[Federal Register Volume 63, Number 209 (Thursday, October 29, 1998)]
[Notices]
[Pages 58083-58085]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-29010]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 40593; File No. SR-PHLX-98-37]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Philadelphia Stock Exchange, Inc. Relating to Stopping
Stock
October 22, 1998.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule19b-4 thereunder,\2\ notice is hereby given that
on September 28, 1998, the Philadelphia Stock Exchange Inc. (``PHLX''
or ``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I, II, and III 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.
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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 adopt Rule 220, Stopping Stock, which
would define agreements to stop stock; establish the obligations of a
member who agrees to stop stock; set forth market conditions under
which a stop should be granted; establish a policy for executing
stopped stock, including the price at which the order should be
executed; and establish policies and procedures for execution of stop
orders in minimum variation markets that are consistent with the rules
of parity, priority and precedence. In addition, the Exchange proposes
to amend Equity Floor Procedure Advice A-2 (``Advice A-2'') regarding
stopped stock, in order to include reference to proposed Rule 220.
The text of the proposed rule change is available at the Office of
the Secretary, PHLX and at the Commission.
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 and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set
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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
In approving the PHLX's adoption of Advice A-2 regarding the
stopping of stock in 1994, the Commission noted that the Exchange
should also adopt a rule ``to ensure proper handling of stopped
stock''.\3\ The Exchange now proposes codifying and enhancing the
procedures outlined in Advice A-2 as proposed Rule 220, Stopping Stock,
including permitting PHLX specialists to stop stock in minimum
variation markets.\4\
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\3\ See Securities Exchange Act Release No. 34614 (August 30,
1994)(SR-PHLX-93-41), 59 FR 32034.
\4\ The proposed stopping stock rule is substantially similar to
the stopping stock rules adopted by the Boston Stock Exchange
(``BSE'') and the Chicago Stock Exchange (``CHX''). See BSE Chapter
II, Section 38 and CHX Article XX, Rule 28.
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Currently stopping stock is a long established practice in equity
markets. Reference to this practice presently appears in various rules
in addition to Advice A-2. For instance, under Rule 229, Commentary
.05, the Public Order Execution System (``POES'') window subjects
certain orders to a delay of 30 seconds in order to receive an
opportunity for price improvement. If such order is not improved, the
order receives the Philadelphia Stock Exchange Automatic Communication
and Execution (``PACE'') System quote at which it was stopped.\5\
Further, Rule 229, Commentary .07 reflects the practice of stopping
stock in the context of price improvement.\6\ In fact, the Exchange's
efforts in offering superior price improvement technology focus
attention on stopping stock practices and the need for codification in
PHLX Rules.
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\5\ Securities Exchange Act Release No. 39225 (October 8, 1997)
(SR-PHLX-97-32), 62 FR 54147.
\6\ See Secutities Exchange Act Release Nos. 39548 (January 13,
1998) (SR-PHLX-97-23), 63 FR 3596; 39640 (February 10, 1998) (SR-
PHLX-98-05), 63 FR 8510; and 40006 (May 19, 1998) (SR-PHLX-98-10) 63
FR 29288.
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Under the proposed rule change, an agreement by a PHLX specialist
to ``stop'' securities at a specified price will constitute a guarantee
by a member or member organization of the purchase or sale of the
securities at the specified price or better. In addition, the proposed
rule states that all stopped orders will expire at the end of the
trading day.
Proposed rule 220(b) will impose certain procedural requirements
for the handling of stopped orders. The specialist will be permitted to
stop stock upon the unsolicited request of another member when such
member is acting on behalf of either a public customer account or an
account in which such member or another member has an interest. After
granting the stop, the specialist must display the order in his or her
quote, including representative size, and reduce the spread by bidding
(offering) at a price higher (lower) than the prevailing bid or offer
if not executed immediately after being stopped.\7\ This procedure
applies in other than minimum variation markets, that is, where the
spread in the quotation is greater than twice the minimum variation.
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\7\ See BSE, Chapter II, Section 38(b).
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Proposed Rule 220(b)(2) prohibits the specialist from trading for
his own account with any order he stopped while he is in possession of
an order at an equal or better price than the price of the stopped
order and, in each such case, the specialist must exercise due
diligence to match the stopped order with such other order in his
possession in accordance with Exchange Rules 119 and 120. This
provision is similar to the restrictions of Exchange Rule 452,
Limitations on Members Trading Because of Customer Orders, and is
intended to expressly incorporate the due diligence requirement into
the new rule. This provision currently appears in Advice A-2.
The Exchange also proposes to adopt procedures for stopping stock
in minimum variation markets.\8\ Stopping orders in minimum variation
markets will occur primarily when the bid (offer) is at a price higher
(lower) than the primary market for day. Specifically, proposed rule
220(d) would provide that in minimum variation markets, the specialist
must change his or her quoted bid (offer) in order to reflect the size
of the order being stopped. In cases of minimum variation markets, a
stopped order to buy (sell) will be filled: (1) after a transaction
takes place on the primary market at the stop price or higher (lower)
or (2) when the share volume on the Exchange at the bid (offer) is
exhausted. All orders stopped in minimum a variation markets shall be
executed by the end of the trading day on which the order was stopped
at no worse than the stopped price. In granting a stop in a minimum
variation market, a specialist should change the quoted bid (offer)
size in order to reflect the size of the order being stopped. This
provision is similar to provisions of other exchanges.\9\
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\8\ See Proposed Rule 220(d).
\9\ See BSE Chapter II, Section 38, and CHX Article XX, Rule 28
and CHX Article XX, Rule 37, interpretation and policy .03. Both of
these programs were initially approved as pilot programs, which,
thereafter, received permanent approval. See Securities Exchange Act
Release Nos. 37134 (April 22, 1996) (SR-BSE-96-03), 61 FR 18634 and
36401 (October 20, 1995) (SR-CHX-95-100, 60 FR 54893.
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Section 220(c) provides that the member or member organization
which agreed to stop the securities in order to obtain a favorable
price will either provide price improvement or guarantee the stop
price. If the order is executed at a less favorable price, then such
member will be liable for the adjustment of the difference between the
two prices.
As explained above, the proposed stopping stock rule codifies
existing procedures for stopping stock on the Exchange floor. In
addition, the practice of stopping stock enables Exchange specialists
to offer primary market price protection, an important price
improvement function of PHLX specialists, consistent with national
market system principles by executing orders at better prices away from
the primary market. Furthermore, it provides the opportunity for the
specialist to improve upon the market and narrow the bid/offer spread.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6 of the Act, in general, and Section 6(b)(5), in
particular, in that it is designed to promote just and equitable
principles of trade, and foster cooperation and coordination with
persons engaged in regulating, clearing, settling, processing
information with respect to and facilitating transactions in securities
by codifying stopping stock procedures into PHLX rules.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any inappropriate burden on competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received from Members, Participants, or Others
The Exchange has neither solicited nor received written comments on
the proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing
for Commission Action
Within 35 days of the publication of this notice in the Federal
Register or within such longer period (i) as the
[[Page 58085]]
Commission may designate up to 90 days of such date if it finds such
longer period to be appropriate and publishes its reasons for so
finding or (ii) as to which the Exchange consents, the Commission will:
(A) by order approve the proposed rule change, 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
arguments concerning the foregoing, including whether the proposal is
consistent with the Act. Persons making written submissions should file
six copies thereof with the Secretary, Securities and Exchange
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of
this 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 at the Commission's
Public Reference Room. Copies of such filing will also be available for
inspection and copying at the principal office of the PHLX. All
submissions should refer to File No. SR-PHLX-98-37 and should be
submitted by November 19, 1998.
For the Commission, by the Division of Market Regulation
pursuant to delegated authority.\10\
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\10\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-29010 Filed 10-28-98; 8:45 am]
BILLING CODE 5010-01-M
