[Federal Register Volume 63, Number 236 (Wednesday, December 9, 1998)]
[Notices]
[Pages 67972-67973]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-32607]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40728; File No. SR-PHLX-98-37]


Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Order Granting Approval to Proposed Rule Change Relating to Rule 220 
Regarding Stopping Stock

November 30, 1998.

I. Introduction

    On September 28, 1998, the Philadelphia Stock Exchange, Inc. 
(``Phlx'' or ``Exchange'') filed with 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 adopt Rule 220, which concerns 
stopping stock.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    The proposed rule change was published for comment in the Federal

[[Page 67973]]

Register on October 29, 1998.\3\ No comments were received on the 
proposal. This order approves the proposal.
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    \3\ Securities Exchange Act Release No. 40593 (October 22, 
1998), 63 FR 58083 (File No. SR-PHLX-98-37).
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II. Description of the Proposal

    The Phlx proposes to adopt Rule 220 regarding stopping stock.\4\ 
This rule codifies and enhances the procedures for stopping stock on 
the Exchange floor outlined in Phlx Advice A-2.\5\
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    \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.
    \5\ See Securities Exchange Act Release No. 34614 (August 30, 
1994), 59 FR 46280 (September 7, 1994).
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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.\6\ Further, the specialist 
will be permitted to stop stock upon the unsolicited request of another 
member when the member is acting on behalf of either a public customer 
account or an account in which the 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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    \6\ See Proposed Rule 220(a).
    \7\ See Proposed Rule 220(b)(1).
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    Proposed Rule 220(b)(2) will prohibit 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. 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.
    Proposed Rule 220(c) will provide 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 
the member will be liable for the adjustment of the difference between 
the two prices.
    Under proposed Rule 220(d), stopping orders in minimum variation 
markets will occur primarily when the bid (offer) is at a price higher 
(lower) than the primary market for the day. Specifically, the rule 
will 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 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.

III. Discussion

    After careful review, 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\ 
Specifically, the Commission believes the proposal is consistent with 
the Section 6(b)(5) \9\ requirements that the rules of an exchange be 
designed to promote just and equitable principles of trade, to foster 
cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities and, in general, to protect 
investors and the public interest.\10\
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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
    \10\ In approving this rule, 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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    In approving Phlx Advice A-2, the Commission urged the Phlx to 
submit a proposed rule which would ensure the proper handling of 
stopped stock.\11\ The Commission suggested that any such rule should 
include, inter alia, the obligations of the member who agrees to grant 
the stop, a policy for determining the price at which the order should 
be executed and procedures for minimum variation markets that are 
consistent with the rules of priority, parity and precedence. The 
proposed rule change is fully responsive to the Commission's 
suggestions.
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    \11\ See Securities Exchange Act Release No. 34614 (August 30, 
1994), 59 FR 46280 (September 7, 1994).
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    The practice of stopping stock enables exchange specialists to 
offer primary market price protection, an important price improvement 
function of specialists, by executing orders at better prices away from 
the primary market. Further, the practice of stopping stock provides 
the opportunity for the specialist to improve upon the market and 
narrow the bid/offer spread. The Commission believes the requirements 
of Rule 220, in particular, should increase the likelihood that a 
customer whose order is stopped will receive price improvement. The 
stop order procedures codified in Rule 220 provide that where ``the 
spread in the quotation is greater than the minimum variation of 
trading in the stock, the specialist is required to reduce the spread 
by bidding (offering) at a price higher (lower) than the prevailing bid 
or offer. Specifically each order on the book which has been stopped by 
the Specialist must be displayed, including a representative size, at 
its price or better if not executed immediately after being stopped.'' 
\12\ Accordingly, the Commission believes that the proposed rule change 
is consistent with the objectives of Section 6(b)(5) of the Act.
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    \12\ See Proposed Rule 220(b)(1).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\13\ that the proposed rule change (SR-PHLX-98-37) is approved.
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    \13\ 15 U.S.C. 78s(b)(2).

    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. 98-32607 Filed 12-8-98; 8:45 am]
BILLING CODE 8010-01-M