[Federal Register Volume 62, Number 99 (Thursday, May 22, 1997)]
[Notices]
[Pages 28093-28095]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: X97-10522]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38649; File No. SR-PSE-96-35]
Self-Regulatory Organizations; Order Approving Proposed Rule
Change and Notice of Filing and Order Granting Accelerated Approval of
Amendment No. 2 to the Proposed Rule Change by the Pacific Stock
Exchange, Incorporated Relating to Its Rules on Executions of ``Odd
Lot'' Equity Orders
May 16, 1997.
I. Introduction
On September 25, 1996, the Pacific Stock Exchange, Incorporated
(``PSE'' or ``Exchange'') filed with the Securities and Exchange
Commission (``Commission'' or ``SEC'') 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 relating to its rules on
executions of odd lot equity orders. On December 17, 1996, the PSE
submitted an amendment (``Amendment No. 1'') to
[[Page 28094]]
the proposed rule change.\3\ The proposed rule change and Amendment No.
1 were published in the Federal Register on December 24, 1996.\4\ No
comments were received on the proposal. On May 15, 1997 the PSE
submitted a second amendment (``Amendment No. 2'') to the proposed rule
change.\5\ This order approves the proposal. Also, Amendment No. 2 is
approved on an accelerated basis.
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\1\ 15 U.S.C. Sec. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Letter from Michael D. Pierson, Senior Attorney, Regulatory
Policy, PSE to Janet Russell-Hunter, Special Counsel, Office of
Market Supervision, Division of Market Regulation, SEC, dated
December 17, 1996. In Amendment No. 1, the PSE clarified the purpose
of the rule change and made technical corrections to the text of the
rule.
\4\ Securities Exchange Act Release No. 38087 (December 24,
1997), 62 FR 782 (January 6, 1997).
\5\ Letter from Michael D. Pierson, Senior Attorney, Regulatory
Policy, PSE to Janet Russell-Hunter, Special Counsel, Office of
Market Supervision, Division of Market Regulation, SEC, dated May
14, 1997. In Amendment No. 2, the PSE modified the provision of the
proposal on executions of odd-lot market orders (see discussion
below) and made a minor technical correction to the proposal. The
PSE also requested that the Commission approve Amendment No. 2 on an
accelerated basis.
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II. Description of the Proposal
The Exchange proposed this rule change in order to provide better
service to customers and to be competitive with other exchanges.\6\ The
Exchange proposed to modify Rule 5.34(b) (``Odd Lot Executions'') to
provide as follows:
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\6\ See Amendment No. 1, supra note 3.
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First, with regard to market orders, the PSE proposed that an odd
lot market order shall be filled at either (a) the price being
disseminated on the Intermarket Trading System (``ITS'') best bid or
offer at the time the odd lot dealer receives the order, provided
certain conditions are met; \7\ or (b) the price of the next round lot
sale on the primary market or a price deemed appropriate under
prevailing market conditions if one or more of the conditions specified
in (a) does not apply. The Exchange is making this change in order to
assure that the application of the rule in unusual circumstances is
fair, reasonable, and consistent with the rules relating to the ITS.
The current rule states that such orders shall be filled at the price
of the first round lot transaction which takes place on the primary
market, plus if a buy order, or minus if a sell order, an odd lot
differential, if any.
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\7\ The conditions are that: the stock is included in ITS in
that market center; the size of the quote is greater than 100
shares; the bid or offer is no more than one-quarter dollar away
from the bid or offer disseminated by the primary market; the quote
conforms to PSE Rule 5.3(b) regarding trading differentials; the
quote does not result in a locked market; the market center is not
experiencing operational problems with respect to the dissemination
of quotes; and that the bid or offer is firm. See PSE Rule
5.34(b)(1) (A)-(G). These conditions are essentially the same as
those provided in New York Stock Exchange Rule 124, Odd Lot Orders,
Supplementary Material .60.
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Second, with regard to limit orders, the PSE proposed that an odd
lot limit order shall be filled at, or better than, the price of the
next \8\ regular way round lot transaction that is at, or better than,
the limit order's price printed on the consolidated tape from the
security's primary market.\9\ The PSE further proposed that such odd
lot orders shall be allowed to establish precedence without regard to
priority of existing round lot bids or offers at that price. The
current rule states that such orders shall be filled at the price of
the first round lot transaction which takes place on the primary
market, which in the case of a buy order is below the specified limit
by the amount of the trading differential, or by a greater amount; or
which in the case of a sell order is above the specified limit by the
amount of the trading differential, or by a greater amount; plus if a
buy order, or minus if a sell order, an odd lot differential, if any.
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\8\ See Amendment No. 2, supra note 5.
\9\ See Amendment No. 1, supra note 3.
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Third, with regard to stop orders, the PSE proposed that an odd lot
stop order to buy shall become a market order when a regular way round
lot transaction takes place at or above the price of the stop order on
the primary market.\10\ The PSE further proposed that an odd lot stop
order to sell shall become a market order when a regular way round lot
transaction takes place at or below the price of the stop order on the
primary market.\11\ The current rule states that an odd lot stop order
becomes a market order when a round lot transaction takes place on the
primary market, which in the case of a buy order is at or above the
stop price; or which in the case of a sell order is at or below the
stop price; and it further states, that the order shall then be filled
at the price of the next round lot transaction which takes place on the
primary market, plus if a buy order, or minus if a sell order, an odd
lot differential, if any.
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\10\ Id.
\11\ Id.
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Fourth, the PSE proposed that it shall be inconsistent with the
purpose and intent of the Rule to engage in the following actions: (a)
the unbundling of round lots for the purpose of entering odd lot limit
orders in comparable amounts; (b) the failure to aggregate odd lot
orders into round lots when such orders are for the same account or for
various accounts in which there is a common monetary interest; and (c)
the entry of both buy and sell odd lot limit orders in the same stock
before one of the orders is executed for the purpose of capturing the
``spread'' in the stock. The proposal also states that, in general, the
Exchange views order entry practices that are intended to circumvent
the round lot auction market as abuses of the intent and purpose of the
odd lot system, and such practices shall be considered violations of
these rules.
Finally, the PSE proposed to remove several provisions from the
rules relating to odd lot executions that no longer apply. First, the
Exchange proposed to eliminate all provisions in Rule 5.34(b) on odd
lot differentials. Second, the proposal modified Rule 5.34(b) to
eliminate the distinction between ``PMP stocks'' and ``non-PMP
stocks.'' \12\
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\12\ ``PMP'' stocks are those for which Exchange specialists
provide primary market protection. Today, such protection applies to
all stocks that may be executed on P/COAST, the Exchange's automatic
execution system for equity securities.
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The Exchange stated its belief that the proposal is consistent with
Section 6(b) of the Act, in general, and Section 6(b)(5) of the Act, in
particular, in that it is designed to facilitate transactions in
securities and to promote just and equitable principles of trade.
III. Discussion
After careful consideration, 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. In particular, the Commission believes the proposal is
consistent with the requirements of Section 6(b)(5) \13\ of the Act in
that it is designed to facilitate transactions in securities and to
promote just and equitable principles of trade.
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\13\ In approving the proposed rule change, the Commission has
considered the proposed rule changes' impact on efficiency,
competition, and capital formation. 15 U.S.C. Sec. 78c(f).
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The Commission believes that the Exchange's proposed pricing
procedures for standard odd lot market orders should facilitate the
execution and accurate reporting of odd lot transactions, and should
also assist in the prompt and accurate clearance and settlement of such
transactions. Because the orders, under most circumstances, will be
priced off a current market quote instead of a subsequent transaction,
investors should receive a timely execution of their orders. Moreover,
the Commission believes that the revised procedures, which provide for
the pricing of standard odd lot market orders at best bid or offer
reflected in the consolidated quote system, rather
[[Page 28095]]
than the price of the first round lot transaction in the primary
market, will result in orders which should receive execution at prices
which more accurately reflect market conditions than would otherwise be
the case under the former procedures.
The PSE also has proposed an alternative method of pricing odd lot
market orders in the event that the condition provided for in the
proposed rule do not apply.\14\ In such an event, an odd lot market
order will be executed at the price of the next round lot sale on the
primary market or will be executed by the odd lot dealer at a price
deemed appropriate under prevailing market conditions. Using this
method, the PSE can continue to provide procedures which will
facilitate the execution of odd lot orders. The Commission recognizes
that it is difficult to develop a method of pricing odd lot orders that
under all market conditions would reflect appropriately the current
market price. The Commission finds that it is reasonable for the PSE to
have determined that use of the next sale price is appropriate under
the several enumerated circumstances.
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\14\ Supra note 7.
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The Commission believes that the proposal with regard to odd lot
limit orders also represents an improvement in the execution of such
orders for investors. Allowing such limit orders to establish
precedence without regard to priority of existing round lot bids or
offers at that price will afford odd lot limit orders highly efficient
and price superior execution services.
With respect to stop orders, the Commission finds that the proposal
will provide improve execution for investors. Once a stop order becomes
a market order under the terms of the amended rule, it will be treated
in the same manner as a standard odd lot market order under the amended
rule. Therefore, rather than receiving an execution at the price of the
next round lot transaction which takes place on the primary market, as
under the rule prior to amendment, investors will receive execution at
the best bid or offer reflected in the consolidated quote system.
The Commission finds appropriate the proposal's explicit
enumeration of those activities that shall be inconsistent with the
intent of the rule, such as the unbundling of round lot orders for the
purpose of entering odd lot limit orders in comparable amounts; the
failure to aggregate odd lot orders into round lots when such orders
are for the same account or for various accounts in which there is a
common monetary interest; and the entry of both buy and sell odd lot
limit orders in the same stock before one of the orders is executed for
the purpose of capturing the ``spread'' in the stock. The Commission
finds reasonable the Exchange's statement that, in general, order entry
practices that are intended to circumvent the round lot auction market
will be viewed as abuses of the intent and purpose of the odd lot
system and such practices shall be considered violations of these
rules.
The Commission believes that the proposal's provision removing
discussion of odd lot differentials is a technical correction that is
consistent with the Exchange's previous elimination of odd-lot
differentials.\15\ The Commission also finds appropriate the
elimination of the distinction between ``PMP stocks'' and ``non-PMP
stocks'' in light of the fact that all stocks that may be executed on
P/COAST, the exchange's automatic execution system, currently receive
such primary market protection.
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\15\ See PSE Rule 5.4.
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The Commission finds good cause to approve Amendment No. 2 to the
proposed rule change prior to the thirtieth day after the publication
of notice thereof in the Federal Register. Amendment No. 2 creates an
alternate pricing mechanism that strengthens the proposal. Accordingly,
the Commission believes there is good cause, consistent with Section
6(b)(5) and 19(b)(2) of the Act, to approve Amendment No. 2 to the
proposal on an accelerated basis.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning Amendment No. 2. 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 in the Commission's Public Reference Room, 450 Fifth Street,
N.W., Washington, D.C. 20549. Copies of such filing will also be
available for inspection and copying at the principal office of the
PSE. All submissions should refer to File No. SR-PSE-96-35 and should
be submitted by June 12, 1997.
V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\16\ that the proposed rule change (SR-PSE-96-35), and amendments
thereto, be and hereby are, approved.
\16\ 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.\17\
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\17\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Dos. 97-13456 Filed 5-21-97; 8:45 am]
BILLING CODE 8010-01-M