[Federal Register Volume 65, Number 144 (Wednesday, July 26, 2000)]
[Notices]
[Pages 46027-46028]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-18882]


=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43055; File No. SR-Phlx-98-43)]


Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Order Approving Proposed Rule Change and Notice of Filing and Order 
Granting Accelerated Approval to Amendment No. 4 to the Proposed Rule 
Change Amending Its Procedures Regarding Stop Order Bans and Requiring 
the Use of Account Identifiers for PACE Users

July 19, 2000.

1. Introduction

    On November 18, 1998, the Philadelphia Stock Exchange, Inc. 
(``Phlx'' or ``Exchange'') submitted to 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 amend its procedures regarding 
stop order and stop limit order bans and require the use of account 
identifiers for PACE users. On December 9, 1998, February 2, 1999, and 
July 14, 1999, respectively, the Exchange filed Amendments 1, 2, and 3 
to the proposal with the Commission.\3\
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19B-4.
    \3\ See letter from Nandita Yagnik, Counsel, Phlx, to Michael 
Walinskas, Deputy Associate Director, Division of Market Regulation 
(``Division''), Commission, dated December 8, 1998 (``Amendment No. 
1''); letter from Nandita Yagnik, Counsel, Phlx, to Michael 
Walinskas, Deputy Associate Director, Division, Commission, dated 
February 1, 1999 (``Amendment No. 2''); and letter from Nandita 
Yagnik, Counsel, Phlx, to Michael Walinskas, Associate Director, 
Division, Commission, dated July 13, 1999 (``Amendment No. 3'').
---------------------------------------------------------------------------

    The proposed rule change, including Amendments 1, 2, and 3, was 
published for comment in the Federal Register on September 1, 1999.\4\ 
On July 17, 2000, the Exchange filed Amendment No. 4 to the proposal 
with the Commission.\5\ No comments were received on the proposal. This 
notice and order approves the proposed rule change, as amended, and 
seeks comment from interested persons on Amendment No. 4.
---------------------------------------------------------------------------

    \4\ Securities Exchange Act Release No. 41789 (August 25, 1999), 
64 FR 47885.
    \5\ See Letter from Nandita Yagnick, Counsel, Phlx, to David 
Sieradzki, Special Counsel, Commission, dated July 14, 2000 
(``Amendment No. 4''). The Commission has approved a proposed rule 
change (SR-NYSE-98-45) to eliminate the stop and stop limit order 
banunder Rule 80A. See Securities Exchange Act Release No. 41041 
(Feb. 11, 1999), 64 FR 8424 (Feb. 19, 1999). As a result, in 
amendment No. 4, the Exchange eliminates references to stop and stop 
limit order bans occurring pursuant to NYSE Rule 80A.
---------------------------------------------------------------------------

II. Description of the Proposal

    The Exchange has previously adopted circuit breaker rules, 
paralleling the rules of other exchanges.\6\ At this time, the Exchange 
proposes, like other exchanges, to prohibit the entry of stop and stop 
limit orders during times of market stress.\7\
---------------------------------------------------------------------------

    \6\ See Securities Exchange Act Release No. 39846 (April 9, 
1998), 63 FR 18477 (April 15, 1998) (Order approving SR-PHLX-98-15).
    \7\ See Boston Stock Exchange Rules Chapter II, Section 35(b); 
and Chicago Stock Exchange Chapter IX, Rule 10B, .01(ii).
---------------------------------------------------------------------------

    Proposed Rule 134 will establish a procedure prohibiting the entry 
of stop orders and stop limit orders whenever the primary market for a 
stock admitted to dealings on the Exchange institutes a stop and stop 
limit order ban. When the primary market institutes a stop and stop 
limit order ban, the Exchange will also ban such orders in the stock 
(or stocks) until such time as the ban in the primary market is lifted.
    The Exchange will use the following procedures to implement a stop 
order ban. Following notice from the Consolidated Tape, the Exchange 
will announce to the floor and to PACE users that a stop order ban is 
in effect in a particular issue (or issues). the entry of stop and stop 
limit orders on the Phlx would be prohibited until the ban in the 
primary market is lifted and that information is disseminated on the 
Consolidated Tape. Any stop or stop limit orders residing on the 
specialist's book when a ban goes into effect for a stock that is 
subject to the ban may \8\ be canceled by the Exchange with the 
approval of two Floor Officials and a market regulation officer.\9\
---------------------------------------------------------------------------

    \8\ See Amendment No. 2, supra note 3. The Commission notes 
that, pursuant to Boston Stock Exchange Rules Chapter II, Section 35 
(b), any stop or stop limit orders residing on the specialist's book 
when a ban goes into effect for an individual stock will be canceled 
by the Exchange.
    \9\ See Amendment No. 2, supra note 3. In Amendment No. 3, the 
Exchange amended Rule 134(c)(iii) to codify factors to be considered 
in determining whether stop and stop limit orders on the book would 
be cancelled in the event that the Exchange institutes a stop order 
ban in an individual stock. These factors include: (1) If the 
primary market cancels stop orders residing on their book; on (2) 
other unusual conditions or circumstances. See Amendment No. 3, 
supra, note 3.
---------------------------------------------------------------------------

    The Exchange believes that it is appropriate to ban stop orders and 
stop limit orders when the primary market institutes a ban because, in 
a violatile market, stop orders can accumulate at various prices and, 
if triggered, the stop orders may increase price fluctuations. Because 
other exchanges have adopted stop order ban procedures, Phlx is 
concerned that a migration of stop and stop limit orders to the Phlx 
could occur, thus causing a burden on Phlx specialists.
    The Exchange also proposes requiring PACE \10\ users to attach 
account identifiers on orders submitted through PACE. Among other 
things, this will allow the system to distinguish orders for the 
account of an individual investor from other orders. Specifically, Rule 
229, Commentary .20 will require that all orders sent through PACE 
shall include the appropriate account designator. The following are 
acceptable account types: ``P''--principal order; \11\ ``A''--agency; 
``I''--individual investor; ``D''--program trade, non-index arbitrage 
for member/member organization; ``J''--program trade, index arbitrage 
for individual customers; ``K''--program trade, non-index arbitrage for 
individual customer; ``U''--program trade, index arbitrage for other 
agency; and ``Y''--program trade, non-index arbitrage for other agency. 
Orders for less than 2,099 shares with the account identifier of ``I'' 
would still be able to be entered during the duration of the ban. Other 
orders will be automatically rejected by the PACE System.
---------------------------------------------------------------------------

    \10\ PACE is an electronic order entry, delivery, and execution 
system which operates on the equity floor pursuant to Phlx Rule 229.
    \11\ See Amendment No. 1, supra note 3.
---------------------------------------------------------------------------

    The Exchange believes that the proposed account identifiers will 
enhance efficiency and accuracy of audit trail information and will 
facilitate surveillance investigations by readily identifying a 
member's proprietary trades. More accurate audit trail information 
should also increase the effectiveness of the Exchange's surveillance 
procedures.\12\ Member firms will be given notice following the 
approval of the proposal to enable them to comply with new order 
identification requirements.
---------------------------------------------------------------------------

    \12\ Telephone conversation between Nandita Yagnik, Counsel, 
Phlx, and David Sieradzki, Special Counsel, Division, Commission, on 
July 21, 1999.
---------------------------------------------------------------------------

    The purpose of the proposed rule is to reduce selling pressure by 
preventing market professionals from entering stop and stop limit 
orders during a market sell-off as well as enhance market coordination 
of the circuit breaker rules. In turn, the Phlx believes that the 
proposal should help reduce market volatility. In addition, proposed 
Phlx Rule 134 should prevent the migration to stop orders from the 
primary markets to the Phlx in the case of extraordinary

[[Page 46028]]

market volatility, which should prevent the transfer of market 
volatility to the Phlx. Thus, the Exchange believes that the proposal 
represents a reasonable effort and coordinated means to address 
potential strain on the market that may develop should the Exchange 
become inundated with such orders.

III. Discussion

    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).\13\ Specifically, 
the Commission believes that the proposal is consistent with the 
Section 6(b)(5) \14\ 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 interest.\15\
---------------------------------------------------------------------------

    \13\ 15 U.S.C. 78f(b).
    \14\ 15 U.S.C. 78f(b)(5).
    \15\ In approving this rule, the Commission has considered its 
impact on efficiency, competition, and capital formation. 15 U.S.C. 
78c(f).
---------------------------------------------------------------------------

    The Exchange represents that proposed Rule 134 should prevent the 
migration of stop orders from the primary markets to the Exchange in 
the case of extraordinary market volatility, which should prevent the 
transfer of market volatility to the Phlx. The Commission believes 
that, by preventing the entry of stop and stop limit orders on the Phlx 
when such orders are prohibited on the primary market, the proposal may 
help to alleviate market volatility during times of market stress. As a 
result, the Commission finds that it is reasonable for the Exchange to 
ban the entry of stop and stop limit orders when the primary Exchange 
has issued a ban on such orders. In determining to approve the 
proposal, the Commission notes that, as amended, the proposed rule is 
substantially similar to the rules of the Boston Stock Exchange 
regarding stop and stop limit order bans.\16\
---------------------------------------------------------------------------

    \16\ See supra note 8.
---------------------------------------------------------------------------

    Regarding the use of account identifiers for PACE users, the 
Commission finds that the proposed identification codes may help to 
prevent fraudulent and manipulative acts by improving the accuracy and 
efficiency of audit trail information. Specifically, the Commission 
believes that the use of identifier codes should facilitate 
surveillance investigations by clearly identifying a members's own 
proprietary trading. In addition, more accurate audit trail information 
should increase the effectiveness of the Exchange's automated 
surveillance procedures and provide Exchange staff with a more 
comprehensive reconstruction of trading activity. Accordingly, the 
Commission finds that the proposed mandatory use of audit trail 
identifiers for orders sent through PACE is reasonable and consistent 
with the Act.
    The Commission finds good cause for approving Amendment No. 4 prior 
to the thirtieth day after the date of publication of notice in the 
Federal Register. Amendment No. 4 simply eliminates references to stop 
and stop limit order bans pursuant to NYSE Rule 80A. As noted above, 
NYSE Rule 80A has been amended and no longer requires stop and stop 
limit order bans. As a result, the amendment does not raise any 
significant regulatory issues. Accordingly, the Commission finds good 
cause, consistent with Sections 6(b)(5) \17\ and 19(b)(2) \18\ of the 
Act, to approve Amendment No. 4 to the proposed rule change on an 
accelerated basis.
---------------------------------------------------------------------------

    \17\ 15 U.S.C. 78f(b)(5).
    \18\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 4, including whether Amendment No. 4 
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. 20549-0609. 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 
Phlx. All submissions should refer to File No. SR-PHLX-98-43 and should 
be submitted by August 16, 2000.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\19\ that the proposed rule change (SR-Phlx-98-43) as amended, is 
approved and Amendment No. 4 to the proposed rule change is approved on 
an accelerated basis.
---------------------------------------------------------------------------

    \19\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\20\
---------------------------------------------------------------------------

    \20\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Jonathan G. Katz,
Secretary.
[FR Doc. 00-18882 Filed 7-25-00; 8:45 am]
BILLING CODE 8010-01-M