[Federal Register Volume 63, Number 209 (Thursday, October 29, 1998)]
[Notices]
[Pages 58083-58085]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-29010]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 40593; File No. SR-PHLX-98-37]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Philadelphia Stock Exchange, Inc. Relating to Stopping 
Stock

October 22, 1998.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule19b-4 thereunder,\2\ notice is hereby given that 
on September 28, 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 
Exchange. 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 Exchange proposes to adopt Rule 220, Stopping Stock, which 
would define agreements to stop stock; establish the obligations of a 
member who agrees to stop stock; set forth market conditions under 
which a stop should be granted; establish a policy for executing 
stopped stock, including the price at which the order should be 
executed; and establish policies and procedures for execution of stop 
orders in minimum variation markets that are consistent with the rules 
of parity, priority and precedence. In addition, the Exchange proposes 
to amend Equity Floor Procedure Advice A-2 (``Advice A-2'') regarding 
stopped stock, in order to include reference to proposed Rule 220.
    The text of the proposed rule change is available at the Office of 
the Secretary, PHLX 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 Exchange 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 Exchange has prepared summaries, set

[[Page 58084]]

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 approving the PHLX's adoption of Advice A-2 regarding the 
stopping of stock in 1994, the Commission noted that the Exchange 
should also adopt a rule ``to ensure proper handling of stopped 
stock''.\3\ The Exchange now proposes codifying and enhancing the 
procedures outlined in Advice A-2 as proposed Rule 220, Stopping Stock, 
including permitting PHLX specialists to stop stock in minimum 
variation markets.\4\
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    \3\ See Securities Exchange Act Release No. 34614 (August 30, 
1994)(SR-PHLX-93-41), 59 FR 32034.
    \4\ The proposed stopping stock rule is substantially similar to 
the stopping stock rules adopted by the Boston Stock Exchange 
(``BSE'') and the Chicago Stock Exchange (``CHX''). See BSE Chapter 
II, Section 38 and CHX Article XX, Rule 28.
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    Currently stopping stock is a long established practice in equity 
markets. Reference to this practice presently appears in various rules 
in addition to Advice A-2. For instance, under Rule 229, Commentary 
.05, the Public Order Execution System (``POES'') window subjects 
certain orders to a delay of 30 seconds in order to receive an 
opportunity for price improvement. If such order is not improved, the 
order receives the Philadelphia Stock Exchange Automatic Communication 
and Execution (``PACE'') System quote at which it was stopped.\5\ 
Further, Rule 229, Commentary .07 reflects the practice of stopping 
stock in the context of price improvement.\6\ In fact, the Exchange's 
efforts in offering superior price improvement technology focus 
attention on stopping stock practices and the need for codification in 
PHLX Rules.
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    \5\ Securities Exchange Act Release No. 39225 (October 8, 1997) 
(SR-PHLX-97-32), 62 FR 54147.
    \6\ See Secutities Exchange Act Release Nos. 39548 (January 13, 
1998) (SR-PHLX-97-23), 63 FR 3596; 39640 (February 10, 1998) (SR-
PHLX-98-05), 63 FR 8510; and 40006 (May 19, 1998) (SR-PHLX-98-10) 63 
FR 29288.
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    Under the proposed rule change, an agreement by a PHLX specialist 
to ``stop'' securities at a specified price will constitute a guarantee 
by a member or member organization of the purchase or sale of the 
securities at the specified price or better. In addition, the proposed 
rule states that all stopped orders will expire at the end of the 
trading day.
    Proposed rule 220(b) will impose certain procedural requirements 
for the handling of stopped orders. The specialist will be permitted to 
stop stock upon the unsolicited request of another member when such 
member is acting on behalf of either a public customer account or an 
account in which such member or another member has an interest. After 
granting the stop, the specialist must display the order in his or her 
quote, including representative size, and reduce the spread by bidding 
(offering) at a price higher (lower) than the prevailing bid or offer 
if not executed immediately after being stopped.\7\ This procedure 
applies in other than minimum variation markets, that is, where the 
spread in the quotation is greater than twice the minimum variation.
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    \7\ See BSE, Chapter II, Section 38(b).
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    Proposed Rule 220(b)(2) prohibits the specialist from trading for 
his own account with any order he stopped while he is in possession of 
an order at an equal or better price than the price of the stopped 
order and, in each such case, the specialist must exercise due 
diligence to match the stopped order with such other order in his 
possession in accordance with Exchange Rules 119 and 120. This 
provision is similar to the restrictions of Exchange Rule 452, 
Limitations on Members Trading Because of Customer Orders, and is 
intended to expressly incorporate the due diligence requirement into 
the new rule. This provision currently appears in Advice A-2.
    The Exchange also proposes to adopt procedures for stopping stock 
in minimum variation markets.\8\ Stopping orders in minimum variation 
markets will occur primarily when the bid (offer) is at a price higher 
(lower) than the primary market for day. Specifically, proposed rule 
220(d) would provide that in minimum variation markets, the specialist 
must change his or her quoted bid (offer) in order to reflect the size 
of the order being stopped. In cases of minimum variation markets, a 
stopped order to buy (sell) will be filled: (1) after a transaction 
takes place on the primary market at the stop price or higher (lower) 
or (2) when the share volume on the Exchange at the bid (offer) is 
exhausted. All orders stopped in minimum a variation markets shall be 
executed by the end of the trading day on which the order was stopped 
at no worse than the stopped price. In granting a stop in a minimum 
variation market, a specialist should change the quoted bid (offer) 
size in order to reflect the size of the order being stopped. This 
provision is similar to provisions of other exchanges.\9\
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    \8\ See Proposed Rule 220(d).
    \9\ See BSE Chapter II, Section 38, and CHX Article XX, Rule 28 
and CHX Article XX, Rule 37, interpretation and policy .03. Both of 
these programs were initially approved as pilot programs, which, 
thereafter, received permanent approval. See Securities Exchange Act 
Release Nos. 37134 (April 22, 1996) (SR-BSE-96-03), 61 FR 18634 and 
36401 (October 20, 1995) (SR-CHX-95-100, 60 FR 54893.
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    Section 220(c) provides that the member or member organization 
which agreed to stop the securities in order to obtain a favorable 
price will either provide price improvement or guarantee the stop 
price. If the order is executed at a less favorable price, then such 
member will be liable for the adjustment of the difference between the 
two prices.
    As explained above, the proposed stopping stock rule codifies 
existing procedures for stopping stock on the Exchange floor. In 
addition, the practice of stopping stock enables Exchange specialists 
to offer primary market price protection, an important price 
improvement function of PHLX specialists, consistent with national 
market system principles by executing orders at better prices away from 
the primary market. Furthermore, it provides the opportunity for the 
specialist to improve upon the market and narrow the bid/offer spread.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6 of the Act, in general, and Section 6(b)(5), in 
particular, in that it is designed to promote just and equitable 
principles of trade, and foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, processing 
information with respect to and facilitating transactions in securities 
by codifying stopping stock procedures into PHLX rules.

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

    The Exchange has neither solicited nor received written comments on 
the proposed rule change.

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

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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 Exchange 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 proposal 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 
this 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 Room. Copies of such filing will also be available for 
inspection and copying at the principal office of the PHLX. All 
submissions should refer to File No. SR-PHLX-98-37 and should be 
submitted by November 19, 1998.

    For the Commission, by the Division of Market Regulation 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-29010 Filed 10-28-98; 8:45 am]
BILLING CODE 5010-01-M