

[Federal Register: October 3, 2006 (Volume 71, Number 191)]
[Notices]               
[Page 58460-58462]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr03oc06-123]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54511; File No. SR-PCX-2005-53]

 
Self-Regulatory Organizations; Pacific Exchange, Inc. (n/k/a NYSE 
Arca, Inc.); Order Approving Proposed Rule Change and Amendment Nos. 1 
and 2 Thereto and Notice of Filing and Order Granting Accelerated 
Approval to Amendment Nos. 3 and 4 To Create a New Order Type--Passive 
Liquidity Orders--for Use on NYSE Arca Marketplace

 September 26, 2005.

I. Introduction

    On April 15, 2005, the Pacific Exchange, Inc. (n/k/a NYSE Arca, 
Inc.) (``NYSE Arca'' or ``Exchange''), through its wholly-owned 
subsidiary PCX Equities, Inc. (n/k/a ``NYSE Arca Equities, Inc.''), 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to 
create a new order type, the Passive Liquidity Order (``PL Order''), 
for use on NYSE Arca, LLC (f/k/a the Archipelago Exchange) (``NYSE Arca 
Marketplace''). The Exchange filed Amendment No. 1 to the proposed rule 
change on June 3, 2005.\3\ The Exchange filed Amendment No. 2 to the 
proposed rule change on August 26, 2005.\4\ The proposed rule change, 
as amended, was published for comment in the Federal Register on 
September 21, 2005.\5\ The Commission received 2 comments from the 
public in response to the proposed rule change.\6\ The Exchange filed 
Amendment No. 3 to the proposed rule change on December 1, 2005.\7\ The 
Exchange filed Amendment No. 4 to the proposed rule change on August 
28, 2006.\8\ This order approves the proposed rule, as amended by 
Amendment Nos. 1 and 2; grants accelerated approval to Amendment Nos. 3 
and 4; and solicits comments from interested persons on Amendment Nos. 
3 and 4.
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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, made 
technical and clarifying changes to the proposed rule change.
    \4\ Amendment No. 2, which replaced Amendment No. 1, clarified 
the execution priority of Passive Liquidity Orders by NYSE Arca 
Equities Rule 7.37, as compared to other orders that are part of the 
Display Order Process and the Working Order Processes, and as 
compared to Directed Fills in the Display Order Process. In 
addition, Amendment No. 2 made other technical and clarifying 
changes to the proposed rule change.
    \5\ See Securities Exchange Act Release No. 52436 (September 14, 
2005, 70 FR 55441.
    \6\ See letter from George U. Sauter, Managing Director, the 
Vanguard Group, Inc., to Jonathan G. Katz, Secretary, Commission, 
dated October 12, 2005 (``Vanguard letter''). See also letter from 
Neal L. Wolkoff, Chairman and CEO, American Stock Exchange LLC, to 
Jonathan G. Katz, Secretary, Commission, dated June 28, 2005 (``Amex 
Letter'').
    \7\ Amendment No. 3 proposed that in securities where the NYSE 
Arca Marketplace is the primary listings market and there is a Lead 
Market Maker (``LMM''), the PL Order would be limited to the LMM 
registered in the primary listing. In exchange for this exclusive 
use, LMMs would be subject to performance standards, as defined by 
the Exchange. In Amendment No. 3, the Exchange also addressed 
comments made in the Vanguard Letter.
    \8\ Amendment No. 4 proposed that LMMs who are registered in the 
primary listing of an issue on the NYSE Arca Marketplace may execute 
PL Orders only if such LMMS comply with certain quotation 
requirements.
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II. Description

    The Exchange, through its wholly-owned subsidiary NYSE Arca 
Equities, proposes to establish a new order type, the PL Order. The PL 
Order would be an order to buy or sell a stated number of shares of a 
security at a specified, undisplayed price.
    Under the proposal, PL Orders would be entered with a size of at 
least 200 shares and would only be permitted in round lot 
denominations. PL Orders would not route out of NYSE Arca Marketplace 
to other Market Centers \9\ and would not execute against incoming 
orders sent from other markets.
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    \9\ 17 CFR 242.600(b)(38).
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    The NYSE Arca Marketplace ranks and maintains limit orders in the 
NYSE Arca Marketplace Order Book (``NYSE Arca Book'') according to 
price/time priority and generally affords priority to displayed orders 
in the Display Order Process and prices over undisplayed orders in the 
Working Order Process, sizes and prices. However, PL Orders with a 
price superior to that of displayed orders would have price priority 
and would execute ahead of inferior priced displayed orders in the 
Display Order Process. A PL Order would be executed in the Working 
Order Process after all other orders, including Reserve Orders and the 
display portion of Discretionary Orders at a particular price level, 
but would have priority over undisplayed Discretionary Order interest. 
In addition, PL Orders with a price superior to that of Directed Fills 
would have price priority and would execute ahead of inferior priced 
Directed Fills in the Directed Order Process.
    In Amendment No. 3, the Exchange proposed that in securities where 
the Exchange is the primary listings market for which an LMM has been 
registered, the PL Order would be available only to the LMM registered 
in the primary

[[Page 58461]]

listing. As part of its rationale for allowing this exclusive listing, 
the Exchange stated that such exclusive use of the PL Order by LMMs for 
primary listings is consistent with allowing the LMM the exclusive use 
of the Directed Process in primary listings.\10\ LMMs must adhere to 
the quote spread and size levels set by the Exchange in order to be 
registered as LMMs on the Exchange. In all other equity and ETF issues 
traded on the Exchange, whether dually listed issues or issues traded 
pursuant to unlisted trading privileges, the PL Order would remain 
available to all Users.
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    \10\ See Securities Exchange Act Release No. 52827 (November 23, 
2005), 70 FR 72139 (December 1, 2005) (approving the Exchange's new 
Directed Order Process which introduced the classifications of LMMS 
on the Exchange and defined a LMM as ``a registered Market Maker 
that is the exclusive Designated Market Maker in listings for which 
the [Exchange] is the primary market''). The difference between the 
Directed Order Process and PL Orders is that the possible price 
improvement offered by a PL Order would be available to incoming 
marketable orders submitted by any User, and not just those orders 
from specified Users as determined by the LMM.
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    In Amendment No. 4, the Exchange proposed that Lead Market Makers 
(``LMMs'') who are registered in the primary listing of an issue on the 
NYSE Arca Marketplace would have exclusive access to PL Orders only if 
such LMMs comply with certain requirements. Specifically, in such 
instance, the Exchange proposes that a buy (sell) PL Order will only 
execute against an incoming sell (buy) marketable order only if one of 
the following conditions is met: (1) The NYSE Arca Book is at the 
national best bid (offer) (``NBBO'') and the LMM has a displayed bid 
(offer) equal to the NYSE Arca Marketplace best bid (offer) (``BBO'') 
with a quoted size at least as large as the total size of the incoming 
marketable sell (buy) order against which the PL Order would trade; (2) 
the NYSE Arca Book is at the NBBO and the LMM has a displayed bid 
(offer) $0.01 below (above) the NYSE Arca Marketplace BBO with a quoted 
size at least twice as large as the total size of the incoming 
marketable sell (buy) order against which the PL Order would trade; or 
(3) where the NYSE Arca Book is not at the NBBO and the price of the PL 
Order is at least $0.01 higher (lower) than the NYSE Arca Book BBO and 
the incoming marketable order is not designated as an ``inter-market 
sweep'' order as defined in Regulation NMS.\11\ The Exchange also 
clarified that a PL Order would not execute if it is priced inferior to 
the other orders in the NYSE Arca Book or if the LMM does not have a 
displayed order within $0.01 of the BBO when NYSE Arca is at the NBBO.
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    \11\ 17 CFR 242.600(b)(30).
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III. Comments Received

    As stated above, the Commission received two comment letters on 
this proposal.\12\ One commenter requested that the Commission abstain 
from granting accelerated approval because the proposed order type 
raises issues about market structure that should be vetted 
publicly.\13\
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    \12\ See Amex Letter and Vanguard Letter, supra note 6.
    \13\ See Amex Letter, supra note 6.
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    Another commenter stated that undisplayed orders, including the 
proposed PL Order, create a disincentive to displaying limit orders, 
which the commenter believes is not in the best interest of an 
efficient market structure.\14\ To the extent Market Centers offer such 
order types, however, the commenter agrees that they should be 
available to all users.\15\
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    \14\ See Vanguard Letter, supra note 6, at 1.
    \15\ See Vanguard Letter, supra note 6 at 3.
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    In its response to the Vanguard Letter,\16\ the Exchange stated 
that the introduction of the PL Order would attract liquidity to the 
Exchange and that with this additional order type, investors can 
express their trading interest more accurately than is possible with 
other order types. In addition, as discussed above, the Exchange 
believes that restricting the use of the PL Order to LMMs is consistent 
with the Exchange's rule limiting the Directed Order Process to LMMs in 
primary listings and is justified by the fact that LMMs would be 
subject to performance standards relating to quote spread and size 
levels set by the Exchange and would have to comply with certain 
display requirements.
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    \16\ See Amendment No. 3, supra note 7.
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment Nos. 3 and 4, including whether 
Amendment Nos. 3 and 4 are 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-2005-53 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 Amendment Nos. 3 and 4 to File Number 
SR-PCX-2005-53. 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 NYSE Arca. 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 Amendment Nos. 3 and 4 to File Number SR-PCX-2005-53 
and should be submitted on or before October 24, 2006.

V. Discussion

    After careful review, the Commission finds that the proposed rule 
change, as amended, is consistent with the requirements of the Act and 
the rules and regulations thereunder applicable to a national 
securities exchange.\17\ In particular, the Commission finds that the 
proposal, as amended, is consistent with the provisions of Section 
6(b)(5) of the Act,\18\ which requires, among other things, that a 
national securities exchange's rules be designed to promote just and 
equitable principles of trade, to remove impediments to and to 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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    \17\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \18\ 15 U.S.C. 78f(b)(5).

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[[Page 58462]]

    This proposal would create a new order type, the PL Order. The 
Commission believes that the proposal is reasonably designed to permit 
passive interaction with incoming orders while protecting displayed 
orders in the NYSE Arca Book that are priced at or better than the PL 
Order. In the Vanguard Letter, the commenter was concerned that the 
proposed PL Order would create a disincentive to displaying limit 
orders. The Commission emphasizes the fact that a PL Order would never 
execute ahead of a displayed order that is at the same or a better 
price. As noted above, PL Orders would be executed in the Working Order 
Process \19\ after all other orders, including reserve orders and the 
display portion of discretionary orders at a particular price 
level.\20\
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    \19\ See NYSE Arca Rule 7.37(b)(2).
    \20\ As also noted above, PL Orders would, however, take 
precedence over undisplayed discretionary order interest.
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    The Commission believes that the ability of LMMs appointed in 
primary listings on the Exchange to use the PL Order exclusively is 
consistent with the requirements of the Act. The Commission notes that 
NYSE specialists similarly have exclusive ability to provide price 
improvement to incoming orders on its Hybrid system only if the 
specialists are meaningfully represented in the BBO and provide a 
minimum amount of price improvement.\21\ LMMs appointed in primary 
listings would be able to use the PL Order only if (1) the NYSE Arca 
Book is at the NBBO, the order is priced better than the Exchange's BBO 
by the Minimum Price Variation (``MPV''), and the LMM is quoting a 
certain minimum amount in proximity to the Exchange's BBO \22\ or (2) 
the NYSE Arca Book is not at the NBBO, the order is priced better than 
the Exchange's BBO by the MPV, and the incoming order is not designated 
an inter-market sweep order.\23\ The Commission believes that 
permitting Users of the PL Order to provide price improvement by at 
least the MPV could increase the quality of NYSE Arca's market, and 
that the condition that LMMs must quote a minimum amount in proximity 
to the Exchange's BBO might enhance depth and liquidity at or near the 
Exchange's BBO.
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    \21\ See NYSE Rule 104.
    \22\ If the NYSE Arca Book is at the NBBO, the LMM must have a 
displayed bid (offer) that is either equal to the NYSE Arca 
Marketplace BBO with a quoted size at least as large as the total 
size of the incoming marketable sell (buy) order against which the 
PL Order would trade or $0.01 below (above) the NYSE Arca 
Marketplace BBO with a quoted size at least twice as large as the 
total size of the incoming marketable sell (buy) order against which 
the PL Order would trade.
    \23\ See 17 CFR 242.600(b)(30).
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VI. Accelerated Approval of Amendment Nos. 3 and 4

    The Commission finds good cause for approving Amendment Nos. 3 and 
4 to the proposed rule change prior to the thirtieth day after the 
amendment is published for comment in the Federal Register pursuant to 
Section 19(b)(2) of the Act.\24\ In Amendment No. 3, the Exchange 
proposed that in issues where NYSE Arca Marketplace is the primary 
listing market and there is an LMM, the PL Order would be available 
only to the LMM registered in the primary listing. The Exchange also 
proposed that LMMs would be held to certain performance obligations 
related to quote size and quote spread. In Amendment No. 4, the 
Exchange proposed that LMMs who are registered in the primary listing 
of an issue on the NYSE Arca Marketplace will have exclusive access to 
PL Orders only if such LMMs comply with certain quoting and price 
improvement requirements.
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    \24\ 15 U.S.C. 78s(b)(2).
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    The Commission believes that limiting use of the PL Order to LMMs 
registered in a primary listing raises no novel issue of regulatory 
concern because, as noted above, the Commission recently approved a 
similar functionality for New York Stock Exchange ``NYSE'' 
specialists.\25\ Under NYSE Hybrid Rules, NYSE specialists may employ 
algorithms which generate trading messages that provide price 
improvement to incoming orders only if the specialist is represented in 
a meaningful amount in the NYSE's BBO.\26\ Accordingly, the Commission 
finds good cause to accelerate approval of Amendment Nos. 3 and 4.
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    \25\ See Securities Exchange Act Release No. 53539 (March 22, 
2006), 71 FR 16353 (March 31, 2006) (SR-NYSE-2004-05).
    \26\ See NYSE Rule 104.
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VII. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\27\ that the proposed rule change (SR-PCX-2005-53), as amended by 
Amendment Nos. 1 and 2, be, and it hereby is, approved, and that 
Amendment Nos. 3 and 4 are approved on an accelerated basis.
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    \27\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\28\
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    \28\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
[FR Doc. E6-16247 Filed 10-2-06; 8:45 am]

BILLING CODE 8010-01-P
