[Federal Register Volume 63, Number 140 (Wednesday, July 22, 1998)]
[Notices]
[Pages 39336-39338]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-19438]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40199; File No. SR-PCX-97-46]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by the Pacific 
Exchange, Inc. Relating to Minimum Trading Increments

July 14, 1998.
    Pursuant to Section 19(b)(1) of Securities Exchange Act of 1934 
(``Exchange Act'' or ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice 
is hereby given that on December 22, 1997, the Pacific Exchange, Inc. 
(``PCX'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``SEC'' or ``Commission'') the proposed rule change as 
described in Items I and II 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 and to grant accelerated approval to the proposed rule change.
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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 PCX proposes to amend its Rule 5.3(b) by adding a new 
Commentary .02 to permit members to trade on the Exchange in increments 
smaller than \1/16\, in order to match bids and offers displayed in 
other markets for the purpose of preventing Intermarket Trading System 
(``ITS'') trade-throughs. The text of the proposed rule change is 
available at the Office of the Secretary, the PCX, 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
    In May 1997, the Commission approved an Exchange proposal to amend 
its rules to permit trading of stocks in sixteenths when the selling 
price is $5 or above.\3\ Previously such

[[Page 39337]]

stocks could only be traded in \1/8\ increments.
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    \3\ See Exchange Act Release No. 38575 (May 5, 1997), 62 FR 
26606 (May 14, 1997) (order granting temporary accelerated approval 
of File No. SR-PCX-97-16); see also Exchange Act Release No. 38780 
(June 26, 1997), 62 FR 36087 (July 3, 1997) (order approving File 
No. SR-PCX-97-15, amending Rule 5.3(b)).
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    Since that time, certain third market makers have disseminated 
quotations in certain listed securities in fractions smaller than a 
sixteenth. In addition, ITS has been modified to permit ITS commitments 
to trade to be sent through ITS in fractions as small as \1/64\. This 
ITS modification permits PCX members to send orders via ITS to a market 
displaying a quotation in \1/32\ or \1/64\.
    The Exchange believes that it is important to provide its members 
with flexibility to effect transactions on the Exchange at a smaller 
increment than \1/16\ for the purpose of matching a displayed bid or 
offer in another market at such smaller increment(i.e., \1/32\ or \1/
64\) for the purpose of preventing ITS trade-throughs. For example, if 
the best bid on the Exchange is 8 and a bid of 8 \1/32\ is displayed 
through ITS in another market center, the Exchange specialist or floor 
broker may execute a market or marketable limit order at 8 \1/32\ in 
order to match the other market's bid. Limit orders entered on the 
Exchange, however, will continue to be priced at the current minimum 
trading increment of \1/16\, and orders priced in smaller increments 
will not be accepted.
2. Statutory Basis
    The basis under the Act for the proposed rule change is the 
requirement under Section 6(b)(5)\4\ that an Exchange have rules that 
are designed to promote just and equitable principles of trade, to 
remove impediments to, and perfect the mechanism of a free and open 
market and, in general, to protect investors and the public interest.
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    \4\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The proposed rule change will impose no 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 solicited or received with respect to the 
proposed rule change.

III. Commission's Findings and Order Granting Accelerated Approval 
of the Proposed Rule Change

    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) of the Act.\5\ 
Specifically, the Commission believes the proposal is consistent with 
the Section 6(b)(5) \6\ 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.\7\
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    \5\ 15 U.S.C. 78f(b).
    \6\ 15 U.S.C. 78f(b)(5).
    \7\ In approving this rule change, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
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    Recently, there has been a movement within the industry to reduce 
the minimum trading and quotation increments imposed by the various 
self-regulatory organizations (``SROs''). Last year, the PCX, American 
Stock Exchange (``Amex''), Nasdaq Stock Market (``Nasdaq''), New York 
Stock Exchange (``NYSE'') and Chicago Board Options Exchange (``CBOE'') 
reduced their minimum trading increments.\8\ Currently, exchange rules 
provide for trading of most equity securities in increments as small as 
\1/16\ of a dollar.\9\ PCX represents that several third market makers 
have begun quoting securities in increments smaller than those approved 
for trading on the primary markets. The proposed rule change will 
provide PCX with the limited flexibility it needs to address this 
development and remain competitive with these markets.
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    \8\ See Exchange Act Release No. 38780 (June 26, 1997), 62 FR 
36087 (July 3, 1997) (order approving PCX-97-15, amending PCX Rule 
5.3(b)); Exchange Act Release No. 38571 (May 5, 1997), 62 FR 25682 
(May 9, 1997) (approving an Amex proposal to reduce the minimum 
trading increment to \1/16\ for certain Amex-listed equity 
securities); Exchange Act Release No. 38678 (May 27, 1997), 62 FR 
30363 (June 6, 1997) (approving a Nasdaq rule change to reduce the 
minimum quotation increment to \1/16\ for certain Nasdaq-listed 
securities); Exchange Act Release No. 38897 (Aug. 1, 1997), 62 FR 
42847 (Aug. 8, 1997) (approving a NYSE rule change to reduce the 
minimum quotation increment to \1/16\ for certain NYSE-listed 
securities); and Exchange Act Release No. 39159 (Sept. 30, 1997), 62 
FR 52365 (Oct. 9, 1997) (approving a CBOE rule change to reduce the 
minimum quotation increment to \1/16\ for stocks).
    \9\ Id.
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    The size of the minimum trading increment for securities traded 
through the facilities of Nasdaq is determined by the technical 
limitations of the Nasdaq system. Currently, Nasdaq systems are capable 
of trading securities priced under $10 in increments as fine as \1/32\ 
of one dollar. Securities priced over $10 may be traded in increments 
as fine as \1/16\ of one dollar.\10\ As a result, the Commission 
recognizes that Nasdaq third market makers may trade exchange listed 
securities priced at less than $10 in increments finer than sixteenths. 
Nasdaq has informed the Commission that Nasdaq third market makers are 
currently posting quotes for listed securities in increments finer than 
sixteenths.\11\ The proposed amendment to Exchange Rule 5.3(b) will 
allow PCX traders to match prices disseminated by Nasdaq market makers 
that may better the PCX quote by an increment finer than the current 
\1/16\ minimum increment. In addition, the Commission notes that the 
proposal will enable the Exchange to match prices disseminated by 
another exchange in the event that another exchange were to reduce its 
minimum trading increment.\12\ The proposal should assist Exchange 
members to fulfill their obligation to obtain the best price for their 
customers. Accordingly, the Commission believes that it is reasonable 
for the Exchange to allow trading in increments finer than sixteenths 
for the limited purpose of preventing an ITS trade-through.
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    \10\ The Commission notes that any change to the minimum 
increment for securities traded through the facilities of the Nasdaq 
system would be considered a change in an existing order-entry or 
trading system of an SRO. Accordingly, the NASD would be required to 
file a proposed rule change under Section 19(b)(3)(A) of the Act to 
change its minimum increment.
    \11\ Telephone conversation between Andrew S. Margolin, Senior 
Attorney, Nasdaq, Gene Lopez, Vice President, Trading and Market 
Services, Nasdaq, and David Sieradzki, Attorney, Commission, on July 
8, 1998.
    \12\ To change its minimum increment, an exchange would be 
required to file a proposed rule change that would become 
immediately effective under Section 19(b)(3)(A) of the Act.
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    The Commission finds good cause for approving the proposed rule 
change prior to the thirtieth day after the date of publication of 
notice thereof in the Federal Register. Approval of the proposal will 
provide PCX members with the ability to match a better bid or offer 
made available through ITS, thereby helping to prevent ITS trade-
throughs and ensuring the best execution of PCX customer orders. The 
Commission notes that this proposal is similar to a proposal by the 
NYSE that was published for the full notice and comment period, no 
comments were made on that proposal.\13\ Therefore, the Commission 
believes it is consistent with Section 6(b)(5) and Section 19(b)(2) of 
the Act to grant accelerated approval to the proposed rule change.\14\
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    \13\ See Exchange Act Release No. 38897 (Aug. 1, 1997), 62 FR 
42847 (Aug. 8, 1997). The Commission also notes that it recently 
approved on an accelerated basis a similar proposal by Amex. See 
Exchange Act Release No. 40189 (July 9, 1998) (order approving File 
No. SR-Amex-97-39).
    \14\ 15 U.S.C. 78f(b)(5) and 78s(b)(2).
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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

[[Page 39338]]

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 susequent 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 Room, located at the above address. 
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-PCX-97-46 and should be submitted by August 12, 1998.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2)of the 
Act,\15\ that the proposed rule change (SR-PCX-97-46) is approved.

    \15\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-19438 Filed 7-21-98; 8:45am]
BILLING CODE 8010-01-M