[Federal Register Volume 63, Number 33 (Thursday, February 19, 1998)]
[Notices]
[Pages 8510-8512]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-4096]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-39640; File No. SR-PHLX-98-05]
Self-Regulatory Organizations; Notice of Filing and Immediate
Effectiveness of Proposed Rule Change and Amendments 1 and 2 Thereto by
the Philadelphia Stock Exchange, Inc. Regarding Automatic Price
Improvement
February 10, 1998.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that January 27, 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 self-regulatory organization. On
February 3, 1998, and February 6, 1998, respectively, the Exchange
filed amendments 1 and 2 to the proposal with the Commission.\2\ The
Commission is publishing this notice to solicit comments on the
proposed rule change, as amended from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ See Letter from Edith Hallahan, Associate General Counsel,
Phlx to Michael Walinskas, Senior Special Counsel, SEC dated
February 2, 1998 (``Amendment No. 1'') and letter from Edith
Hallahan, Associate General Counsel, Phlx to Michael Walinskas,
Senior Special Counsel, SEC dated February 6, 1998 (``Amendment No.
2''). Amendment No. 1 makes several substantive change to the
originally proposed filing. Amendment No. 2 makes a non-substantive
change to correct an internal cross-reference in Rule
229.07(c)(i)(D).
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The Exchange, pursuant to Rule 19b-4 of the Act, proposes to amend
Rule 229, the Phlx Automated Communications and Execution (``PACE'')
System, Supplementary Material .07(c)(i), Automatic Double-up/Double-
down Price Improvement, to clarify and correct three aspects of this
new provision.\3\ First. the Exchange proposes to add into the text of
Rule 229.07(c) that the Public Order Exposure (``POES'') window does
not apply where automatic price improvement or manual price protection
are in place. Second, the Exchange proposes to expand upon the
provision stating that member organizations entering orders may elect
to have such orders executed in accordance with paragraph (c), or not
to participate in either double-up/double-down feature. Specifically,
the Exchange proposes to add that failure to elect will result in the
activation of the double-up/double-down feature for that User, but
specialists determine whether to provide automatic price improvement in
a particular security. Third, the Exchange proposes to clarify that in
situations where automatic pride improvement would result in an
execution at a price better than the last sale price, the order would
be stopped at the PACE Quote \4\ when received, meaning that the order
is guaranteed to
[[Page 8511]]
receive at least that price by the end of the trading day. The text of
the proposed rule change is available at the Office of the Secretary,
the Phlx and at the Commission.
---------------------------------------------------------------------------
\3\ See Securities Exchange Act Release No. 39548 (January 13,
1998), 63 FR 3596 (January 23, 1998).
\4\ The PACE Quote consists of the best bid/offer among the
American, Boston, Cincinnati, Chicago, New York, Pacific and
Philadelphia, Stock Exchanges as well as the Intermarket Trading
System/Computer Assisted Execution System (``ITS/CAES''). See Phlx
Rule 229.
---------------------------------------------------------------------------
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 self-regulatory organization
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 self-regulatory organization
has prepared summaries, 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
PACE is the Exchange's automated order routing and execution system
on the equity trading floor. PACE accepts orders for automatic or
manual execution in accordance with the provisions of Rule 229, which
governs the PACE System and defines its objectives and parameters. The
PACE Rule establishes execution parameters for orders depending on type
(market or limit), size and the guarantees offered by specialists.
Recently, the Commission approved Rule 229.07(c), providing either
automatic price improvement or manual price protection in double-up/
double-down situations.\5\ A ``double-up/double-down'' situation is
defined as a trade that would be at least: (i) \1/4\ (up or down) from
the last regular way sale on the primary market; or (ii) \1/4\ from the
regular way sale that was the previous intraday change on the primary
market.\6\ The term ``double'' originated with two \1/8\ ticks, meaning
\1/4\. A down tick of \1/16\ followed by a down tick of \3/16\ would be
a double-down situation, because it equals \1/4\.
---------------------------------------------------------------------------
\5\ See supra note 3.
\6\ Hereinafter, all references to the last sale price are to
the last regular way sale.
---------------------------------------------------------------------------
During the approval process for Rule 229.07(c), two potential
clarifications were identified. First, the POES window does not apply
where automatic price improvement or manual price protection are in
place.\7\ The POES window, contained in Rule 229.05, currently provides
that round-lot market orders up to 500 shares and partial round-lot
(``PRL'' which combines a round-lot with an odd-lot) market orders up
to 599 shares are stopped at the PACE Quote at the time of 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\ point If such order is not
executed with the POES window, the order is automatically executed at
the Stop Price. The representation that the POES window does not apply
when automatic price improvement or manual price protection are in
place was made by the Exchange in the original proposal to adopt Rule
229.07(c),\8\ and is now being added to the actual text of that
provision.
---------------------------------------------------------------------------
\7\ See Securities Exchange Act Release No. 39225 (October 8,
1997), 62 FR 54147 (October 17, 1997).
\8\ See Securities Exchange Act Release No. 39548 (January 13,
1998), 63 FR 3596 (January 23, 1998), at note 10.
---------------------------------------------------------------------------
Second, the Exchange proposes to expand upon the provision stating
that member organizations entering orders may elect to have such orders
executed in accordance with paragraph (c), or not to participate in
either double-up/double-down feature. The Exchange proposes to add that
failure to elect will result in the activation of the double-up/double-
down feature for that User, noting that specialists determine whether
to provide automatic price improvement in a particular security.\9\
This change is intended to clarify that enabling the features is the
default setting; thus, PACE users may choose not to participate, but
failure to choose results in enabling the features.
---------------------------------------------------------------------------
\9\ See Securities Exchange Act Release NO. 39548 (January 13,
1998), 63 FR 3596 (January 23, 1998), at note 22.
---------------------------------------------------------------------------
Third, following approval, but prior to implementation of the
proposal, a situation was identified whereby certain orders would
automatically receive price improvement resulting in an execution
better than the last sale. Specifically, ``better than the last sale''
means a buy order at a price less than the last sale or a sell order at
a price higher than the last sale. This was not the intent of the
original proposal, and, in fact, may create a potential violation of
the short sale rule,\10\ which prohibits certain short sales of a
security on a down tick. For example, where the PACE Quote is 22\1/4\-
\3/4\, the last sale was at \3/4\ and the previous sale was at \1/2\,
the provision would apply to a sell order, because selling at \1/4\
creates a double-down tick (\1/2\ away from \3/4\), as well as a buy
order, because buying at \3/4\ is, although not an up or down tick from
the last sale of \3/4\, \1/4\ away from the last change, even though
the last sale at \3/4\ (which was a zero tick) created the double-up
tick from the previous sale at \1/2\. The buy order would automatically
be improved to \5/8\, which would result in an execution at a price
better than the last sale and, possibly, in violation of the short sale
rule; if the specialist selling at \5/8\ was short that security, a
short sale on a down tick has occurred automatically. The sell order is
currently eligible to be improved to \3/8\, without a potential short
sale rule violation.\11\
---------------------------------------------------------------------------
\10\ See Phlx Rule 455 and Section 10(a) of the Act.
\11\ The specialist would be the buyer in this case, and the
sell order could not be a sell short order, as such orders are not
accepted over the PACE System.
---------------------------------------------------------------------------
Instead, the Exchange proposes that in any situation where an
improved price would be better than the last sale, the order be stopped
at the PACE Quote when received. As stated in the proposal adopting
this provision, stopped orders are subject to Equity Floor Procedure
Advice A-2, such that specialists must display stopped orders at the
improved price \12\ 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. Thus, this change is
intended to eliminate potential short sale violations respecting PACE
orders to buy, and to correct the result that any order may receive
price improvement over the last sale. The Exchange does not believe it
is customary or appropriate to provide price improvement over the last
sale price. Price improvement generally takes the form of stopping
orders, where the next sale price can benefit the stopped order; the
last sale price also serves as a measure against the stop price. In
this regard, the Exchange notes that automatic price improvement on the
Chicago Stock Exchange (``CHX'') does not consist of price improvement
over the last sale.\13\ The proposal at hand is intended to create an
exception to providing automatic double-up/double-down price
improvement to eligible orders pursuant to rule 229.07(c)(i). As stated
above, this exception was omitted from the original proposal and serves
to complete that initiative for quick implementation of automatic price
improvement on the Phlx. Despite this exception, the essence of the
provision--to automatically improve eligible orders in double-up/
double-down situations--remains fundamentally preserved.
---------------------------------------------------------------------------
\12\ The order would be incorporated into the determination of
the Specialist's best bid and offer.
\13\ See CHX Rules Article XX, Rule 37.
---------------------------------------------------------------------------
[[Page 8512]]
2. Statutory Basis
The Exchange represents that the proposed rule change is consistent
with Section 6 of the Act,\14\ in general, and furthers the objectives
of Section 6(b)(5) \15\ in particular, in that it is designed to
promote just and equitable principles of trade and perfect the
mechanism of a free and open market and a national market system, by
correcting and clarifying the Phlx's double-up/double-down rule to more
accurately and fairly provide price improvement to PACE orders.
---------------------------------------------------------------------------
\14\ 15 U.S.C. 78f.
\15\ U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
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
Pursuant to Section 19(b)(3)(A) of the Act \16\ and Rule 19b-
4(e)(6) \17\ thereunder, the proposed rule change has become effective
upon filing as it effects a change that: (1) Does not significantly
affect the protection of investors or the public interest; (2) does not
impose any significant burden on competition; and (3) by its terms,
does not become operative for 30 days from the date of filing, or such
shorter time that the Commission may designate if consistent with the
protection of investors and the public interest. The Exchange has
provided written notice of its intent to replace the original filing
with this filing (Amendment No. 1). The Exchange has requested that the
Commission accelerate the operative date of the proposal in order for
the automatic double-up/double-down price improvement provision, as
amended, to become operative promptly.
---------------------------------------------------------------------------
\16\ 15 U.S.C. 78s(b)(3)(A).
\17\ 17 CFR 240.19b-4(e).
---------------------------------------------------------------------------
The Commission finds good cause for accelerating the operative date
of the proposal as of the date of this notice. Accelerating the
operative date of the proposal will enable the Exchange to begin using
its automatic double-up/double-down price improvement provision without
the possibility of violating the short sale rule. In addition, the
Exchange's representation that the POES window does not apply when
automatic price improvement or manual price protection are in place was
made in the original proposal; the current filing merely codifies this
treatment in Phlx's rule book.\18\ Finally, the Commission believes
that the proposed refinement to the automatic double-up/double-down
feature that stops certain orders at the PACE quote rather than
providing an immediate execution better than the last sale price is
consistent with the double-up/double-down protection program that is
employed by CHX.\19\ Although customers may not benefit from the
automatic double-up/double-down program to the extent the original
filing (Phlx 97-23) allowed, the revised program should still enhance
the quality of stock executions on Phlx. The Commission notes that the
original proposal was published for the full comment period during
which no comments were received.\20\ The Commission believes that the
proposal does not significantly affect the protection of investors or
the public interest and does not impose any significant burden on
competition. At any time within 60 days of the filing of the proposed
rule change, the Commission may summarily abrogate such rule change if
it appears to the Commission that such action is necessary or
appropriate for the public interest, for the protection of investors,
or otherwise in furtherance of the purposes of the Act.
---------------------------------------------------------------------------
\18\ See Securities Exchange Act Release No. 39548 (January 13,
1998), 63 FR 3596 (January 23, 1998).
\19\ See CHX Rules Article XX, Rule 37(b)(6).
\20\ See Securities Exchange Act Release No. 39548 (January 13,
1998), 63 FR 3596 (January 23, 1998) (order approving SR-Phlx-97-
23).
---------------------------------------------------------------------------
IV. 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. 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 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 at the
Commission's Public Reference Room. Copies of such filing also will be
available for inspection and copying at the principal office of the
Phlx. All submissions should refer to File No. SR-PHLX-98-05 and should
be submitted by March 12, 1998.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\21\
---------------------------------------------------------------------------
\21\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-4096 Filed 2-18-98; 8:45 am]
BILLING CODE 8010-01-M
