[Federal Register Volume 59, Number 130 (Friday, July 8, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-16494]


[[Page Unknown]]

[Federal Register: July 8, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34290; File No. SR-Phlx-93-49]

 

Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Order Granting Approval to Proposed Rule Change Relating to Unbundling 
of PACE Orders

June 30, 1994.
    On November 3, 1993 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 prohibit the unbundling of 
orders entered for execution through the Philadelphia Stock Exchange 
Automated Communication and Execution System (``PACE''). On February 7, 
1994, the Phlx submitted Amendment No. 1 to the proposal.\3\
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    \1\15 U.S.C. 78s(b)(1) (1988).
    \2\17 CFR 240.19b-4 (1991).
    \3\See letter from Gerald D. O'Connell, Vice President, Market 
Surveillance, Phlx, to Sandy Sciole, Branch Chief, Commission, dated 
February 1, 1994. The language submitted originally by the Phlx 
prohibited unbundling ``for the primary purpose of availing upon 
PACE volume and size execution guarantees.'' In the amendment the 
Phlx clarified the language of the rule to prohibit any such action 
for the purpose of attaining PACE guarantees by removing the world 
``primary'' which originally preceded ``purpose.''
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    The proposed rule change, as amended, was published for comment in 
Securities Exchange Act Release No. 33594 (February 8, 1994), 59 FR 
6989 (February 14, 1994). No comments were received on the proposal.
    The proposed rule change adopts Commentary .19 to Phlx Rule 229,\4\ 
which details the execution guarantees due a PACE order. Commentary .19 
prohibits members from unbundling customer orders, or soliciting 
customers to unbundle their orders, for purposes of availing upon PACE 
volume and size execution guarantees.
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    \4\See Philadelphia Stock Exchange Rules, Rule 229.
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    PACE is the Exchange's automated order routing, delivery and 
execution system for equity securities. Pursuant to Phlx Rule 229, 
customer orders entered through PACE are entitled to certain execution 
guarantees. For example, limit orders for less than 600 shares become 
due an execution once an accumulative volume of 1,000 shares of that 
security prints at the limit price or better on the New York Stock 
Exchange (``primary market guarantee'').\5\
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    \5\See Phlx Rule 229, Supplementary Material .10(a).
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    Unbundling occurs when a member organization or its agent splits a 
larger sized order into two or more small-sized orders. Because PACE 
does not have a size maximum for order entry,\6\ the Commission agrees 
with the Phlx that there may be circumstances where the member 
organizations are justified in unbundling a customer order to attain 
best execution. For example, if a customer places a buy order for 
20,000 shares, a better overall price may often be obtained if the 
order is entered as two orders for 10,000 shares each (i.e., the first 
half would probably be filled at a lower price than the second). 
However, the Exchange believes, and the Commission agrees, that 
unbundling orders solely to take advantage of PACE execution guarantees 
is abusive and contrary to the Act.
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    \6\Phlx Rule 229 does, however, have size maximums with respect 
to automatic order execution.
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    The Phlx proposal prohibits members from unbundling customer 
orders, as well as from soliciting their customers to unbundle orders, 
for the purpose of taking advantage of PACE execution guarantees. 
However, because the Exchange does not have any jurisdiction over non-
members, the proposed prohibition against unbundling does not extend to 
any orders broken up by a non-member customer at his or her own 
discretion as long as the customer was not solicited to do so by the 
Phlx member firm for the aforementioned purpose.
    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).\7\ 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 
promote just and equitable principles of trade, to prevent fraudulent 
and manipulative acts, and, in general, to protect investors and the 
public, in that it prevents the abuse of the Exchange's execution 
guarantees available through PACE. Such abuse can result in increased 
risk to the Phlx specialists who are required to fill these trades and 
can potentially result in misleading market information with respect to 
legitimate trading interest. Moreover, unbundling of orders solely to 
take advantage of PACE execution guarantees is contrary to the intent 
of the system to facilitate guaranteed automatic execution of small 
public customer orders.
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    \7\15 U.S.C. 78f(b) (1988).
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    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\8\ that the proposed rule change (SR-Phlx-93-49) is approved.

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    \8\15 U.S.C. 78s(b)(2) (1988).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\17 CFR 200.30-3(a)(12) (1991).
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Jonathan G. Katz,
Secretary.
[FR Doc. 94-16494 Filed 7-7-94; 8:45 am]
BILLING CODE 8010-01-M