[Federal Register Volume 66, Number 24 (Monday, February 5, 2001)]
[Notices]
[Pages 8988-8991]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-2955]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43901; File No. SR-Phlx-01-12]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Philadelphia Stock 
Exchange, Inc., Relating to Automatic Price Improvement for Equities 
Trading in Decimals

January 30, 2001.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934

[[Page 8989]]

(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on January 26, 2001, 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 Exchange. On 
January 29, 2001, the Phlx amended the proposal.\3\ The Exchange filed 
the proposal pursuant to Section 19(b)(3)(A) of the Act,\4\ and Rule 
19b-4(f)(6) thereunder,\5\ which renders the proposal effective upon 
filing with the Commission.\6\ 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\ See January 29, 2001 letter from Edith Hallahan, Deputy 
General Counsel, Phlx to Joseph P. Morra, Special Counsel, Division 
of Market Regulation, Commission (``Amendment No. 1''). At the 
Commission's request, the Phlx filed Amendment No. 1, which asks 
that the proposal be implemented on a six-month pilot basis.
    \4\ 15 U.S.C. 78s(b)(3)(A).
    \5\ 17 CFR 240.19b-4(f)(6).
    \6\ The Phlx has asked the Commission to waive the 5-day pre-
filing notice requirement. See Rule 19b-4(f)(6)(iii). 17 CFR 
240.19b-4(f)(6)(iii).
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Phlx proposes to codify a new automated price improvement 
feature for equities traded in decimals into Phlx Rule 229.07. The text 
of the proposed rule change is below. Proposed new language is in 
italics. Proposed deletions are in brackets.
Rule 229.  Philadelphia Stock Exchange Automated Communication and 
Execution System (PACE)
    PACE provides a system for the automatic execution of orders on the 
Exchange equity floor under predetermined conditions. Orders accepted 
under the system may be executed on a fully automated or manual basis 
in accordance with the provisions of this Rule. Securities admitted to 
dealings on the equity floor are eligible for trading on the PACE 
System in which equity specialists and member organizations may choose 
to participate. The conditions under which orders will be accepted and 
executed are set forth below. When used in the Rule, PRL means a 
combined round-lot and odd-lot order, and PACE Quote means 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. The PACE rules, conditions and guidelines do not apply 
to orders not on the system, and existing rules governing orders not on 
the system are not affected hereby.
    Supplementary Material:
General
    The following PACE execution parameters are minimum standards 
applicable to agency orders received through PACE. Orders transmitted 
to the floor through the PACE system can be executed on a basis better 
than the applicable minimum standard:
    .01-.06  No change.
    .07  (a) Member organizations which enter market orders after the 
opening may elect to have such orders executed
    (i) in accordance with the procedures set forth in Supplementary 
Material Section .05 or,
    (ii) if such execution price would be outside the New York market 
high-low range for the day manually at or within the New York market 
high-low range of the day.
    (b) Market orders (round-lots of 600 to 2000 shares or such greater 
size which the specialist agrees to accept and PRL's of 601 to 2099 
shares or such greater size which the specialist agrees to accept) 
which are entered after the opening and which the specialist has not 
agreed to accept for automatic execution shall not be subject to the 
execution parameters set forth in Supplementary Material .05 and shall 
be executed in accordance with Supplementary Material .10(b) and other 
applicable rules of the Philadelphia Stock Exchange; provided, however, 
that the odd-lot portion of PRL's of 601 or more shares shall be 
executed at the same price as the round-lot portion. In the case of a 
PRL order, the round-lot portion(s) of which is executed at more than 
one price, the odd-lot portion shall be executed at the same price as 
the first round-lot portion is executed.
    (c) Price Improvement for PACE Orders.
    (i) Automatic Price Improvement--Where the specialist voluntarily 
agrees to provide automatic price improvement to all customers and all 
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 from the 
PACE Quote when received of \1/16\ for equities trading in fractions 
or, either $.01 or a percentage of the PACE Quote when the order is 
received for equities trading in decimals [from the PACE Quote when 
received] beginning at 9:30 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 (except as provided in (E) below); 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 (except as provided in (E) below). 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 for 
equities trading in fractions; [, or .03 or greater or .05 or greater] 
for equities trading in decimals, a specialist may choose to provide 
automatic price improvement of: (i) $.01 where the PACE Quote is either 
$.05 or greater, or $.03 or greater, or (ii) where the PACE Quote is 
$.02 or greater, a percentage of the PACE Quote when the order is 
received, up to 50%, rounded to the nearest penny, and at least $.01, 
in a particular security to all customers.
    (C) Automatic price improvement will not occur for odd-lot orders, 
nor where the execution price before or after the application of 
automatic price improvement would be outside the primary market high/
low range for the day, if so elected by the entering member 
organization.
    (D) The POES window of Supplementary Material .05 above does not 
apply where an order is subject to automatic price improvement or 
manual price protection.
    (E) Sell Order Enhancement I--A specialist may choose to give 
automatic price improvement to all sell orders of 100 shares or more, 
as determined by the specialist, in a particular security which would 
be improved to the last sale on an uptick; or,
    Sell Order Enhancement II--A specialist may choose to give 
automatic price improvement to all sell orders of 100 shares or more, 
as determined by the specialist, in a particular security which would 
be improved to a price higher than the last sale.

[[Page 8990]]

    (ii) Mandatory Manual Double-up/Double-down Price Protection--Where 
the specialist does not agree to provide automatic price improvement in 
a security, the specialist must provide manual double-up/double-down 
price protection in any instance where the bid/ask of the PACE Quote is 
\1/8\ or greater for equities trading in fractions, or .05 or greater 
for equities trading in decimals, beginning at 9:30 A.M., to all 
customers and all eligible orders in a security, where the PACE System 
shall stop eligible automatically executable market and marketable 
limit orders of 599 shares or less in New York Stock Exchange or 
American Stock Exchange listed securities received through PACE in 
double-up/down situations in order to receive an opportunity for price 
improvement over the PACE Quote when received. Orders are ``stopped'' 
by the specialist at the PACE Quote when received, meaning that the 
order is guaranteed to receive at least that price by the end of the 
trading day. A specialist may voluntarily agree to provide manual 
double-up/double-down price protection to larger orders in a particular 
security to all customers under this provision. Where the execution 
(stop) price would be outside the primary market high/low range for the 
day, if so elected by the entering member organization, the order will 
be handled manually pursuant to paragraph (a) above. Odd-lot orders are 
not eligible for double-up/double-down manual price protection.
    A double-up/double down situation is defined as a trade that would 
be at least:
    (i) \1/4\ (up or down) for equities trading in fractions, or .10 
(up or down) for equities trading in decimals from the last regular way 
sale on the primary market; or
    (ii) \1/4\ for equities trading in fractions, or .10 for equities 
trading in decimals from the regular way sale that was the previous 
intraday change on the primary market.
    (iii) Member organizations entering orders may elect to participate 
in manual double-up/double-down price protection. Failure to elect will 
result in the activation of the double-up/double-down feature for that 
User, but specialists determine whether to provide automatic price 
improvement in a particular security.
    (iv) Extraordinary Circumstances--Both automatic price improvement 
and manual double-up/double-down price protection may be disengaged in 
a security or floor-wide in extraordinary circumstances with the 
approval of two Floor Officials. In addition to fast market conditions, 
for purposes of this paragraph, extraordinary circumstances also 
include systems malfunctions and other circumstances that limit the 
Exchange's ability to receive, disseminate or update market quotations 
in a timely and accurate manner.
* * * * *

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 its proposal and discussed any 
comments it received regarding the proposal. 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
    The Exchange proposes to incorporate a new form of automatic price 
improvement for equities trading in decimals, based on a percentage of 
the spread between the bid and offer.
    According to the Phlx, price improvement statistics are often used 
by order flow providers as a measure of both a specialist's and an 
exchange's execution quality. Broker-dealers are subject to the 
fiduciary duty of best execution respecting their order routing 
decisions. The Phlx has long sought to encourage the development of 
features, and specialist participation in such features, that 
contribute to higher price improvement figures and thus encourage 
better execution quality for the Exchange. The proposal is intended to 
codify a new automatic price improvement choice for equities trading in 
decimals that enables price improvement greater than one penny.
    Currently, specialists may choose to provide automatic price 
improvement of $.01 for equities trading in decimals (where the PACE 
\7\ Quote \8\ is either $.05 or greater, or $.03 or greater).\9\ 
Automatic price improvement is a feature of the Exchange's PACE System 
that automatically executes eligible orders at a price better than the 
PACE Quote. Although participation in automatic price improvement (as 
well as participation in PACE as a whole) is voluntary, specialists are 
required to manually provide price improvement in certain situations 
described in Phlx Rule 229.07(c)(ii) (double downtick protection).
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    \7\ PACE is the Exchange's automated order delivery, routing, 
execution and reporting system for equities.
    \8\ The PACE Quote is the NBBO, or National Best Bid/Offer.
    \9\ See Securities Exchange Act Release No. 43206 (August 25, 
2000), 65 FR 53250 (September 1, 2000) (SR-Phlx-00-08).
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    The proposal amends Phlx Rule 229, Supplementary Material .07(c), 
such that, for equities trading in decimals, a specialist may choose to 
provide automatic price improvement in the form of a percentage of the 
PACE Quote when an order is received, up to 50%, rounded to the nearest 
penny. This ``percentage price improvement'' feature would be available 
to all customers where the PACE Quote is $.02 or greater in a 
particular security. For example, where the PACE Quote is $10.00-$10.50 
(a spread of $.50), a specialist electing this feature and choosing a 
percentage of 30 would provide automatic price improvement of $.15 to 
an eligible PACE order; thus, an incoming eligible sell order would 
receive an execution price of $10.15, whereas, absent automatic price 
improvement, it would be automatically executed at $10.00. If the 
specialist in this example chooses a percentage of 25, the resulting 
$.125 (12-\1/2\ cents) would be rounded down to 12 cents. Thus, the new 
feature provides automatic price improvement greater than one 
penny.\10\
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    \10\ The new price improvement feature will be implemented on a 
six-month pilot basis, beginning January 29, 2001.
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2. Statutory Basis
    The Phlx believes that the proposal is consistent with section 6(b) 
of the Act,\11\ in general, and furthers the objectives of section 
6(b)(5) \12\ in particular, in that it is designed to promote just and 
equitable principles of trade, remove impediments to and perfect the 
mechanism of a free and open market and protect investors and the 
public interest by extending automated price improvement more widely to 
equities traded in decimals.
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    \11\ 15 U.S.C. 78f(b).
    \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 result 
in 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.

[[Page 8991]]

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

    Because the foregoing proposed rule change does not:
    (i) Significantly affect the protection of investors or the public 
interest;
    (ii) Impose any significant burden on competition; and
    (iii) Become operative for 30 days from the date on which it was 
filed, or such shorter time as the Commission may designated, it has 
become effective pursuant to section 19(b)(3)(A) of the Act \13\ and 
Rule 19b-4(f)(6) \14\ thereunder. At any time within 60 days of the 
filing of the 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 purposes of 
the Act.
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    \13\ 15 U.S.C. 78s(b)(3)(A).
    \14\ 17 CFR 240.19b-4(f)(6).
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    The Phlx has requested that the Commission waive the 5-day pre-
filing notice requirement, and the 30-day operative waiting period, to 
allow the Phlx to implement the feature for decimal trading beginning 
January 29, 2001. The Commission finds good cause for waiving both the 
5-day pre-filing notice requirement and the 30-day operative waiting 
period. Waiving these requirements will allow investors to reap the 
benefits of the Phlx's new price improvement program without delay. For 
these reasons, the Commission finds good cause for waiving the 5-day 
pre-filing notice requirement and the 30-day operative waiting period.

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 Phlx. All 
submissions should refer to file number SR-Phlx-01-12 and should be 
submitted by February 27, 2001.

    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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Jonathan G. Katz,
Secretary.
[FR Doc. 01-2955 Filed 2-2-01; 8:45 am]
BILLING CODE 8010-01-M