[Federal Register Volume 62, Number 201 (Friday, October 17, 1997)]
[Notices]
[Pages 54147-54149]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-27544]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-39225; File No. SR-Phlx-97-32]
Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.;
Order Granting Approval to Proposed Rule Change Respecting the Public
Order Exposure System for PACE Orders
I. Introduction
On June 30, 1997, 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'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to extend the duration of its
automatic execution system order exposure time period for eligible
orders from the current 15 seconds to 30 seconds.
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\1\ 15 U.S.C. Sec. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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The proposed rule change was published for comment in Securities
Exchange Act Release No. 38864 (July 23, 1997), 62 FR 40882 (July 30,
1997). No comments were received on the proposal. This order approves
the proposed rule change.
II. Description
The operation of the Philadelphia Stock Exchange Automatic
Communication and Execution (``PACE'') System is governed by Phlx Rule
229 (``PACE Rule''). The PACE System is the Exchange's automatic order
routing and executing system for securities on its equity trading
floor.
With respect to market orders entered into PACE, Supplementary
Material .05 to the PACE Rule provides that, in \1/8\ point markets or
greater, round-lot market orders up to 500 shares and partial round-lot
(``PRL'') market orders up to 599 shares (i.e., orders that combine a
round-lot with an odd-lot order) are stopped at the PACE Quote \3\
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at the time of their entry into PACE (``Stop Price'') in the Public
Order Execution System (``POES''). In addition, market orders for more
than 599 shares that a specialist voluntarily has agreed to execute
automatically also are entitled to participate in POES.\4\
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\3\ 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 PACE
Rule.
\4\ See Supplementary Material .05 to the PACE Rule.
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Supplementary Material .05 to the PACE Rule states that the purpose
of stopping eligible market orders in POES is to allow such orders to
receive an opportunity for price improvement. Supplementary Material
.05 further states that if a stopped order is not executed within the
applicable order exposure time period, or ``window,'' the order will be
automatically executed at the Stop Price.
Upon its adoption in early 1995, POES utilizes a 15 second order
exposure window.\5\ Following Phlx Floor Procedure Committee (``FPC'')
approval in December 1995, however, the Exchange increased the duration
of the POES window from 15 to 30 seconds.\6\ At this time, the Exchange
proposes to codify the 30 second time period into Supplementary
Material .05, which currently reflects a 15 second window. The Exchange
has represented that it believes that extending the POES window to 30
seconds enables the specialist to better gauge the market and thus,
improves the likelihood of price improvement. Moreover, the Exchange
stated that it has learned, in its two years of experience with POES,
that additional time is needed for a meaningful opportunity for price
improvement to be afforded to such orders. In this regard, the Exchange
represented that the 30 second window better enables the specialist to
locate between-the-market interest and probe other market centers.\7\
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\5\ Securities Exchange Act Release No. 35283 (January 26,
1995), 60 FR 6333 (February 1, 1995) (File No. SR-Phlx-94-58).
\6\ The Exchange has represented that by its oversight, this
change was not filed with the SEC as a proposed rule change prior to
its implementation pursuant to Section 19(b) of the Act and Rule
19b-4 thereunder. The Exchange contends that upon the discovery of
this oversight in the course of drafting changes to the PACE Rule,
the change was promptly filed with the SEC. See Securities Exchange
Act Release No. 37479 (July 25, 1996), 61 FR 40276 (August 1, 1996)
(File No. SR-Phlx-96-25). The Exchange has re-filed this change as a
separate proposed rule change due to the withdrawal of File No. SR-
Phlx-96-25. The Exchange represents that, to date, it has not
distributed marketing material reflecting an order exposure window
of 30 seconds.
The Commission notes that Section 19(b) of the Act provides that
each self-regulatory organization is required to file any proposed
rule change with the Commission and that no proposed rule change
shall take effect unless approved by the Commission or otherwise
permitted in accordance with its provisions.
\7\ In addition, the Exchange previously had stated its
reasoning behind the expansion of the POES window to 30 seconds in
an amendment letter respecting File No. SR-Phlx-96-25. See Letter
from Gerald D. O'Connell, Senior Vice President, Phlx, to Jennifer
Choi, Attorney, SEC, dated July 19, 1996. Specifically, the Exchange
stated that the FPC recognized that 15 seconds was often too short
of a time period for the specialist to act. In this regard,
specialists has informed the Exchange that by the time they noticed
an order was stopped, it had been automatically executed. The
Exchange further stated that its decision to expand the POES window
to 30 seconds ``is rooted in the logical principle that more time
means more opportunity for price improvement.'' Id.
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III. Discussion
For the reasons discussed below, 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).\8\ In particular, the Commission believes the proposal is
consistent with the Section 6(b)(5) requirements that the rules of an
exchange be designed to prevent fraudulent and manipulative acts and
practices, to promote just and equitable principles of trade, to remove
impediments to and perfect the mechanism of a free and open market and
a national market system, and, in general, to protect investors and the
public interest.\9\
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\8\ 15 U.S.C. Sec. 78f(b).
\9\ In approving the proposed rule change, the Commission notes
that it has considered the proposed rule's impact on efficiency,
competition, and capital formation. 15 U.S.C. Sec. 78c(f).
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As stated in the previous section, the purpose of the proposed rule
change is to amend Supplementary Paragraph .05 to the PACE Rule in
order to increase the duration of the Exchange's POES order exposure
window from 15 to 30 seconds. Each regional exchange has incorporated
an order exposure feature similar to POES into its automatic order
execution system.\10\ Initially, the Chicago Stock Exchange (``CHX'')
and the Pacific Exchange (``PCX'') had adopted 30 second order exposure
windows into their rules. The CHX and PCX, however, amended their rules
in 1990 to reduce the duration of their order exposure windows from 30
to 15 seconds.\11\
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\10\ BSE Rules, Ch. XXXIII, Section 3(c); CHX Rules, Art. XX,
Rule 37(b)(6); and Securities Exchange Act Release No. 27727
(February 22, 1990), 55 FR 7396 (March 1, 1990) (order approving
amendment of order exposure feature to PCX's P/COAST automatic
execution system). See also CSE Rule 11.9(o)(2) (requires exposure
of any unexecuted portion of any market or marketable limit order
not fully executed pursuant to the CSE's public agency guarantee).
In addition, the CSE has adopted a price improvement policy that
requires preferencing dealers either to: (1) expose eligible
customer orders on the Exchange for a minimum of 30 seconds in
greater than minimum variation markets; or (2) immediately execute
the order at an improved price. CSE Rule 11.9(u), Interpretation and
Policy .01.
\11\ See Securities Exchange Act Release No. 27727, supra note
10 (order reducing CHX and PCX order exposure time periods from 30
to 15 seconds). See also Securities Exchange Act Release No. 28667
(November 30, 1990), 55 FR 50624 (December 7, 1990) (order approving
change in order exposure time from 30 to 15 seconds in CSE Rule
11.9(o)(2).
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In the order approving the CHX and PCX proposals, the Commission
acknowledged that any decrease in the duration of an order exposure
window would have an adverse effect on price improvement opportunities
available to eligible orders, while having a positive effect on the
timeliness of the execution of such orders.\12\ The Commission's
analysis of the appropriateness of these proposals therefore required a
balancing of their positive and negative effects. The Exchange's
current proposal to increase the duration of the POES window requires
that a similar analysis be undertaken; namely, balancing the proposal's
potential positive effect on price improvement opportunities for
customers orders against any negative effect that it may have on the
timeliness of customer order execution. In this regard, based upon the
Exchange's representations of its experience with POES, the system's
functionalities, and the realities of competition for order flow
between markets, the Commission believes that the Exchange's proposal
strikes an appropriate balance in that the positive effects of
increased order exposure time should offset any negative effects on the
efficiency of order execution.
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\12\ See Securities Exchange Act Release No. 27727, supra note
9.
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With regard to opportunities for price improvement, the Commission
notes that, as stated above, the Exchange has had experience with both
15 and 30 second order exposure windows. The Exchange has represented
that this experience has indicated that a 15 second window often was
insufficient to allow the specialist to attempt price improvement at
all, while the additional time afforded by a 30 second window provided
specialists with a more meaningful opportunity to do so. In light of
the Exchange's experience, and absent any empirical evidence to the
contrary, the Commission believes that the proposal is appropriate in
that the increase in order exposure time should result in a
concomitant, and beneficial, increase in the price improvement
opportunities afforded by Phlx specialists to customer orders that are
eligible for POES.
[[Page 54149]]
Moreover, the Commission believes that the proposal should have a
limited impact on the timeliness of order executions on the Phlx. In
this regard, the Commission notes that under the proposal a specialist
will maintain the ability to execute manually an order residing on POES
prior to the expiration of the POES window. Accordingly, if the
specialist determines that price improvement is unlikely to occur, the
specialist may execute the order at the Stop Price prior to the end of
the 30 second period. In addition, the effect of the proposal on the
overall timeliness of Phlx executions is further limited by the fact
that the POES window only is applicable to certain market orders and
then only in \1/8\ point markets or greater. Finally, the Commission
believes that the competition between Phlx specialists and other
markets for order flow should provide a continuing incentive for
specialists to execute customer orders promptly, thereby serving to
further alleviate any potential adverse impact that the proposal may
have on the provision of timely executions of customer orders.
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\13\ that the proposed rule change (SR-Phlx-97-32) is approved.
\13\ 15 U.S.C. Sec. 78s(b)(2).
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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).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-27544 Filed 10-16-97; 8:45 am]
BILLING CODE 8010-01-M