 1,000 shares, and a random reserve of
zero. The ArcaEx system would treat this order as a regular Reserve
Order and the display quantity will be refreshed at the original
displayed size (100 shares), i.e., the ArcaEx system would not vary the display quantity for this order.
d. Pegged Orders
The Exchange is proposing to modify the ArcaEx trading system to
accept Pegged Orders. A Pegged Order is a limit order to buy or sell a
stated amount of a security at a display price set to track the current
bid or ask of the NBBO in an amount specified by the User.\13\ The
tracking of the relevant Consolidated Quote information for Pegged
Orders would occur on a realtime basis in a dynamic fashion. The
associated price of each Pegged Order that is updated would be assigned
a new entry time with priority in accordance with rule 7.36(a). A
Pegged Order may be designated as a Reserve Order or Discretionary
Order and would be subject to the applicable order execution rules.
Finally, Pegged Orders are only eligible during the Core Session.
\13\ See proposed PCXE rule 7.31(cc) (definition of ``Pegged Order'').
2. Amendment to PCXE Rule 7.37
The Exchange's current rules governing the order execution
processes for orders in the ArcaEx Book are set forth in PCXE rule
7.37. Presently, rule 7.37 provides, in part, that for an execution to
occur in any Order Process, the price must be equal to or better than
the NBBO. The requirements of this rule do not apply to orders
designated as ImmediateorCancel (``IOC''), NOW and Post No Preference
(``PNP'') in certain exchangetraded funds (``ETFs'') that are subject
to the Commission's order granting a de minimis exemption from the
tradethrough restrictions of the Intermarket Trading System (``ITS'')
Plan; provided, however, that any resulting executions will be at a
price no more than three cents ($0.03) away from the NBBO displayed in
the Consolidated Quote.\14\ The current proposal would also broaden
this exception to include Passive Discretionary, IOC Cross and PNP
Cross order types.\15\ The definition for a Passive Discretionary Order
includes a provision clarifying the application of the Commission's de
minimis exemption order. The Exchange is also proposing that the
aforementioned NBBO price protection restriction would not apply to
certain existing order types (IOC, NOW and PNP orders) and proposed new
order types (Passive Discretionary, Discretion Limit, IOC Cross and PNP
Cross) \16\ in Nasdaq securities. The definition for IOC, NOW, PNP,
Passive Discretionary and Discretion Limit order types \17\ includes a
provision clarifying that the NBBO price protection requirement set
forth in rule 7.37 will not apply to these order types in Nasdaq
securities. Unlike the market for listed securities, there is no
linkage between participants in the Nasdaq UTP Plan and, therefore, no
rules that prohibit a participant from trading through another
participant's quote.\18\ Consequently, the Exchange believes that it
would not be praticable to attempt to provide such orders with intermarket price protection. The
[[Page 4532]]
Exchange also believes that these proposed orders are sophisticated
types of orders, and persons using these orders will understand the
benefits and limitations of their use. Moreover, such orders are still
subject to a broker's duty of best execution for its customer.
\14\ See Securities Exchange Act Release No. 46428 (August 28,
2002), 67 FR 56607 (September 4, 2002) (Order Pursuant to Section
11A of the Act and Rule 11Aa32(f) thereunder Granting a De Minimus
Exemption for Transactions in Certain ETFs from the ITS Trade
Through Provisions. See also Securities Exchange Act Release No.
46684 (October 17, 2002), 67 FR 65618 (October 25, 2002) (SRPCX 200269).
\15\ The Exchange notes that it has filed a separate proposed
rule change relating to IOC Cross and PNP Cross Orders. See
Securities Exchange Act Release No. 47010 (December 16, 2002), 67 FR 78554 (December 24, 2002) (SRPCX200274).
\16\ Id.
\17\ See generally PCXE rule 7.31.
\18\ See note 1, supra.
3. Working Order Process
The Exchange proposes the following conforming changes to certain provisions of the Working Order Process set forth in PCXE rule 7.37(b)(2):
a. Current PCXE Rule 7.37(b)(2)(C)This section has been modified to clarify the conditions in which a Passive Discretionary Order and Discretion Limit Order would be routed to an away market participant's quote. Passive Discretionary Orders would be routed away only if the displayed price is marketable against an away market participant. Discretion Limit Orders would be routed away only if the displayed share size of such order is equal to or less than the displayed share size of the away market participant.
b. Proposed PCXE Rule 7.37(b)(2)(A)(iv)Several pricing scenarios
have been added to the Working Order Process regarding incoming
marketable orders that could be matched against a Passive Discretionary
Order. First, for Nasdaq securities, if the BBO is outside the NBBO and
a Passive Discretionary Order(s) within the Working Order Process has a
discretionary price worse than the NBBO, then the incoming order would
execute against such Passive Discretionary Order(s) at the price of the
incoming order or the displayed price of the Discretionary Order(s),
whichever is better. Second, for Nasdaq securities, if the BBO is
outside the NBBO and a Passive Discretionary Order(s) within the
Working Order Process has a discretionary price equal to or better than
the NBBO, then the incoming order would execute against such Passive
Discretionary Order(s) pursuant to current rule 7.37(b)(2)(A)(ii).
Finally, for ITS TradeThrough Exempt Securities (as defined in rule
7.37), if the BBO is outside the NBBO and a Passive Discretionary
Order(s) within the Working Order Process has a discretionary price
worse than the NBBO by three cents ($0.03) or less, the incoming order
would execute against such Passive Discretionary Order(s) at the price
of the incoming order or the displayed price of the Discretionary Orders(s), whichever is better.
4. Technical Changes
Minor technical changes have been made throughout PCXE rules 1.1 and 7.18 to conform to the Nasdaq UTP Plan, which extends UTP to Nasdaq SmallCap securities. Accordingly, the Exchange is proposing to delete references to the term ``Nasdaq/NM Security'' and replacing it with ``Nasdaq Security.'' In addition, several definitions contained in rule 1.1 are being amended to reflect the change in name of the Nasdaq UTP Plan. Finally, current PCXE rule 1.1(jj), which defines the term ``OTC/ UTP Primary Market,'' is being amended to reflect that the Listing Market, rather than the Primary Market, would have the authority to call a Regulatory Halt pursuant to PCXE rule 7.18(c). A definition of ``OTC/UTP Listing Market'' is being adopted from the Nasdaq UTP Plan.\19\
\19\ Id.
The Exchange believes that the implementation of the aforementioned order types will facilitate enhanced order interaction and foster price competition. The proposal also promotes a more efficient and effective market operation, and provides market participants with greater flexibility in determining how their orders would be executed. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with section 6(b) of the Act, \20\ in general, and further the
objectives of section 6(b)(5),\21\ 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,\22\ which states that new data processing and communications
techniques create the opportunity for more efficient and effective market operations.
\20\ 15 U.S.C. 78f(b).
\21\ 15 U.S.C. 78f(b)(5).
\22\ 15 U.S.C. 78k1(a)(1)(B).
B. SelfRegulatory 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. SelfRegulatory 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 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
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. Persons making written submissions should file six copies thereof with the Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., Washington, DC 205490609. 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 filings will also be available for inspection and copying at the principal office of the PCX. All submissions should refer to File No. SRPCX200275 and should be submitted by February 19, 2003.
For the Commission, by the Division of Market Regulation, pursuant to delegated authority.\23\
\23\ 17 CFR 200.303(a)(12).
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 031978 Filed 12803; 8:45 am]
BILLING CODE 801001P
SUMMARY:
Pacific Exchange, Inc.,
DOCUMENT BODY 2:
January 21, 2003.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and rule 19b4 thereunder,\2\ notice is hereby given that
on December 9, 2002, the Pacific Exchange, Inc. (``PCX'' or
``Exchange''), through its 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 January 15, 2003, the Exchange
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.
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b4.
\3\ In Amendment No. 1, the Exchange submitted a new form 19b4, which replaced the original filing in its entirety.
I. SelfRegulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change
The PCX, through its wholly owned subsidiary, PCXE, proposes to amend its rules governing the Archipelago Exchange, the equities trading facility of PCXE, by: (1) Adopting several new order types to accommodate the trading of securities listed on the Nasdaq Stock Market, Inc., on an unlisted trading privileges (``UTP'') basis; (2) amending PCXE rule 7.37 to provide for a limited exemption from the tradethrough restrictions for some of these new order types; (3) amending certain provisions of the Working Order Process to reflect the unique operational requirements of two proposed order types; and (4) making several minor technical rule changes to conform to the Nasdaq UTP Plan, which extends UTP to Nasdaq SmallCap securities. The text of the proposed rule change follows:
Additions are italicized; deletions are in [brackets]. PCX Equities, Inc.
Rule 1 Definitions
Rule 1.1(a)(z)No change.
Nasdaq[/NM] Security
(aa) The term ``Nasdaq[/NM] Security'' shall mean any security (i)
designated as an eligible [national market system] security pursuant to
the ``Nasdaq Unlisted Trading Privileges Plan'', as amended, [NASD's
``National Market System Securities Designation Plan with respect to
Nasdaq Securities,''] filed with and approved by the Commission
pursuant to SEC rule 11Aa21 under the Exchange Act and (ii) that is
either listed on the Corporation pursuant to rule 5 or as to which
unlisted trading privileges have been granted pursuant to section 12(f) of the Exchange Act.
Rule 1.1 (bb)(hh)No change.
OTC/UTP Plan
(ii) The term ``OTC/UTP Plan'' shall mean the Nasdaq Unlisted Trading
[[Page 4528]]
Privileges [National Market/Unlisted Trading System/Unlisted Trading
Privileges] Plan, as from time to time amended according to its provisions.
OTC/UTP Listing [Primary] Market
(jj) The term ``OTC/UTP Listing [Primary] Market'' for a Nasdaq[/
NM] Security means the OTC/UTP Participant's Market on which the Nasdaq
Security is listed. If the Nasdaq Security is dually listed, OTC/UTP
Listing Market shall mean the OTC/UTP Participant's Market on which the
Nasdaq Security is listed that also has the highest number of the
average of the reported transactions and reported share volume for the
preceding 12month period. The OTC/UTP Listing Market for duallylisted
Nasdaq Securities shall be determined at the beginning of each calendar
quarter. [Nasdaq; provided, however, that if for any 12month period
the number of reported transactions and the reported share volume in a
Nasdaq/NM Security in any other OTC/UTP Participant's market exceeds
50% of the aggregate reported transactions and reported share volume of
all OTC/UTP Participants in such security, then that OTC/UTP Participant's market shall be the OTC/UTP Primary Market.]
OTC/UTP Regulatory Halt
(kk) The term ``OTC/UTP Regulatory Halt'' means a trade suspension
or halt called by the OTC/UTP Listing [Primary] Market for the purpose of dissemination of material news.
* * * * *
Rule 7 Equities Trading
Trading in Nasdaq[/NM] Securities
Rule 7.18(a) Access.
(1) The Corporation shall permit each Nasdaq Market Maker, acting
in its capacity as a market maker, telephone access, or such other
access as may be established between the Corporation and the Nasdaq
System (collectively, ``approved access''), to the Corporation for each
Nasdaq[/NM] Security in which such market maker is registered as a
market maker. Such approved access shall include appropriate procedures
to assure the timely response to communications received through telephone or other approved access.
(2) Nasdaq Market Makers may use such approved access to transmit
orders for execution on the Corporation. Market Makers, via the
facilities of the Corporation, may send orders via approved access to
any Nasdaq Market Maker in each Nasdaq[/NM] security in which it displays quotations.
(3)No change.
(4) No Market Maker shall permit the imposition of any access or
execution fee, or any other fee or charge, with respect to transactions
in Nasdaq[/NM] Securities effected with Nasdaq Market Makers that are communicated to the Corporation through telephone access.
(b)No change.
(c) OTC/UTP Regulatory Halts. Whenever, in the exercise of its
regulatory function, the OTC/UTP Listing [Primary] Market for a
Nasdaq[/NM] Security determines that an OTC/UTP Regulatory Halt is
appropriate, the Corporation shall halt or suspend trading in that
security until the notification by the OTC/UTP Listing [Primary] Market
that the halt or suspension is no longer in effect. The Corporation
will assume that adequate publication or dissemination has occurred
upon the expiration of one hour after initial publication in a national
news dissemination service of the information that gave rise to an OTC/
UTP Regulatory Halt and may, at its discretion, reopen trading at that
time, notwithstanding notification from the OTC/UTP Listing [Primary] Market that the halt or suspension is no longer in effect.
(d) Applicability. The following rules of the Corporation will not
be applicable to transactions on the Corporation in Nasdaq[/NM] Securities: rules 7.16, 7.557.57.
* * * * *
Orders and Modifiers
Rule 7.31(a)(c)No change.
(d) Inside Limit Order. A Limit Order, which, if routed away
pursuant to rule 7.37(d), will be routed to the market participant with
the best displayed price. Any unfilled portion of the order will not be
routed to the next best price level until all quotes at the current
best bid or offer are exhausted. If the order is no longer marketable
it will be ranked in the Arca Book pursuant to rule 7.36. [Reserved.]
(e) ImmediateorCancel Order. A market or limit order that is to
be executed in whole or in part as soon as such order is received, and
the portion not so executed is to be treated as canceled. An immediate
orcancel order for TradeThrough Exempt Securities (as defined in rule
7.37) will be permitted to trade at a price no more than three cents
($0.03) away from the NBBO displayed in the Consolidated Quote. The
NBBO price protection provision set forth in rule 7.37 will not apply to immediateorcancel orders in Nasdaq securities.
(f)(g)No change.
(h) Working Order. Any order with a conditional or undisplayed
price and/or size designated as a ``Working Order'' by the Corporation, including, without limitation:
(1)No change.
(2) Discretionary Order. An order to buy or sell a stated amount of
a security at a specified, undisplayed price (the ``discretionary
price''), in addition to at a specified, displayed price (``displayed price.'')
(A) Passive Discretionary Order. A Discretionary Order may be
designated as a Passive Discretionary Order and such order will be
routed pursuant to rule 7.37(d) only if the displayed price is marketable against an away market participant.
(i) For Passive Discretionary Orders in exchangelisted securities,
if the discretionary price is marketable, such order will only interact
with trading interest in the Arca Book pursuant to rule 7.37(b)(2) and
will not be routed away. A Passive Discretionary Order for ITS Trade
Through Exempt Securities will be permitted to trade at a price no more
than three cents ($0.03) away from the NBBO displayed in the Consolidated Quote.
(ii) For Passive Discretionary Orders in Nasdaq securities, if the
discretionary price can be matched against orders in the Arca Book,
such order will intereact with trading interest in the Arca Book
pursuant to 7.37(b)(2). The NBBO price protection provision set forth
in rule 7.37 will not apply to Passive Discretionary Orders in Nasdaq securities.
(B) Discretion Limit Order. A Discretionary Order may be designated
as a Discretion Limit Order for Nasdaq securities only. If the
discretionary price of a Discretion Limit Order can be matched against
trading interest in the Arca Book, then such order will be executed at
the discretionary price or better. If the discretionary price of a
Discretion Limit Order can be matched against an away market
participant, then such order will be routed pursuant to rule 7.37(d)
but only if the displayed share size of the Discretion Limit Order is
equal to or less than the displayed share size of the away market
participant. The NBBO price protection provision set forth in rule 7.37
will not apply to Discretion Limit Orders in Nasdaq securities.
(3) Reserve Order. A limit order with a portion of the size
displayed and with a reserve portion of the size (``reserve size'') that is not displayed on the Corporation.
(A) Sweep Reserve Order. A Reserve Order may be designated as a
Sweep Reserve Order. Based upon a User's instruction, if the displayed price of a Sweep Reserve Order is marketable
[[Page 4529]]
against an away market participant(s), then such order will be routed
(i) serially as component orders, such that each component corresponds
to the displayed price, or (ii) only once in its entirety, including both the displayed and reserve portions.
(B) Random Reserve Order. A Reserve Order designated as a Random
Reserve Order will have a random reserve value which, as a range of
round lots, will vary the displayed size of the Reserve Order. A random
reserve value set to zero will permit the displayed size of the Reserve
Order to vary to within 20% of the original specified displayed size. (i)(u)No change.
(v) NOW Order. A Limited Price Order that is to be executed in
whole or in part on the Corporation, and the portion not so executed
shall be routed pursuant to rule 7.37(d) only to one or more NOW
Recipients for immediate execution as soon as the order is received by
the NOW Recipient. Any portion not immediately executed by the NOW
Recipient shall be cancelled. If a NOW Order is not marketable when it
is submitted to the Corporation, it shall be cancelled. NOW Orders may
not be Directed Orders. NOW Orders for ITS TradeThrough Exempt
Securities (as defined in rule 7.37) may be routed and executed at a
price that is no more than three cents ($0.03) away from the NBBO
displayed in the Consolidated Quote. The NBBO price protection
provision set forth in rule 7.37 will not apply to NOW Orders in Nasdaq securities.
(w) PNP Order (Post No Preference). A limit order to buy or sell
that is to be executed in whole or in part on the Corporation, and the
portion not so executed is to be ranked in the Arca Book, without
routing any portion of the order to another market center; provided,
however, the Corporation shall cancel a PNP Order that would lock or
cross the NBBO. PNP Orders for TradeThrough Exempt Securities (as
defined in rule 7.37) will not be canceled at the time of order entry
if such orders would lock or cross the NBBO. PNP Orders in ITS Trade
Through Exempt Securities may be executed at a price no more than three
cents ($0.03) away from the NBBO displayed in the Consolidated Quote.
The NBBO price protection provision set forth in Rule 7.37 will not apply to PNP Orders in Nasdaq securities.
(x)(z)No change.
(aa)(bb)Reserved.
(cc) Pegged Order. A limit order to buy or sell a stated amount of
a security at a display price set to track the current bid or ask of
the NBBO in an amount specified by the User. The associated price of
each Pegged Order that is updated will be assigned a new entry time
with priority in accordance with rule 7.36(a). A Pegged Order may be designated as a Reserve Order or Discretionary Order.
* * * * *
Order Execution
Rule 7.37. Subject to the restrictions on short sales under rule
10a1 under the Exchange Act, likepriced orders, bids and offers shall
be matched for execution by following Steps 1 through 5 in this rule;
provided, however, for an execution to occur in any Order Process, the
price must be equal to or better than the NBBO, unless the Archipelago
Exchange has routed orders to away markets at the NBBO, where
applicable (however, a User may submit a NOW Order or Primary Only
Order that may be routed to an away market without consideration of the
NBBO). This rule will not apply to designated order types including
IOC, NOW, PNP, Passive Discretionary, Discretion Limit (except for
exchangelisted securities), IOC Cross and PNP Cross orders in Nasdaq
securities or securities that are subject to an exemption from the
Commission under SEC rule 11Aa32(f) to the tradethrough provisions of
the ITS Plan (``ITS TradeThrough Exempt Securities''). Orders in ITS
TradeThrough Exempt Securities [designated as IOC, NOW and PNP orders]
will be effected at a price no more than three cents ($0.03) away from the best bid and offer quoted in CQS.
(a)No change.
(b)(1)No change.
(2) Step 3: Working Order Process.
(A) An incoming marketable order shall be matched for execution
against orders in the Working Order Process in the following manner: (i)(iii)No change.
(iv) Determination of a Passive Discretionary Order's Execution Price.
(a) For Nasdaq Securities, if the BBO is outside the NBBO and a
Passive Discretionary Order(s) within the Working Order Process has a
discretionary price worse than the NBBO, then the incoming order will
execute against such Passive Discretionary Order(s) at the price of the
incoming order or the displayed price of the Discretionary Order(s), whichever is better.
(b) For Nasdaq Securities, if the BBO is outside the NBBO and a
Passive Discretionary Order(s) within the Working Order Process has a
discretionary price equal to or better than the NBBO, then the incoming
order will execute against such Passive Discretionary Order(s) pursuant to subsection (2)(A)(ii) above.
(c) For ITS TradeThrough Exempt Securities (as defined in Rule
7.37), if the BBO is outside the NBBO and a Passive Discretionary
Order(s) within the Working Order Process has a discretionary price
worse than the NBBO by three cents ($0.03) or less, the incoming order
will execute against such Passive Discretionary Order(s) at the price
of the incoming order or the displayed price of the Discretionary Orders(s), whichever is better.
(v)No change.
(B) An incoming order that is not marketable shall be matched for
execution against orders in the Working Order Process in the following manner:
(i)(ii)No change.
(C) With the exception of Passive Discretionary Orders and
Discretion Limit Orders, [I]if any change in the NBBO or other
available away trading interest would cause a potential match between
the away order and an order in the Working Order Process, a commitment
to trade shall be sent to that market center or market participant
pursuant to Step 5 below after having proceeded through Step 4.
(i) Passive Discretionary Orders will be routed away only if the
displayed price is marketable against an away market participant.
(ii) Discretion Limit Orders will be routed away only if the
displayed share size of the Discretion Limit Order is equal to or less
than the displayed share size of the away market participant. (c)(e)No change.
II. SelfRegulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, Nasdaq 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. PCX has prepared summaries, set forth in sections A, B,
and C below, of the most significant aspects of such statements.
A. SelfRegulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
Purpose
1. Proposed New Order Types
As part of its ongoing preparation for the trading of Nasdaq securities on the Archipelago Exchange (``ArcaEx'')
[[Page 4530]]
facility pursuant to UTP,\4\ PCX proposes to adopt several new order
types, which are currently in use on the Archipelago electronic
communication network (``ECN'').\5\ These proposed order types will
apply to both Nasdaq and listed securities traded on ArcaEx.\6\ The
Exchange believes that these order types will provide ETP Holders \7\
and Sponsored Participants \8\ (collectively ``Users'') greater
flexibility in determining how their orders will be executed. The proposed order types are discussed below.
\4\ The Nasdaq UTP Plan was initially approved in 1990. See
Securities Exchange Act Release No. 28146 (June 26, 1990), 55 FR
27919 (July 6, 1990) (S72489). It has subsequently been amended on
several occasions to, among other things, admit new Participants.
See also Securities Exchange Act Release No. 46381 (August 19,
2002), 67 FR 54687 (August 23, 2002) (S72489) (Order approving
most recent amendments to Nasdaq UTP Plan, the 13th Amendment).
\5\ The brokerdealer commonly referred to as the Archipelago
ECN is Archipelago Securities, a wholly owned subsidiary of
Archipelago Holdings LLC and a member of the NASD. The ECN function
will cease to operate as such once all the Nasdaq securities have been transferred to ArcaEx.
\6\ The proposed Discretion Limit order type will apply to
Nasdaq securities only. See proposed PCXE rule 7.31(h)(2)(B). \7\ See PCXE rule 1.1(n).
\8\ 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).
a. Inside Limit Order
An Inside Limit Order is a limit order that is to be executed in
whole or in part on ArcaEx, and the portion not so executed would be
routed pursuant to rule 7.37(d) to the market participant \9\ with the
best displayed price. Any unfilled portion of the order would not be
routed to the next best price level until all quotes at the current
best bid or offer are exhausted. For example, after having proceeded
through the four order execution processes of the ArcaEx Book,\10\
there remains an unexecuted portion of an Inside Limit Order to buy at
a price of 12.50. ArcaEx would route the order to the away market
participant with the best displayed offer. Suppose the best displayed
offer by other market participants is Market A at 12.45, Market B at
12.46, Market C at 12.47, and Market D at 12.50. The Inside Limit Order
would be routed first to Market A at 12.45. The balance of the Inside
Limit Order would not be routed to the next price level (i.e., Market B
at 12.46) until the current offer is exhausted. Each successive number
of shares remaining (if any) would be routed at the next price level in
the same manner. If the Inside Limit Order is no longer marketable it would be ranked in the Arca Book pursuant to rule 7.36.
\9\ See PCXE rule 1.1(w) (definition of ``market participant'').
\10\ ArcaEx maintains an electronic file of orders, called the
ArcaEx Book, through which orders are displayed and matched. The
ArcaEx Book is divided into four components, called processesthe
Directed Order Process, the Display Order Process, the Working Order
Process, and the Tracking Order Process. See PCXE rule 7.37 for a detailed description of these order execution processes.
b. Discretionary Orders
Currently, a User can submit a Discretionary Order, which is an
order to buy or sell a stated amount of a security at a specified,
undisplayed price (the ``discretionary price''), as well as at a
specified, displayed price. The undisplayed prices of a Discretionary
Order are represented in the Working Order Process \11\ and can be
matched with orders on the other side of the market under prescribed
conditions. Since the Discretionary Order type allows a User to
represent a single order at multiple price points, investors are able
to express their trading interest more accurately than is possible with
traditional order types. The Exchange is proposing to adopt two new
variations of the Discretionary Order called a ``Passive Discretionary
Order'' and a ``Discretion Limit Order,'' which would provide Users
with more flexibility when such orders are routed to away market
participants. A summary of these proposed order types is discussed below.
\11\ The Working Order Process is the third step in the ArcaEx
execution algorithm. Working Orders are defined to include any order
with a conditional or undisplayed price and/or size, including All
orNone, Discretionary, and Reserve Orders. See PCXE rule 7.37(b)(2) (description of ``Working Order Process'').
i. Passive Discretionary
The Exchange proposes to add PCXE rule 7.31(h)(2)(A) to define a Passive Discretionary Order. A Discretionary Order may be designated as a Passive Discretionary Order and such order would be routed pursuant to rule 7.37(d) only if the displayed price is marketable against an away market participant. If the discretionary price of a Passive Discretionary Order were marketable, such order would only interact with trading interest in the ArcaEx Book pursuant to rule 7.37(b)(2) and would not be routed away. Under the proposal, the Passive Discretionary order type will be available for exchangelisted and Nasdaq securities. For Passive Discretionary Orders in exchangelisted securities, if the discretionary price is marketable, such order will only interact with trading interest in the ArcaEx Book pursuant to rule 7.37(b)(2) and will not be routed away. A Passive Discretionary Order for ITS TradeThrough Exempt Securities (as defined in rule 7.37) will be permitted to trade at a price no more than three cents ($0.03) away from the NBBO displayed in the Consolidated Quote. For Passive Discretionary Orders in Nasdaq securities, if the discretionary price can be matched against orders in the ArcaEx Book, then such order will interact with trading interest in the ArcaEx Book pursuant to 7.37(b)(2). The NBBO price protection provision set forth in rule 7.37 will not apply to Passive Discretionary Orders in Nasdaq securities.
To illustrate how this order type is processed by the ArcaEx trading system, suppose that a User submits a Passive Discretionary Order to buy 1000 shares at 12.48 (discretion to 12.50). After first attempting to match the order with available trading interest in the ArcaEx Book (up to a price of 12.50), ArcaEx would route the order to an away market participant, but only if the offer published by the market participant is equal to or less than the displayed price of 12.48. In the event that a Passive Discretionary Order routed from ArcaEx to another market participant is not executed in its entirety at the other market participant's quote, ArcaEx would attempt to match the residual against trading interest in the ArcaEx Book pursuant to rule 7.37. Finally, if the Passive Discretionary Order is no longer marketable it would be ranked in the ArcaEx Book pursuant to rule 7.36.
ii. Discretion Limit
The Exchange also proposes to add PCXE rule 7.31(h)(2)(B) to define
a Discretion Limit Order. A Discretionary Order may be designated as a
Discretion Limit Order for Nasdaq securities only. If the discretionary
price of a Discretion Limit Order could be matched against trading
interest in the ArcaEx Book, then such order would be executed at the
discretionary price or better against the displayed share size of
available trading interest in the ArcaEx Book, regardless of size. If
the discretionary price of a Discretion Limit Order could be matched
against an away market participant, then such order would be routed
pursuant to rule 7.37(d) but only if the displayed share size of the
Discretion Limit Order is equal to or less than the displayed share
size of the away market participant. As discussed in more detail in
section 2 below, the Exchange is proposing that the NBBO price
protection provision set forth in rule 7.37 will not apply to Discretion Limit Orders.
c. Reserve Orders
Under current PCXE rule 7.31(h)(3), a Reserve Order is a limit
order with a portion of the size displayed and with a reserve portion
of the size (``reserve size'') that is not displayed on the [[Page 4531]]
ArcaEx Book. For example, a User could submit a Reserve Order to buy
5000 shares of XYZ security at 20 with a request that 1000 shares are
displayed and 4000 shares, as the reserve size, are not displayed. With
this filing, the Exchange is proposing to adopt two new variations of
the Reserve Order called a ``Sweep Reserve Order'' and a ``Random
Reserve Order.'' These proposed order types would be ranked and
maintained in the Display Order Process \12\ and/or Working Order
Process of the ArcaEx Book according to pricetime priority and would
be processed for internal matches in a manner no different than a
standard Reserve Order pursuant to PCXE rule 7.37(b)(2). The proposed
rule change regarding Sweep Reserve Orders merely provides a
clarification as to the manner in which such orders would be treated
through ArcaEx's trading system when the routing of these orders to
other market participants is required. In the case of a Random Reserve
Order, the proposed rule change would allow a User to define the
original display quantity and a random reserve value that would be used
to determine the displayed quantity within a defined range each time it
is replenished. These proposed order types are discussed separately below.
\12\ 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'').
i. Sweep Reserve Order
Under proposed PCXE rule 7.31(h)(3)(A), a Reserve Order may be
designated as a Sweep Reserve Order. Based upon a User's instruction,
if the displayed price of a Sweep Reserve Order is marketable against
an away market participant(s), then such order will be routed (i)
serially as component orders, such that each component corresponds to
the displayed price, or (ii) only once in its entirety, including both
the displayed and reserve portions. The Exchange believes that this
rule change codifies current order routing methodology, and that the
proposed Sweep Reserve Order type is clearly implied in current PCXE rule 7.37(d)(2)(A)(ii).
ii. Random Reserve Order
The Exchange proposes to add PCXE rule 7.31(h)(3)(B) to define a Random Reserve Order. Under the rule proposal, a User could define not only a display and reserve quantity, but also a random reserve delta that could be used to determine the displayed quantity within a defined range each time it is replenished in a random amount (rounded to the nearest round lot). Users are required to display at least 100 shares for all Reserve Orders including Random Reserve Orders. The following examples illustrate the use of the Random Reserve Order.
Suppose a User entered a Random Reserve Order for 10,000 shares with a display quantity of 2000 shares and a random reserve delta of 200 shares. This order would randomly display orders at 1800 (200 shares less than the original display quantity), 1900 (100 shares less than the original display quantity), 2000, 2100 (100 shares more than the original display quantity) or 2200 shares (200 shares more than the original display quantity) each time the displayed portion of the order is replenished. If the User does not specify the random reserve delta or the random reserve delta is set to zero, the ArcaEx system would assign the displayed size of the Reserve Order to vary to within 20% of the original specified displayed size. In the example above, the displayed amount would fall within a 400share range (i.e., 20% of 2000 shares is 400 shares).
Should a User enter a Random Reserve Order with a display amount of
500 shares or less and a random reserve delta that is unspecified or
set to zero, the order would be handled as a regular Reserve Order.
Suppose a User entered a Random Reserve Order with a display amount of
100 shares, a reserve amount of 1,000 shares, and a random reserve of
zero. The ArcaEx system would treat this order as a regular Reserve
Order and the display quantity will be refreshed at the original
displayed size (100 shares), i.e., the ArcaEx system would not vary the display quantity for this order.
d. Pegged Orders
The Exchange is proposing to modify the ArcaEx trading system to
accept Pegged Orders. A Pegged Order is a limit order to buy or sell a
stated amount of a security at a display price set to track the current
bid or ask of the NBBO in an amount specified by the User.\13\ The
tracking of the relevant Consolidated Quote information for Pegged
Orders would occur on a realtime basis in a dynamic fashion. The
associated price of each Pegged Order that is updated would be assigned
a new entry time with priority in accordance with rule 7.36(a). A
Pegged Order may be designated as a Reserve Order or Discretionary
Order and would be subject to the applicable order execution rules.
Finally, Pegged Orders are only eligible during the Core Session.
\13\ See proposed PCXE rule 7.31(cc) (definition of ``Pegged Order'').
2. Amendment to PCXE Rule 7.37
The Exchange's current rules governing the order execution
processes for orders in the ArcaEx Book are set forth in PCXE rule
7.37. Presently, rule 7.37 provides, in part, that for an execution to
occur in any Order Process, the price must be equal to or better than
the NBBO. The requirements of this rule do not apply to orders
designated as ImmediateorCancel (``IOC''), NOW and Post No Preference
(``PNP'') in certain exchangetraded funds (``ETFs'') that are subject
to the Commission's order granting a de minimis exemption from the
tradethrough restrictions of the Intermarket Trading System (``ITS'')
Plan; provided, however, that any resulting executions will be at a
price no more than three cents ($0.03) away from the NBBO displayed in
the Consolidated Quote.\14\ The current proposal would also broaden
this exception to include Passive Discretionary, IOC Cross and PNP
Cross order types.\15\ The definition for a Passive Discretionary Order
includes a provision clarifying the application of the Commission's de
minimis exemption order. The Exchange is also proposing that the
aforementioned NBBO price protection restriction would not apply to
certain existing order types (IOC, NOW and PNP orders) and proposed new
order types (Passive Discretionary, Discretion Limit, IOC Cross and PNP
Cross) \16\ in Nasdaq securities. The definition for IOC, NOW, PNP,
Passive Discretionary and Discretion Limit order types \17\ includes a
provision clarifying that the NBBO price protection requirement set
forth in rule 7.37 will not apply to these order types in Nasdaq
securities. Unlike the market for listed securities, there is no
linkage between participants in the Nasdaq UTP Plan and, therefore, no
rules that prohibit a participant from trading through another
participant's quote.\18\ Consequently, the Exchange believes that it
would not be praticable to attempt to provide such orders with intermarket price protection. The
[[Page 4532]]
Exchange also believes that these proposed orders are sophisticated
types of orders, and persons using these orders will understand the
benefits and limitations of their use. Moreover, such orders are still
subject to a broker's duty of best execution for its customer.
\14\ See Securities Exchange Act Release No. 46428 (August 28,
2002), 67 FR 56607 (September 4, 2002) (Order Pursuant to Section
11A of the Act and Rule 11Aa32(f) thereunder Granting a De Minimus
Exemption for Transactions in Certain ETFs from the ITS Trade
Through Provisions. See also Securities Exchange Act Release No.
46684 (October 17, 2002), 67 FR 65618 (October 25, 2002) (SRPCX 200269).
\15\ The Exchange notes that it has filed a separate proposed
rule change relating to IOC Cross and PNP Cross Orders. See
Securities Exchange Act Release No. 47010 (December 16, 2002), 67 FR 78554 (December 24, 2002) (SRPCX200274).
\16\ Id.
\17\ See generally PCXE rule 7.31.
\18\ See note 1, supra.
3. Working Order Process
The Exchange proposes the following conforming changes to certain provisions of the Working Order Process set forth in PCXE rule 7.37(b)(2):
a. Current PCXE Rule 7.37(b)(2)(C)This section has been modified to clarify the conditions in which a Passive Discretionary Order and Discretion Limit Order would be routed to an away market participant's quote. Passive Discretionary Orders would be routed away only if the displayed price is marketable against an away market participant. Discretion Limit Orders would be routed away only if the displayed share size of such order is equal to or less than the displayed share size of the away market participant.
b. Proposed PCXE Rule 7.37(b)(2)(A)(iv)Several pricing scenarios
have been added to the Working Order Process regarding incoming
marketable orders that could be matched against a Passive Discretionary
Order. First, for Nasdaq securities, if the BBO is outside the NBBO and
a Passive Discretionary Order(s) within the Working Order Process has a
discretionary price worse than the NBBO, then the incoming order would
execute against such Passive Discretionary Order(s) at the price of the
incoming order or the displayed price of the Discretionary Order(s),
whichever is better. Second, for Nasdaq securities, if the BBO is
outside the NBBO and a Passive Discretionary Order(s) within the
Working Order Process has a discretionary price equal to or better than
the NBBO, then the incoming order would execute against such Passive
Discretionary Order(s) pursuant to current rule 7.37(b)(2)(A)(ii).
Finally, for ITS TradeThrough Exempt Securities (as defined in rule
7.37), if the BBO is outside the NBBO and a Passive Discretionary
Order(s) within the Working Order Process has a discretionary price
worse than the NBBO by three cents ($0.03) or less, the incoming order
would execute against such Passive Discretionary Order(s) at the price
of the incoming order or the displayed price of the Discretionary Orders(s), whichever is better.
4. Technical Changes
Minor technical changes have been made throughout PCXE rules 1.1 and 7.18 to conform to the Nasdaq UTP Plan, which extends UTP to Nasdaq SmallCap securities. Accordingly, the Exchange is proposing to delete references to the term ``Nasdaq/NM Security'' and replacing it with ``Nasdaq Security.'' In addition, several definitions contained in rule 1.1 are being amended to reflect the change in name of the Nasdaq UTP Plan. Finally, current PCXE rule 1.1(jj), which defines the term ``OTC/ UTP Primary Market,'' is being amended to reflect that the Listing Market, rather than the Primary Market, would have the authority to call a Regulatory Halt pursuant to PCXE rule 7.18(c). A definition of ``OTC/UTP Listing Market'' is being adopted from the Nasdaq UTP Plan.\19\
\19\ Id.
The Exchange believes that the implementation of the aforementioned order types will facilitate enhanced order interaction and foster price competition. The proposal also promotes a more efficient and effective market operation, and provides market participants with greater flexibility in determining how their orders would be executed. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with section 6(b) of the Act, \20\ in general, and further the
objectives of section 6(b)(5),\21\ 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,\22\ which states that new data processing and communications
techniques create the opportunity for more efficient and effective market operations.
\20\ 15 U.S.C. 78f(b).
\21\ 15 U.S.C. 78f(b)(5).
\22\ 15 U.S.C. 78k1(a)(1)(B).
B. SelfRegulatory 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. SelfRegulatory 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 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
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. Persons making written submissions should file six copies thereof with the Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., Washington, DC 205490609. 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 filings will also be available for inspection and copying at the principal office of the PCX. All submissions should refer to File No. SRPCX200275 and should be submitted by February 19, 2003.
For the Commission, by the Division of Market Regulation, pursuant to delegated authority.\23\
\23\ 17 CFR 200.303(a)(12).
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 031978 Filed 12803; 8:45 am]
BILLING CODE 801001P