[Federal Register Volume 65, Number 146 (Friday, July 28, 2000)]
[Notices]
[Pages 46541-46543]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-19053]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43059; File No. SR-Phlx-00-58]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Philadelphia Stock 
Exchange, Inc. Relating to Certain PACE Rule Provisions

July 20, 2000.
    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 June 30, 2000, the Philadelphia Stock Exchange, Inc. (``Phlx'' 
or ``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Phlx. On July 18, 
2000, the Exchange submitted Amendment No. 1 to the proposed rule 
change.\3\ The Exchange has designated the proposed rule change as 
constituting a ``non-controversial'' rule change under paragraph (f)(6) 
of Rule 19b-4 under the Act, \4\ which renders the proposal effective 
upon receipt of this filing by the Commission.\5\ 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.
    \3\ In Amendment No. 1, the Exchange modified its proposed 
change to the text of Supplementary Material .10(a)(i). The 
modification clarifies that qualifying marketable limit orders will 
continue to be executed at the price quoted in the Phlx Automated 
Communication and Execution System, whether or not executed 
automatically. See Letter from Edith Hallahan, Deputy General 
Counsel, Phlx, to Steven Johnston, Special Counsel, Division of 
Market Regulation, dated July 17, 2000 (``Amendment No. 1'').
    \4\ 17 CFR 240.19b-4(f)(6).
    \5\ The Exchange has represented that the proposed rule change: 
(i) will not significantly affect the protection of investors or the 
public interest; (ii) will not impose any significant burden on 
competition; and (iii) will not become operative for 30 days after 
the date of this filing, unless otherwise accelerated by the 
Commission. The Exchange also has provided at least five business 
days notice to the Commission of its intent to file this proposed 
rule change, as required by Rule 19b-4(f)(6) under the Act. Id.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Phlx, pursuant to Rule 19b-4 under the Act, \6\ proposes to 
implement a change to the Phlx Automated Communication and Execution 
(``PACE'') System. By incorporating two provisions into Phlx Rule 229 
(concerning PACE), this change will provide an entering member 
organization with additional elections with respect to certain features 
of PACE similar to those currently provided for in the Rule. 
Specifically, the language ``unless the entering member organization 
otherwise elects'' is proposed to be added to both Supplementary 
Material .10(a)(i) and (ii).
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    \6\ 17 CFR 240.19b-4.
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    The proposed change to Supplementary Material .10(a)(i) provides 
that round-lot orders up to 599 shares, and the round-lot portion of 
PRL \7\ limit orders up to 599 shares, that are entered at the PACE 
Quote, shall be executed at the PACE Quote.\8\ This proposal would 
codify that such execution guarantee can either be provided by the PACE 
System automatically or by the specialist, at the election of the 
entering member. This amendment does not change the fundamental 
principle of PACE that the specialist must provide the PACE Quote to 
eligible orders.
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    \7\ The first paragraph of Rule 229 defines a PRL as a combined 
round-lot and odd-lot order.
    \8\ The PACE Quote is defined in Rule 229 as the best bid/ask 
quote among the American, Boston, Cincinnati, Chicago, New York, 
Pacific or Philadelphia Stock Exchange, or the Intermarket Trading 
System/Computer Assisted Execution System (``ITS/CAES'') quote, as 
appropriate.
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    Second, the revision would permit the entering member organization 
to elect whether certain eligible non-marketable limit orders will be 
executed via PACE in accordance with the ``primary market print 
protection'' provision set forth in Supplementary Material .10(a)(ii) 
of the PACE Rule.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, Phlx 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

[[Page 46542]]

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
    The purpose of the proposed rule change is to extend to an entering 
member organization the ability to control all aspects of the handling 
of its orders in conjunction with the other elections already provided 
within the rule. Currently, entering member organizations can make an 
election regarding the price improvement provisions of Supplementary 
Material .07. An entering member organization may also elect manual, 
instead of default automatic execution of market orders if automatic 
execution would have occurred at a price outside of the day's primary 
market high-low range (``out-of-range protection''). Finally, under 
Supplementary Material .10(a)(iii), member organizations that enter 
limit orders after the opening may elect to have such orders executed 
manually at or within the New York market high-low range of the day. 
similar to the proposed elections, these provisions are intended to 
give member organizations greater flexibility as to the disposition of 
their orders, which should, in turn, enhance the Exchange's competitive 
position among firms seeking an appropriate venue for the execution of 
their order flow.\9\
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    \9\ Footnote deleted. Telephone conversation between Edith 
Hallahan, Deputy General Counsel, Phlx, and Steven Johnston, Special 
Counsel, Division of Market Regulation, Commission, July 19, 2000.
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    The PACE System, as described in Rule 229, is the Exchange's 
automated order routing, delivery, execution and reporting system on 
the equity floor. PACE is available to member organizations, who are 
referred to here as either the entering member organizations sending 
order flow or the specialist on the equity trading floor, both of whom 
are users of the PACE System.
    As stated above, the proposal is designed to provide entering 
member organizations with two elections similar to those currently 
noted within the rule. Member organizations may choose not to receive 
certain guarantees for many different reasons, which are often specific 
to their types of customers and business, as well as specific to 
certain securities, order types and sizes.
    First, Supplementary material .10(a)(i) generally provides that 
marketable limit orders up to 599 shares entered at the PACE Quote 
shall be executed at the PACE Quote. The rule does not currently state 
that such orders are automatically executed, only that they are to be 
executed at the PACE Quote. Specifically, the proposal reflects that 
the automatic execution price guarantee would be available if the order 
is executed by the specialist or automatically.
    Second, the entering member organization could elect not to receive 
the execution guarantee resulting from primary market trading at that 
price. A member organization may not wish, for example, to receive a 
partial execution of 500 shares of a 10,000-share order, if only 1,000 
shares trade on the primary market.\10\
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    \10\ Amendment No. 1. supra.
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    The Exchange believes that automatic and other order handling 
features, such as those provided by PACE, generally facilitate the 
ability of members firms to satisfy their best execution and other 
fiduciary obligations to their customers when routing orders to the 
Phlx. However, as the Commission has recognized, there is no single 
benchmark for what constitutes ``best execution'' for all customers, 
all firms and all orders. Member firms consider a variety of factors in 
determining whether to route their equity orders to the Phlx or to 
handle their orders in some other fashion, and the Exchange believes 
that a ``one size fits all'' execution and orer handling methodology 
for PACE-eligible orders could, in certain circumstances, be an 
impediment to firms in choosing to route eligible orders to the Phlx 
floor. The Phlx believes that entering members should have the greatest 
degree of flexibility in determining, based upon their business, their 
customers' desires, and the specific capabilities and characteristics 
of the Phlx equity floor, whether PACE-eligible orders would be equally 
well handled (or handled better) manually in some fashion other than 
that provided for in the pre-programmed PACE System.
2. Statutory Basis
    The Exchange represents that the proposed rule change is consistent 
with Section 6(b) of the Act in general,\11\ and furthers the 
objectives of Section 6(b)(5) \12\ in particular, in that it is 
designed to remove impediments to and perfect the mechanism of a free 
and open market and a national market system, as well as to promote 
just and equitable principles of trade, by extending an entering member 
organization's election ability to control all aspects regarding the 
processing of that firm's orders. This flexibility should increase the 
Exchange's competitive position as well as provide a more tailored 
execution venue to member organizations.
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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 Phlx does not believe that the proposed rule change will impose 
any inappropriate burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    The Exchange neither received nor solicited written comments.

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    The proposed rule change has become effective upon filing pursuant 
to Rule 19(b)(3)(A) of the Act and Rule 19b-4(f)(6) thereunder, because 
it: (i) Does not significantly affect the protection of investors or 
the public interest; (ii) does not impose any significant burden on 
competition; and (iii) does not become operative for 30 days after the 
date of filing or such shorter period 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, or such shorter 
time as designated by the Commission.
    At any time within 60 days of the filing of such proposed rule 
change, the Commission may summarily abrogate such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purpose of the Act.

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 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. 
Copies of

[[Page 46543]]

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-00-58 and should be 
submitted by August 18, 2000.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 00-19053 Filed 7-27-00; 8:45 am]
BILLING CODE 8010-01-M