[Federal Register Volume 59, Number 189 (Friday, September 30, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-24272]
[[Page Unknown]]
[Federal Register: September 30, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34717; File No. SR-Phlx-91-20]
Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.;
Order Granting Approval to Proposed Rule Change Relating to Equity
Floor Procedure Advice E-A-1--Responsibility for Displaying Best Bid
and Offer Prices
September 26, 1994.
On July 15, 1991, as subsequently amended on June 23, 1994,\1\ and
July 14, 1994,\2\ 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'')\3\ and Rule 19b-4
thereunder,\4\ a proposed rule change to adopt Phlx Equity Floor
Procedure Advice (``EFPA'') E-A-1: Responsibility for Displaying Best
Bid and Offer Prices Established on the Equity Floor (the ``Advice'').
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\1\See letter from Gerald D. O'Connell, First Vice President,
Phlx, to Sharon Lawson, Assistant Director, SEC, dated June 23,
1994.
\2\See letter from Gerald D. O'Connell, First Vice President,
Phlx, to Sandra Sciole, Special Counsel, SEC, dated July 14, 1994.
This amendment, which is available in the Commission's Public
Reference Room, changed ``national exchanges'' to ``national
securities exchanges'' in the text of the Equity Floor Procedure
Advice. This change was technical in nature and has no substantive
impact on the original filing.
\3\15 U.S.C. 78s(b)(1) (1988).
\4\17 CFR 240.19b-4 (1993).
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The proposed rule change, including amendment no. 1, was published
for comment in Securities Exchange Act Release No. 34342 (July 11,
1994), 59 FR 36244 (July 15, 1994). No comments were received on the
proposal.
The Advice being adopted requires specialists to display the best
bid and offer available in their assigned securities. The specialists'
responsibility will be different for primary stock issues\5\ and
secondary stock issues.\6\ For primary securities, specialists' will be
responsible for ensuring that the best bid and offer voiced on the
floor of the Exchange is properly and timely displayed for
dissemination purposes. For securities in which the specialists make
secondary markets, specialists will be responsible for ensuring proper
and timely display of the best bid or offer so long as such bid or
offer is equal to or superior to all other bids or offers reflected and
disseminated at the time by the national securities exchanges.
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\5\A primary stock issue is any security listed on the Phlx
which is not listed on any other national securities exchange or any
issue dually listed with another exchange for which the Phlx has
traded the majority of exchange volume over the previous six months.
\6\Secondary issues are all securities in which Phlx specialists
make secondary markets, i.e., all securities not classified as
primary issues. See note 5, supra.
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In addition, the Advice will be included in the Exchange's minor
rule plan.\7\ The fine schedule below will be applied when an Exchange
review identifies that five percent or more of the bids or offers have
not been properly displayed in a timely fashion. The following schedule
will be implemented on a three year running calendar basis:\8\
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\7\See letter from Gerald D. O'Connell, First Vice President,
Phlx, to Sandra Sciole, Special Counsel, SEC, dated August 18, 1994.
The Exchange's minor rule plan is administered pursuant to Phlx Rule
970 (Floor Procedure Advices: Violations, Penalties, and
Procedures). Under Phlx Rule 970, in lieu of commencing a
disciplinary proceeding under Phlx Rule 960, the Exchange may impose
a fine, not to exceed $2,500, for any violation of a Floor Procedure
Advice if the Exchange has determined the violation is minor in
nature.
\8\In November 1993, the commission approved a Phlx proposal to
place nine Advices on a three-year rolling cycle for the imposition
of fines. See Securities Exchange Act Release No. 33130 (November 2,
1993), 58 FR 59502 (November 9, 1993). Under the three-year rolling
cycle, a violation of Advice E-A-1 that occurs within three years of
the first violation of the Advice will be treated as a second
occurrence, and any violation of the Advice within three years of
the previous violation of the Advice will be subject to the next
highest fine. Thus, a third violation of Advice E-A-1 within less
than three years after a fine for a second violation of Advice E-A-1
will be treated as a third violation of that Advice, even though
more than three years may have elapsed since the first violation of
Advice E-A-1.
Floor Procedure Advice E-A-1
1st occurrence...... $100.00
2nd occurrence...... 250.00
3rd occurrence...... 500.00
4th and thereafter.. Sanction is discretionary with Business Conduct
Committee.
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).\9\ In particular,
the Commission believes the proposal is consistent with Section 6(b)(5)
requirements that the rules of an exchange be designed to promote just
and equitable principles of trade, to prevent fraudulent and
manipulative acts, and, in general, to protect investors and the public
interest.
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\9\15 U.S.C. 78f(b) (1988).
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The Commission has long believed that transparency plays a
fundamental role in the fairness and efficiency of the secondary
markets. Transparency may be defined as the extent to which trading
information (i.e., information regarding quotations, price, and volume
of transactions) is made publicly available promptly after either the
entry of a quotation or the completion of a transaction. As the
Commission's Division of Market Regulation (``Division'') stated in its
Market 2000 Study,\10\ at least three tangible benefits flow from
transparency: (1) Transparency enhances investor protection because it
makes it easier for investors to monitor the quality of executions they
receive from their intermediaries, (2) transparency encourages investor
participation in the market, and thereby promotes market liquidity, and
(3) transparency fosters the efficiency of securities markets by
facilitating price discovery and open competition, and thus counteracts
the effects of fragmentation.\11\
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\10\See Division of Market Regulation, Market 2000: An
Examination of Current Equity Market Developments (January 1994).
\11\Id. at IV-2.
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The Division noted in the Market 2000 Study that the failure to
display limit orders that are priced better than current quotes raises
at least three regulatory concerns. First, the failure to display limit
orders could artificially widen spreads, which raises the concern that
investors are receiving unfair prices. Second, the failure to display
limit orders raises fair competition concerns. If the quotes from a
market or market maker do not fully represent the buying and selling
interest, markets will lose incentives to compete based on quotes, and
the price discovery process may be impaired. Third, with many markets
offering automatic executions of small orders at the best displayed
quotes, a failure to display the best quotes results in inferior
executions for some small-order customers. The Division therefore
recommended that the SROs encourage the display of all limit orders in
listed stocks that are better than the best intermarket quotes (unless
the ultimate customer expressly requests that an order not be
displayed), noting that such a requirement would provide a more
accurate picture of trading interest, result in tighter spreads, and
contribute to improved price discovery.\12\
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\12\Id. at IV-6.
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The Commission believes that the Phlx proposal will result in
increased transparency to the benefit of investors. In particular, the
Commission believes that the portion of Advice E-A-1 which requires
specialists to display the best bid or offer price on the floor for
primary stock issues will be beneficial because it should increase
transparency and provide an indication of market interest for stocks in
which Phlx is the primary market. For secondary issues, the
requirements for the display of bids and offers will also be beneficial
to market participants because it will provide to other market centers
in the national market system all Phlx bids and offers that are equal
to or superior to bids and offers displayed in the system. Such a
standard is consistent with the discussion of limit order display in
the Market 2000 Study, noted above.
The Commission also believes that it is appropriate to include
Advice E-A-1 in the Phlx's minor rule plan because a violation of the
dissemination requirements for the best bids or offers should not
entail the complicated factual and interpretative inquiries associated
with more sophisticated Exchange disciplinary actions under Phlx Rule
960. The Commission further believes that the fine schedule, which is
graduated to account for repeat offenders and will be administered on a
three-year rolling calendar basis under the Phlx's minor rule plan,
should provide a prompt, effective and appropriate means to enforce
compliance with the Advice. Moreover, under the Phlx's minor rule plan,
a person fined under the Advice will be permitted to contest the fine
pursuant to Phlx Rule 970 and will be entitled to full due process.
It Is Therefore Ordered, pursuant to Section 19(b)(2) of the
Act,\13\ that the proposed rule change (SR-Phlx-91-20) is approved.
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\13\15 U.S.C. 78s(b)(2) (1988).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\14\
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\14\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-24272 Filed 9-29-94; 8:45 am]
BILLING CODE 8010-01-M
