[Federal Register Volume 64, Number 169 (Wednesday, September 1, 1999)]
[Notices]
[Pages 47885-47886]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-22694]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-41789; File No. SR-Phlx-98-43]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change and Amendment Nos. 1, 2, and 3 by the Philadelphia Stock
Exchange, Inc. Adopting Proposed Rule 134 Regarding Stop-Order Bans and
Amendment Rule 229 To Require the Use of Account Identifiers for PACE
Users
August 25, 1999.
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 November 18, 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. On December 9, 1998, February 2, 1999, and July 14, 1999,
respectively, the Exchange filed Amendment Nos. 1,\3\ 2,\4\ and 3 \5\
to the proposal with the Commission. The Commission is publishing this
notice to solicit comments on the proposed rule change, including
Amendments Nos. 1, 2, and 3, from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See letter from Nandita Yagnik, Counsel, Phlx, to Michael
Walinskas, Deputy Associate Director, Division of Market Regulation
(``Division''), Commission, dated December 8, 1998 (``Amendment No.
1''). In Amendment No. 1, the Exchange corrects the reference to the
identifier ``P'' to refer to Principal orders not non-agency orders.
\4\ See letter from Nandita Yagnik, Counsel, Phlx, to Michael
Walinskas, Deputy Associate Director, Division, Commission, dated
February 1, 1999 (``Amendment No. 2''). In Amendment No. 2, the
Exchange proposes to adopt Rule 134, Commentary .01, Stop order
definition. In addition, the Exchange has amended proposed Rule
134(c)(iii) to state that any stop orders or stop limit orders on
the book may be canceled by the Exchange. The Exchange represents
that, by changing ``will'' to ``may,'' the Exchange retains
flexibility to determine whether stop orders on the book should be
canceled at the time the primary market institutes a stop order ban.
\5\ See letter from Nandita Yagnik, Counsel, Phlx, to Michael
Walinskas, Associate Director, Division, Commission, dated July 13,
1999 (``Amendment No. 3''). In Amendment No. 3, the Exchange
clarified that outstanding stop and stop limit orders cannot be
cancelled without the approval of two floor officials and a market
regulation officer. The Exchange also amended Rule 134(c)(iii) to
codify factors to be considered in determining whether stop and stop
limit orders on the book would be cancelled in the event that the
Exchange institutes a stop order ban in an individual stock. These
factors include: (1) If the primary market cancels stop orders
residing on their book; or (2) other unusual conditions or
circumstances.
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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 adopt Rule
134 to provide for stop order and stop limit order \6\ bans whenever
such orders are banned on the primary market. In addition, the Exchange
proposes to amend Phlx Rule 229 to require account identifiers for
orders submitted through the Phlx Automated Communication and Execution
(``PACE'') \7\ System.
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\6\ A stop order to buy (sell) becomes a market order when a
transaction in the security occurs at or above (below) the stop
price after the order is represented at the specialist post. A stop
limit order to buy (sell) becomes a limit order executable at the
limit price or at a better price, if obtainable, when a transaction
in the security occurs at or above (below) the stop price after the
order is presented at the specialist post.
\7\ PACE is an electronic order entry, delivery, and execution
system which operates on the equity floor pursuant to Phlx Rule 229.
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The text of the proposed rule change is available at the 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 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
The Exchange has previously adopted circuit breaker rules,
paralleling the rules of other exchanges.\8\ At this time, the Exchange
proposes, like other exchanges, to prohibit the entry of stop and stop
limit orders during times of market stress.\9\
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\8\ See Securities Exchange Act Release No. 39846 (April 9,
1998), 63 FR 18477 (April 15, 1998) (Order approving SR-PHLX-98-15).
\9\ See Boston Stock Exchange Rules Chapter II, Section 35(b);
and Chicago Stock Exchange Chapter IX, Rule 10B, .01(ii).
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Proposed Rule 134 will establish a procedure prohibiting the entry
of stop orders and stop limit orders in the following situations: (1)
whenever the primary market for a stock admitted to dealings on the
Exchange institutes a stop and stop limit order ban, the Exchange will
also ban such orders in the stock until such time as the ban in the
primary market is lifted; and (2) whenever the NYSE institutes a stop
and stop limit order ban pursuant to NYSE Rule 80A, the Exchange will
also ban stop and stop limit orders for the remainder of the day,
except that a member or member organization may enter a stop or stop
limit order of 2,099 shares or less for the account of an individual
investor pursuant to instructions received directly from the individual
investor.\10\
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\10\ The Commission has approved a proposed rule change (SR-
NYSE-98-45) to eliminate the stop and stop limit order ban under
Rule 80A. See Securities Exchange Act Release No. 41041 (Feb. 11,
1999), 64 FR 8424 (Feb. 19, 1999).
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The first instance where a stop order ban can occur is when the
primary market for the security issues a stop order ban. Following
notice from the Consolidated Tape, the Exchange will announce to the
floor and to PACE users that a stop order ban is in effect in the
particular issue. The entry of stop and stop limit orders on the Phlx
would be prohibited until the ban in the primary market is lifted and
that information is disseminated on the Consolidated Tape. However,
unlike the broad market ban described below, any stop or stop limit
orders residing on the specialist's book when a ban goes into effect
for an individual stock may \11\ be canceled by the Exchange with the
approval of two Floor Officials and a market regulation officer.\12\
This provision is consistent with the rules of the Boston Stock
Exchange.\13\
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\11\ See Amendment No. 2, supra note 4. The Commission notes
that, pursuant to Boston Stock Exchange Rules Chapter II, Section
35(b), any stop or stop limit orders residing on the specialist's
book when a ban goes into effect for an individual stock will be
canceled by the Exchange.
\12\ See Amendment No. 2, supra note 5.
\13\ See Boston Stock Exchange Rules Chapter II, Section 35(b).
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The Exchange believes that it is appropriate to ban stop orders and
stop limit orders when the primary market institutes a ban because, in
a volatile market, stop orders can accumulate at various prices and, if
triggered, the stop orders may increase price fluctuations in a
particular stock. Because other exchanges have adopted stop order ban
[[Page 47886]]
procedures, Phlx is concerned that a migration of stop and stop limit
orders to the Phlx could occur, thus causing a burden on Phlx
specialists.
The second situation automatically arises, pursuant to NYSE Rule
80A, when there is a 12 point decline in the Standard and Poor's 500
\14\ futures contract traded on the Chicago Mercantile Exchange. Once
implemented, the ban remains in effect until the end of the trading
day. Any stop and stop limit orders on the specialist's book at the
time the ban goes into effect remain eligible for execution.
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\14\ Standard & Poor's 500 Stock Index is a service mark of
Standard & Poors Corporation.
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The proposed rule creates an exception for the entry of a stop or
stop limit order of 2,099 shares or less for the account of an
individual investor pursuant to instructions received from the
individual investor. The Exchange defines the account of an individual
investor as an account covered by Section 11(a)(1)(E) of the Act.\15\
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\15\ An account covered by Section 11(a)(1)(E) of the Act is an
``account for a natural person, the estate of a natural person, or a
trust created by a natural person for himself or another natural
person.'' 15 U.S.C. 78k(a)(1)(E).
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The Exchange also proposes requiring PACE users to attach account
identifiers on orders submitted through PACE. Among other things, this
will allow the system to distinguish orders for the account of an
individual investor from other orders. Specifically, Rule 229,
Commentary .20 will require that all orders sent through PACE shall
include the appropriate account designator. The following are
acceptable account types: ``P''--principal order; \16\ ``A''--agency;
``I''--individual investor; ``D''--program trade, non-index arbitrage
for member/member organization; ``J''--program trade, index arbitrage
for individual customers; ``K''--program trade, non-index arbitrage for
individual customer; ``U''--program trade, index arbitrage for other
agency; and ``Y''--program trade, non-index arbitrage for other agency.
Orders for less than 2,099 shares with the account identifier of ``I''
would still be able to be entered during the duration of the ban. Other
orders will be automatically rejected by the PACE System.
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\16\ See Amendment No. 1, supra note 3.
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The Exchange believes that the account identifiers proposed in the
filing will enhance efficiency and accuracy of audit trail information
and will facilitate surveillance investigations by readily identifying
a member's proprietary trades. More accurate audit trail information
should also increase the effectiveness of the Exchange's surveillance
procedures.\17\ Member firms will be given notice following the
approval of the proposal to enable them to comply with new order
identification requirements.
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\17\ Telephone conversation between Nandita Yagnik, Counsel,
Phlx, and David Sieradzki, Special Counsel, Division, Commission, on
July 21, 1999.
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The purpose of the proposed rule is to reduce selling pressure by
preventing market professionals from entering orders during a market
sell-off as well as enhance market coordination of the circuit breaker
rules; in turn, the Phlx believes that the proposal should help reduce
market volatility. In addition, proposed Phlx Rule 134 should prevent
the migration of stop orders from the primary markets to the Phlx in
the case of extraordinary market volatility, which should prevent the
transfer of market volatility to the Phlx. The exception, which allows
individual investors to enter stop orders or stop limit orders for
2,099 shares or less, provides those investors who do not have the
ability to continuously monitor market conditions some measure of
downside protection in a rapidly moving market. Thus, the Exchange
believes that the proposal represents a reasonable effort and
coordinated means to address potential strain on the market that may
develop should the Exchange become inundated with such orders.
2. Statutory Basis
For the reasons stated above, the Exchange believes that proposed
Phlx Rule 134 and the amendment to Phlx Rule 229 are consistent with
Section 6(b)(5) of the Act \18\ in that they are designed to promote
just and equitable principles of trade and remove impediments to and
perfect the mechanism of a free and open market, by facilitating the
maintenance of an orderly market and reducing market volatility.
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\18\ 15 U.S.C. 78f(b)(5).
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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 appropriated and publishes its reasons 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-
0609. 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 will also be
available for inspection and copying at the principal office of the
Exchange. All submissions should refer to File No. SR-Phlx-98-43 and
should be submitted by September 22, 1999.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\19\
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\19\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-22694 Filed 8-31-99; 8:45 am]
BILLING CODE 8010-01-M
