[Federal Register Volume 63, Number 15 (Friday, January 23, 1998)]
[Notices]
[Pages 3596-3601]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-1551]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-39548; File No. SR-Phlx-97-23]
Self-Regulatory Organizations: Philadelphia Stock Exchange, Inc.;
Order Granting Approval to Proposed Rule Change and Notice of Filing
and Order Granting Accelerated Approval to Amendment No. 2 Relating to
the Treatment of PACE Orders in Double-up/Double-down Tick Situations
January 13, 1998.
I. Introduction
On May 2, 1997, the Philadelphia Stock Exchange, Inc. (``Phlx'' or
``Exchange'') submitted to the Securities and Exchange Commission
(``SEC'' or ``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 relating to double-up/double-down
automatic price improvement and manual price protection. On August 4,
1997, the Exchange submitted to the Commission Amendment No. 1 to the
proposed rule change.\3\
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\1\ 15 U.S.C. Sec. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\See Letter from Philip H. Becker, Senior Vice President and
Chief Regulatory Officer, Phlx, to Michael Walinskas, Senior Special
Counsel, Division of Market Regulation, SEC, dated August 1, 1997
(``Amendment No. 1'').
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The proposed rule change was published for comment in Securities
Exchange Act Release No. 39000 (September 2, 1997), 62 FR 47865
(September 11, 1997). No comments were received on the proposal. On
October 20, 1997, the Exchange submitted to the Commission Amendment
No. 2 to the proposed rule change.\4\ This order approves the proposal,
including Amendment No. 2 on an accelerated basis.
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\4\ See Letter from Philip H. Becker, Senior Vice President,
Phlx, to Michael Walinskas, Senior Special Counsel, SEC, dated
October 17, 1997 (``Amendment No. 2''). Amendment No. 2 revises the
proposal to provide that relief from the requirements concerning
double-up/down guarantee sizes may be granted pursuant to the
extraordinary circumstances language contained in the text of
proposed Rule 229.07(c)(iii), rather than that of existing Rule
229.13. Moreover, the text of Rule 229.07(c)(iii) is proposed to be
amended to state that extraordinary circumstances also include
situations where the Exchange is unable to receive market quotations
in a timely and accurate manner. In addition, while the Form 19b-4
filing containing the proposed rule change stated that member
organizations may decline to participate in both double-up/down
automatic price improvement and manual price protection, the text of
proposed Rule 229.07(c)(i)(D) did not reflect this option. Amendment
No. 2 adds such language to the text.
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II. Description
A. Background
The Exchange, pursuant to Rule 19b-4 of the Act, proposes to adopt
Supplementary Material .07(c) to Phlx Rule 229, Philadelphia Stock
Exchange Automatic Communication and Execution (``PACE'') System,
relating to automatic double-up/double-down price improvement and
manual double-up/double-down price protection. The PACE System accepts
orders for automatic or manual execution in accordance with the
provisions of Phlx Rule 229, which governs the operation of the PACE
System and defines its objectives and parameters. Agency orders
received through PACE are subject to certain minimum execution
parameters and non-agency orders are subject to the provisions of
Supplementary Material .02 of Rule 229. In addition, Rule 229
establishes execution parameters for orders depending on type (market
or limit), size, and the guarantees offered by specialists.\5\
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\5\ Rule 229.05 provides that round-lot market orders up to 500
shares and partial round-lot (``PRL'') market orders of up to 599
shares, which combine a round-lot with an odd-lot, are stopped at
the PACE Quote at the time of their entry into PACE (``Stop Price'')
for a 30 second delay to provide the Phlx specialist with the
opportunity to effect price improvement when the spread between the
PACE Quote exceeds \1/8\ of a point. This feature is known as the
Public Order Exposure System (``POES'') ``window.'' Rule 229.05
further provides that market orders for more than 599 shares that a
specialist voluntarily has agreed to execute automatically also are
entitled to participation in POES. If orders eligible for POES are
not executed within the POES 30 second window, the order is
automatically executed at the Stop Price.
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B. Automatic Double-up/Double-down Price Improvement
The Exchange proposes to adopt Rule 2929.07(c)(i), Automatic
Double-up/Double-down Price Improvement, which would state that where
the specialist voluntarily agrees to provide automatic double-up/
double-down price improvement to all customers and all eligible orders
in a security, in any instance where the bid/ask spread of the PACE
Quote \6\ is a \1/4\ point or greater, market and marketable limit
orders \7\ in NYSE-listed or Amex-listed securities for 599 shares or
less that are received through PACE in double-up/double-down situations
shall be provided with automatic price improvement of \1/8\ of a point,
beginning at 9:45 a.m.
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\6\ The PACE Quote consists of the best bid/offer among the
American Stock Exchange (``Amex''); New York Stock Exchange
(``NYSE''); Pacific Exchange; Phlx, Boston Stock Exchange,
Cincinnati Stock Exchange, and Chicago Stock Exchange, as well as
the Intermarket Trading System/Computer Assisted Execution System
(``ITS/CAES''). See Rule 229.
\7\ A market order is an order to buy or sell a stated amount of
a security at the best price obtainable when the order is received.
A marketable limit order is an order to buy or sell a stated amount
of a security at a specified price, which is received at a time when
the market is trading at or better than such specified price.
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Under the proposal, a ``double-up/double-down situation'' is
defined as a trade that would be at least: (i) \1/4\ point (up or down)
from the last regular way sale on the primary market; or (ii) \1/4\
point from the regular way sale that was the previous intra-day change
on the primary market. The term ``double'' originated with two \1/8\
point ticks, meaning \1/4\ of a point. Under the proposal, a down tick
of \1/16\ of a point followed by a down tick of \3/16\ of a point would
be a double-down situation, because it equals \1/4\ of a point.
As an example of the part (i) of the definition of a double up/
double-down situation, assuming that the specialist has agreed to
participate in this feature, where the PACE Quote is 22\1/2\-22\3/4\,
if the last sales on the primary market were 22\3/4\ followed by a down
tick at 22\5/8\, a double-up/double-down situation would not occur for
a market order to buy, because buying at 22\3/4\ is a single up tick of
\1/8\ of a point and,
[[Page 3597]]
thus, does not meet the \1/4\ point requirement. Under the proposal,
because no double-up/double-down situation occurred, no automatic price
improvement would be afforded. However, applying part (ii) of the
definition, a double-up/double-down situation would occur for a sell
order, because a sale at 22\1/2\ is a \1/4\ point away from the next-
to-last intra-day change, executed at 22\3/4\. Under the proposal, the
market order to sell would be automatically executed at 22\5/8\,
providing an \1/8\ point price improvement over the otherwise-automatic
execution at 22\1/2\.
Where the PACE Quote is 22\1/4\-22\3/4\, with the last sale at
22\1/2\, part (i) of the definition would apply to a market order to
buy or sell, because buying at 22\3/4\ creates a double-up tick (\1/4\
of a point away from 22\1/2\) and selling at 22\1/4\ creates a double-
down tick (also \1/4\ of a point away from 22\1/2\).
If the last sale was at 22\3/4\ and the next-to-last sale was at
22\1/2\, part (i) of the definition would apply to a market order to
sell, because selling at 22\1/4\ creates a double-down tick \1/2\ of a
point away from 22\3/4\, and part (ii) of the definition would apply to
a buy order, because buying at 22\3/4\, although not an up or down tick
from the last sale of 22\3/4\, is \1/4\ of a point away from the next
to last change, executed at 22\1/2\.
If the last sale was at 22\5/8\ and the next-to-last sale was at
22\1/2\, part (ii) of the definition would apply to a market order to
buy, because buying at 22\3/4\ creates a double-up tick (\1/4\ of a
point away) from 22\1/2\, as well as to a market order to sell, because
selling at 22\1/4\ creates a double-down tick (\1/4\ of a point away)
from 22\1/2\.
Pursuant to part (ii) of the definition of a double-up/double-down
situation, this term includes qualifying changes from the last change,
not just the two previous last sales. For example, where the last sales
on the primary market were: 22\1/2\; 22\3/8\; and 22\3/8\, with the
PACE Quote at 22\1/4\-22\1/2\, a market order to sell that would
otherwise be executable at 22\1/4\ should be price-improved to 22\3/8\,
because it is a double-down tick (\1/4\ of a point away) from the last
``change'' or sale that was the previous change (meaning the change
from 22\1/2\ to 22\3/8\).\8\ Under part (i) of the definition, this
order would not qualify as a double-up/double-down situation, because
an execution at 22\1/4\ would be only \1/8\ of a point away from the
last sale of 22\3/8\.
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\8\ The first down tick was from 32\1/2\ to 32\3/8\, and the
second down tick would have been from 32\3/8\ to 32\1/4\ had the
order been executed. The intervening sale at 32\3/8\ does not change
this result.
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To explain the interaction between the POES window and the
automatic double-up/double-down price improvement feature, assuming
that the PACE Quote is 15\1/2\-\3/4\ and the last sale was at 15\1/2\,
an order to buy 500 shares would be subject to automatic price
improvement, because buying at 15\3/4\ creates a double up tick (\1/4\
of a point away) from the last sale at 15\1/2\. The order would be
automatically executed under the proposal at 15\5/8\ (giving \1/8\ of a
point price improvement over the PACE Quote of 15\3/4\) and no POES
window would occur. The proposed automatic double-up/double-down price
improvement feature results in an automatic execution, with no window,
timer or delay. If, on the other hand, the order was to sell 500
shares, a double-up/double-down situation would not occur, because
selling at 15\1/2\ is not a double-up/double-down situation (not \1/4\
of a point away from the last sale); this order would be POES-eligible
such that the POES window would apply. At the expiration of the POES
window, absent manual specialist intervention, this order would be
manually executed at 15\1/2\, its Stop Price.
Automatic double-up/double-down price improvement also would be
available for marketable limit orders. As an example, assuming that the
specialist has agreed to participate in this feature, where the PACE
Quote is 15\1/2\-15\3/4\, and the last sale was at 15\1/2\, an order to
buy 500 shares at 15\3/4\ would be subject to automatic price
improvement, because buying at 15\3/4\ creates a double up tick (\1/4\
of a point away) from the last sale at 15\1/2\. The order to buy 500
shares at 15\3/4\ is a marketable limit order, because it is
immediately executable on the offer. Under this proposal, this order
would be automatically executed at 15\5/8\, receiving price improvement
of \1/8\ of a point.
The Exchange notes that the execution resulting from the automatic
price improvement feature can create a double-up/double-down situation;
for instance, where the PACE Quote is 32-32\1/4\ and the last sale was
at 32\3/8\, a sell order that would be executable at 32 would be
improved to 32\1/8\, which is a double-down tick (\1/4\ point from
32\3/8\ to 32\1/8\).
Automatic double-up/double-down price improvement will not occur
where the execution price would be outside the primary market high/low
range for the day, if out-of-range protection was elected by the member
organization entering the order pursuant to Rule 229.07(a). The
following example illustrates how the execution price before automatic
price improvement can be out-of-range. Where the primary market high
and low for the day are 22\1/2\ and 22\1/4\, the last sale was at 22\3/
8\ and the PACE Quote is 22\5/8\-22\7/8\, an incoming market order to
sell would revert to manual status since an execution at 22\5/8\ (or
22\3/4\, if automatic price improvement would have been applied) would
constitute an out-of-range execution (i.e., an execution at 22\5/8\
would have been at a price about the 22\1/2\ high for the day). The
next example illustrates how the execution price could be out-of-range
as a result of automatic price improvement. Where the primary market
high and low for the day are 22\5/8\ and 22\1/4\, the last sale was at
22\3/8\ and the PACE Quote is 22\5/8\-22\7/8\, an incoming sell order
executable at 22\5/8\ would not be improved to 22\3/4\, because such
price would be out-of-range (i.e., an execution at 22\3/4\ would have
been at a price above the 22\5/8\ high for the day). Instead, the order
would revert to manual status, and the specialist would either stop the
order or execute if at 22\5/8\. Absent out-of-range protection, the
22\5/8\ execution would have been a double-up situation (\1/4\ of a
point away from the last sale of 22\3/8\).
The Exchange represented that it is proposing to extend its price
improvement initiative to double-up/double-down situations, because
these are particularly suitable for price improvement. Instead of
affording an automatic execution at the PACE Quote, the proposal
results in an automatic execution that improves on that price by an \1/
8\ of a point.
The Exchange has determined that, as with many PACE features and
participation in the PACE System itself, automatic double-up/double-
down price improvement should be made available on a voluntary, symbol-
by-symbol basis, so that specialists can determine which securities are
suitable for the program. Moreover, the Exchange has asserted that the
availability of a price improvement feature benefits the specialist
function, especially in high-volume securities, where stopping orders
and effecting manual intervention are time-consuming, can delay
execution, and do not necessarily result in price improvement.
C. Manual Double-up/Double-down Price Protection
The Exchange also proposes to adopt a manual double up/double-down
price protection provision as Rule 229.07(c)(ii). Currently, a form of
manual double-up/double-down price protection is a feature of the PACE
System, but is neither mandatory, nor
[[Page 3598]]
available in all securities.\9\ Nor has it been incorporated into
Exchange rules. Thus, the Exchange is proposing to replace the existing
voluntary feature with the proposed mandatory feature. This aspect of
the proposal is intended to impose a double-up/double-down price
protection requirement upon specialists that choose not to participate
in the automatic price improvement feature. Manual price protection
would apply in \1/8\ point-wide markets or greater in double-up/double-
down situations; thus, unlike automatic price improvement, which is
triggered only by \1/4\ point-wide or greater markets, a \3/16\ point-
wide market would trigger manual price protection. Further, the
Exchange has represented that in situations where both manual double-
up/double-down price protection and POES would otherwise apply, an
order will receive manual price protection, but will not be eligible
for POES.\10\
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\9\ The Exchange has represented that the current double-up/down
price protection feature has been in use since 1991. If elected by
the entering member organization in a security selected by the
specialist as eligible for this feature, orders within the
specialist's automatic execution guarantee size are stopped in
double/up/down situations.
\10\ Telephone conversation between Philip Becker, Senior Vice
President and Chief Regulatory Officer, Phlx, and Jon Kroeper,
Special Counsel, Division of market Regulation, SEC, dated November
7, 1997. The Phlx proposal also states that the POES window is not
applicable where the automatic double up/down price improvement
feature is applicable.
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The proposed manual double-up/double-down price protection
provision would stop eligible orders (i.e., automatically executable
market and marketable limit orders of 599 shares or less in NYSE- or
Amex-listed securities received through PACE in double-up/double down
situations, beginning at 9:45 a.m.) to give such orders the possibility
of receiving manual price improvement from the specialist. Under this
proposal, an eligible order would be ``stopped'' by the specialist at
the PACE Quote at the time of its entry into PACE, meaning that the
order is guaranteed to receive at least the price by the end of the
trading day. Consistent with Phlx Equity Floor Procedure Advice A-2
(``Advice A-2'') specialists are required to display stopped orders at
an improved price and any contra-side orders received by the specialist
will be taken into account for purposes of determining when to execute
a stopped order and at what price.
The Exchange has represented that the purpose of a manual price
protection provision is to provide an alternative double-up/double-down
feature, which allows for price improvement, albeit not automatic, for
securities which the specialist has determined are not appropriate for
the automatic feature, due to, for example, liquidity, trading
patterns, and volatility. In this regard, the Exchange has stated that
less liquid stocks may trade in sizes that render it unfair to
specialists to afford automatic price improvement to such orders and
manage the resulting positions.\11\
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\11\ Specifically, the Exchange has stated that its reference to
trading patterns may cover stocks where the spread between the bid
and offer is very narrow, with little trading occurring between such
bid/offer spread, or very wide, with most trading on the bid/offer.
Moreover, the Exchange has stated its belief that low volatility
stocks may not be appropriate for automatic price improvement,
because little movement in the stock may also indicate that little
trading is occurring between the bid and offer price.
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D. Both Features
For both automatic price improvement and manual price protection,
specialists may establish higher sizes than the 599 share minimum (but
less than or equal to the specialist's automatic execution guarantee),
which may be changed effective the next day. Member organizations
entering PACE orders (``PACE Users'') will be notified of any such
changes.
Specialists choosing to activate the automatic feature would also
be subject to the procedure described above (i.e., it would become
effective the next day). In addition, switching between the automatic
and manual features triggers this procedure. Signing up for the manual
price protection feature is not required, because all specialists will
be required to participate.
PACE Users entering orders may decline to participate in the
automatic and manual double-up/double-down features; however, they may
not choose to participate in only one of the two features. Moreover,
odd-lot orders are not eligible for either proposed feature. Further,
the proposed features are available only for orders that are eligible
for automatic execution. For instance, non-marketable limit orders and
orders exceeding a specialist's automatic execution guarantee size are
not eligible for either proposed feature, because the features depend
upon either stopping or automatically improving orders guaranteed a
certain automatic execution price.
Finally, the proposed rule change provides that both proposed
features may be disengaged in a security or floor-wide in extraordinary
circumstances. In addition to fast market conditions, extraordinary
circumstances also include systems malfunctions and other circumstances
that limit the Exchange's ability to receive, disseminate, or update
market quotations in a timely and accurate manner.
III. Discussion
For the reasons discussed below, 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, and, in particular, with the requirements of
Section 6(b).\12\ In particular, the Commission believes the proposal
is consistent with the Section 6(b)(5) requirements that the rules of
an exchange be designed to prevent fraudulent and manipulative acts and
practices, 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.\13\
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\12\ 15 U.S.C. Sec. 78f(b).
\13\ In approving the proposed rule change, the Commission notes
that it has considered the proposed rule's impact on efficiency,
competition, and capital formation. 15 U.S.C. Sec. 78c(f).
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Over the years, the Commission has recognized that the increased
competition for order flow that results from permitting regional
specialists to attract orders from other markets by providing price
improvement opportunities and superior quotations enhances market
making ability and the quality of customer order execution. The
Commission has approved proposals by national securities exchanges to
integrate price improvement opportunities, on both an automatic and
manual basis, into their automatic execution systems. Accordingly, the
Commission believes that the Exchange's present proposal, which would
adopt both automatic price improvement and manual price protection
features in double-up/double-down situations, may enhance both
intermarket competition and order execution quality on the Exchange. In
addition, the Commission believes that both features should contribute
to the maintenance of orderly markets by Phlx specialists because they
help to reduce the price variations occurring from trade to trade on
low volume.
A. Automatic Double-up/Double-down Price Improvement
Under the proposal, specialists voluntarily may agree to provide
automatic price improvement of \1/8\ of a point from the PACE Quote to
all customers and all market and marketable limit orders of up to 599
(or higher, if elected by the specialist)
[[Page 3599]]
shares in a particular security on a stock-by-stock basis, in any
instance where the bid/ask spread of the PACE Quote is \1/4\ point or
greater and an automatic execution at the PACE Quote would create a
double-up/double-down situation from the last primary market sale. The
Commission believes that the adoption of this proposed feature by the
Exchange is appropriate in that its use by Phlx specialists should
increase the likelihood that eligible customer orders, particularly
marketable limit orders, will be executed at an improved price over the
PACE Quote. As stated above, certain market orders already are stopped
in the POES window for 30 seconds to give the specialist the
opportunity to provide price improvement to such orders.\14\ The
Commission's Division of Market Regulation previously has noted that
price improvement windows, such as POES, by themselves rarely provide
an execution that betters the quoted market.\15\ The Exchange's
proposal should enhance the price improvement opportunities available
for such orders as it will provide automatic price improvement to
eligible orders in double-up/double-down situations.
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\14\ See supra note 5.
\15\ See, Division of Market Regulation, SEC, Market 2000: An
Examination of Current Equity Market Developments (January 1994), at
Study V, n.19.
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The Commission's recent Report on the Practice of Preferencing
found that the frequency of price improvement for marketable limit
orders was significantly lower than that for market orders when
measured across exchanges, spreads, and order size ranges.\16\ As
marketable limit orders currently are not eligible for the POES window,
the Commission finds that the proposed automatic price improvement
feature should have a beneficial impact, in that it should increase
significantly the price improvement opportunities available to
marketable limit orders, as such orders otherwise would be executed
automatically at the PACE Quote upon their entry into PACE.
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\16\ See SEC, Report on the Practice of Preferencing (April 11,
1997) at Tables V-8A to V-8C.
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B. Manual Double-up/Double-down Price Protection
The Exchange also has proposed to adopt a mandatory manual double-
up/double-down price protection feature.\17\ In situations where a
specialist has not agreed to provide automatic double-up/double-down
price improvement, this feature would stop all market and marketable
limit orders of up to 599 shares (or higher, if elected by the
specialist) to all customers in all stocks in instances where the bid/
ask spread of the PACE Quote is \1/8\ or greater in double-up/double-
down situations, making it possible for the specialist to provide price
improvement to such orders.
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\17\ As stated above, the Exchange has represented that its
existing manual double-up/double-down price improvement feature has
been in use since 1991. See supra note 9 and accompanying text.
The Commission notes that Section 19(b) of the Act provides that
each self-regulatory organization is required to file any proposed
rule change with the Commission and that no proposed rule change
shall take effect unless approved by the Commission or otherwise
permitted in accordance with its provisions.
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The Commission historically has been concerned that the practice of
stopping stock may compromise the specialist's fiduciary duties to
unexecuted limit orders on the specialist's limit order book.\18\ The
Commission, however, has approved the practice in instances where the
harm to existing orders on the specialist's limit order book was
believed to be offset by the resulting reduced spread and possibility
of price improvement for the stopped order. The Commission believes
that the instances in which the Exchange's proposal is intended to
apply are appropriate for the use of stopping stock procedures.
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\18\ See SEC, Report of Special Study of Securities Markets,
88th Cong., 1st Sess., H.R. Doc. No. 95, pt. 2, at 150-154;
Preferencing Report, supra note 16, at Part II.B.4. For example, in
a market quoted 20-20\1/8\ (with a minimum variation of \1/16\ of a
point), 1000 shares bid and offered, the offer representing a
customer limit order, the specialist receives a market order to buy
500 shares. If the specialist decides to stop the market order, the
specialist will change his or her quote to 20\1/16\-20\1/8\, 500
shares bid and 1000 shares offered, the bid representing the stopped
market order. If the specialist subsequently receives a market order
to sell 500 shares, the specialist will execute the sell order
against the stopped order at 20\1/16\, improving the price for the
stopped order. However, the sell limit order at 20\1/8\ with
priority on the book is bypassed and does not receive the execution
it would have had if the stop had not been granted. In addition, if
the market turns away from the limit price (i.e., moves to 20-20\1/
16\ or lower), the limit order may never be executed.
The Commission notes, however, that because manual double-up/
double-down price protection only is available in \1/8\ point
markets and greater, and the minimum trading variation on the Phlx
currently is \1/16\, the proposal does not implicate the
Commission's particular and continuing concerns with the practice of
stopping stock in minimum variation markets that were set forth in
the Preferencing Report. See Preferencing Report, supra note 16, at
Part II.B.4.
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Further, the Commission notes that the proposal and existing Phlx
procedures provide for the display of stopped orders by Phlx
specialists. Specifically, Advice A-2, which governs the handling of
stopped orders on the Phlx equity floor, requires a Phlx specialist who
stops an order pursuant to the feature to display such an order in his
or her quote at an improved price.\19\
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\19\ The Commission notes that the Exchange has represented that
in situations where both manual double-up/double-down price
protection and POES would otherwise apply, an order will receive
manual price protection, but will not be eligible for POES. See
supra note 9. The Commission believes that this aspect of the
proposal should increase order exposure on the Exchange, as orders
stopped for manual price protection will be required to be displayed
in the specialist's quote, whereas orders eligible for POES are
displayed only to the specialist. See supra note 5.
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Moreover, as was stated above in connection with double-up/double-
down price improvement, the proposed manual double-up/double-down price
protection feature gives the specialist the opportunity to provide
price improvement to orders that would otherwise be subject to
immediate automatic execution at the PACE Quote. Additionally, a
specialist voluntarily may extend automatic price improvement or manual
price protection in double-up/double-down situations to orders for more
than 599 shares, provided the level is at or below the specialist's
automatic execution guarantee. This aspect of the proposal should have
a beneficial impact as it appears to be specifically targeted to
provide the possibility of price improvement by the specialist to
orders currently lacking such opportunities.
The Commission also believes that the proposal, taken together with
Advice A-2, the proposal provides adequate guidelines for a
specialist's handling of orders that are stopped in double-up/double-
down situations in a manner consistent with his or her obligation to
maintain fair and orderly markets.\20\ In particular, proposed Rule
229.07(c)(ii) provides that orders that are stopped for manual double-
up/double-down price protection are guaranteed to receive at least the
Stop Price by the end of the trading day. While the specialist's
provision of this guarantee is implicit in the concept of stopping
stock, it is not stated explicitly in Advice A-2.\21\
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\20\ See Phlx Rule 203.
\21\ In approving the Phlx's adoption of Advice A-2 in 1994, the
Commission stated its belief that ``further action could be taken
[by the Exchange] to ensure proper handling of stopped stock.'' See
Securities Exchange Act Release No. 34614 (August 30, 1994), 59 FR
46280 (September 7, 1994) (File No. SR-Phlx-93-41). Specifically,
the Commission stated that it expected the Phlx to submit a proposed
rule change to complement its floor procedure advice. The Commission
set forth a number of elements that the Exchange should consider
including in such a rule, namely: a definition of the agreement to
``stop'' stock and the obligations of the member who agrees to grant
the stop; the market conditions under which a stop should be
granted; a policy for the execution of stopped stock and, in
particular, for determining the price at which the order should be
executed; and pilot procedures for minimum variation markets that
are consistent with the rules of priority, parity, and precedence.
The Commission continues to believe strongly that the Exchange
should submit a proposed rule change pursuant to Section 19(b) of
the Act and Rule 19b-4 thereunder to adopt such a stopping stock
rule.
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[[Page 3600]]
C. Provisions Common to Both Proposed Features
Under Rule 229.07(a), PACE Users may elect that if an automatic
execution of their orders at the PACE Quote would result in an
execution price that is outside the primary market high-low range for
that trading day, such orders would be routed to the specialist for
manual execution at or within the high-low range of the day. The
proposal provides that PACE Users may elect that neither automatic
double-up/double-down price improvement nor manual double-up/double-
down price protection will occur where the execution price (before or
after the application of automatic price improvement) or Stop Price,
respectively, would be outside the high-low range for the day. In such
instances, orders would be handled manually by the specialist and be
subject to an execution at or within the primary market high-low range
of the day. The Commission believes that this aspect of the proposal is
appropriate in that it provides PACE Users with greater flexibility as
to the disposition of their orders. Moreover, providing such
flexibility could enhance the Exchange's competitive position among
firms seeking an appropriate venue for the execution of their order
flow.
In addition, under proposed Rule 229.07(c)(i)(D), PACE Users may
decline to participate in the automatic and manual double-up/double-
down features; however, they may not choose to participate in only one
of the two features.\22\ The Commission believes that such a provision
is appropriate in that it should offer a preferred alternative to PACE
Users for whom a prompt execution at a definitive price is most
important. As described above, when the manual double up/double down
price protection feature is applicable, a significant time delay may
occur when an order is stopped and price improvement is attempted. In
addition, as with offering PACE Users the alternative between double-
up/double-down features and out-of-range services, offering PACE Users
the option to decline both features may enhance its competitive
position among order execution venues. The Commission further believes
that the Exchange's decision to require that PACE Users only may
decline to participate in both features, not a particular one, is a
decision that appropriately falls within the business judgment of the
Exchange.
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\22\ A firm's election to not participate in the double up/
double down features will apply to trading in all Phlx stocks; the
firm will not be able to make separate elections on a security by
security basis. Phone conversation between Michael Walinskas, SEC
and Edith Hallahan, Phlx, January 13, 1998.
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Further, proposed Rule 229.07(c)(i) and (c)(ii) set forth
procedures through which specialists may activate automatic double-up/
double-down price improvement in a particular stock, switch between the
automatic and manual features, and change the size of the orders that
will be eligible for either feature. In each instance, the change will
be effective the next trading day, and PACE Users will be notified of
any such changes. The Commission believes the proposal provides
satisfactory procedures in this regard. In particular, the Commission
believes that making these changes effective on the next trading day is
appropriate in that it grants specialists the necessary flexibility to
manage the proposed features in light of changing market conditions. At
the same time, it alleviates concerns that specialists potentially may
take advantage of their unique knowledge with respect to incoming PACE
order flow to make intra-day modifications to the double-up/double-down
features that would be to the detriment of other market participants.
Finally, proposed PACE Rule 229.07(c)(iii) provides that both
double-up/double-down features may be disengaged in one or more
securities, upon the presence of extraordinary circumstances, as
determined by two Phlx Floor Officials. Extraordinary circumstances are
defined to include fast market conditions, systems malfunctions and
other circumstances that limit the Exchange's ability to receive,
disseminate, or update market quotations in a timely manner. The
Commission believes that this aspect of the proposal is appropriate in
that it provides sufficient guidance to the Phlx membership by clearly
delineating the circumstances under which the double-up/double down
features may be disengaged and the procedure to be followed in seeking
such disengagement. The Commission further believes that the provision
requiring two Floor Officials to approve the disengagement of both
double-up/double-down features is important. Specifically, while the
particular categories of events covered in the proposed paragraph
generally are appropriate grounds for the disengagement of the double-
up/double-down features, the Commission believes that requiring Floor
Officials to confirm that such conditions exists is a necessary
safeguard to ensure the appropriate treatment of PACE orders eligible
for these features.\23\
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\23\ In addition, the Commission expects the Exchange to monitor
the performance of Floor Officials in granting any requests by
specialists to disengage the double-up/double-down features.
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The Commission finds good cause for approving Amendment No. 2 to
the proposed rule change prior to the thirtieth day after the date of
publication of notice of filing thereof in the Federal Register.
Amendment No. 2 revises the proposals to provide that relief from the
requirements concerning double-up/double-down guarantee sizes may be
granted pursuant to the extraordinary circumstances language contained
in the text of proposed Rule 229.07(c)(iii) to the PACE Rule, rather
than that of existing PACE Rule 229.13. The Commission believes that
amending the proposal to utilize Rule 229.07(c)(iii) for this purpose
is a reasonable approach, as this provision has been formulated
specifically for use in double-up/double-down situations, whereas Rule
229.13 was developed to apply in the context of specialist performance
obligations. In addition, Amendment No. 2 revises the text of proposed
Rule 229.07(c)(iii) to state that extraordinary circumstances also
include situations where the Exchange is unable to receive market
quotations in a timely and accurate manner, as well as where it is
unable to disseminate or update such quotations. The Commission finds
that the addition of this provision is appropriate in that such
instances may interfere with the ability of PACE to determine whether a
double-up/double-down situation actually has occurred, and the ability
of specialists to handle orders stopped pursuant to the manual feature.
Further, Amendment No. 2 adds language to the text of proposed Rule
229.07(c)(i)(D) to state specifically that member organizations may
decline to participate in both double-up/double-down features. While
this alternative was set forth in the Form 19b-4 filing containing the
proposed rule change, it was not reflected in the text of proposed Rule
229.07(c)(i)(D). The Commission finds that this aspect of the change is
appropriate in that it will serve as a reminder to member organizations
of the availability of this alternative. Finally, the Commission notes
that the proposed rule change was noticed previously in the Federal
Register for the full statutory period and the Commission did not
receive any comments on it. Therefore, the Commission believes that it
is
[[Page 3601]]
consistent with Section 6(b)(5) of the Act to approve Amendment No. 2
to the proposed rule change on an accelerated basis.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning Amendment No. 2 to the proposed rule change.
Persons making written submissions should file six copies thereof with
the Secretary, Securities and Exchange Commission, 450 Fifth Street,
NW., Washington, DC 20549. Copies of the submission, all subsequent
amendments, all written statements with respect to the proposed rules
changes that are filed with the Commission, and all written
communications relating to Amendment No. 2 between the Commission and
any persons, other than those that may be withheld from the public in
accordance with the provisions of 5 U.S.C. Sec. 552, will be available
for inspection and copying in the Commission's Public Reference
Section, 450 Fifth Street, NW., Washington, DC 20549. Copies of such
filing will also be available at the principal office of the Exchange.
All submissions should refer to File No. SR-Phlx-97-23 and should be
submitted by February 13, 1998.
V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\24\ that the proposed rule change (SR-Phlx-97-23), as amended, is
approved.
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\24\ 15 U.S.C. Sec. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\25\
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\25\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 98-1551 Filed 1-22-98; 8:45 am]
BILLING CODE 8010-01-M
