[Federal Register Volume 63, Number 51 (Tuesday, March 17, 1998)]
[Notices]
[Pages 13083-13087]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-6763]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39740; File No. SR-Phlx-98-10]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Philadelphia Stock Exchange, Inc. Relating to Automatic 
Price Improvement for Certain PACE Orders

March 10, 1998.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on, February 10, 1998, the Philadelphia Stock Exchange, Inc. (``Phlx'' 
or ``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change 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\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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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 amend Rule 
229, Philadelphia Stock Exchange Automatic Communication and Execution 
(``PACE'') System,\3\ Supplementary Material .07(c), Double-up/Double-
down Situations, to adopt a new automatic price improvement initiative 
for PACE orders. Specifically, specialists could voluntarily choose to 
provide automatic price improvement of \1/16\ to eligible orders where 
the PACE Quote \4\ is \1/8\ or greater, or \3/16\ or greater. Eligible 
orders would be automatically executable market and marketable limit 
orders \5\ in New York Stock Exchange or American

[[Page 13084]]

Stock Exchange listed securities received through PACE beginning at 
9:45 A.M., in sizes of 599 shares or less (or the specialist's higher 
automatic execution guarantee size).
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    \3\ PACE is the Exchange's automatic order routing and execution 
system for securities on the equity trading floor.
    \4\ 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 Phlx 
Rule 229.
    \5\ 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 the specified price.
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    However, the proposed automatic price improvement feature would not 
price improve in certain situations. First, where a buy order would be 
improved to a price less than the last sale or a sell order would be 
improved to a price higher than the last sale, the order is not 
eligible for automatic price improvement, and is, instead, 
automatically executed at the PACE Quote. Similarly, where a buy order 
would be improved to the last sale price which is a down tick, or where 
a sell order would be improved to the last sale price which is an up 
tick, the order is also not eligible for automatic price improvement, 
and is, instead, automatically executed at the PACE Quote.
    Certain limitations regarding automatic price improvement are 
similar to the current double-up/double-down program.\6\ For instance, 
odd-lot orders would not be eligible for the proposed automatic price 
improvement.\7\ Nor would it be available where the execution price 
before or after the application of automatic price improvement would be 
outside of the primary market high/low range of the day. Further, only 
automatically executable orders would be eligible for automatic price 
improvement.\8\
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    \6\ Securities Exchange Act Release No. 39548 (January 13, 
1998), 63 FR 3596 (January 23, 1998) (``Double-Up/Double-Down 
Order'').
    \7\ The paragraph concerning odd-lots is being moved from Rule 
229.07(c)(i)(B) to (c)(i)(C). Respecting manual price protection, 
odd-lot orders are specifically addressed in Rule 229.07(c)(ii).
    \8\ For example, orders exceeding the specialist's automatic 
execution guarantee size would not be eligible, because the feature 
depends on automatically improving orders guaranteed a certain 
automatic execution price.
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    Under the proposal, specialists may choose whether to participate 
in automatic price improvement, as opposed to the mandatory manual 
double-up/double-down price protection of Rule 229.07(c)(ii).\9\ If a 
specialist elects to provide automatic price improvement, they must 
further determine whether to price improve in \1/8\ or greater markets, 
or \3/16\ or greater markets.\10\ Necessarily, specialists who choose 
price improvements in \1/8\ wide markets automatically agree to price 
improve in \3/16\ or greater markets. However, although choosing 
automatic price improvement in \3/16\ or greater markets obviously does 
not trigger automatic price improvement in \1/8\ wide markets, the 
manual double-up/down price protection provision may be triggered, such 
that eligible orders would be stopped in \1/8\ wide markets; in this 
situation, no automatic price improvement would be given, even in 
double-up/down situations.\11\
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    \9\ Specifically, where the specialist does not agree to provide 
automatic double-up/down price improvement in a security, in any 
instance where the bid/ask of the PACE Quote is more than \1/8\, 
beginning at 9:45 A.M., the specialist must provide manual double-
up/down price protection to all customers and all eligible orders in 
a security. The manual double-up/down price protection feature 
causes eligible market and marketable limit orders of 599 shares or 
less in New York Stock Exchange or American Stock Exchange listed 
securities received through PACE in double-up/down situations to be 
stopped at the PACE Quote at the time of entry into PACE. Manual 
double-up/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/down situations.
    \10\ The specialist's choice to provide automatic price 
improvement, select \1/8\ or \3/16\ markets, establish an order size 
maximum and switch between the automatic and manual features may be 
changed, effective the next day. Member organizations entering PACE 
orders would be notified of such changes.
    \11\ A double-up/double-down situation is defined as a trade 
that would be at least: (i) \1/4\ (up or down) from the last regular 
way sale on the primary market: or (ii) \1/4\ from the regular way 
sale that was the previous intra-day change on the primary market.
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    Although the proposed automatic price improvement proposal will be 
voluntary, all specialists will still be required to provide manual 
double-up/double-down tick price protection to eligible orders (\1/8\ 
markets. This feature provides that eligible orders will be stopped at 
the PACE Quote when received for an opportunity for price improvement. 
Automatically executable market orders not eligible for double-up/down 
price protection will continue to be stopped for the 30 second POES 
window, and then automatically executed.\12\
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    \12\ See Phlx Rule 229.05 and Securities Exchange Act Release 
No. 39275 (October 8, 1997), 62 FR 54147 (October 17, 1997) (SR-
Phlx-97-32). Rule 229.05 provides that round-lot markets 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 30 second delay to provide the specialist with an 
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. Further, market 
orders for more than 599 shares that a specialist voluntarily has 
agreed to execute automatically also are entitled to participation 
in POES. If orders eligible for POES are not executed within the 
POES 30 second window, the order is automatically executed at the 
Stop Price.
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    The new automatic price improvement feature will replace the 
current automatic double-up/double-down price improvement feature of 
Rule 229.07(c)(i). Thus, the Exchange is proposing to retitle Rule 
229.07(c) as ``Price Improvement for PACE Orders.'' Further, the 
Exchange is proposing to delete the term ``double-up/double-down'' when 
paired with automatic price improvement throughout the Rule to reflect 
that automatic price improvement will no longer be limited to double-
up/double-down situations. The definition of a double-up/double-down 
situation is thus being moved from Rule 229.07(c)(i)(A) to (c)(ii). The 
language relating to \1/4\ wide markets is also proposed to be deleted 
and replaced with the specialist's choice of \3/16\ or \1/8\ as the 
minimum market width to activate automatic price improvement; 
furthermore, price improvement of \1/8\ will be replaced with \1/16\. 
The language creating an exception to automatic double-up/double-down 
price improvement better than the last sale will be deleted and 
replaced with reference to the two situations where an order would not 
receive the new, proposed automatic price improvement; such orders 
would be automatically executed at the PACE Quote. Lastly, Rule 
229.10(a) would be amended to cover marketable limit orders.
    The text of the proposed rule change is available at the Office of 
the Secretary, CBOE and at the Commission.

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
    As stated above, PACE is the Exchange's automated order routing and 
execution system on the equity trading floor. PACE accepts orders for 
automatic or manual execution in accordance with the provisions of Rule 
229, which governs the PACE System and defines its objectives and 
parameters. The PACE Rule establishes execution parameters for orders 
depending on type (market or limit), size and the guarantees offered by 
specialists.

[[Page 13085]]

    Currently, paragraph (c)(i), Automatic Double-up/Double-down Price 
Improvement, states that where the specialist voluntarily agrees to 
provide automatic double-up/double-down price improvements to all 
customers and all eligible orders in a security, in any instance where 
the bid/ask of the PACE Quote is \1/4\ or greater, market and 
marketable limit orders in New York Stock Exchange or American Stock 
Exchange listed securities received through PACE in double-up/double-
down situations for 599 shares or less shall be provided with automatic 
price improvement of \1/8\, beginning at 9:45 A.M. A specialist may 
also voluntarily agree to provide automatic double-up/double-down price 
improvement to larger orders in a particular security to all customers 
under this provision.
    As a further effort to champion the principle of best execution, 
the Exchange is proposing a more comprehensive automatic price 
improvement initiative. Specifically, specialists could choose to 
provide \1/16\ automatic price improvement to eligible orders in \1/8\ 
or greater markets, or \3/16\ or greater markets. Thus, as compared to 
the current automatic price improvement feature for double-up/double-
down situations which is limited to \1/4\ wide markets or greater, the 
universe of orders eligible for the proposed feature would be expanded. 
Further, the proposal involves automatic price improvement without 
requiring a double-up/double-down situation. This again expands the 
benefits of price improvement to a larger universe of eligible orders.
    Nevertheless, automatic price improvement would not occur in two 
situations. First, automatic price improvement would not occur to a 
price better than the last sale. More specifically, where a buy order 
would be improved to a price less than the last sale or a sell order 
would be improved to a price higher than the last sale, the order is 
not eligible for automatic price improvement, and is, instead, 
automatically executed at the PACE Quote. The following are examples 
\13\ of this exception (not improving over the last sale):-
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    \13\ These examples consist of the PACE Quote, the last sale 
price with an up or down tick indicator, and the price at which a 
buy and sell order, respectively, would be executed.

23-23\1/8\
LS 23+ or -
Buy improved to \1/16\
Sell executed at 23

23-23\1/8\
LS \1/8\+ or -
Buy executed at \1/8\
Sell improved to \1/16\

23-23\3/16\
LS 23+ or -
Buy improved to \1/8\
Sell executed at 23

23-23\3/16\
LS \3/16\+ or -
Buy executed at \3/16\
Sell improved to \1/16\
    This is similar to the current exception from automatic double-up/
double-down price improvement; \14\ however, currently, where an 
improvemed price would be better than the last sale, the order would be 
stopped at the PACE Quote when received. Under this proposal, the order 
would be automatically executed at the PACE Quote when received.
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    \14\ See Securities Exchange Act Release No. 39640 (February 10, 
1998), 63 FR 8510 (February 19, 1998), which creates an exception 
where such price improvement would be better than the last sale 
price (for instance, a buy order would be improved to a price less 
than the last sale or a sell order would be improved to a price 
higher than the last sale); pursuant to this exception, such orders 
are stopped by the specialist at the PACE Quote when received, 
meaning that the order is guaranteed to receive at least that price 
by the end of the trading day.
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    Second, where a buy order would be improved to the last sale price 
which is a down tick, or where a sell order would be improved to the 
last sale price which is an up tick, the order is also not eligible for 
automatic price improvement, and is, instead, automatically executed at 
the PACE Quote. The following are examples of the exception to 
automatic price improvement respecting improvement to the last sale:

23-23\1/8\
LS \1/16\-
Buy executed at \1/8\
Sell improved to \1/16\

23-23\1/8\
LS \1/16\+
Buy improved to \1/16\
Sell executed at 23

23-23\3/16\
LS \1/8\-
Buy executed at \3/16\
Sell improved to \1/16\

23-23\3/16\
LS \1/8\+
Buy improved to \1/8\
Sell improved to \1/16\

23-23\3/16\
LS \1/16\ -
Buy improved to \1/8\
Sell improved to \1/16\

23-23\3/16\
LS \1/16\+
Buy improved to \1/8\
Sell executed at 23

23-23\1/4\
LS\1/8\+or-
Buy improved to \3/16\
Sell improved to \1/16\

    These exceptions are intended to cover situations where automatic 
price improvement may not be appropriate in light of overall market 
conditions. In this regard, the Exchange does not believe it is 
customary or appropriate to provide price improvement over the last 
sale price, or, in every case, to the last sale price. Price 
improvement generally takes the form of stopping orders, where the next 
sale price can benefit the stopped order; the last sale price also 
serves as a measure against the stop price.\15\ Despite these 
exceptions to automatic price improvement under this proposal, the 
Exchange believes that automatic price improvement would be afforded in 
a meaningful way, considering the wider breadth of eligible orders.
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    \15\ In this regard, the Exchange notes that automatic price 
improvement on the Chicago Stock Exchange (``CHX'') does not consist 
of price improvement over the last sale. See CHX Article XX, Rule 
37.
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    This proposal would result in automatic price improvement of \1/
16\, as opposed to the current automatic double-up/double-down price 
improvement, which provides for \1/8\ price improvement. Although the 
amount of automatic price improvement will be less under the proposal 
for a particular order, the number of orders receiving price 
improvement of \1/16\ should increase, as explained above. Price 
improvement of \1/16\ recognizes that \1/16\ is the current minimum 
trading increment for PACE issues on the Exchange's equity trading 
floor.\16\ Thus, it reflects the reality of today's marketplace, 
including other price improvement initiatives in the industry.
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    \16\ See Phlx Rule 125.
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    Because the proposal would provide automatic price improvement, no 
POES window would occur, similar to the current automatic double-up/
double-down price improvement provision.\17\ Instead, an automatic 
execution occurs at an improved price, with no window, timer or delay. 
Orders not eligible for automatic price improvement due to the two 
exceptions relating to the last sale price are automatically executed 
at the PACE Quote and not subject to the

[[Page 13086]]

POES delay. Where an order is otherwise not eligible for the proposed 
automatic price improvement, the POES window may apply.
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    \17\ See Double-Up/Double-Down Order, supra note 6, at note 10 
and Securities Exchange Act Release No. 39640 (February 10, 1998), 
63 FR 8510 (February 19, 1998).
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    Automatic 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. This limitation currently 
appears in Rule 229.07(c)(i)(C), and has applied to both automatic 
double-up/double-down price improvement and manual double-up/double-
down price protection. Similarly, pursuant to paragraph (c)(iii), the 
provision that member organizations entering orders may elect to 
participate in manual double-up/double-down price protection continues 
to apply. However, member organizations will not have the ability to 
elect the proposed automatic price improvement feature.
    Currently, both the automatic double-up/double-down price 
improvement and manual price protection features are jointly subject to 
the entering firm's election.\18\ As a result, electing these features 
where the specialist has not chosen automatic double-up/double-down 
price improvement in that security may currently cause a firm's orders 
to be stopped. Thus, firms who do not want their orders stopped because 
they prefer a prompt execution can currently elect out of both 
features.
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    \18\ This election must be made for all Phlx stocks, not 
security-by-security. See Double-Up/Double-Down Order, supra note 6, 
at note 22.
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    Once automatic price improvement is no longer limited to double-up/
double-down situations, the election for automatic price improvement 
will end, because the reason for allowing a firm's choice will no 
longer exist. Under this proposal, firms electing out of manual price 
protection could nevertheless receive automatic price improvement. For 
instance, where a specialist switches from manual to automatic price 
improvement for a security, the automatic feature would be activated 
even for firms that elected out of the manual feature. This proposal 
results in an assumption, and thus requirement, that all entering firms 
accept automatic price improvement from a participating specialist.\19\
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    \19\ The Exchange believes that it is typical of competitors' 
automatic price improvement initiatives not to allow an opt-out.
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    The Exchange notes that the manual double-up/double-down price 
protection provision, which is mandatory for specialists, will continue 
to be subject to an election by entering member organizations,\20\ who 
may continue to prefer a prompt execution over the opportunity for 
price improvement. Failure to elect will result in the activation of 
the double-up/double-down feature for that User. Specialists continue 
to determine whether to provide automatic price improvement in a 
particular security.
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    \20\ A firm's election continues to apply to all Phlx stocks, 
not security-by-security.
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    The extraordinary circumstances provision currently in the Rule 
would also apply to the new feature, such that automatic price 
improvement may be disengaged in a security or floor-wide in 
extraordinary circumstances with the approval of two Floor Officials. 
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 receive, disseminate 
or update market quotations in a timely and accurate manner.
    The Exchange has determined that, as with many PACE features and 
participation in the PACE System itself, automatic 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.\21\ 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.
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    \21\ Some securities are not appropriate for automatic price 
improvement due to, for instance, liquidity, trading patterns and 
volatility situations rendering it unfair for specialists to afford 
price improvement automatically and then manage the resulting 
positions. See Double-Up/Double-Down Order, supra note 6, at note 
11.
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2. Statutory Basis
    The Exchange represents that the proposed rule change is consistent 
with Section 6(b)(5) of the Act \22\ 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 automatic price improvement to eligible 
orders. In approving the existing price improvement/protection program, 
the Commission noted that price improvement opportunities may enhance 
intermarket competition and order execution quality.\23\
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    \22\ 15 U.S.C. 78f(b)(5).
    \23\ See Double-Up/Double-Down Order, supra note, 6.
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    The Exchange also believes that the proposal is consistent with 
Section 11A \24\ of the Act, and paragraph (a)(1) \25\ 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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    \24\ 15 U.S.C. 78k-1.
    \25\ 15 U.S.C. 78k-1(a)(1).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange 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 reason 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, including whether the proposed rule 
change is consistent with the Act. 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

[[Page 13087]]

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 Room. 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-98-10 and should be 
submitted by April 7, 1998.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\26\
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    \26\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-6763 Filed 3-16-98; 8:45 am]
BILLING CODE 8010-01-M