[Federal Register Volume 62, Number 201 (Friday, October 17, 1997)]
[Notices]
[Pages 54147-54149]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-27544]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39225; File No. SR-Phlx-97-32]


Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Order Granting Approval to Proposed Rule Change Respecting the Public 
Order Exposure System for PACE Orders

I. Introduction

    On June 30, 1997, 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 extend the duration of its 
automatic execution system order exposure time period for eligible 
orders from the current 15 seconds to 30 seconds.
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    \1\ 15 U.S.C. Sec. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    The proposed rule change was published for comment in Securities 
Exchange Act Release No. 38864 (July 23, 1997), 62 FR 40882 (July 30, 
1997). No comments were received on the proposal. This order approves 
the proposed rule change.

II. Description

    The operation of the Philadelphia Stock Exchange Automatic 
Communication and Execution (``PACE'') System is governed by Phlx Rule 
229 (``PACE Rule''). The PACE System is the Exchange's automatic order 
routing and executing system for securities on its equity trading 
floor.
    With respect to market orders entered into PACE, Supplementary 
Material .05 to the PACE Rule provides that, in \1/8\ point markets or 
greater, round-lot market orders up to 500 shares and partial round-lot 
(``PRL'') market orders up to 599 shares (i.e., orders that combine a 
round-lot with an odd-lot order) are stopped at the PACE Quote \3\

[[Page 54148]]

at the time of their entry into PACE (``Stop Price'') in the Public 
Order Execution System (``POES''). In addition, market orders for more 
than 599 shares that a specialist voluntarily has agreed to execute 
automatically also are entitled to participate in POES.\4\
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    \3\ The PACE Quote consists of the best bid/offer among the 
American, Boston, Cincinnati, Chicago, New York, Pacific and 
Philadelphia Stock Exchanges as well as the Intermarket Trading 
System/Computer Assisted Execution System (``ITS/CAES''). See PACE 
Rule.
    \4\ See Supplementary Material .05 to the PACE Rule.
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    Supplementary Material .05 to the PACE Rule states that the purpose 
of stopping eligible market orders in POES is to allow such orders to 
receive an opportunity for price improvement. Supplementary Material 
.05 further states that if a stopped order is not executed within the 
applicable order exposure time period, or ``window,'' the order will be 
automatically executed at the Stop Price.
    Upon its adoption in early 1995, POES utilizes a 15 second order 
exposure window.\5\ Following Phlx Floor Procedure Committee (``FPC'') 
approval in December 1995, however, the Exchange increased the duration 
of the POES window from 15 to 30 seconds.\6\ At this time, the Exchange 
proposes to codify the 30 second time period into Supplementary 
Material .05, which currently reflects a 15 second window. The Exchange 
has represented that it believes that extending the POES window to 30 
seconds enables the specialist to better gauge the market and thus, 
improves the likelihood of price improvement. Moreover, the Exchange 
stated that it has learned, in its two years of experience with POES, 
that additional time is needed for a meaningful opportunity for price 
improvement to be afforded to such orders. In this regard, the Exchange 
represented that the 30 second window better enables the specialist to 
locate between-the-market interest and probe other market centers.\7\
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    \5\ Securities Exchange Act Release No. 35283 (January 26, 
1995), 60 FR 6333 (February 1, 1995) (File No. SR-Phlx-94-58).
    \6\ The Exchange has represented that by its oversight, this 
change was not filed with the SEC as a proposed rule change prior to 
its implementation pursuant to Section 19(b) of the Act and Rule 
19b-4 thereunder. The Exchange contends that upon the discovery of 
this oversight in the course of drafting changes to the PACE Rule, 
the change was promptly filed with the SEC. See Securities Exchange 
Act Release No. 37479 (July 25, 1996), 61 FR 40276 (August 1, 1996) 
(File No. SR-Phlx-96-25). The Exchange has re-filed this change as a 
separate proposed rule change due to the withdrawal of File No. SR-
Phlx-96-25. The Exchange represents that, to date, it has not 
distributed marketing material reflecting an order exposure window 
of 30 seconds.
    The Commission notes that Section 19(b) of the Act provides that 
each self-regulatory organization is required to file any proposed 
rule change with the Commission and that no proposed rule change 
shall take effect unless approved by the Commission or otherwise 
permitted in accordance with its provisions.
    \7\ In addition, the Exchange previously had stated its 
reasoning behind the expansion of the POES window to 30 seconds in 
an amendment letter respecting File No. SR-Phlx-96-25. See Letter 
from Gerald D. O'Connell, Senior Vice President, Phlx, to Jennifer 
Choi, Attorney, SEC, dated July 19, 1996. Specifically, the Exchange 
stated that the FPC recognized that 15 seconds was often too short 
of a time period for the specialist to act. In this regard, 
specialists has informed the Exchange that by the time they noticed 
an order was stopped, it had been automatically executed. The 
Exchange further stated that its decision to expand the POES window 
to 30 seconds ``is rooted in the logical principle that more time 
means more opportunity for price improvement.'' Id.
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III. Discussion

    For the reasons discussed below, 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).\8\ 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 prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, and, in general, to protect investors and the 
public interest.\9\
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    \8\ 15 U.S.C. Sec. 78f(b).
    \9\ In approving the proposed rule change, the Commission notes 
that it has considered the proposed rule's impact on efficiency, 
competition, and capital formation. 15 U.S.C. Sec. 78c(f).
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    As stated in the previous section, the purpose of the proposed rule 
change is to amend Supplementary Paragraph .05 to the PACE Rule in 
order to increase the duration of the Exchange's POES order exposure 
window from 15 to 30 seconds. Each regional exchange has incorporated 
an order exposure feature similar to POES into its automatic order 
execution system.\10\ Initially, the Chicago Stock Exchange (``CHX'') 
and the Pacific Exchange (``PCX'') had adopted 30 second order exposure 
windows into their rules. The CHX and PCX, however, amended their rules 
in 1990 to reduce the duration of their order exposure windows from 30 
to 15 seconds.\11\
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    \10\ BSE Rules, Ch. XXXIII, Section 3(c); CHX Rules, Art. XX, 
Rule 37(b)(6); and Securities Exchange Act Release No. 27727 
(February 22, 1990), 55 FR 7396 (March 1, 1990) (order approving 
amendment of order exposure feature to PCX's P/COAST automatic 
execution system). See also CSE Rule 11.9(o)(2) (requires exposure 
of any unexecuted portion of any market or marketable limit order 
not fully executed pursuant to the CSE's public agency guarantee). 
In addition, the CSE has adopted a price improvement policy that 
requires preferencing dealers either to: (1) expose eligible 
customer orders on the Exchange for a minimum of 30 seconds in 
greater than minimum variation markets; or (2) immediately execute 
the order at an improved price. CSE Rule 11.9(u), Interpretation and 
Policy .01.
    \11\ See Securities Exchange Act Release No. 27727, supra note 
10 (order reducing CHX and PCX order exposure time periods from 30 
to 15 seconds). See also Securities Exchange Act Release No. 28667 
(November 30, 1990), 55 FR 50624 (December 7, 1990) (order approving 
change in order exposure time from 30 to 15 seconds in CSE Rule 
11.9(o)(2).
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    In the order approving the CHX and PCX proposals, the Commission 
acknowledged that any decrease in the duration of an order exposure 
window would have an adverse effect on price improvement opportunities 
available to eligible orders, while having a positive effect on the 
timeliness of the execution of such orders.\12\ The Commission's 
analysis of the appropriateness of these proposals therefore required a 
balancing of their positive and negative effects. The Exchange's 
current proposal to increase the duration of the POES window requires 
that a similar analysis be undertaken; namely, balancing the proposal's 
potential positive effect on price improvement opportunities for 
customers orders against any negative effect that it may have on the 
timeliness of customer order execution. In this regard, based upon the 
Exchange's representations of its experience with POES, the system's 
functionalities, and the realities of competition for order flow 
between markets, the Commission believes that the Exchange's proposal 
strikes an appropriate balance in that the positive effects of 
increased order exposure time should offset any negative effects on the 
efficiency of order execution.
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    \12\ See Securities Exchange Act Release No. 27727, supra note 
9.
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    With regard to opportunities for price improvement, the Commission 
notes that, as stated above, the Exchange has had experience with both 
15 and 30 second order exposure windows. The Exchange has represented 
that this experience has indicated that a 15 second window often was 
insufficient to allow the specialist to attempt price improvement at 
all, while the additional time afforded by a 30 second window provided 
specialists with a more meaningful opportunity to do so. In light of 
the Exchange's experience, and absent any empirical evidence to the 
contrary, the Commission believes that the proposal is appropriate in 
that the increase in order exposure time should result in a 
concomitant, and beneficial, increase in the price improvement 
opportunities afforded by Phlx specialists to customer orders that are 
eligible for POES.

[[Page 54149]]

    Moreover, the Commission believes that the proposal should have a 
limited impact on the timeliness of order executions on the Phlx. In 
this regard, the Commission notes that under the proposal a specialist 
will maintain the ability to execute manually an order residing on POES 
prior to the expiration of the POES window. Accordingly, if the 
specialist determines that price improvement is unlikely to occur, the 
specialist may execute the order at the Stop Price prior to the end of 
the 30 second period. In addition, the effect of the proposal on the 
overall timeliness of Phlx executions is further limited by the fact 
that the POES window only is applicable to certain market orders and 
then only in \1/8\ point markets or greater. Finally, the Commission 
believes that the competition between Phlx specialists and other 
markets for order flow should provide a continuing incentive for 
specialists to execute customer orders promptly, thereby serving to 
further alleviate any potential adverse impact that the proposal may 
have on the provision of timely executions of customer orders.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\13\ that the proposed rule change (SR-Phlx-97-32) is approved.

    \13\ 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.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-27544 Filed 10-16-97; 8:45 am]
BILLING CODE 8010-01-M