Document ID: SEC-2005-0362-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: Pacific Exchange, Inc.
Posted Date: 2005-12-13T05:00Z

[Federal Register: December 13, 2005 (Volume 70, Number 238)]
[Notices]               
[Page 73811-73815]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr13de05-87]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52898; File No. SR-PCX-2005-87]

 
Self-Regulatory Organizations; The Pacific Exchange, Inc.; Notice 
of Filing of Proposed Rule Change, and Amendment No. 1 Thereto, 
Relating to the Tracking Order Process

December 6, 2005.
    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 26, 2005, the Pacific Exchange, Inc. (``PCX'' or ``Exchange'') 
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 November 22, 2005, the Exchange 
submitted 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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No.1, which replaced the original filing in its 
entirety, made technical and clarifying changes to the proposed rule 
change.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The PCX, through its wholly-owned subsidiary PCX Equities, Inc. 
(``PCXE''), proposes to amend its rules governing the Archipelago 
Exchange (``ArcaEx''), the equities trading facility of PCXE. With this 
filing, the Exchange proposes to replace the existing PCXE rules 
describing the current ArcaEx Tracking Order Process \4\ with new 
provisions setting forth a simplified price/time execution priority for 
the Tracking Order Process. Further, the PCX

[[Page 73812]]

proposes to modify the Tracking Order \5\ for use in the revised 
Tracking Order Process.
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    \4\ See PCXE Rule 7.37(c).
    \5\ See PCXE Rule 7.31(f).
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    The text of the proposed rule change, as amended, appears below. 
Additions are italicized; deletions are [bracketed].
* * * * *

Rules of PCX Equities, Inc.

Rule 7
Equities Trading; Section 3 Archipelago Exchange-Orders and Modifiers
    Rule 7.31(a)-(e)--No Change.
    (f) Tracking Order.
    An undisplayed, priced round lot order that is eligible for 
execution in the Tracking Order Process against orders equal to or less 
than the aggregate size of Tracking Order interest available at that 
price. If a Tracking Order is executed but not exhausted, the remaining 
portion of the order shall be cancelled, without routing the order to 
another market center or market participant.
    [(1) Any User may submit an instruction to the Archipelago Exchange 
for the parameters of a Tracking Order at any time during the day. The 
parameters shall include:]
    [(A) the maximum aggregate size, which is the aggregate size of all 
partial orders generated in the Tracking Order Process for a particular 
security that the User is willing to trade on that day;]
    [(B) the maximum tradeable size, which is the maximum size of any 
partial order generated in response to an order entering the Tracking 
Order Process that the User is willing to trade on that day;]
    [(C) the price in relation to the NBBO; and]
    [(D) the relevant security.]
    [(2) Once a User has submitted an instruction for the parameters of 
the Tracking Order, the instruction will remain in effect until closing 
or until the User has traded its maximum aggregate size for that day, 
whichever comes first.]
    [(3) The Tracking Order Process rotation is as follows: Users who 
have submitted an instruction for the parameters of a Tracking Order 
will be assigned trades on a price/time rotating basis, such that 
within each price level, trades shall be assigned by the time the 
Users' instructions are received by the Archipelago Exchange. Within 
each price level, the first User to send an instruction for a Tracking 
Order will be the first User to be assigned a trade in the rotation 
process. For each order that enters the Tracking Order Process, the 
Tracking Order Process will rotate once through the Users in the 
rotation pattern. In each rotation, the User will be responsible for 
one trade up to the User's maximum tradeable size.]
    [(4) The order described in the User's Tracking Order instruction 
will only be generated if:]
    [(A) an unfilled round or mixed lot order enters the Tracking Order 
Process and]
    [(B) it is such User's turn as determined by the Tracking Order 
Process rotation pattern.]
    [(5) Each partial order generated in a rotation is a limit order in 
which:]
    [(A) The price is set at or better than the NBBO at the time the 
unfilled order enters the Tracking Order Process, based on the User's 
parameters; and]
    [(B) The size is (i) equal to the User's maximum tradeable size if 
the unfilled order is equal to or larger than the maximum tradeable 
size; or (ii) equal to the size of the unfilled order if the unfilled 
order is smaller than the maximum tradeable size.]
    [(6) A User may modify the parameters of the instruction for the 
Tracking Order from time to time, as the Corporation permits.]
    [(7) The Corporation shall suspend the Tracking Order Process for a 
security when a locked or crossed market exists in that security. The 
Tracking Order Process for that security shall resume when the locked 
or crossed market in that security no longer exists.]
    [(8) Whenever in the judgment of the Corporation, because of an 
influx of orders, a system malfunction or other unusual conditions or 
circumstances, the interests of a fair and orderly market so require, 
the Corporation may suspend the Tracking Order Process. The Tracking 
Order Process shall resume when the Corporation determines that the 
conditions supporting the suspension no longer exist.]
    (g) Odd Lot Tracking Order.
    (1)--No Change.
    (2) An Odd Lot Dealer may submit an instruction to the Archipelago 
Exchange for the parameters of an OLTO at any time during the day. The 
parameters shall include: [is a Tracking Order, as described in 
paragraph (f), in which:]
    (A) The maximum aggregate size [is unlimited;], which is the 
unlimited aggregate size of all orders generated in the Odd Lot 
Tracking Order Process for a particular security that the Odd Lot 
Dealer is willing to trade on that day;
    (B) The maximum tradeable size [is] up to 99 shares, which is the 
maximum size of any order generated in response to an order entering 
the Odd Lot Tracking Order Process that the Odd Lot Dealer is willing 
to trade on that day;
    (C) The price is set at the NBBO; and
    (D) The relevant security [is one] in which the Odd Lot Dealer is 
registered as such; and
    (E) The instruction must be in effect for the duration of Core 
Trading Hours; provided, however, the order described in the OLTO 
instruction will only be generated if:
    (1) An unfilled odd lot market order enters the Odd Lot Tracking 
Order Process pursuant to Rule 7.37(c); or
    (2) An odd lot limit order causes a locked market as described in 
Rule 7.56.
    (3) Each order generated in a rotation is a limit order in which:
    (A) The price is set at the NBBO at the time the unfilled order 
enters the Odd Lot Tracking Order Process, based on the Odd Lot 
Dealer's parameters; and
    (B) The size is (i) equal to the Odd Lot Dealer's maximum tradeable 
size; or (ii) equal to the size of the unfilled order if the unfilled 
order is smaller than the maximum tradeable size.
    (4) An Odd Lot Dealer may modify the parameters of the instruction 
for the Odd Lot Tracking Order from time to time, as the Corporation 
permits.
    (5) The Corporation shall suspend the Odd Lot Tracking Order 
Process for a security when a locked or crossed market exists in that 
security. The Odd Lot Tracking Order Process for that security shall 
resume when the locked or crossed market in that security no longer 
exists.
    (6) Whenever in the judgment of the Corporation, because of an 
influx of orders, a system malfunction or other unusual conditions or 
circumstances, the interests of a fair and orderly market so require, 
the Corporation may suspend the Odd Lot Tracking Order Process. The Odd 
Lot Tracking Order Process shall resume when the Corporation determines 
that the conditions supporting the suspension no longer exist.
    (h)-(hh)--No Change.
* * * * *
Order Execution
Rule 7.37
* * * * *
    (a)-(b)--No Change.
    (c) Step 4: Tracking Order Process. During Core Trading Hours only, 
orders may be matched and executed in the Tracking Order Process as 
follows: If an order has not been executed in its entirety pursuant to 
paragraphs (a) and (b) of this Rule, the Archipelago Exchange shall 
match and execute any remaining part of the order in the Tracking Order 
Process in price/time priority [the following manner]; provided, 
however, any portion of an

[[Page 73813]]

order received from another market center or market participant shall 
be cancelled immediately[:].
    [(1) If the unfilled order is a mixed lot or round lot order, the 
order shall be matched against any Tracking Orders pursuant to the 
rotation pattern described in Rule 7.31(f)(3) for immediate execution 
thereafter. After the order has been matched against any Tracking 
Orders, if the order has not been executed in its entirety and the 
remaining part of the order is an odd lot, the odd lot order shall be 
executed in the Odd Lot Tracking Order Process, as described in 
paragraph (2).]

Odd Lot Tracking Order Process

    [(2)](1) If the unfilled order is an odd lot, and there is an Odd 
Lot Dealer registered in that security, the order shall be matched in 
the Odd Lot Tracking Order Process against any OLTOs pursuant to the 
following rotation pattern:
    Odd Lot Dealers who have submitted an instruction for the 
parameters of an Odd Lot Tracking Order will be assigned trades on a 
price/time rotating basis, such that within each price level, trades 
shall be assigned by the time the Odd Lot Dealers' instructions are 
received by the Archipelago Exchange. Within each price level, the 
first Odd Lot Dealer to send an instruction for an Odd Lot Tracking 
Order will be the first Odd Lot Dealer to be assigned a trade in the 
rotation process. For each order that enters the Odd Lot Tracking Order 
Process, the Odd Lot Tracking Order Process will rotate once through 
the Odd Lot Dealers in the rotation pattern. In each rotation, the Odd 
Lot Dealer will be responsible for one trade up to the Odd Lot Dealer's 
maximum tradeable size. [described in Rule 7.31(f)(3) for immediate 
execution thereafter.]
    (2) If there is no Odd Lot Dealer registered in that security, the 
odd lot will be routed away pursuant to PCXE Rule 7.37(d).
    (d)--No Change.
* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the PCX included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The 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
    To enhance participation on the ArcaEx facility, the Exchange 
proposes to restructure its Tracking Order Process by modifying the 
current rule text governing the Tracking Order Process to implement a 
simplified price/time priority execution process. In addition, the 
Exchange proposes to modify the existing Tracking Order for use in the 
revised and simplified Tracking Order Process.

Current ArcaEx Tracking Order Process

    Current PCXE Rules 7.31(f) and 7.37(c) describe the Tracking Order 
Process. The purpose of the Tracking Order Process is to provide a 
final opportunity for execution against any remaining liquidity on the 
ArcaEx system before routing to an away market center. As currently 
written, Users \6\ of the Tracking Order Process submit a Tracking 
Order instruction to ArcaEx based on certain parameters. ArcaEx 
generates orders based on these User instructions. Executions occur in 
a rotating manner pursuant to PCXE Rule 7.37(c). In general, the first 
User to send an instruction for a Tracking Order for each price level 
is the first User to be assigned a trade in the rotation process. With 
each rotation, a User who has entered a Tracking Order is responsible 
for one trade up to the User's maximum tradable size.
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    \6\ See PCXE Rule 1.1(yy).
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Proposed Changes to the Tracking Order Process

    As proposed, the rule change would modify the current Tracking 
Order Process described above and replace it with a new process based 
on the submission of orders, rather than instructions, to be executed 
in price/time priority. Users would no longer be required to submit and 
maintain Tracking Order instructions to participate in the Tracking 
Order Process. Instead, Users would simply submit a Tracking Order (as 
described below) designed specifically to reside in the modified 
Tracking Order Process. ArcaEx would continue to process all orders 
residing in the modified Tracking Order Process after it processes 
orders entered into the other ArcaEx execution processes.\7\ Within the 
Tracking Order Process, the modified Tracking Order would execute based 
on its price and time received as opposed to the price and time the 
instruction was received.
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    \7\ See PCXE Rule 7.37 for a description of the ArcaEx execution 
processes that precede the Tracking Order Process. These include the 
Directed Process, Display Process and Working Order Process.
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    This filing also proposes changes to the existing Odd Lot Tracking 
Order Process.\8\ The Odd Lot Tracking Order Process that is currently 
available for incoming odd lot orders would continue to exist and would 
be distinct from the Tracking Order Process which would be available 
for incoming mixed lot and round lot orders. Accordingly, the existing 
Tracking Order Process and associated assignment of trades on a price/
time rotating basis would continue to apply to the Odd Lot Tracking 
Order Process. The rule text that previously resided in PCXE Rule 
7.31(f)(3) would be inserted into PCXE Rule 7.37(c)(1) to describe the 
Odd Lot Tracking Order Process and revised to clarify that only Odd Lot 
Dealers \9\ may be assigned trades under the Odd Lot Tracking Order 
Process.\10\ Also, under the proposal, orders would only participate in 
the Odd Lot Tracking Order Process if there is an Odd Lot Dealer 
registered in that security. If no such dealer exists, the odd lot 
order would be routed away pursuant to PCXE Rule 7.37(d). Further, the 
proposal includes clarifying changes that the Odd Lot Tracking Order 
Process does not generate partial fills.
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    \8\ See PCXE Rule 7.37(c).
    \9\ See PCXE Rule 1.1(gg).
    \10\ Similarly, the rule text that describes the generation of 
Tracking Orders in PCXE Rule 7.31(f) and that also applies to Odd 
Lot Tracking Orders would be inserted in PCXE Rule 7.31(g). PCXE 
Rule 7.31(g) would also be further modified, as necessary, to 
accommodate such insertion.
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The Tracking Order

    The rule proposal modifies an existing order type, the Tracking 
Order, for use in the revised Tracking Order Process. Currently, a User 
submits a Tracking Order instruction that includes specific parameters 
that must be entered including maximum aggregate size and maximum 
tradeable size. The revised Tracking Order is an undisplayed, priced 
order with a specified size that would be eligible for execution 
against other ArcaEx orders that have already been exposed to other 
ArcaEx execution processes and have not been executed in full. The 
Tracking Order would execute in the revised Tracking Order Process 
against an incoming order only if the size of the incoming order is 
less than or equal to the aggregate Tracking Order interest available 
at the price of the incoming order and the incoming order is not an odd 
lot order. If the size of any contra order exposed to the revised 
Tracking Order Process is greater than

[[Page 73814]]

the size of the aggregate Tracking Order interest residing in the 
Tracking Order Process at the executable price, such Tracking Orders 
would not execute against the contra order. For example, if a Tracking 
Order was entered for 300 shares and a contra order with a size of 301 
shares was exposed to the Tracking Order Process (after being exposed 
to all other ArcaEx execution processes), the contra order would not 
execute against the Tracking Order and would route out of ArcaEx.
    Tracking Orders would execute only if the price of the Tracking 
Order is equal to or better than prices found at away markets (and 
would therefore execute at the price of the NBBO at the time of 
execution or better).\11\ If a Tracking Order is executed but not 
exhausted, the remaining portion of the Tracking Order shall be 
cancelled, without routing to another market center or market 
participant. Tracking Orders residing in the Tracking Order Process 
would be sorted and executed against in price/time priority. Tracking 
Orders may only be entered as round lots and are not displayed to any 
Users. However, mixed lot contra orders exposed to a Tracking Order 
would be eligible for execution against such Tracking Order (assuming 
the size of the contra order is equal to or less than the size of the 
Tracking Order).\12\ An odd lot contra order would be exposed to an Odd 
Lot Tracking Order and eligible for execution against such Odd Lot 
Tracking Order as described above. In the circumstance when a Tracking 
Order receives a partial fill, the unexecuted portion of the Tracking 
Order would be cancelled. Because Tracking Orders may be cancelled and 
are only executed against once, the current provision in PCXE Rule 
7.31(f)(8) that enables ArcaEx to suspend the Tracking Order Process 
because of an influx of orders, a system malfunction, or other unusual 
circumstances is no longer relevant and would be removed. In addition, 
the current provision in PCXE Rule 7.31(f)(7) is no longer relevant 
because the new Tracking Order Process would be integrated into 
existing order book processing, which is not suspended in the instance 
of a locked or crossed market. Accordingly, PCXE Rule 7.31(f)(7) would 
not be incorporated into the modified Tracking Order Process. Tracking 
Orders would not route to other market centers, would not be eligible 
for execution against other Tracking Orders, and would not execute 
against incoming ITS orders.
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    \11\ See PCXE Rule 7.37 which states that ``for an execution to 
occur in any Order Process, the price must be equal to or better 
than the NBBO.''
    \12\ PCX clarified that a contra order would be eligible for 
execution against such Tracking Order if the size of the contra 
order is equal to or less than the size of the Tracking Order. 
Telephone conversation between Bridget M. Farrell, Director, 
Strategy PCX/ArcaEx and Johnna B. Dumler, Attorney, Division of 
Market Regulation, Commission, on December 1, 2005.
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    The Exchange believes that the implementation of the aforementioned 
rule changes relating to ArcaEx order processing would enhance order 
execution opportunities on ArcaEx. In particular, the Exchange believes 
the revisions to the Tracking Order Process and Tracking Order would 
simplify the Tracking Order Process and encourage order interaction on 
ArcaEx.
2. Statutory Basis
    The Exchange believes that the proposed rule change, as amended, is 
consistent with section 6(b) of the Act,\13\ in general, and furthers 
the objectives of section 6(b)(5) of the Act \14\ in particular because 
it is designed to prevent fraudulent and manipulative acts and 
practices, 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 to and perfect 
the mechanism of a free and open market and a national market system.
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    \13\ 15 U.S.C. 78f(b).
    \14\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The PCX does not believe that the proposed rule change will impose 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    Written comments on the proposed rule change were neither solicited 
nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such 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, as amended, or
    (B) Institute proceedings to determine whether the proposed rule 
change, as amended, 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. Comments may be 
submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form at (http://www.sec.gov/rules/sro.shtml.
); or     Send an e-mail to rule-comments@sec.gov. Please include 

File Number SR-PCX-2005-87 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-9303.
    All submissions should refer to File Number SR-PCX-2005-87. 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 Room. 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-2005-87 and 
should be submitted on or before January 3, 2006.

[[Page 73815]]

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).

Jonathan G. Katz,
Secretary.
 [FR Doc. E5-7263 Filed 12-12-05; 8:45 am]

BILLING CODE 8010-01-P