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

[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]


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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.
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    \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).
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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.
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    \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.
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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\.
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    \5\ See supra note 3.
    \6\ Hereinafter, all references to the last sale price are to 
the last regular way sale.
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    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.
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    \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.
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    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.
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    \9\ See Securities Exchange Act Release NO. 39548 (January 13, 
1998), 63 FR 3596 (January 23, 1998), at note 22.
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    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\
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    \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.
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    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.
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    \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.

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[[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.
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    \14\ 15 U.S.C. 78f.
    \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

    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.
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    \16\ 15 U.S.C. 78s(b)(3)(A).
    \17\ 17 CFR 240.19b-4(e).
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    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.
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    \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).
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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\
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    \21\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-4096 Filed 2-18-98; 8:45 am]
BILLING CODE 8010-01-M