[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