

[Federal Register: January 19, 2006 (Volume 71, Number 12)]
[Notices]               
[Page 3145-3147]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr19ja06-134]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53096; File No. SR-PCX-2005-141]

 
Self-Regulatory Organizations; Pacific Exchange, Inc.; Notice of 
Filing of Proposed Rule Change Relating to Modifications to Archipelago 
Exchange's Closing Auction

January 11, 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 December 21, 2005, the Pacific Exchange, Inc. (``PCX'' or 
``Exchange''), through its wholly owned subsidiary (``PCXE'' or the 
``Corporation''), 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 PCX. The Commission is 
publishing this notice to solicit comment on the proposed rule change 
from interested persons.
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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 proposes to amend its rules governing the Archipelago 
Exchange (``ArcaEx''), the equity trading facility of PCXE. With this 
filing, the Exchange proposes to clarify the ArcaEx's Closing Auction 
functionality and limit the use of the Closing Auction to primary 
listed securities. The text of the proposed rule change is available on 
the PCX Web site (http:/www.pacificex.com), at the PCX's Office of the 

Secretary and at the Commission's Public Reference Room.

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 IV below. The Exchange has prepared summaries,

[[Page 3146]]

set forth in Sections A, B and C below, of the most significant aspects 
of such statements.

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

1. Purpose
    The Exchange proposes to make clarifying changes to the Closing 
Auction rule contained in PCXE Rule 7.35. In particular, the Exchange 
proposes to make conforming changes that were recently incorporated 
into the ArcaEx Market Order Auction rules.\3\ In addition, the 
Exchange proposes to limit the use of its Closing Auction to Exchange-
listed securities, including Exchange-listed exchange traded funds, for 
which the Corporation is the primary market.
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    \3\ See Securities Exchange Act Release No. 52361 (August 30, 
2005), 70 FR 53704 (September 9, 2005)(SR-PCX-2005-58).
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    The conforming changes that the Exchange proposes are as follows. 
First, PCXE Rule 7.35(e)(2)(A) would be clarified to reflect that 
orders on the side of the Imbalance \4\ shall be executed as follows: 
(i) Market-on-Close (``MOC'') Orders \5\; (ii) Limit Orders entered 
prior to the Closing Auction; and (iii) Limit-on-Close (``LOC'') 
Orders.\6\ Second, the language in PCXE Rule 7.35(e)(3) would be 
modified to be substantively consistent with that of the Market Order 
Auction changes recently adopted.\7\ Specifically, when there are 
Limited Price Orders \8\ eligible for execution in the Closing Auction, 
the Closing Auction price would be the Indicative Match Price.\9\ If 
there were no Limited Price Orders eligible for execution in the 
Closing Auction, MOC Orders would be rejected. In addition, MOC Orders 
that are eligible for, but not executed in, the Closing Auction would 
be cancelled immediately upon conclusion of the Closing Auction. The 
Exchange also proposes to delete PCXE Rule 7.35(e)(3)(C), regarding 
limiting the Closing Auction Price to prices within a threshold amount. 
In the rule filing where modifications were made to the ArcaEx Market 
Order Auction, the same concept as described in PCXE Rule 
7.35(e)(3)(C), was incorporated into PCXE Rule 1.1(r)(A).\10\
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    \4\ See PCXE Rule 1.1(q).
    \5\ See PCXE Rule 1.1(dd).
    \6\ See PCXE Rule 1.1(ee).
    \7\ See supra note 3. Note that the Market Order Auction rule 
text can be distinguished from the Closing Auction because the 
Market Order Auction applies both to Nasdaq-listed and Exchange-
listed securities for which the Corporation is the primary market 
and all Exchange-listed exchange traded funds.
    \8\ See PCXE Rule 1.1(s).
    \9\ See PCXE Rule 1.1(r).
    \10\ See supra note 3.
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    Further, the Exchange proposes a few, non-substantive changes to 
clarify the existing language in the Closing Auction rule. First, the 
Exchange proposes to modify PCXE Rule 7.35(e)(1)(A) to clarify that the 
Total Imbalance \11\ and Market Imbalance \12\ would be published via 
electronic means. Second, Examples 1 and 2 of that provision would be 
clarified to make the reference to the last sale during normal market 
hours as determined by the consolidated tape to be consistent with the 
reference in the ``Indicative Match Price'' definition. Lastly, PCXE 
Rule 7.35(e)(2)(B) would be modified to reflect that Limited Price 
Orders, with the exception of LOC Orders, may be cancelled.
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    \11\ See PCXE Rule 1.1(q)(1)(A).
    \12\ See PCXE Rule 1.1(q)(1)(B).
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    The Exchange also proposes to limit the use of its Closing Auction 
to Exchange-listed securities, including Exchange-listed exchange 
traded funds, for which the Corporation is the primary market. 
Accordingly, PCXE Rule 7.31(dd) that defines MOC Orders and PCXE Rule 
7.31(ee) that defines LOC Orders would be modified to reflect that such 
orders might be cancelled in the following circumstances: (i) in 
securities for which the Corporation is not the primary market; or (ii) 
when the auction is suspended pursuant to PCXE Rule 7.35(g). In 
addition, PCXE Rule 7.35(e) would be modified to reflect that the 
Closing Auction would be limited to Exchange-listed securities, 
including Exchange-listed exchange traded funds, for which the 
Corporation is the primary market. The Exchange proposes to limit the 
use of its Closing Auction to certain securities because of limited 
participation in the Closing Auction to date. Accordingly, with limited 
liquidity to participate in the Closing Auction, orders are frequently 
executed at prices that vary from the closing prices at other primary 
markets. In order to protect ETP Holders \13\ from this execution 
occurring, the Exchange proposes to limit its Closing Auctions to only 
those securities where the Corporation is the primary market.
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    \13\ See PCXE Rule 1.1(n).
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    Lastly, the Exchange proposes to clarify that in the case of 
unusual system problems or other malfunctions, the Exchange may suspend 
auctions. Accordingly, PCXE Rule 7.35(g) would be modified to reflect 
this. This exception would only be used on an infrequent basis when 
needed to maintain a fair and orderly market. In addition, the Exchange 
would reject MOC and LOC Orders as indicated in proposed PCXE Rules 
7.31(dd) and (ee), respectively.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) \14\ of the Act, in general, and furthers the 
objectives of Section 6(b)(5) of the Act,\15\ in particular in that it 
is designed to facilitate transactions in securities, to promote just 
and equitable principles of trade, to enhance competition and to 
protect investors and the public interest. In particular, the Exchange 
believes that making such changes to the Closing Auction procedures 
would better protect ETP Holders from executions at the close that are 
substantially away from the primary market closing prices.\16\
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    \14\ 15 U.S.C. 78f(b).
    \15\ 15 U.S.C. 78f(b)(5).
    \16\ Clarified in telephone conference among Bridget Farrell, 
Director, Strategy, ArcaEx, Timothy Fox, Special Counsel, Division 
of Market Regulation (``Division''), Commission and Mitra Mehr, 
Special Counsel, Division, Commission on January 10, 2006.
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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 self-regulatory organization consents, the Commission will:
    (A) by order approve the proposed modifications, 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

[[Page 3147]]

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 rules-comments@sec.gov. Please include 

File No. SR-PCX-2005-141 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-9303.
    All submissions should refer to File No. SR-PCX-2005-141. 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 will also 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 No. SR-PCX-
2005-141 and should be submitted February 9, 2006.
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    \17\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\
Nancy M. Morris,
Secretary.
 [FR Doc. E6-520 Filed 1-18-06; 8:45 am]

BILLING CODE 8010-01-P
