[Federal Register Volume 62, Number 108 (Thursday, June 5, 1997)]
[Notices]
[Pages 30923-30925]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-14688]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38701; File No. SR-PHLX-97-13]


Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Order Granting Approval to Proposed Rule Change and Notice and Order 
Granting Accelerated Approval to Amendment Nos. 1 and 2 to Proposed 
Rule Change Amending the Exchange's Rule Concerning the Pre-Opening 
Application of the Intermarket Trading System

May 30, 1997.

I. Introduction

    On March 19, 1997, the Philadelphia Stock Exchange, Inc. (``PHLX'' 
or ``Exchange'') submitted to the Securities and Exchange Commission 
(``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 amend Phlx Rule 2001, Intermarket Trading 
System (``ITS''), to enhance the operation of the Pre-Opening 
Application by effectively including circuit breakers as a trading halt 
situation that will trigger the Pre-Opening Application. The proposed 
rule change will also reorganize and update Rule 2001 to make it 
conform more closely to the Pre-Opening Application rules of other 
exchanges and to the model Pre-Opening Application Rule attached as 
Exhibit A to the ITS Plan.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

    Notice of the proposed rule change, together with the substance of 
the proposal, was published for comment in Securities Exchange Act 
Release No. 38507 (April 14, 1997), 62 FR 193883 (April 21, 1997).\3\ 
No comments were received on the proposal. Phlx subsequently filed 
Amendment Nos. 1 and 2, on May 27, 1997 and May 29, 1997, 
respectively.\4\
---------------------------------------------------------------------------

    \3\ The Commission notes that a joint order approving the ITS 
Pre-Opening Application rule proposals for the other eight ITS 
Participants is being issued on the same day as this approval order, 
as well as an order approving similar changes to the ITS Plan 
itself. See Securities Exchange act Release Nos. 38700 (May 30, 
1997) and 38699 (May 30, 1997) (ITS Plan Amendment Approval Order).
    \4\ Amendment No. 1 amends Rule 2001 to add subparagraph 
(c)(ii)(B), titled ``Pre-Opening Responses for Open Markets'' and 
sub-paragraph (d)(ii) titled ``Responses When the Exchange is Open'' 
and renumbers the remaining sub-paragraphs. Amendment No. 1 also 
places sub-paragraph headings in bold print and amends sub-paragraph 
(d)(vii), ``Request for Participation Report,'' to reflect a T+3 
time frame; instead of a T+1 time frame. Amendment No. 2 further 
amends the new sub-paragraph (c)(ii)(B) by adding additional 
language, and by adding the word ``third'' to sub-paragraph (d)(vii) 
to reflect the change to a T+3 time frame. See letters from Philip 
H. Becker, Senior Vice President, Chief Regulatory Officer, Phlx, to 
Heather Seidel, Attorney, Market Regulation, Commission, dated May 
23, 1997 (``Amendment No. 1'') and May 29, 1997 (``Amendment No. 
2'') respectively.
---------------------------------------------------------------------------

II. Description

    The purpose of the proposed rule change is to enhance the operation 
of the Pre-Opening Application under PHLX's Rule 2001. Rule 2001 
contains basic definitions pertaining to ITS, prescribes the types of 
transactions that may be effected through ITS and the pricing of 
commitments to trade, and specifies the procedures pertaining to the 
operation of the Pre-Opening Application, whereby an Exchange 
specialist who wishes to open a market in an ITS stock may obtain any 
pre-opening interest in that stock by other market-makers registered in 
that stock in other Participant markets.
    PHLX's current Pre-Opening Application prescribes that if an 
Exchange specialist anticipates that the opening transaction on the 
Exchange will be at a price that represents a change from the 
security's previous day's consolidated closing price of more than the 
``applicable price change,'' the Exchange specialist shall notify other 
Participant markets by sending a pre-opening notification through ITS. 
The ``applicable price changes'' in current Rule 2001 are:

------------------------------------------------------------------------
                                           Applicable price change (more
      Consolidated closing price \5\                   than)            
------------------------------------------------------------------------
Network A: \6\                                                          
  Under $15..............................  \1/8\ point.                 
  $15 or over............................  \1/4\ point.                 
Network B:                                                              
  Under $5 or over.......................  \1/8\ point.                 
                                           \1/4\ point.                 
------------------------------------------------------------------------

    Thereafter, the Exchange specialist shall not open the market in 
the security until not less than three minutes after the transmission 
of the pre-opening notification. Once an Exchange specialist has issued 
a pre-opening notification, other Participant markets may transmit 
``pre-opening responses'' to the Exchange specialist through ITS that 
contain ``obligations to trade.'' The Exchange specialist is then 
obligated to combine these obligations with orders it already holds in 
the security, and, on the basis of this aggregated information, decide 
upon the opening transaction in the security.
---------------------------------------------------------------------------

    \5\ If the previous day's closing price of an eligible listed 
security exceeded $100 and the security does not underlie an 
individual stock option contract listed and currently trading on an 
exchange, the ``applicable price change'' is one point.
    \6\ Network A is comprised of New York Stock Exchange (``NYSE'') 
securities; Network B is comprised of securities admitted on the 
American Stock Exchange, the Boston Stock Exchange, the Chicago 
Board Options Exchange, the Chicago Stock Exchange, the Cincinnati 
Stock Exchange, the Pacific Exchange, PHLX, or any other exchange, 
but not also admitted to dealings on the NYSE.
---------------------------------------------------------------------------

    PHLX's current Rule 2001(c)(ii) states that the Pre-Opening 
Application also applies whenever the specialist wishes to resume 
trading on the Exchange in any Eligible Listed security following the 
initiation of a ``Regulatory Halt'' by any Participant that is an 
exchange if both trading has been halted in all exchange markets and, 
when the relevant security is also eligible for trading through the 
interface between the ITS and the NASD's Computer Assisted Execution 
System (``CAES''), the NASD has suspended quotations in the relevant 
security. Pursuant to current Rule 2001(c)(ii), the Pre-Opening 
Application does not apply

[[Page 30924]]

when trading on the Exchange is resumed following the initiation of a 
Regulatory Halt if either (1) Trading has not been halted in all 
exchange markets or, when the relevant security is also eligible for 
trading through the interface between the ITs and CAES, the NASD has 
not suspended quotations in the affected security or (2) following any 
other type of halt in trading on the Exchange for any reason. When the 
Pre-Opening Application applies under Rule 2001(c)(ii), the Exchange 
specialist must send a pre-opening notification through ITS.
    The purpose of the proposal is to amend PHLX's Rule 2001 to provide 
that the Pre-Opening Application would be triggered whenever any 
``indication of interest'' (i.e., an anticipated opening price range) 
is sent to the Consolidated Tape System prior to the opening or 
reopening of trading in the relevant security. Under the proposed 
change, the Pre-Opening Application would be triggered when indications 
of interest are disseminated in situations other than those defined in 
Rule 2001(c)(ii), ``Applicability Following Regulatory Halts,'' 
including the resumption of trading following the activation of market-
wide circuit breakers.
    In particular, the proposal would amend Rule 2001(b)(7) to provide 
that the Pre-Opening Application applies (i) ``whenever a market maker 
in any Participant market, in arranging an opening transaction in that 
market in a System security, anticipates that the opening transaction 
will be at a price that represents a change from the security's 
`previous day's closing price' at more than the `applicable price 
range' '' and (ii) ``whenever an `indication of interest' (an 
anticipated opening price range) is sent to the CTA Plan Processor as 
required or permitted by the CTA Plan or a Participant market's 
rules.''\7\ The proposed rule change also deletes current Rule 
2001(c)(x), ``Tape Indications,'' replaces it with the exact language 
of the ITS Plan model Pre-Opening Application rule pertaining to tape 
indications, and renumbers the section as Rule 2001(c)(i)(B). The 
proposed rule change would replace all references to ``Trading Halt'' 
with ``halt or suspension in trading'' and delete current Rule 
2001(c)(ii), ``Applicability Following Regulatory Halts,'' because it 
would be inconsistent with the new language ``halt or suspension in 
trading.'' As a result, one standard procedure would then govern all 
trading halt situations and would include suspensions of trading 
pursuant to circuit breaker halts.\8\
---------------------------------------------------------------------------

    \7\ The Commission notes that this language is essentially the 
same as that in other exchange's Pre-Opening Application rules and 
the model Pre-Opening Application rule contained in the ITS Plan.
    \8\ The Exchange notes that this amendment to Rule 2001 is being 
made in conjunction with comparable amendments to the ITS Plan, as 
well as the rules of the other ITS Participant exchanges, which 
originate from recent changes to exchange circuit breaker 
provisions. See SR-BSE-96-11 and Securities Exchange Act Release 
Nos. 37459 (July 19, 1996) 61 FR 39172 (July 26, 1996) (one-half 
hour and one hour halts) and 38221 (January 31, 1997) 62 FR 5871 
(February 7, 1997) (350 and 550 point thresholds).
---------------------------------------------------------------------------

    In addition, the proposed rule change amends Rule 2001(a), which 
contains the core definitions applicable to ITS, by adding the 
previously omitted definitions or Network A and Network B eligible 
securities and renumbering the remaining definitions. The Exchange also 
proposes to reorganize certain provisions of Rule 2001 to improve its 
clarity. The proposed rule change reorganizes Rule 2001(c) into sub-
paragraphs (i) Notifications and (ii) Pre-Opening Responses. The 
proposed rule change further divides proposed Rule 2001(c)(i) into (A) 
Applicable Price Changes and (B) Tape Indications. The proposed rule 
change then further subdivides Rule 2001(c)(i)(A) into (1) Initial 
Notification, (2) Forms of Notification, and (3) Subsequent 
Notification. The proposed rule change also amends proposed Rule 
2001(c)(i)(A)(1) to state that the applicable price changes for Network 
B securities would be \1/8\ point for consolidated closing prices under 
$5 and \1/4\ point for consolidated closing prices of $5 or over. 
Finally, the proposed rule change adds ``Network A'' to the footnote 
under proposed Rule 2001(c)(i)(A)(1) to state that ``[i]f the previous 
day's consolidated closing price of a Network A Eligible Listed 
security exceeded $100 and the security does not underlie an individual 
stock option contract listed and currently trading on a national 
securities exchange, the `applicable price change' is one point.''
    In addition, Amendment No. 1 adds proposed Rule 2001(c)(ii)(B), 
``Pre-Opening Responses from Open Markets,'' and proposed Rule 
2001(d)(ii), ``Responses When the Exchange is Open.'' Amendment No. 2 
adds additional language to proposed Rule 2001(c)(ii)(B). Amendment 
Nos. 1 and 2 also amend Rule 2001(d)(vii) to reflect a T+3 time 
frame.\9\
---------------------------------------------------------------------------

    \9\ Finally, Amendment No. 1 amends all sub-paragraph headings 
to place them in bold print.
---------------------------------------------------------------------------

III. Discussion

    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).\10\ Specifically, 
the Commission believes the proposal is consistent with the Section 
6(b)(5) \11\ 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, by treating all halts similarly for purposes of ITS.\12\
---------------------------------------------------------------------------

    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(5).
    \12\ In approving this rule, the Commission notes that it has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    The Commission finds that the proposed rule change is also 
consistent with Section 11A(a)(1)(D) \13\ of the Act that states that 
the linking of all markets for qualified securities through 
communications and data processing facilities will foster efficiency, 
enhance competition, increase the information available to brokers, 
dealers, and investors, facilitate the offsetting of investors' orders, 
and contribute to the best execution of such orders.
---------------------------------------------------------------------------

    \13\ 15 U.S.C. 78d-1(a)(1)(D).
---------------------------------------------------------------------------

    The Commission believes that the portions of the proposed rule 
change that conform the operation of PHLX's Pre-Opening Applications 
with regard to trading halts to the amended rules of the other ITS 
Participants and with the Model Pre-Opening Application rules contained 
as Exhibit A to the ITS Plan, are consistent with the Act. The 
Commission finds that this change will facilitate transactions in 
securities while continuing to further investor protection and the 
public interest by enhancing the linkage among ITS Participant Markets 
and promoting coordinated openings and reopenings in ITS securities. 
The proposed rule change achieves these goals by amending the PHLX's 
Pre-Opening Application so that one standard procedure governs all 
trading halt situations, including circuit breaker halts.
    PHLX's proposed rule change makes additional substantive proposed 
changes, which include: adding the previously omitted definitions of 
Network A and Network B eligible securities and renumbering the 
remaining definitions; reorganizing certain provisions of Rule 2001 to 
improve its clarity; \14\ amending proposed Rule 2001(c)(i)(A)(1) to 
state that the applicable price changes for

[[Page 30925]]

Network B securities would be \1/8\ point for consolidated closing 
prices under $5 and \1/4\ point for consolidated closing prices of $5 
or over; adding ``Network A'' to the footnote under proposed Rule 
2001(c)(i)(A)(1) to state that ``[i]f the previous day's consolidated 
closing price of a Network A Eligible Listed security exceeded $100 and 
the security does not underlie an individual stock option contract 
listed and currently trading on a national securities exchange, the 
`applicable price change' is one point;'' deleting current Rule 
2001(c)(X) ``Tape Indications,'' replacing it with the ITS Plan model 
Pre-Opening Application rule language, and renumbering the section; 
adding proposed Rules 2001(c)(ii)(B), ``Pre-Opening Responses from Open 
Markets'' and 2001(d)(ii), ``Responses When the Exchange is Open''; 
\15\ and amending Rule 2001(d)(vii) to reflect a T+3 time frame.\16\
---------------------------------------------------------------------------

    \14\ The details of the reorganization of Rule 2001 are 
contained in the Description section above.
    \15\ See Amendment Nos. 1 and 2, supra note 4.
    \16\ See Amendment Nos. 1 and 2, supra note 4.
---------------------------------------------------------------------------

    The Commission believes that these changes are consistent with the 
Act because they should facilitate transactions in securities between 
and promote the linkage among the ITS Participants by conforming the 
PHLX's ITS rules with the model Pre-Opening Application rules contained 
as Exhibit A to the ITS Plan and the other ITS Participants' rules. 
This alignment should help ensure that all the Participants operate 
under similar rules that are designed to achieve similar goals.
    The Commission finds good cause to approve Amendment Nos. 1 and 2 
prior to the thirtieth day after the date of publication of notice of 
filing thereof in the Federal Register. Amendment Nos. 1 and 2 amend 
the Pre-Opening Application by adding proposed Rules 2001 (c)(ii)(B) 
and (d)(ii) and by changing Rule 2001(d)(vii) to reflect a T+3 time 
frame, to conform PHLX's Pre-Opening Application rule those of the 
existing rules of other ITS Participants and to the model ITS Plan Pre-
Opening Application rule. In addition, Amendment No. 1 makes a 
technical change by placing all sub-paragraph headings in bold print. 
These changes will help ensure consistency in the Pre-Opening 
Application rules of all the Participants.
    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment Nos. 1 and 2 to the rule proposal. 
Persons making written submissions should file six copies thereof with 
the 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. Sec. 552, will 
be available for inspection and copying at the Commission's Public 
Reference Room. Copies of such filing also will be available for 
inspection and copying at the principal office of the PHLX. All 
submissions should refer to File No. SR-PHLX-97-13 and should be 
submitted by June 26, 1997.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\17\ that the proposed rule change (SR-PHLX-97-13), including 
Amendment Nos. 1 and 2, is approved.

    \17\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\18\
---------------------------------------------------------------------------

    \18\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-14688 Filed 6-4-97; 8:45 am]
BILLING CODE 8010-01-M