[Federal Register Volume 62, Number 176 (Thursday, September 11, 1997)]
[Notices]
[Pages 47865-47869]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-24037]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-39000; File No. SR-Phlx-97-23]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change and Amendment No. 1 Thereto by the Philadelphia Stock Exchange,
Inc. Relating to the Treatment of PACE Orders in Double-up/Double-Down
Tick Situations
September 2, 1997.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''), 15 U.S.C. 78s(c)(1), notice is hereby given that on May 2,
1997, the Philadelphia Stock Exchange, Inc. (``Phlx'' or ``Exchange'')
filed with the Securities and Exchange Commission (``Commission'') the
proposed rule change, and on August 4, 1997 filed with the Commission
Amendment No. 1 thereto,\1\ as described in Items I, II, and III below,
which Items have been prepared by the self-regulatory organization. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ See Letter from Philip H. Becker, Senior Vice President and
Chief Regulatory Officer, Phlx, to Michael Walinskas, Senior Special
Counsel, Division of Market Regulation, SEC, dated August 1, 1997
(``Amendment No. 1''). The substance of amendment No. 1 has been
incorporated into this notice.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Phlx, pursuant to Rule 19b-4 of the Act, proposes to adopt
paragraph (c) to Supplementary Material .07 of Rule 229, Philadelphia
Stock Exchange Automatic Communication and Execution (``PACE'') System,
relating to automatic double-up/double-down price improvement and
manual double-up/double-down price protection. The operation of the
PACE System, which is the Exchange's automatic order routing and
execution system for equity securities, is governed by Phlx Rule 229
(``PACE Rule'').
Proposed paragraph (c)(i), Automatic Double-up/Double-down Price
Improvement, would state that where the specialist voluntarily agrees
to provide automatic double-up/double-down price improvement to all
customers and all eligible orders in a security, in any instance where
the bid/ask spread of the PACE Quote \2\ is a \1/4\ point or greater,
market and marketable limit orders \3\ in NYSE-listed or Amex-listed
securities for 599 shares or less that are received through PACE in
double-up/double-down situations shall be provided with automatic price
improvement of \1/8\ of a point, beginning at 9:45 a.m. Moreover, a
specialist voluntarily may agree to provide automatic double-up/double-
down price improvement to larger orders in a particular security to all
customers under this provision. Automatic double-up/double-down price
improvement will not occur where the execution price would be outside
the primary market high/low range for the day, if out-of-range
protection was elected by the member organization entering the order
pursuant to Supplementary Material .07(a) of the PACE Rule. In
addition, the Exchange proposes to adopt a corollary provision in
Supplementary Material .10(a) to the PACE Rule respecting automatic
double-up/double-down price improvement for marketable limit orders.
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\2\ The PACE Quote consists of the best bid/offer among the
American Stock Exchange (``Amex''), New York Stock Exchange
(``NYSE''), Pacific Exchange, Phlx, Boston, Cincinnati, and Chicago
Stock Exchanges, as well as the Intermarket Trading System/Computer
Assisted Execution System (``ITS/CAES''). See PACE Rule.
\3\ A market order is an order to buy or sell a stated amount of
a security at the best price obtainable when the order is received.
A marketable limit order is an order to buy or sell a stated amount
of a security at a specified price, which is received at a time when
the market is trading at or better than such specified price.
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The Exchange also proposes to adopt an alternative to automatic
double up/double-down price improvement. Specifically, proposed
Supplementary Material .07(c)(ii), Manual Double-up/Double-down Price
Protection would state that where the specialist does not agree to
provide automatic double-up/double-down price improvement in a
security, in any instance where the bid/ask spread of the PACE Quote is
\1/8\ of a point or greater, beginning at 9:45 a.m., the specialist
must provide manual double-up/double-down price protection to all
customers and all eligible orders in a security. The manual double-up/
double-down price protection feature causes eligible market and
marketable limited orders of 599 shares or less in NYSE-listed and
Amex-listed securities that are received through PACE in double-up/
double-down situations to be stopped at the PACE Quote at the time of
their entry into PACE. Moreover, a specialist may voluntarily agree to
provide manual double-up/double-down price protection to larger orders
in a particular security to all customers under this provision.
However, if the execution price of an order would be outside the
primary market high/low range for the day, where out-of-range
protection is elected by the member organization entering the order,
the order would be stopped for manual handling by the specialist,
regardless of the existence of a double-up/double-down situation.
Manual double-up/double-down price protection does not provide an
automatic execution or automatic price improvement. Instead, this
feature stops orders to provide an opportunity for manual price
improvement in double-up/double-down situations.
Finally, proposed paragraph (c)(iii) would provide that both
automatic double-up/double-down price improvement and manual double-up/
double-down price protection may be disengaged in a security or
floorwide in extraordinary circumstances with the approval of two Floor
Officials of the Exchange.
[[Page 47866]]
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of and basis for the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of these statements may be examined at
the places specified in Item IV below. The self-regulatory organization
has prepared summaries, set forth in Sections A, B, and C below, of the
most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
a. Background. As stated above, the PACE System is the Exchange's
automated order routing and execution system on its equity trading
floor. The PACE System accepts orders for automatic or manual execution
in accordance with the provisions of the PACE Rule, which governs the
operation of the PACE System and defines its objectives and parameters.
Agency orders received through PACE are subject to certain minimum
execution parameters and non-agency orders are subject to the
provisions of Supplementary Material .02 of the PACE Rule. The PACE
Rule establishes execution parameters for order depending on type
(market or limit), size, and the guarantees offered by specialists.\4\
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\4\ The Commission recently approved a number of amendments to
the execution parameters and guarantees of the PACE Rule. See
Securities Exchange Act Release No. 38898 (August 1, 1997), 62 FR
42616 (August 7, 1997) (File No. SR-Phlx-97-11).
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With respect to market orders, Supplementary Material .05 of the
PACE Rule currently provides that round-lot market orders up to 500
shares and partial round-lot (``PRL'') market orders of up to 599
shares, which combine a round-lot with an odd-lot, are stopped at the
PACE Quote at the time of their entry into PACE (``Stop Price'') for a
15 second delay to provide the Phlx specialist with the opportunity to
effect price improvement when the spread between the PACE Quote exceeds
\1/8\ of a point. This feature is known as the Public Order Exposure
System (``POES'') ``window.\5\ If such orders are not executed within
the POES window, the order is automatically executed at the Stop Price.
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\5\ The Exchange recently has filed a proposed rule change to
amend this provision to increase the duration of the POES window to
30 seconds. See Securities Exchange Act Release No. 38864 (July 23,
1997), 62 FR 40882 (July 30, 1997) (File No. SR-Phlx-97-32).
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b. Automatic double-up/double-down price improvement. At this time,
the Exchange proposes to adopt a double-up/double-down provision
respecting PACE orders. The proposal consists of two alternatives:
automatic double-up/double-down price improvement and manual double-up/
double-down price protection. Thus, one purpose of the proposal is to
provide automatic price improvement to eligible orders. As part of a
continued effort to improve its execution parameters and promote the
principle of best execution, the Exchange is proposing to adopt an
automatic price improvement feature affording eligible orders price
improvement of an \1/8\ of a point from the PACE Quote when received,
in double-up/double-down situations.
Under the proposal, a ``double-up/double-down'' situation is
defined as a trade that would be at least: (i) \1/4\ point (up or down)
from the last regular way sale on the primary market; or (ii) \1/4\
point from the regular way sale that was the previous intra-day change
on the primary market. The term ``double'' originated with two \1/8\
point ticks, meaning \1/4\ of a point. Under the proposal, a down tick
of \1/16\ of a point followed by a down tick of \3/16\ of a point would
be a double-down situation, because it equals \1/4\ of a point.
As an example of the part (i) of the definition of a double-up/
double-down situation, assuming that the specialist has agreed to
participate in this feature, where the PACE Quote is 22\1/2\-22\3/4\,
if the last sales on the primary market were 22\3/4\ followed by a down
tick at 22\5/8\, a double-up/double-down situation would not occur for
a market order to buy, because buying at 22\3/4\ is a single up tick of
\1/8\ of a point and, thus, does not meet the \1/4\ point requirement.
Under the proposal, because no double-up/double-down situation
occurred, no automatic price improvement would be afforded. However,
applying part (ii) of the definition, a double-up/double-down situation
would occur for a sell order, because a sale at 22\1/2\ is a \1/4\
point away from the next to last intra-day change, executed at 22\3/4\.
Under the proposal, the market order to sell would be automatically
executed at 22\5/8\, providing an \1/8\ point price improvement over
the otherwise-automatic execution at 22\1/2\.
Where the PACE Quote is 22\1/4\-22\3/4\, with the last sale at
22\1/2\, part (i) of the definition would apply to a market order to
buy or sell, because buying at 22\3/4\ creates a double-up tick (\1/4\
of a point away from 22\1/2\) and selling at 22\1/4\ creates a double-
down tick (also \1/4\ of a point away from 22\1/2\).
If the last sale was at 22\3/4\ and the next-to-last sale was at
22\1/2\, part (i) of the definition would apply to a market order to
sell, because selling at 22\1/4\ creates a double-down tick (\1/2\ of a
point away from 22\3/4\), and part (ii) of the definition would apply
to a buy order, because buying at 22\3/4\, although not an up or down
tick from the last sale of 22\3/4\, is \1/4\ of a point away from the
next to last change, executed at 22\1/2\.
If the last sale was at 22\5/8\ and the next to last sale was at
22\1/2\, part (ii) of the definition would apply to a market order to
buy, because buying at 22\3/4\ creates a double-up tick of (\1/4\ of a
point away) from 22\1/2\, as well as to a market order to sell, because
selling at 22\1/4\ creates a double-down tick (\1/4\ of a point away)
from 22\1/2\.
Pursuant to part (ii) of the definition of a double-up/double-down
situation, this term includes qualifying changes from the last change,
not just the two previous last sales. For example, where the last sales
on the primary market were: 32\1/2\; 32\3/8\; and 32\3/8\, with the
PACE Quote at 32\1/4\-32\1/2\, a market order to sell that would
otherwise be executable at 32\1/4\ should be price-improved to 32\3/8\,
because it is a double-down tick (\1/4\ of a point away) from the last
``change'' or sale that was the previous change (meaning the change
from 22\1/2\ to 22\3/8\).\6\ Under part (i) of the definition, this
order would not qualify as a double-up/double-down situation, because
an execution at 22\1/4\ would be only \1/8\ of a point away from the
last sale of 22\3/8\.
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\6\ The first down tick was from 32\1/2\ to 32\3/8\, and the
second down tick would have been from 32\3/8\ to 32\1/4\ had the
order been executed. The intervening sale at 32\3/8\ does not change
this result.
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To explain the interaction between the POES window and the proposal
at hand, assuming that the PACE Quote is 15\1/2\-\3/4\ and the last
sale was at 15\1/2\, an order by buy 500 shares would be subject to
automatic double-up/double-down price improvement, because buying at
15\3/4\ creates a double up tick (\1/4\ of a point away) from the last
sale at 15\1/2\. The order would be automatically executed under the
proposal at 15\5/8\ (giving \1/8\ of a point price improvement over the
PACE Quote of 15\3/4\) and no POES window would occur. The proposed
automatic double-up/double-down price improvement feature results in an
automatic execution, with no window,
[[Page 47867]]
timer or delay. If, on the other hand, the order was to sell 500
shares, a double-up/double-down situation would not occur, because
selling at 15\1/2\ is not an up or down tick (not \1/4\ of a point away
from the last sale); this order would be POES-eligible such that the
POES window would apply. At the expiration of the POES window, absent
manual specialist intervention, this order would be manually executed
at 15\1/2\, its Stop Price.
This proposal would also apply to marketable limit orders. As an
example, assuming that the specialist has agreed to participate in the
automatic double-up/double-down price improvement feature, where the
PACE Quote is 15\1/2\-15\3/4\, and the last sale was at 15\1/2\, an
order to buy 500 shares at 15\3/4\ would be subject to automatic
double-up/double-down price improvement, because buying at 15\3/4\
creates a double up tick (\1/4\ of a point away) from the last sale at
15\1/2\. The order to buy 500 shares at 15\3/4\ is a marketable limit
order, because it is executable on the offer. Under this proposal, this
order would be automatically executed at 15\5/8\, receiving price
improvement of \1/8\ of a point.
The Exchange notes that the execution resulting from the automatic
price improvement feature can create a double-up/double-down situation;
for instance, where the PACE Quote is 31-32\1/4\ and the last sale was
at 32\3/8\, a sell order that would be executable at 32 would be
improve to 32\1/8\, which is a double-down tick (\1/4\ point from 32\3/
8\ to 32\1/8\).
The Exchange proposes to clarify that automatic double-up/double-
down price improvement will not occur where the execution price before
or after the application of automatic price improvement would be
outside the primary market high/low range for the day, if so elected by
the entering member organization. The following example illustrates how
the execution price before automatic price improvement can be out-of-
range. Where the low for the day is 22\1/4\ and the high is 22\1/2\,
the last sale was at 22\3/8\ and the PACE Quote is 22\5/8\-22\7/8\, an
incoming sell order executable at 22\5/8\ would be stopped due to out-
of-range protection (i.e., an execution at 22\5/8\ would have been at a
price above the 22\1/2\ high for the day) and thus would not be subject
to automatic price improvement (to 22\3/4\, which also would have been
out-of-range). An execution at 22\5/8\ would have created a double-up/
double-down situation, because 22\5/8\ is \1/4\ of a point away from
the last sale at 22\3/8\.
The next example illustrates how the execution price could be out-
of-range as a result of automatic price improvement. Where the low for
the day is 22\1/4\ and the high is 22\5/8\, the last sale was at 22\3/
8\ and the PACE Quote is 22\5/8\-22\7/8\, an incoming sell order
executable at 22\5/8\ would not be improved to 22\3/4\, because such
price would be out-of-range (i.e., an execution at 22\3/4\ would have
been at a price above the 22\5/8\ high for the day). Instead, the order
would revert to manual status, and the specialist would either stop the
order or execute it at 22\5/8\. Absent out-of-range protection, the
22\5/8\ execution would have been a double-up situation (\1/4\ of a
point away from the last sale of 22\3/8\).
The Exchange is proposing to extend its price improvement
initiative to double-up/double-down situations, because these are
particularly suitable for price improvement. Specifically, when the
current market is \1/4\ of a point away from the last sale price, with
this trend continuing, as evidenced by consecutive up or down ticks, it
is consistent with the role of the specialist to enter into stabilizing
transactions on behalf of public customers.7 Instead of
affording an automatic execution at the PACE Quote, the proposal
results in an automatic execution that improves on that price by an \1/
8\ of a point. Thus, automatically executed orders continue to receive
the important benefits of speedy automatic execution and reporting,
while also receiving price improvement. Heretofore, price improvement
was synonymous with delay. Now, price improvement would be automatic
for eligible orders. The proposal enables specialist to extend this
innovative price improvement procedure to larger orders.
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\7\ See Phlx Rule 203(d).
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The Exchange has determined that, as with many PACE features and
participation in the PACE System itself, automatic double-up/double-
down price improvement should be made available on a voluntary, symbol-
by-symbol basis, so that specialists can determine which securities are
suitable for the program. The availability of a price improvement
feature benefits the specialist function, especially in high-volume
securities, where stopping orders and manual intervention are time-
consuming, delay execution and do not necessarily result in price
improvement. The proposed feature triggers a superior result--an
immediate automatic execution, with no specialist intervention or
delay.
c. Manual double-up/double-down price protection. Second, the
Exchange proposes to adopt a manual double-up/double-down price
protection provision as Supplemental Paragraph .07(c)(ii) of the PACE
Rule. Currently, a form of such price protection is a feature of the
Pace System, but is neither mandatory, nor available in all
securities.\8\ Nor has it been incorporated into Exchange rules. Thus,
the Exchange is proposing to replace the existing voluntary feature
with the proposed mandatory feature. This aspect of the proposal is
intended to require a double-up/double-down feature of specialists who
do not choose to participate in the automatic price improvement
feature.
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\8\ The current double-up/down price protection feature has been
in use since 1991. If elected by the entering member organization in
a security selected by the specialist as eligible for this feature,
orders within the specialist's automatic execution guarantee size
are stopped in double-up/down situations.
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Manual price protection is proposed to be a mandatory requirement
floor-wide in all Phlx non-primary PACE-eligible stocks. Manual price
protection would apply in \1/8\ point-wide markets or greater; thus,
unlike automatic price improvement, which is triggered by \1/4\ point-
wide markets, a \3/16\ point-wide market would trigger manual price
protection.
The proposed manual double-up/double-down price protection
provision would stop eligible orders for an opportunity for manual
price improvement by the specialist. Under this proposal, an order
would be ``stopped'' by the specialist at the PACE Quote at the time of
its entry into PACE, meaning that the order is guaranteed to receive at
least that price by the end of the trading day. Consistent with Phlx
Floor Procedure Advice A-2, specialists are required to display stopped
orders at the improved price and any contra-side orders received by the
specialist will be taken into account for purposes of determining when
to execute a stopped order and at what price. The purpose of stopping
an order is to seek a better price for the order, by probing the market
further or facilitating the order in a proprietary account at that
better price.
Thus, the purpose of a manual price protection provision is to
provide an alternative double-up/double-down feature, which allows for
price improvement, albeit not automatic, for securities which the
specialist has determined are not appropriate for the automatic
feature, due to, for example, liquidity, trading patterns and
volatility. Less liquid stocks may trade in sizes that render it unfair
to specialists to afford automatic price improvement to such orders and
manage the resulting positions. The reference to trading
[[Page 47868]]
patterns may cover stocks where the spread between the bid and offer is
very narrow, with little trading occurring between such bid/offer
spread, or very wide, with most trading on the bid/offer. Low
volatility stocks may not be appropriate for automatic price
improvement, because little movement in the stock may also indicate
little trading in between the bid/offer. Recognizing that not all
stocks should be treated the same, the Exchange notes that different
automatic execution sizes are permissible under the PACE Rule (with a
minimum of 599 shares).\9\ The Exchange believes that offering an
opportunity for manual price improvement promotes the goal of best
execution on the Phlx.
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\9\ The Exchange also notes that all stocks on the CHX are not
eligible for SuperMAX, the CHX's automatic price improvement
program. Article XX, Rule 37(c) of the CHX Rules states that
specialists may choose to participate on a stock-for-stock basis.
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d. Both features. For both automatic price improvement and manual
price protection, specialists may establish higher sizes than the 599
share minimum (but less than or equal to the specialist's automatic
execution guarantee), which may be changed effective the next day.
Member organizations entering PACE orders (``PACE Users'') will be
notified of any such changes.
Specialists choosing to activate the automatic feature would also
be subject to the procedure described above (i.e., it would become
effective the next day). In addition, switching between the automatic
and manual features triggers this procedure. Signing up for the manual
price protection feature is not required, because all specialists will
be required to participate.
The Exchange notes that PACE Users may choose whether to receive
the protections offered by the double-up/double-down features (both,
not a particular one). In reality, most PACE Users today have elected
to receive at least manual protection, which is proposed to be
mandatory for all specialists. However, some PACE Users may determine
not to participate in either double-up/double-down feature. For
instance, a PACE User may determine that the certainty and speed of an
automatic execution--a factor in a broker-dealer's decision respecting
best execution obligations--outweigh the delay associated with being
stopped for potential manual price improvement.
The Exchange notes that odd-lots are not eligible for either
double-up/double-down price improvement or price protection. The
Exchange also notes that the double-up/double-down features are
available for orders that are eligible for automatic execution only.
For instance, non-marketable limit orders and orders exceeding a
specialist's automatic execution guarantee are not eligible for either
feature, because the features depend upon either stopping or
automatically improving orders guaranteed a certain automatic execution
price.
Pursuant to proposed subparagraph .07(c)(iii) to the PACE Rule,
both automatic double-up/double-down price improvement and manual
double-up/double-down price protection may be disengaged in a security
or floor-wide in extraordinary circumstances. In addition to fast
market conditions, for purposes of this paragraph, extraordinary
circumstances also include systems malfunctions and other circumstances
that limit the Exchange's ability to disseminate or update market
quotations in a timely and accurate manner.
2. Statutory Basis
In sum, the Exchange believes that the proposed price improvements
features enhance the many benefits of the PACE System. For the reasons
discussed above, the Exchange believes that the proposed rule change is
consistent with Section 6 of the Act in general,\10\ and in particular,
with Section 6(b)(5), in that it is designed to promote just and
equitable principles of trade, remove impediments to and perfect the
mechanism of a free and open market and a national market system, as
well as to protect investors and the public interest by providing an
opportunity for price improvement for eligible orders, whether
automatic or manual. In order to champion the principle of best
execution, the Exchange has listened and responded to its PACE
customers and members by developing these innovation price improvement
features. The Exchange also believes that the proposal is consistent
with Section 11A of the Act,\11\ and paragraph (a)(1) thereunder, which
encourages the use of new data processing and communication techniques
that create the opportunity for more efficient and effective market
operations. Specifically, the proposal is consistent with the public
interest and investor protection purposes of Section 11A, in that it
should assure the practicability of executing customer orders in the
best market as well as an opportunity for investors' orders being
executed without the participation of a dealer.
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\10\ 15 U.S.C. Sec. 78(f).
\11\ 15 U.S.C. Sec. 78k-1.
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Phlx does not believe that the proposed rule change will impose
any inappropriate burden on competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the publication of this notice in the Federal
Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve the proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing. 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 at the
Commission's Public Reference Section, 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 Exchange. All
submissions should refer to File No. SR-Phlx-97-23 and should be
submitted by October 2, 1997.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\12\
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\12\ 17 CFR 200.30-3(a)(12).
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[[Page 47869]]
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-24037 Filed 9-10-97; 8:45 am]
BILLING CODE 8010-01-M