Document ID: SEC-2005-0107-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: Pacific Exchange, Inc.
Posted Date: 2005-10-13T04:00Z

[Federal Register: October 13, 2005 (Volume 70, Number 197)]
[Notices]               
[Page 59791-59793]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr13oc05-143]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52566; File No. SR-PCX-2005-56]

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

October 5, 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 April 21, 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 October 4, 2005, the PCX 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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4
    \3\ Amendment No. 1, which replaced and superceded the original 
filing in its entirety, is incorporated in this notice.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The PCX proposes to modify its Directed Order Process as part of 
its continuing efforts to enhance participation on the Archipelago 
Exchange (``ArcaEx'') facility. In conjunction with these 
modifications, the Exchange proposes two new classifications of Market 
Makers, Designated Market Makers (``DMMs'') and Lead Market Makers 
(``LMMs''). Only DMMs and LMMs will be eligible to participate in the 
Directed Order Process as Market Makers.
    The text of the proposed rule change, as amended, appears below. 
Additions are in italics. Deleted items are in brackets.

Rule 1

Definitions

Definitions
    Rule 1.1 (a)-(aaa)--No change.
    (bbb) The term ``Designated Market Maker'' shall mean a registered 
Market Maker that participates in the Directed Order Process.
    (ccc) The term ``Lead Market Maker'' shall mean a registered Market 
Maker that is the exclusive Designated Market Maker in listings for 
which the Corporation is the primary market.
* * * * *

Rule 7

Equities Trading

Registration of Market Makers in a Security
    Rule 7.22 (a)-(b)--No change.
    (c) The Corporation may limit the number of Designated Market 
Makers in a security upon prior written notice to ETP Holders.
    (d) Designated Market Makers and Lead Market Makers shall be 
selected by the Corporation. Such selection shall be based on, but is 
not limited to, the following: experience with making markets in 
equities; adequacy of capital; willingness to promote the Exchange as a 
marketplace; issuer preference; operational capacity; support 
personnel; and history of adherence to Exchange rules and securities 
laws.
    [(c)] (e) Voluntary Termination of Security Registration. A Market 
Maker may voluntarily terminate its registration in a security by 
providing the Corporation with a one-day written notice of such 
termination. A Market Maker that fails to give advanced written notice 
of termination to the Corporation may be subject to formal disciplinary 
action pursuant to Rule 10.
    [(d)] (f) The Corporation may suspend or terminate any registration 
of a Market Maker in a security or securities under this Rule whenever, 
in the Corporation's judgment, the interests of a fair and orderly 
market are best served by such action.
    [(e)] (g) An ETP Holder may seek review of any action taken by the 
Corporation pursuant to this Rule, including the denial of the 
application for, or the termination or suspension of, a Market Maker's 
registration in a security or securities, in accordance with Rule 
10.13.
* * * * *

Rule 7

Equities Trading

Designated Market Maker Performance Standards

    Rule 7.24 [Reserved].
    (a) Designated Market Makers will be required to maintain minimum 
performance standards the levels of which may be determined from time 
to time by the Corporation. Such levels will vary depending on the 
price, liquidity, and volatility of the security in which the 
Designated Market Maker is registered. The performance measurements 
will include (i) percent of time at the NBBO; (ii) percent of 
executions better than the NBBO; (iii) average displayed size; (iv) 
average quoted spread; and (v) in the event the security is a 
derivative security, the ability of the Designated Market Maker to 
transact in underlying markets.
    (b) Designated Market Makers that are Lead Market Makers will be 
held to higher performance standards in the securities in which they 
are registered as Lead Market Maker than Designated Market Makers that 
are not Lead Market Makers.
    (c) Market Makers that are not Designated Market Makers will not be 
required to maintain the minimum performance standards as described in 
paragraph (a) above.
* * * * *

Rule 7

Equities Trading

Registration of Odd Lot Dealers
    Rule 7.25 (a)--No change.
    (b) Market Makers Registered in a Security. For each security in 
which a Market Maker is registered, the Market Maker may become an Odd 
Lot Dealer in that security. For each security in which a Market Maker 
is registered as Lead Market Maker, the Lead Market Maker must also 
register as an Odd Lot Dealer in that security.
    Rule 7.25 (c)-(e)--No change.
* * * * *

Rule 7

Equities Trading

Orders and Modifiers
    Rule 7.31 (a)-(h)--No change.
    (i) Directed Order.
    (1) Any market or limit order to buy or sell which has been 
directed to a particular Designated Market Maker by the User. Users 
must be permissioned by Designated Market Makers to send a Directed 
Order to that Designated Market Maker.
    [(2) The Corporation shall suspend the Directed Order Process for a 
security

[[Page 59792]]

when a locked or crossed market exists in that security. The Directed 
Order Process for that security shall resume when the locked or crossed 
market in that security no longer exists.]
    (j) Directed Fill. Any Designated Market Maker [with the 
appropriate technology, as determined from time to time by the 
Corporation,] may submit a standing instruction to the Archipelago 
Exchange for the parameters of a Directed Fill, including, but not 
limited to, the size and price of the order.[, the Users that may send 
such Market Maker a Directed Order, the price improvement algorithm and 
the period of time the instruction is effective.] The Market Maker's 
Directed Fill described in the instruction will only be generated in 
response to a Directed Order directed to such Market Maker. [The 
Directed Fill is a limit order with (1) a size that is equal to or less 
than the size of the Directed Order and (2) a price that improves the 
BBO by an automatically preset amount, which, except as provided in 
Rule 7.6(a), Commentary .06, must be equal to or greater than the MPII, 
pursuant to a price improvement algorithm; provided, however, the 
Directed Fill will not be generated if the price is not equal to or 
better than the NBBO.] A Market Maker may modify the parameters of the 
instruction for a Directed Fill at any time [from time to time], as the 
Corporation permits.
    Rule 7.31 (k)-(hh)--No change.
* * * * *

Rule 7

Equities Trading

Order Execution
    Rule 7.37
    (a) Step 1: Directed Order Process. [During Core Trading Hours 
only,] [o]Orders may be matched and executed in the Directed Order 
Process as follows:
    (1) If a User submits a marketable Directed Order to the 
Archipelago Exchange and the User's [d]Designated Market Maker has a 
standing instruction for a Directed Fill to the Archipelago Exchange, 
the Directed Order shall be [executed] matched against the Directed 
Fill of the [d]Designated Market Maker.
    (2) If a User submits a marketable Directed Order to the 
Archipelago Exchange and the User's [d]Designated Market Maker has not 
submitted an instruction for a Directed Fill, the Directed Order shall 
enter the Display Order Process, as described in subsection (b) of this 
Rule.
    (3) Directed Orders that are matched for execution against Directed 
Fills may be broken up by orders on the Arca Book if there is a 
displayed order on the Arca Book priced at or better than the matched 
order. In the event that the matched order is broken up, it will be 
handled as follows:
    (i) If the remaining balance of the matched order results in the 
Designated Market Maker side of the order being unexecuted, the 
remaining balance of the order shall be returned to the Directed 
Process to be eligible as a Directed Fill instruction.
    (ii) If the remaining balance of the matched order results in the 
User being unexecuted, the remaining balance of the order will be 
posted in the Arca Book.
    ([3]4) If a User submits any order other than a marketable Directed 
Order to the Archipelago Exchange, the User's order immediately shall 
enter the Display Order Process, as described in subsection (b) of this 
Rule, without interacting with any Directed Fills.
    [(4) No Directed Order to buy (sell) shall be executed at a price 
equal to or better than the national best bid (offer) within the 
Directed Order Process. Such Directed Orders immediately shall enter 
the Display Order Process, as described in subsection (b) of this Rule, 
without interacting with any Directed Fills.]
    Rule 7.37 (b)-(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 PCX 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
    Currently, PCXE Rule 7.37 describes ArcaEx's order execution 
processes.\4\ This proposal seeks to modify the first of those 
processes, the Directed Order Process. In particular, the Exchange 
seeks to make the following modifications. First, the Exchange proposes 
to add a provision that requires Users \5\ to be permissioned by DMMs 
to send a Directed Order to that DMM. Second, the Exchange proposes to 
eliminate a provision of PCXE Rule 7.31 that suspends the Directed 
Order Process when a locked or crossed market exists in a security. 
This section would be eliminated because the Exchange believes that it 
is not relevant to suspend the Directed Order Process during a locked 
or crossed market. Third, the Exchange proposes to simplify the 
``Directed Fill'' definition to make clear that a Directed Fill 
specifies the size and price of the Directed Fill.
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    \4\ PCXE Rule 7.37 includes the following ArcaEx order execution 
processes: Directed Order Process, Display Order Process, Tracking 
Order Process, and Routing Away. This rule proposal seeks to modify 
the Directed Order Process.
    \5\ See PCXE Rule 1.1(yy).
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    The modifications to PCXE Rule 7.37 and the Directed Order Process 
are described below. First, the Exchange proposes that the Directed 
Order Process be available during Opening, Core, and Late trading 
sessions and that PCXE Rule 7.37's language that limits the Directed 
Process to Core Trading Hours be eliminated. Second, the Exchange 
proposes to simplify language in PCXE Rule 7.31(j) related to the 
definition of a Directed Fill to make clear that the parameters of a 
Directed Fill are price and size, and to delete obsolete language no 
longer necessary. Third, the Exchange proposes that marketable Directed 
Orders first attempt to match against the DMM to which the order has 
been directed. Directed Orders that are matched against DMMs pursuant 
to their Directed Fill instructions would be exposed to the Arca Book 
before execution.\6\ Such matched orders would be broken up if there is 
an order displayed on the Arca Book at a price that is at or better 
than the matched order. In the event that a matched order is broken up, 
the remaining portion of the Directed Order would be posted in the Arca 
Book. Further, because the displayed orders in the book take priority 
over Directed Orders, the Exchange proposes deleting the existing 
reference in PCXE Rule 7.37(a)(4).\7\
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    \6\ Directed Fills that are matched against Directed Orders 
would not be eligible for post trade anonymity and, as such, the 
Exchange is not seeking a limited exemption from Paragraph 
(a)(2)(i)(A) of Rule 10b-10 under the Act.
    \7\ PCXE Rule 7.37(a)(4) states that ``[n]o Directed Order to 
buy (sell) shall be executed at a price equal to or better than the 
national best bid (offer) within the Directed Order Process. Such 
Directed Orders immediately shall enter the Display Order Process, 
as described in subsection (b) of this Rule, without interacting 
with any Directed Fills.''
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    In addition, the Exchange proposes creating a definition of 
``Designated Market Maker.'' The definition would be added to PCXE Rule 
1.1 to clarify that a DMM is a registered Market Maker that 
participates in the Directed Order

[[Page 59793]]

Process. The Exchange also proposes adding a definition to PCXE Rule 
1.1 to describe a LMM as an exclusive DMM for primary listings. 
Further, the Exchange proposes adding language to PCXE Rule 7.22 
regarding the Registration of Market Makers to provide the Corporation 
with the ability to limit the number of DMMs with prior written notice 
to ETP Holders.\8\ PCXE Rule 7.22 already provides that the Corporation 
may consider certain performance and capability guidelines in selecting 
Market Makers. The Exchange also proposes adding DMM and LMM selection 
criteria that is consistent with the criteria described in PCX Rule 
6.82 for options LMMs.\9\ In addition, the Exchange seeks to clarify in 
PCXE Rule 7.24 that DMMs would be required to maintain certain 
performance standards which may vary depending on the price, liquidity, 
and volatility of the security. In particular, such standards would 
include (i) Percent of time at the NBBO; (ii) percent of executions 
better than the NBBO; (iii) average displayed size; (iv) average quoted 
spread; and (v) in the event the security is a derivative security, the 
ability of the DMM to transact in the underlying markets. The Exchange 
would have the ability to modify the specific levels to be used in 
defining the performance standards, however, the Exchange would not 
modify the types of standards to be used. Lastly, PCXE Rule 7.25 would 
be modified to require LMMs to register as Odd Lot Dealers in the 
securities in which they are registered as LMM. This modification would 
ensure that odd lot executions are facilitated for primary listings 
that could not otherwise be routed away to another market center for 
execution.
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    \8\ See PCXE Rule 1.1(n).
    \9\ See PCX Rule 6.82(e) which states ``The Exchange will select 
that candidate who appears best able to perform the functions of an 
LMM in the designated option issue. Factors to be considered for 
selection include, but are not limited to, the following: experience 
with trading the option issue; adequacy of capital; willingness to 
promote the Exchange as a marketplace; operational capacity; support 
personnel; history of adherence to Exchange rules and securities 
laws; trading crowd evaluations made pursuant to Rule 6.100; and any 
other criteria specified in this Rule.''
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2. Statutory Basis
    The Exchange believes that the proposed rule change, as amended, is 
consistent with Section 6(b) of the Act,\10\ in general, and furthers 
the objectives of Section 6(b)(5) of the Act,\11\ in particular, in 
that it is designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principals 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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    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

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

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 (http://www.sec.gov/rules/sro.shtml.
); or     Send an e-mail to rule-comments@sec.gov. Please include 

File Number SR-PCX-2005-56 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-9303.
    All submissions should refer to File Number SR-PCX-2005-56. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). Copies of the submission, all subsequent amendments, 

all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for inspection 
and copying in the Commission's Public Reference Section, Station 
Place, 100 F Street, NE., Washington, DC 20549. Copies of such filing 
also will be available for inspection and copying at the principal 
office of the PCX. All comments received will be posted without change; 
the Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-PCX-
2005-56 and should be submitted on or before November 3, 2005.
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    \12\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
J. Lynn Taylor,
Assistant Secretary.
 [FR Doc. E5-5594 Filed 10-12-05; 8:45 am]

BILLING CODE 8010-01-P