[Federal Register Volume 63, Number 51 (Tuesday, March 17, 1998)]
[Notices]
[Pages 13083-13087]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-6763]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-39740; File No. SR-Phlx-98-10]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Philadelphia Stock Exchange, Inc. Relating to Automatic
Price Improvement for Certain PACE Orders
March 10, 1998.
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, February 10, 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. 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 Phlx, pursuant to Rule 19b-4 of the Act, proposes to amend Rule
229, Philadelphia Stock Exchange Automatic Communication and Execution
(``PACE'') System,\3\ Supplementary Material .07(c), Double-up/Double-
down Situations, to adopt a new automatic price improvement initiative
for PACE orders. Specifically, specialists could voluntarily choose to
provide automatic price improvement of \1/16\ to eligible orders where
the PACE Quote \4\ is \1/8\ or greater, or \3/16\ or greater. Eligible
orders would be automatically executable market and marketable limit
orders \5\ in New York Stock Exchange or American
[[Page 13084]]
Stock Exchange listed securities received through PACE beginning at
9:45 A.M., in sizes of 599 shares or less (or the specialist's higher
automatic execution guarantee size).
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\3\ PACE is the Exchange's automatic order routing and execution
system for securities on the equity trading floor.
\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.
\5\ 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 the specified price.
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However, the proposed automatic price improvement feature would not
price improve in certain situations. First, where a buy order would be
improved to a price less than the last sale or a sell order would be
improved to a price higher than the last sale, the order is not
eligible for automatic price improvement, and is, instead,
automatically executed at the PACE Quote. Similarly, where a buy order
would be improved to the last sale price which is a down tick, or where
a sell order would be improved to the last sale price which is an up
tick, the order is also not eligible for automatic price improvement,
and is, instead, automatically executed at the PACE Quote.
Certain limitations regarding automatic price improvement are
similar to the current double-up/double-down program.\6\ For instance,
odd-lot orders would not be eligible for the proposed automatic price
improvement.\7\ Nor would it be available where the execution price
before or after the application of automatic price improvement would be
outside of the primary market high/low range of the day. Further, only
automatically executable orders would be eligible for automatic price
improvement.\8\
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\6\ Securities Exchange Act Release No. 39548 (January 13,
1998), 63 FR 3596 (January 23, 1998) (``Double-Up/Double-Down
Order'').
\7\ The paragraph concerning odd-lots is being moved from Rule
229.07(c)(i)(B) to (c)(i)(C). Respecting manual price protection,
odd-lot orders are specifically addressed in Rule 229.07(c)(ii).
\8\ For example, orders exceeding the specialist's automatic
execution guarantee size would not be eligible, because the feature
depends on automatically improving orders guaranteed a certain
automatic execution price.
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Under the proposal, specialists may choose whether to participate
in automatic price improvement, as opposed to the mandatory manual
double-up/double-down price protection of Rule 229.07(c)(ii).\9\ If a
specialist elects to provide automatic price improvement, they must
further determine whether to price improve in \1/8\ or greater markets,
or \3/16\ or greater markets.\10\ Necessarily, specialists who choose
price improvements in \1/8\ wide markets automatically agree to price
improve in \3/16\ or greater markets. However, although choosing
automatic price improvement in \3/16\ or greater markets obviously does
not trigger automatic price improvement in \1/8\ wide markets, the
manual double-up/down price protection provision may be triggered, such
that eligible orders would be stopped in \1/8\ wide markets; in this
situation, no automatic price improvement would be given, even in
double-up/down situations.\11\
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\9\ Specifically, where the specialist does not agree to provide
automatic double-up/down price improvement in a security, in any
instance where the bid/ask of the PACE Quote is more than \1/8\,
beginning at 9:45 A.M., the specialist must provide manual double-
up/down price protection to all customers and all eligible orders in
a security. The manual double-up/down price protection feature
causes eligible market and marketable limit orders of 599 shares or
less in New York Stock Exchange or American Stock Exchange listed
securities received through PACE in double-up/down situations to be
stopped at the PACE Quote at the time of entry into PACE. Manual
double-up/down price protection does not provide an automatic
execution or automatic price improvement. Instead, this feature
stops orders to provide an opportunity for manual price improvement
in double-up/down situations.
\10\ The specialist's choice to provide automatic price
improvement, select \1/8\ or \3/16\ markets, establish an order size
maximum and switch between the automatic and manual features may be
changed, effective the next day. Member organizations entering PACE
orders would be notified of such changes.
\11\ 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 intra-day change on the primary market.
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Although the proposed automatic price improvement proposal will be
voluntary, all specialists will still be required to provide manual
double-up/double-down tick price protection to eligible orders (\1/8\
markets. This feature provides that eligible orders will be stopped at
the PACE Quote when received for an opportunity for price improvement.
Automatically executable market orders not eligible for double-up/down
price protection will continue to be stopped for the 30 second POES
window, and then automatically executed.\12\
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\12\ See Phlx Rule 229.05 and Securities Exchange Act Release
No. 39275 (October 8, 1997), 62 FR 54147 (October 17, 1997) (SR-
Phlx-97-32). Rule 229.05 provides that round-lot markets 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 specialist with an
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. Further, 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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The new automatic price improvement feature will replace the
current automatic double-up/double-down price improvement feature of
Rule 229.07(c)(i). Thus, the Exchange is proposing to retitle Rule
229.07(c) as ``Price Improvement for PACE Orders.'' Further, the
Exchange is proposing to delete the term ``double-up/double-down'' when
paired with automatic price improvement throughout the Rule to reflect
that automatic price improvement will no longer be limited to double-
up/double-down situations. The definition of a double-up/double-down
situation is thus being moved from Rule 229.07(c)(i)(A) to (c)(ii). The
language relating to \1/4\ wide markets is also proposed to be deleted
and replaced with the specialist's choice of \3/16\ or \1/8\ as the
minimum market width to activate automatic price improvement;
furthermore, price improvement of \1/8\ will be replaced with \1/16\.
The language creating an exception to automatic double-up/double-down
price improvement better than the last sale will be deleted and
replaced with reference to the two situations where an order would not
receive the new, proposed automatic price improvement; such orders
would be automatically executed at the PACE Quote. Lastly, Rule
229.10(a) would be amended to cover marketable limit orders.
The text of the proposed rule change is available at the Office of
the Secretary, CBOE 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 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
As stated above, 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.
[[Page 13085]]
Currently, paragraph (c)(i), Automatic Double-up/Double-down Price
Improvement, states that where the specialist voluntarily agrees to
provide automatic double-up/double-down price improvements to all
customers and all eligible orders in a security, in any instance where
the bid/ask of the PACE Quote is \1/4\ or greater, market and
marketable limit orders in New York Stock Exchange or American Stock
Exchange listed securities received through PACE in double-up/double-
down situations for 599 shares or less shall be provided with automatic
price improvement of \1/8\, beginning at 9:45 A.M. A specialist may
also voluntarily agree to provide automatic double-up/double-down price
improvement to larger orders in a particular security to all customers
under this provision.
As a further effort to champion the principle of best execution,
the Exchange is proposing a more comprehensive automatic price
improvement initiative. Specifically, specialists could choose to
provide \1/16\ automatic price improvement to eligible orders in \1/8\
or greater markets, or \3/16\ or greater markets. Thus, as compared to
the current automatic price improvement feature for double-up/double-
down situations which is limited to \1/4\ wide markets or greater, the
universe of orders eligible for the proposed feature would be expanded.
Further, the proposal involves automatic price improvement without
requiring a double-up/double-down situation. This again expands the
benefits of price improvement to a larger universe of eligible orders.
Nevertheless, automatic price improvement would not occur in two
situations. First, automatic price improvement would not occur to a
price better than the last sale. More specifically, where a buy order
would be improved to a price less than the last sale or a sell order
would be improved to a price higher than the last sale, the order is
not eligible for automatic price improvement, and is, instead,
automatically executed at the PACE Quote. The following are examples
\13\ of this exception (not improving over the last sale):-
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\13\ These examples consist of the PACE Quote, the last sale
price with an up or down tick indicator, and the price at which a
buy and sell order, respectively, would be executed.
23-23\1/8\
LS 23+ or -
Buy improved to \1/16\
Sell executed at 23
23-23\1/8\
LS \1/8\+ or -
Buy executed at \1/8\
Sell improved to \1/16\
23-23\3/16\
LS 23+ or -
Buy improved to \1/8\
Sell executed at 23
23-23\3/16\
LS \3/16\+ or -
Buy executed at \3/16\
Sell improved to \1/16\
This is similar to the current exception from automatic double-up/
double-down price improvement; \14\ however, currently, where an
improvemed price would be better than the last sale, the order would be
stopped at the PACE Quote when received. Under this proposal, the order
would be automatically executed at the PACE Quote when received.
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\14\ See Securities Exchange Act Release No. 39640 (February 10,
1998), 63 FR 8510 (February 19, 1998), which creates an exception
where such price improvement would be better than the last sale
price (for instance, a buy order would be improved to a price less
than the last sale or a sell order would be improved to a price
higher than the last sale); pursuant to this exception, such orders
are stopped by the specialist at the PACE Quote when received,
meaning that the order is guaranteed to receive at least that price
by the end of the trading day.
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Second, where a buy order would be improved to the last sale price
which is a down tick, or where a sell order would be improved to the
last sale price which is an up tick, the order is also not eligible for
automatic price improvement, and is, instead, automatically executed at
the PACE Quote. The following are examples of the exception to
automatic price improvement respecting improvement to the last sale:
23-23\1/8\
LS \1/16\-
Buy executed at \1/8\
Sell improved to \1/16\
23-23\1/8\
LS \1/16\+
Buy improved to \1/16\
Sell executed at 23
23-23\3/16\
LS \1/8\-
Buy executed at \3/16\
Sell improved to \1/16\
23-23\3/16\
LS \1/8\+
Buy improved to \1/8\
Sell improved to \1/16\
23-23\3/16\
LS \1/16\ -
Buy improved to \1/8\
Sell improved to \1/16\
23-23\3/16\
LS \1/16\+
Buy improved to \1/8\
Sell executed at 23
23-23\1/4\
LS\1/8\+or-
Buy improved to \3/16\
Sell improved to \1/16\
These exceptions are intended to cover situations where automatic
price improvement may not be appropriate in light of overall market
conditions. In this regard, the Exchange does not believe it is
customary or appropriate to provide price improvement over the last
sale price, or, in every case, to 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.\15\ Despite these
exceptions to automatic price improvement under this proposal, the
Exchange believes that automatic price improvement would be afforded in
a meaningful way, considering the wider breadth of eligible orders.
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\15\ 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. See CHX Article XX, Rule
37.
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This proposal would result in automatic price improvement of \1/
16\, as opposed to the current automatic double-up/double-down price
improvement, which provides for \1/8\ price improvement. Although the
amount of automatic price improvement will be less under the proposal
for a particular order, the number of orders receiving price
improvement of \1/16\ should increase, as explained above. Price
improvement of \1/16\ recognizes that \1/16\ is the current minimum
trading increment for PACE issues on the Exchange's equity trading
floor.\16\ Thus, it reflects the reality of today's marketplace,
including other price improvement initiatives in the industry.
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\16\ See Phlx Rule 125.
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Because the proposal would provide automatic price improvement, no
POES window would occur, similar to the current automatic double-up/
double-down price improvement provision.\17\ Instead, an automatic
execution occurs at an improved price, with no window, timer or delay.
Orders not eligible for automatic price improvement due to the two
exceptions relating to the last sale price are automatically executed
at the PACE Quote and not subject to the
[[Page 13086]]
POES delay. Where an order is otherwise not eligible for the proposed
automatic price improvement, the POES window may apply.
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\17\ See Double-Up/Double-Down Order, supra note 6, at note 10
and Securities Exchange Act Release No. 39640 (February 10, 1998),
63 FR 8510 (February 19, 1998).
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Automatic price improvement will not occur where the execution
price before or after the application of automatic price improvement
would be outside the primary market high/low range for the day, if so
elected by the entering member organization. This limitation currently
appears in Rule 229.07(c)(i)(C), and has applied to both automatic
double-up/double-down price improvement and manual double-up/double-
down price protection. Similarly, pursuant to paragraph (c)(iii), the
provision that member organizations entering orders may elect to
participate in manual double-up/double-down price protection continues
to apply. However, member organizations will not have the ability to
elect the proposed automatic price improvement feature.
Currently, both the automatic double-up/double-down price
improvement and manual price protection features are jointly subject to
the entering firm's election.\18\ As a result, electing these features
where the specialist has not chosen automatic double-up/double-down
price improvement in that security may currently cause a firm's orders
to be stopped. Thus, firms who do not want their orders stopped because
they prefer a prompt execution can currently elect out of both
features.
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\18\ This election must be made for all Phlx stocks, not
security-by-security. See Double-Up/Double-Down Order, supra note 6,
at note 22.
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Once automatic price improvement is no longer limited to double-up/
double-down situations, the election for automatic price improvement
will end, because the reason for allowing a firm's choice will no
longer exist. Under this proposal, firms electing out of manual price
protection could nevertheless receive automatic price improvement. For
instance, where a specialist switches from manual to automatic price
improvement for a security, the automatic feature would be activated
even for firms that elected out of the manual feature. This proposal
results in an assumption, and thus requirement, that all entering firms
accept automatic price improvement from a participating specialist.\19\
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\19\ The Exchange believes that it is typical of competitors'
automatic price improvement initiatives not to allow an opt-out.
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The Exchange notes that the manual double-up/double-down price
protection provision, which is mandatory for specialists, will continue
to be subject to an election by entering member organizations,\20\ who
may continue to prefer a prompt execution over the opportunity for
price improvement. Failure to elect will result in the activation of
the double-up/double-down feature for that User. Specialists continue
to determine whether to provide automatic price improvement in a
particular security.
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\20\ A firm's election continues to apply to all Phlx stocks,
not security-by-security.
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The extraordinary circumstances provision currently in the Rule
would also apply to the new feature, such that automatic price
improvement may be disengaged in a security or floor-wide in
extraordinary circumstances with the approval of two Floor Officials.
In addition to fast market conditions, for purposes of this paragraph,
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.
The Exchange has determined that, as with many PACE features and
participation in the PACE System itself, automatic 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.\21\ The availability of a price improvement feature benefits
the specialist function, especially in high-volume securities, where
stopping orders and manual intervention are time-consuming, delay
execution and do not necessarily result in price improvement. The
proposed feature triggers a superior result--an immediate automatic
execution, with no specialist intervention or delay.
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\21\ Some securities are not appropriate for automatic price
improvement due to, for instance, liquidity, trading patterns and
volatility situations rendering it unfair for specialists to afford
price improvement automatically and then manage the resulting
positions. See Double-Up/Double-Down Order, supra note 6, at note
11.
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2. Statutory Basis
The Exchange represents that the proposed rule change is consistent
with Section 6(b)(5) of the Act \22\ in that it is designed to promote
just and equitable principles of trade, remove impediments to and
perfect the mechanism of a free and open market and a national market
system, as well as to protect investors and the public interest by
providing an opportunity for automatic price improvement to eligible
orders. In approving the existing price improvement/protection program,
the Commission noted that price improvement opportunities may enhance
intermarket competition and order execution quality.\23\
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\22\ 15 U.S.C. 78f(b)(5).
\23\ See Double-Up/Double-Down Order, supra note, 6.
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The Exchange also believes that the proposal is consistent with
Section 11A \24\ of the Act, and paragraph (a)(1) \25\ thereunder,
which encourages the use of new data processing and communication
techniques that create the opportunity for more efficient and effective
market operations. Specifically, the proposal is consistent with the
public interest and investor protection purposes of Section 11A, in
that it should assure the practicability of executing customer orders
in the best market as well as an opportunity for investors' orders
being executed without the participation of a dealer.
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\24\ 15 U.S.C. 78k-1.
\25\ 15 U.S.C. 78k-1(a)(1).
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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 inappropriate burden on competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
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 Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reason for so finding or (ii) as to
which the self-regulatory organization 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 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
[[Page 13087]]
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 Exchange. All
submissions should refer to File No. SR-Phlx-98-10 and should be
submitted by April 7, 1998.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\26\
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\26\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-6763 Filed 3-16-98; 8:45 am]
BILLING CODE 8010-01-M
