[Federal Register Volume 64, Number 222 (Thursday, November 18, 1999)]
[Notices]
[Pages 63101-63102]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-30089]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42120; File No. SR-Phlx-99-33]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change and Amendment Nos. 1 and 2 to the 
Proposed Rule Change by the Philadelphia Stock Exchange, Inc. Relating 
to the Phlx Automatic Communication and Execution System

November 9, 1999.
    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 August 24, 1999, 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 proposal amends rules governing the Phlx Automatic 
Communication and Execution System (``PACE'')-- the Phlx's automatic 
order routing and execution system on the equity trading floor. On 
October 12, 1999, the Exchange filed Amendment No. 1 to the proposed 
rule change, which entirely replaces and supercedes the initial 
proposal.\3\ On November 1, 1999, the Exchange filed Amendment No. 2 to 
the proposed rule change.\4\ The Exchange has designated this proposal 
as one which does not significantly affect the protection of investors 
or the public interest, and does not impose any significant burden on 
competition under Section 19(b)(3)(A) of the Act \5\ and Rule 19b-
4(f)(6) thereunder,\6\ which renders the proposal effective upon filing 
with the Commission.\7\ The Commission is publishing this notice to 
solicit comments on the proposed rule change, as amended, from 
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ The Exchange filed the original proposal under Section 
19(b)(3)(A) of the Act and Rule 19b-4(f)(5) thereunder, 
characterizing the proposal as effecting a change in PACE. 15 U.S.C. 
78s(b)(3)(A) and 17 CFR 240.19b-4(f)(5). The Exchange later 
clarified that the purpose of the proposal was to conform the 
language of Phlx Rule 229 to reflect the manner in which PACE 
currently operates. Because the proposal will not effect any 
significant change other than to amend Phlx Rule 229 to conform to 
how PACE's automatic price improvement feature currently operates, 
the Exchange filed Amendment No. 1 to reflect that the proposal has 
become effective upon filing of Amendment No. 1, pursuant to Section 
19(b)(3)(A) of the Act and Rule 19b-4(f)(6) thereunder. 15 U.S.C. 
78s(b)(3)(A) and 17 CFR 240.19b-4(f)(6). The Commission accepted the 
August 24, 1999 proposal as meeting the 5-day pre-filing requirement 
under Rule 19b-4(f)(6)(iii). 17 CFR 240.19b-4(f)(6)(iii).
    \4\ See letter from Nandita Yagnik, Attorney, Phlx, to Nancy 
Sanow, Senior Special Counsel, Division of Market Regulation, SEC, 
dated October 29, 1999 (Amendment No. 2''). In Amendment No. 2, the 
Phlx corrects inaccuracies in the language of Phlx Rule 229.
    \5\ 15 U.S.C. 78s(b)(3)(A).
    \6\ 17 CFR 240.19b-4(f)(6).
    \7\ Because Amendment No. 1 was substantive, the Commission 
deems the proposal effective as of October 12, 1999, the date that 
the Exchange filed Amendment No. 1.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange proposes to amend Phlx Rule 229, Commentary .07(c)(i), 
the automatic price improvement feature of PACE, to state that PACE 
will determine whether the last sale is an uptick or downtick for 
providing automatic price improvement, and that the previous day's last 
sale will not be considered in improving the price. The purpose of this 
amendment is to conform the language of Phlx Rule 229, Commentary 
.07(c)(i)(B) to reflect the manner in which PACE currently operates. 
The text of the proposal is below. Additions are in italic.
Rule 229
Philadelphia Stock Exchange Automated Communication and Execution 
System
    Commentary .01-.06 No change.
    .07
    (a) No change.
    (b) No change.
    (c) Price Improvement for PACE Orders
    (i) Automatic Price Improvement--Where the specialist voluntarily 
agrees to provide automatic price improvement to all customers and 
eligible market orders in a security, automatically executable market 
and marketable limit orders in New York Stock Exchange and American 
Stock Exchange listed securities received through PACE for 599 shares 
or less shall be provided with automatic price improvement of 1/16 from 
the PACE Quote when received beginning at 9:45 A.M. except where:
    (A) 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; or
    (B) a buy order would be improved to the last sale price which is a 
downtick or a sell order would be improved to the last sale price which 
is an uptick. The PACE System will determine whether the last sale 
price is a downtick or an uptick. The PACE System does not recognize 
changes from the previous day's close.
    In these situations, the order is not eligible for automatic price 
improvement, and is, instead, automatically executed at the PACE Quote. 
A specialist may voluntarily agree to provide automatic price 
improvement to larger orders in a particular security to all customers 
under this provision. A specialist may choose to provide automatic 
price improvement where the PACE Quote is 3/16 or greater or 1/8 or 
greater.
    (C)-(D) No change.
    (ii)-(iv) No change.
    .08-.19 No change.

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 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
    PACE is the Exchange's automatic order routing and execution system 
on the equity trading floor.\8\ PACE accepts orders for manual and 
automatic execution in accordance with the provisions of Phlx Rule 229, 
which governs PACE and defines its objectives and parameters. Recently, 
the Exchange implemented automatic price improvement \9\ where 
specialists could voluntarily provide \1/16\ automatic price 
improvement to eligible orders in markets where the difference in price 
between the bid and the offer is either \1/8\ or greater, or \3/16\ or 
great.
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    \8\ See Phlx Rule 229.
    \9\ See Securities Exchange Act Release No. 40006 (May 19, 
1998), 63 FR 29288 (May 28, 1998) (SR-Phlx-98-10).
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    There are certain exceptions to providing automatic price 
improvement. One exception is when a buy order would be improved (if 
automatic price improvement were provided) to the last sale price which 
is a downtick (or a sell order would be improved to the last sale price 
which is an uptick).\10\ For example, when the market is 41\7/8\ x  
42\1/16\, and the last sale is 42--(a downtick), a buy order would not 
be automatically improved to 42, but

[[Page 63102]]

instead executed at 42\1/16\, because it would have improved to the 
last sale, which is a downtick. However, a sell order would be 
automatically improved and executed at 41\15/16\. As it currently 
operates, PACE does not recognize an uptick or downtick from the 
previous day's close. Thus, for example, on the opening, eligible buy 
orders are automatically improved to the last sale, regardless of 
whether the last sale is a downtick from the previous day's close.
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    \10\ See Phlx Rule 229, Commentary .07(c)(i)(B).
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    To ensure that Phlx Rule 229 accurately reflects the manner in 
which the automatic price improvement feature currently operates, the 
Exchange proposes to amend the automatic price improvement provisions 
to state that PACE will determine whether the last sale is a downtick 
or an uptick, and will not recognize changes from the previous day's 
close. Each day, the first sale is neither an uptick nor downtick from 
the previous day's close. This allows automatic price improvement to 
occur, even if the last sale is a downtick from the previous day's 
close (or in the case of a sell order, an uptick from the previous 
day's close). For example, if the previous day's closing price was 
42\1/8\, and the stock opens at 42, the downtick is not relevant to the 
automatic price improvement process in this example. Thus, where the 
PACE quote is 41\7/8\  x  42\1/16\, a buy order may be automatically 
improved to 42 because PACE will not recognize the 42 as a downtick 
from the previous day's last sale.
    While the Exchange originally did not intend for PACE to operate in 
this manner, the system has operated this way for approximately 12 
months. The Exchange believes that conforming the language of Phlx Rule 
229 to reflect the manner in which PACE has been operating is the most 
efficient way to correct the discrepancy between the language of Phlx 
Rule 229 and the current method of operation of the automatic price 
improvement feature. The Exchange stated it has not been notified of 
any negative impact on customers resulting from the current method of 
operation of the automatic price improvement feature.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
Section 6 of the Act) \11\ in general, and Section 6(b)(5) of the Act 
\12\ in particular, because it is designed to promote just and 
equitable principles of trade, remove impediments to and perfect the 
mechanisms of a free and open market and a nation market system and 
protect investors and the public interest by providing PACE customers 
the ability to receive automatic price improvement, resulting in better 
execution.
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    \11\ 15 U.S.C. 78f.
    \12\ 15 U.S.C. 78f(b)(5).
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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

    The proposed rule change, as amended, as become effective pursuant 
to Section 19(b)(3)(A) of the Act \13\ and Rule 19b-4(f)(6) thereunder 
\14\ because the proposal (1) does not significantly affect the 
protection of investors or the public interest; (2) does not impose any 
significant burden on competition; and (3) does not become operative 
for 30 days after the date of filing or such shorter time as the 
Commission may designate if consistent with the protection of investors 
and the public interest; provided that the Exchange has given the 
Commission written notice of its intent to file the proposed rule 
change at least five business days prior to the filing date of the 
proposed rule change,\15\ or such shorter time as designated by the 
Commission.\16\
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    \13\ 15 U.S.C. 78s(b)(3)(A).
    \14\ 17 CFR 240.19b-4(f)(6).
    \15\ The Exchange pre-filed the proposed rule change on August 
24, 1999. See footnote 3, supra.
    \16\ In reviewing this proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f)
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    The Exchange has requested that the Commission accelerate the 
operative date because the Exchange has not been notified of any 
negative effects in the current operation of PACE, and because Phlx 
Rule 229 should reflect PACE's current method of operation.
    The Commission finds that it is appropriate to designate the 
proposal to become operative today, because such designation is 
consistent with the protection of investors and the public interest. 
Specifically, the Commission finds that it is appropriate to accelerate 
the operative date of the proposal because it is in the best interests 
of investors that the discrepancy between the language of Phlx Rule 229 
and the current method of operation of PACE be corrected as soon as 
possible, to minimize any potential confusion. For this reason, the 
Commission finds that designation of the proposal to become operative 
today is consistent with the protection of investors and the public 
interest.
    At any time within 60 days of the filing of this proposed rule 
change, the Commission may summarily abrogate this rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest or for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.

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, NW, Washington, DC 20549-0609. Copies of 
the 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 in 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 number SR-Phlx-99-33, and should be 
submitted by December 9, 1999.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-30089 Filed 11-17-99; 8:45 am]
BILLING CODE 8010-01-M