Document ID: SEC-2006-0283-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: Pacific Exchange, Inc.
Posted Date: 2006-03-06T05:00Z

[Federal Register: March 6, 2006 (Volume 71, Number 43)]
[Notices]               
[Page 11277-11280]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr06mr06-80]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53370; File No. SR-PCX-2006-11]

 
Self-Regulatory Organizations; Pacific Exchange, Inc.; Notice of 
Filing and Order Granting Accelerated Approval of Proposed Rule Change 
Requiring Archipelago Securities, L.L.C. To Enter Two-Sided Quotes

February 24, 2006.
    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 February 9, 2006, the Pacific Exchange, Inc. (``PCX'' or 
``Exchange''), through its wholly-owned subsidiary PCX Equities, Inc. 
(``PCXE''), filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons and is approving the 
proposal on an accelerated basis.
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    \1\ 15 U.S.C 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange, through PCXE, proposes to amend its rules governing 
the Archipelago Exchange (``ArcaEx''), the equities trading facility of 
PCXE. The Exchange proposes to amend PCXE Rule 7.58 to specify that its 
broker-dealer facility, Archipelago Securities, L.L.C. (``Arca 
Securities''), would be responsible for entering two-sided orders in 
all stocks eligible for trading on ArcaEx for purposes of fulfilling 
the two-sided quote requirement found in section 6(a)(i)(B) of the 
Intermarket Trading System Plan (``ITS Plan''). Further, the Exchange 
proposes to expand certain exceptions recently

[[Page 11278]]

granted by the Commission to the ownership and voting restrictions in 
the PCX Holdings, Inc. (``PCXH'') Certificate of Incorporation to 
encompass the proposed new functionality.
    The text of the proposed rule change appears below. Additions are 
in italics. Deleted items are in [brackets].
* * * * *

PCX Equities, Inc.

Rule 7
    Rule 7.58 [Reserved.] Compliance with Two-Sided Quote Requirement 
in ITS Plan. Archipelago Securities, L.L.C. will enter two-sided orders 
in all stocks eligible for trading on the Archipelago Exchange for 
purposes of fulfilling the two-sided quote requirement found in section 
6(a)(i)(B) of the ITS Plan. The quote parameters for these purposes 
will be buy orders priced at $0.01 and sell orders priced at two times 
the previous day's close for the particular security, or, if required 
due to technology considerations, orders would be priced as near as 
possible to the parameters above.
* * * * *

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

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of, and basis for, the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item III below, and is set forth in sections A, B, and C below.

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

1. Purpose
    The Exchange proposes to add new language to PCXE Rule 7.58 to 
specify that the broker-dealer facility of ArcaEx, Arca Securities, 
would be responsible for entering two-sided orders in all stocks 
eligible for trading on ArcaEx for purposes of fulfilling the quoting 
requirements found in section 6(a)(i)(B) of the ITS Plan. Section 6(a) 
of the ITS Plan states that ``a member in any Exchange Market may trade 
any System security provided that continuous two-sided quotations in 
such security are required to be, and are, furnished under section 
6(a)(i)(B) by or on behalf of such Exchange Participant to other 
Participants.''
    In the past, another broker-dealer affiliate of ArcaEx, Wave 
Securities, L.L.C. (``Wave''), performed this function.\3\ The Exchange 
has determined that transferring this responsibility to the broker-
dealer Arca Securities, a facility of the Exchange, is appropriate at 
this time, given that Wave will no longer be owned by Archipelago 
Holdings, Inc. (``Archipelago''). To accommodate the two-sided quote 
requirement, Arca Securities would enter buy and sell orders in every 
listed symbol eligible for trading at the start of core trading on 
ArcaEx.\4\ All buy orders would be priced at $0.01, and all sell orders 
would be priced at two times the previous day's close for the 
particular security, or, if required due to technology considerations, 
orders would be priced as near as possible to the parameters above. The 
orders would be entered with a time in force during the core trading 
session on ArcaEx and, by their terms, would expire at the close of the 
core trading session. Should an execution result from these two-sided 
orders, Arca Securities, an ETP Holder on ArcaEx, would honor trades at 
the price of the orders entered.\5\
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    \3\ See letter from David E. Rosedahl, Pacific Exchange, Inc., 
to John Polise, Division of Market Regulation (``Division''), 
Commission, regarding ArcaEx's compliance with the two-sided quote 
requirements of the ITS Plan, dated July 31, 2002.
    \4\ See PCXE Rule 7.34.
    \5\ Any trade occurring on the Exchange with an obvious error in 
terms, including price, is subject to the Clearly Erroneous Policy 
set forth in PCXE Rule 7.10. The Exchange represents that it would 
apply the procedures set forth in Rule 7.10 in an even-handed and 
fair manner in the event a transaction involving Arca Securities 
comes before it under the procedures set forth in the rule.
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    Arca Securities is a wholly-owned subsidiary of Archipelago, which 
recently acquired PCXH.\6\ In the rule filings relating to this 
acquisition, the Exchange requested that the Commission provide certain 
exceptions to the ownership and voting limitations contained in the 
Certificate of Incorporation of PCXH to allow any ``Related Person'' of 
Archipelago who is a prohibited person not covered by the definition of 
permitted person (as such terms are defined by the PCXH Certificate of 
Incorporation) to exceed certain voting and ownership restrictions in 
PCXH's Certificate of Incorporation for certain time periods, as 
approved by the Commission. The Commission granted Arca Securities one 
such exception to the PCXH ownership and voting restrictions with 
respect to its Outbound Router \7\ functionality, on the condition that 
it would not undertake any activities other than those set forth in the 
Arca-PCX Approval order, unless such activity was first approved by the 
Commission.\8\
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    \6\ See Securities Exchange Act Release No. 52497 (September 22, 
2005), 70 FR 56949 (September 29, 2005) (SR-PCX-2005-90) (order 
granting approval of proposed rule changes in relation to the 
acquisition of PCXH by Archipelago) (``Arca-PCX Approval Order'').
    \7\ In the Arca-PCX Approval Order, the Commission defined the 
Outbound Router function of Arca Securities as follows: ``an 
optional routing service for ArcaEx to route orders to other 
securities exchanges, facilities of securities exchanges, automated 
trading systems, electronic communications networks or other brokers 
or dealers from ArcaEx in compliance with PCXE Rules.'' See Arca-PCX 
Approval Order at 56952.
    \8\ The Commission initially granted the exception with respect 
to Arca Securities' Outbound Router functionality. See Arca-PCX 
Approval Order, at 56952-56953 and 56958-56959.
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    Because this filing requests approval for new Arca Securities 
functionality, i.e., permission to enter two-sided orders in all stocks 
eligible for trading on ArcaEx for purposes of section 6(a)(i)(B) of 
the ITS Plan, the Exchange has requested that the Commission also 
approve an expansion of the exception to the PCXH ownership and voting 
restrictions to incorporate the proposed functionality and extend the 
exception from the PCXH ownership and voting restrictions to this new 
function of Arca Securities.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with section 6(b) of the Act \9\ in general and furthers the objectives 
of section 6(b)(5),\10\ in particular, in that 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 transaction in 
securities, and to remove impediments to and perfect the mechanisms of 
a free and open market and a national market system.

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. Further, the Exchange 
believes the proposed functionality will not create a condition of 
unfair competition with respect to its affiliate, Arca Securities, and 
other equity trading permit holders because the proposed quoting 
parameters are designed to avoid order interaction. The orders entered 
by Arca Securities under the proposed functionality will not be 
intended to result in transactions but rather will be entered for the 
sole purpose of satisfying ITS Plan requirements to provide continuous 
two-sided quotations. The Exchange

[[Page 11279]]

anticipates that the non-competitively priced orders placed by Arca 
Securities for these purposes would be filled only in exceptional 
circumstances and therefore the Exchange believes there would be a very 
remote potential for a conflict of interest between the Exchange's 
self-regulatory obligations and its commercial interests. For these 
reasons, the Exchange believes it is appropriate and consistent with 
the Act to permit Arca Securities to undertake the proposed new 
functionality.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
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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. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

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

File Number SR-PCX-2006-11 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-PCX-2006-11. 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-2006-11 and should be submitted on or before March 
27, 2006.

IV. Commission's Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange.\11\ In 
particular, the Commission finds that the proposed rule change is 
consistent with section 6(b)(5) of the Act,\12\ which requires that an 
exchange have rules designed, among other things, to promote just and 
equitable principles of trade, to remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and, 
in general, to protect investors and the public interest.
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    \11\ In approving this rule change, the Commission notes that it 
has considered the proposed rule's impact on efficiency, 
competition, and capital formation. See 15 U.S.C. 78c(f).
    \12\ 15 U.S.C. 78f(b)(5).
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    Under the proposal, Arca Securities, an affiliated broker-dealer of 
the Exchange, would maintain two-sided quotes in all stocks eligible 
for trading on ArcaEx for purposes of fulfilling the two-sided quote 
requirement found in section 6(a)(i)(B) of the ITS Plan. The 
performance of this functionality by Arca Securities, without 
Commission approval, would, however, cause Arca Securities to violate 
ownership and voting restrictions set forth in the PCXH Certificate of 
Incorporation.\13\
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    \13\ See PCXH Certificate of Incorporation, Article Nine. See 
also Arca-PCX Approval Order.
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    Arca Securities, as a wholly-owned subsidiary of Archipelago, is a 
``Related Person'' \14\ of Archipelago and an ETP Holder. Consequently, 
Archipelago's ownership of Arca Securities would cause Arca Securities 
to exceed the voting and ownership limitations imposed by Article Nine 
of the PCXH Certificate of Incorporation, absent an exception. The 
Commission approved such an exception in the Arca-PCX Approval Order. 
The exception is, however, limited in scope to allow Arca Securities to 
provide an optional outbound routing service for ArcaEx and does not 
include the functionality contained in this proposal.\15\ PCX has 
requested that the Commission approve an expansion of the exception to 
the PCXH ownership and voting restrictions to allow Arca Securities to 
enter two-sided quotes on ArcaEx for the purpose of complying with 
section 6(a)(i)(B) of the ITS Plan.
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    \14\ The term ``Related Person,'' as defined in the PCXH 
Certificate of Incorporation, means (i) with respect to any person, 
all ``affiliates'' of such person (as such terms are defined in Rule 
12b-2 under the Act); (ii) with respect to any person constituting a 
trading permit holder of PCX or an equities trading permit holder of 
PCXE, any broker dealer with which such holder is assoicated; and 
(iii) any two or more persons that have any agreement, arrangement 
or understanding (whether or not in writing ) to act together for 
the purpose of acquiring, voting, holding or disposing of shares of 
the capital stock of PCXH. PCXH Certificate of Incorporation, 
Article Nine, Section 1(b).
    \15\ See Arca-PCX Order at 56958-56959. See also supra notes 7 
and 8 and accompanying text.
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    The Commission believes that extending the exception from the PCXH 
voting and ownership restrictions to this new function of Arca 
Securities is consistent with section 6(b)(5) of the Act. Accordingly, 
Arca Securities may provide continuous two-sided quotes on ArcaEx for 
the purpose of complying with the ITS Plan. This exception is subject 
to the same conditions described in the Arca-PCX Approval Order.\16\ 
Specifically, Arca Securities is, and will continue to be, operated and 
regulated as a facility of PCX and another self-regulatory organization 
(NASD) has, and will continue to have, primary regulatory 
responsibility for Arca Securities pursuant to Rules 17d-1 and 17d-2 
under the Act.
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    \16\ See Arca-PCXA Order at 56958-56959.
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    Pursuant to section 19(b)(2) of the Act,\17\ the Commission may not 
approve a proposed rule change prior to the thirtieth day after the 
date of publication of the notice thereof, unless the Commission finds 
good cause for so finding. The Commission hereby finds good cause for 
approving this proposed rule change prior to the thirtieth day after 
the publication of notice thereof in the Federal Register. The 
Commission notes that the Exchange has represented that Archipelago 
entered into a definitive agreement to sell its wholly-owned 
subsidiary, Wave, the entity which currently performs the functionality 
which is the subject of this proposal on behalf of the Exchange.\18\ 
Further, the Commission notes that Archipelago may, among other things, 
continue to own Wave until the earlier of (i) the closing date of the 
merger of Archipelago and the New York Stock

[[Page 11280]]

Exchange, Inc., or (ii) March 31, 2006.\19\ Because of the timing of 
these transactions, the Commission believes there is good cause for 
granting accelerated approval, in order to ensure that the Exchange is 
able to comply with the ITS Plan, without interruption, after Wave is 
sold.
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    \17\ 15 U.S.C. 78s(b)(2).
    \18\ See Securities Exchange Act Release No. 53202 (January 31, 
2006), 71 FR 6530 (February 8, 2006) (SR-PCX-2006-04),at 6535.
    \19\ See id., at 6365.
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V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the Act, 
that the proposed rule change (SR-PCX-2006-11), is hereby approved on 
an accelerated basis.\20\
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    \20\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
[FR Doc. E6-3094 Filed 3-3-06; 8:45 am]

BILLING CODE 8010-01-P