[Federal Register Volume 61, Number 149 (Thursday, August 1, 1996)]
[Notices]
[Pages 40276-40279]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-19531]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37479; File No. SR-Phlx-96-25]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Philadelphia Stock Exchange, Inc., Relating to the
Adoption of Automatic Double-Up/Double-Down Price Improvement for
Eligible PACE Orders
July 25, 1996.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''), 15 U.S.C. Sec. 78s(b)(1), notice is hereby given that on
July 1, 1996, the Philadelphia Stock Exchange, Inc. (``Phlx'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change and on July 23, 1996,
submitted Amendment No. 1 to the proposed rule change,\1\ as described
in Items I, II, and
[[Page 40277]]
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\ See letter from Gerald D. O'Connell, Senior Vice President,
Phlx, to Jennifer Choi, Attorney, Division of Market Regulation,
SEC, dated July 19, 1996 (``Amendment No. 1''). Amendment No. 1
clarifies the examples of the double-up/double-down price
improvement proposal and certain elements of the proposal. Moreover,
Amendment No. 1 provides the history of the 30-second order exposure
window proposal. These descriptions and changes are incorporated
into Items I, II, and III below.
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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
paragraph (c) to Supplementary Material .07 of Rule 229, Philadelphia
Stock Exchange Automatic Communication and Execution (``PACE'') System.
The purpose of the new provision is to automatically provide double-up
and double-down price improvement of the minimum variation,\2\ usually
\1/8\ point, to PACE market orders in New York Stock Exchange and
American Stock Exchange listed securities. PACE is the Exchange's
automatic order routing and execution system for securities on the
equity trading floor.
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\2\ Pursuant to Rule 125, bids and offers are generally made at
a variation of \1/8\ of one dollar ($1.00) in stocks. With respect
to American Stock Exchange listed stocks trading under $10, the
minimum variation is \1/16\.
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Specifically, in any instance where the bid/ask of the PACE quote
is wider than the minimum variation, eligible market orders received
through PACE shall be provided with double-up/double-down price
improvement. For purposes of this provision, double-up/double-down
price improvement would be required whenever a double-up or double-down
situation occurs with respect to the execution price of a PACE order.
More specifically, a double-up/double-down situation occurs whenever an
order is guaranteed an execution at the PACE quote resulting in a trade
that creates: (i) a plus or minus tick that is two minimum variation
ticks (up or down) from the last regular way sale on the primary
market; or (ii) a tick that is at least two (up or down) minimum
variation ticks from the regular way sale previous to the last regular
way sale in the security on the primary market.
Orders eligible for such price improvement must be of a size equal
to or less than the established maximum order size, determined as a
fixed number of shares for all specialist units by the Floor Procedure
Committee (``Committee''). A specialist may determine to provide
double-up/double-down price improvement to eligible orders larger than
the size established by the Committee, which is thus a ``minimum''
size.
Price improvement will be automatically accorded by the PACE system
to qualified orders, which will be automatically executed at the
improved price. However, in the event that this automatic execution
feature of PACE is not functioning and unable to provide an automatic
execution, it shall be the responsibility of the specialist to ensure
price improvement treatment to eligible PACE orders on a manual basis
in accordance with the proposed provisions. In extraordinary
circumstances, the Committee Chairman or his designee may grant an
exemption from the requirement of double-up/double-down price
improvement.\3\
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\3\ Specifically, the Exchange anticipates that extraordinary
circumstances warranting such action will arise when fast market
conditions occur where stock prices are not readily discernable over
interrogation devices as well as where system malfunctions occur.
See Amendment No. 1, supra note 1.
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In addition, the Exchange proposes to amend Supplementary Material
.05 by titling the provision ``Public Order Exposure System'' or
``POES,'' as it is known at the Exchange, as well as to reflect a 30
second time period, in lieu of 15 seconds.\4\
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\4\ According to the Exchange, the POES window was extended from
15 to 30 seconds in December 1995 with the authorization of the
Committee. Due to an oversight, the Exchange did not file this
change as a proposed rule change with the Commission for approval
prior to its implementation. After discovering this error in the
course of drafting PACE Rule changes with respect to double-up/
double-down price improvement, the Exchange filed this change with
the Commission. The Exchange also represents that to date it has not
distributed marketing materials reflecting an order exposure window
of 30 seconds. See Amendment No. 1, supra note 1. The Commission
notes that while the Phlx is currently using the 30-second order
exposure window, the change from the 15-second to 30-second window
is not officially effective until the Commission approves this
proposed rule change.
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The text of the proposed rule change is available at the Exchange
and 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
Generally, Rule 229 governs the PACE system and defines its
objectives and parameters. PACE accepts orders for automatic or manual
execution in accordance with the provisions of the Rule. Agency orders
received through PACE are subject to certain minimum execution
parameters, with non-agency orders subject to the provisions of
Supplementary Material .02. The PACE Rule establishes execution
parameters for orders depending on type (market or limit) and size. The
execution of limit orders is governed by Supplementary Material .09 and
.10. With respect to market orders, Supplementary Material .05, .06,
.07 and .08 apply.
Currently, 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 \5\ at the time
of entry into PACE for 30 seconds to provide the Phlx specialist with
the opportunity to effect price improvements when the spread between
the PACE quote exceeds \1/8\ point.\6\ This ``30 second order exposure
window,'' which is also known as the Public Order Exposure System
(``POES''), ensures that stopped orders are automatically executed at
the stopped price after 30 seconds. At this time, the Exchange proposes
to codify the 30 second time period into Supplementary Material .05,
which currently reflects the prior 15 second window. The Exchange
believes that extending the window to 30 seconds enables the specialist
to better gauge the market and thus, improves the likelihood of price
improvement. The Exchange has learned, in its one year of experience
with this order exposure window, that additional time for a meaningful
opportunity for price improvement to be afforded to such orders is
needed. The 30 second window enables the specialist to better locate
between-the-market interest and probe other market centers. Of course,
a large percentage of orders that are currently POES-eligible will also
be eligible for the proposed automatic double-up/double-down price
improvement. In such case, as explained
[[Page 40278]]
below, the order will not be stopped by POES, but will instead be
immediately executed at the improved price.
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\5\ 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 Rule
229.
\6\ Securities Exchange Act Release No. 35283 (Jan. 26, 1995),
60 FR 6333 (SR-Phlx-94-58).
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In addition, Supplementary Material .07 states that a member
organization may choose to have such an order executed manually at or
within the New York high-low range of the day. Pursuant to paragraph
(b), orders greater than the sizes stated in Supplementary Material .05
as execution parameters for market orders (round-lots of 600-1,000
shares and PRLs of 601-1099 shares, or such greater size that the
specialist agrees to accept) are not subject to the execution
parameters of the Rule.\7\
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\7\ However, the odd-lot portion of PRLs of 601 or more shares
shall be executed at the same price as the round-lot portion, or the
last such portion executed.
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Currently, the PACE market orders, subject to the execution
standards explained above, are executable at the PACE Quote, meaning
the best bid/offer at the time the order is received by PACE. In
certain situations, these orders can be ``stopped'' at that price by
the specialist, meaning that the order is guaranteed to receive at
least that price. As explained above, the 30 second order exposure
window provides an example of stopping stock in order to seek price
improvement. The purpose of stopping an order is to seek a better price
for the order, by probing the market further or facilitating the order
in its proprietary account at that better price.
At this time, the Exchange proposes to adopt a double-up/down price
improvement provision for PACE market orders up to a size determined by
the Committee. The Exchange expects to provide the Commission with a
fixed size shortly.\8\ Thereafter, the Committee will review this
threshold as needed, but no less than on a semi-annual basis. The
purpose of the proposed provision is to provide automatic price
improvement to eligible orders. As part of a continued effort to
improve its execution parameters and promote the principle of best
execution, the Exchange is proposing to adopt an automatic price
improvement provision to apply in double-up and double-down situations.
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\8\See Amendment No. 1, supra note 1.
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Under the proposal, ``double-up/double-down'' is defined as an
execution resulting in a trade that creates: (i) a plus or minus tick
that is two minimum variation ticks (up or down) from the last regular
way sale on the primary market; or (ii) a tick that is at least two (up
or down) minimum variation ticks from the regular way sale previous to
the last regular way sale in the security on the primary market. For
example, where the PACE quote is 22\1/2\-\3/4\, if the last sale was a
down tick at \5/8\, a double-up/double-down situation would not occur
for a market order to buy because buying at \3/4\ is a single up of \1/
8\, but would for a sell order because selling at \1/2\ is a down tick
from \5/8\, creating a double down tick. Where the market is 22\1/4\-
\3/4\, with the last sale at \1/2\, the provision would apply to a
market order to buy or sell because buying at \3/4\ creates a two-
variation up tick (two \1/8\ ticks from \1/2\) and selling at \1/4\
creates a two-variation down tick. If, with the market at 22\3/8\-\5/
8\, the last sale was at \3/4\ and the previous sale to that was at \1/
2\, the provision would apply to a sell order because selling at \3/8\
creates a two-variation down tick (more than two \1/8\ ticks from \3/
4\, but not a buy order because \5/8\ is not more than \1/8\ from the
last sale of \3/4\ and is not the second consecutive up or down tick
from the previous sale. If, again with the market at 22\3/8\-\5/8\, the
last sale was at \5/8\ and the previous sale to that was at \1/2\, the
provision would apply to a market order to sell because selling at \3/
8\ creates a two-variation down tick (from \5/8\), but not a buy order
because buying at \5/8\ is simply a trade at the last price.
To explain the interaction between the 30 second order exposure
window and the proposal at hand, assuming the market is 15\1/2\-\3/4\
and the sale is 15\1/2\, an order to buy 500 would be subject to
double-up/double-down price improvement because buying at \3/4\ creates
a two variation up tick from \1/2\ sale. The order would be
automatically executed under the proposal at 15\5/8\ (if \1/8\ is the
minimum variation in that security) and no 30 second window would
occur. If, on the other hand, the order was to sell 500 shares, double-
up/double-down would not apply because selling at \1/2\ does not create
an up or down tick; this order would be POES-eligible such that the 30
second window would apply.
The Exchange is proposing to extend its price improvement
initiative to double-up and double-down situations because these are
particularly suitable for price improvement. Specifically, when the
current market is two ticks away from the last sale price, with this
trend continuing, as evidenced by consecutive up or down ticks, it is
consistent with the role of the specialist to enter into stabilizing
transactions on behalf of public customers. Instead of affording an
automatic execution at the PACE quote, the proposal improves on that
price. Thus, automatically executed orders continue to receive the
important benefits of speedy execution and reporting, while also
receiving price improvement. Heretofore, price improvement was
synonymous with delay. Now, price improvement would be automatic for
eligible orders. The Exchange notes that the proposal enables
specialists to extend this innovative price improvement procedure to
larger orders, and that the Committee may change the minimum size as
competitive conditions warrant. In summary, the Exchange believes that
this automatic price improvement feature adds an expedient benefit to
PACE.
2. Statutory Basis
As explained above, the Exchange believes that the proposed rule
change is consistent with Section 6 of the Act in general, and in
particular, with Section 6(b)(5), 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 automatic price improvement to eligible orders and extending
the order exposure window to 30 seconds.
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 ay
designate up to 90 days of such date if it finds such longer period to
be appropriate 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 whehter 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. Persons making written submissions
should file six copies thereof with the
[[Page 40279]]
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW.,
Washington, DC 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 Section, 450 Fifth Street, NW., Washington, DC 20549. Copyies
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-96-25 and should be submitted by August 22, 1996.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-19531 Filed 7-31-96; 8:45 am]
BILLING CODE 8010-01-M