[Federal Register Volume 66, Number 113 (Tuesday, June 12, 2001)]
[Notices]
[Pages 31728-31730]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-14735]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44395; File No. SR-Phlx-2001-46]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Philadelphia Stock 
Exchange, Inc. (``Phlx''), Relating to a Reduction of the Minimum size 
of PACE\1\ Orders that Must Be Automatically Guaranteed by Equity 
Specialists Pursuant to Phlx Rule 229

June 6, 2001.
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    \1\ PACE is the Philadelphia Stock Exchange's Automatic 
Communication and Execution System. It is the Exchange's order 
routing, delivery, execution and reporting system for its equity 
trading floor. See Rule 229, Philadelphia Stock Exchange Guide.
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    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\2\ notice is hereby given that on April 23, 2001, 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 Phlx filed the proposed 
rule change pursuant to section 19(b)(3)(A) of the Act,\3\ and Rule 
19b-4(f)(5) thereunder.\4\ Pursuant to Rule 19b-4(f)(5), the Phlx has 
designated this proposal as one effecting a change in an existing 
order-entry or trading system of the Phlx that does not: (1) 
Significantly affect the protection of investors or the public 
interest, (2) impose any significant burden on competition, or (3) 
significantly have the effect of limiting the access to or availability 
of the system. As such, the proposed rule change is immediately 
effective upon filing with the Commission. The Commission is publishing 
this notice to solicit comments on the proposed rule change from 
interested persons.
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    \2\ 15 U.S.C. 78s(b)(1).
    \3\ 17 CFR 240.19b-4.
    \4\ 17 CFR 240.19b-4(f)(5).
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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,\5\ proposes to 
amend Phlx Rule 229 to reduce the minimum automatic execution size of 
PACE orders for equity specialists from 599 shares to 299 shares.
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    \5\ 15 U.S.C. 78s(b)(4).
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    The text of the proposed rule change is as follows.

    (Proposed new language is italicized; proposed deletions are in 
brackets)

Rule 229, Philadelphia Stock Exchange Automated Communication and 
Execution System (PACE)

Execution of Market Orders

    .05 Public Order Exposure System--Subject to Supplementary 
Material Section .07, all round-lot market orders up to 200 [500] 
shares and PRL market orders up to 299 [599] shares will be stopped 
at the PACE Quote at the time of entry into the system (``Stop 
Price'') and be subject to a delay of up to 30 seconds from being 
executed in order to receive an opportunity for price improvement. 
If such market order is not executed within the 30 second window, 
the order will be automatically executed at the Stop Price. If the 
PACE Quote at the time of order entry into the system reflects a \1/
8\ point spread or less (the difference between the best bid and 
offer) for equities trading in fractions, or .05 or less for 
equities trading in decimals, pursuant to Rule 134 or 125, that 
order will be executed immediately without the 30 second delay.
    Subject to these procedures, the specialist may voluntarily 
agree to execute round-lot market orders of a size greater than 200 
[500] shares and PRL market orders of a size greater than 299 [599] 
shares upon entry into the system. Where the specialist has 
voluntarily agreed to execute market orders greater than 299 [599] 
shares and the market order size is greater than 299 [599] shares, 
but less than or equal to the size of the PACE Quote, the order is 
automatically executable at the PACE Quote; if such order is greater 
than the size of the PACE Quote, the order shall [manually] receive 
an execution at the PACE Quote up to the size of the PACE Quote, 
either manually or automatically (once this feature is implemented) 
with the balance of the order receiving a professional execution, in 
accordance with Supplementary material .10(b) below; provided that 
the specialist may guarantee an automatic execution at the PACE 
quote up to the entire size of such specialist's automatic execution 
guarantee (regardless of the size of the PACE Quote).
* * * * *

[[Page 31729]]

.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 300 [600] to 2000 shares or 
such greater size which the specialist agrees to accept and PRL's of 
301 [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 301 [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) Unchanged
* * * * *

Execution of Limit Orders

* * * * *

.10

    (a) In the case of stocks for which the PACE Quote bid is less 
than $1.00, the provisions of paragraph .10(b) shall apply.
    In the case of stocks for which the PACE quote bid is $1.00 or 
more:
    (i) Marketable Limit Orders--round-lot orders up to 200 [599] 
shares and the round-lot portion of PRL limit orders up to 299 [599] 
shares which are entered at the PACE Quote shall be executed at the 
PACE Quote. Such orders shall be executed automatically unless the 
member organization entering orders otherwise elects. Specialists 
may voluntarily agree to execute marketable limit orders greater 
than 299 [599] shares. Where the specialist has voluntarily agreed 
to automatically execute marketable limit orders greater than 299 
[599] shares and the order size is greater than 299 [599] shares, 
but less than or equal to the size of the PACE Quote, the marketable 
limit order is automatically executable at the PACE Quote; if the 
order size is greater than 299 [599] shares and greater than the 
size of the PACE Quote, the marketable limit order shall manually 
receive an execution at the PACE Quote up to the size of the PACE 
Quote, with the balance of the order receiving a professional 
execution, in accordance with Supplementary Material .10(b) below; 
provided that the specialist may guarantee an automatic execution at 
the PACE Quote up to the entire size of such specialist's automatic 
execution guarantee.
    (ii)-(iii): Unchanged.
    (b)-(c): Unchanged.

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. 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

    The purpose of this proposed rule change is to reduce the equity 
specialists' minimum automatic execution size for PACE orders, thereby 
reducing the amount of orders that qualify for an automatic execution 
guarantee, pursuant to various provisions of Exchange Rule 229. 
According to the Phlx, the proposed rule change is intended to address 
the equity specialist's hardship in the new decimal environment. 
Specialists indicate that the transition to trading in decimal 
increments, rather than in fractions, has resulted in a wider range of 
quoted prices (more ticks), as well as an increase in small-sized bids 
and offers made at a particular price. Such bids and offers (which can 
be for as little as 100 shares) qualify, regardless of their size, to 
become the National Best Bid or Offer (``NBBO''), also known for PACE 
purposes as the ``PACE Quote.''
    PACE provides certain execution guarantees to eligible orders. 
Currently, with respect to market orders, Rule 229, Supplementary 
Material .05, provides that round-lot market orders for up to 500 
shares (and partial round-lot orders \6\--``PRLs''--up to 599 shares) 
are automatically entitled to the NBBO price (``stopped'') as of the 
time of entry into the PACE system. In addition, Supplementary Material 
.05 provides that those orders will be subject to a 30 second delay in 
execution in order to allow for the opportunity for manual price 
improvement.
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    \6\ A partial round-lot order for the purposes of Rule 229 is a 
combined round-lot and odd-lot order.
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    A specialist may voluntarily agree to execute round-lot market 
orders greater than 500 shares (and PRL market orders greater than 599 
shares). In addition, Supplementary Material .05 states that if a 
specialist agrees to execute market orders greater than 599 shares, and 
the order size is smaller or equal to the size of the PACE Quote, the 
order is automatically executable at the PACE Quote. If the order size 
is greater than the PACE Quote, the order is manually handled by the 
specialist, who executes it at the PACE Quote up to the portion equal 
to the PACE Quote size, with the balance receiving a professional 
manual execution.\7\ Regardless of the size of the PACE Quote, however, 
the specialist may, under Supplementary Material .05, choose to 
guarantee automatic execution at the PACE Quote up to the entire size 
of his automatic execution guarantee.\8\ Thus, when the specialist's 
automatic execution guarantee is higher than 599 shares, whether an 
order automatically executes at the PACE Quote depends on the size of 
the PACE Quote. This size-sensitivity is discussed further below.
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    \7\ See Rule 229, Supplementary Material .10(a).
    \8\ Following a telephone conversation on May 30, 2001 between 
Edith Hallahan, Deputy General Counsel, Exchange, and Heidi Pilpel, 
Special Counsel, Commission, the Exchange represented that the 
specialist sets his automatic execution guarantee by filling out an 
Exchange form to that effect, effective as of the next business day, 
except when unusual circumstances occur, such as a fast market, in 
which case the specialist is allowed to request an immediate change 
of his automatic guarantee, upon floor official approval.
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    Supplementary Material .07(b) currently provides that market orders 
consisting of round-lot orders of 600 to 2,000 shares and PRLs of 601 
to 2,099 shares (or any greater size which the specialist agrees to 
accept), which are entered after the opening and not accepted for 
automatic execution by the specialist, will be handled manually in 
accordance with the requirements of Supplementary Material .10. 
Supplementary Material .07 further provides that the odd-lot portion of 
PRLs of 601 or more shares shall be executed at the same price as the 
round-lot portion.
    With respect to marketable limit orders, Rule 229, Supplementary 
Material .10(a)(i) provides that round-lot marketable limit orders up 
to 500 shares (and partial round-lot marketable limit orders up to 599 
shares) which are entered at the PACE Quote shall be executed at the 
PACE Quote, and executed automatically if the member organization 
entering the order so elects. Although the current minimum automatic 
execution size (for both market and marketable limit orders) is 599 
shares (meaning all securities on PACE are subject to an automatic 
execution size of at least this amount), specialists may establish 
higher sizes.\9\
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    \9\ The minimum delivery size is 2,099 shares. See note 8 above 
explaining how the specialist sets its minimum execution guarantee.
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    Together, these provisions of Rule 229 guaranteeing the NBBO to 
certain eligible PACE orders have become more

[[Page 31730]]

onerous to equity specialists in today's marketplace when required to 
guarantee a minimum of 599 shares. Specifically, specialists face 
situations where bids and offers as small as 100 shares trigger the 
PACE Quote guarantees described above. Small size quotes, however, 
might not necessarily reflect the overall market price at a given time. 
Nevertheless, under the PACE rule, in certain circumstances it is the 
specialist's duty to give the NBBO price, regardless of the size of the 
NBBO. Particularly, when the specialist's guarantee is set at the 
current minimum of 599 shares, the size of the PACE Quote does not 
affect the price at which orders up to 599 shares are executed.
    Thus, the Exchange hereby proposes to decrease the minimum 
automatic execution size from 599 to 299 shares, which should decrease 
the amount of orders that qualify for the above automatic price 
guarantee features; and should allow the specialist to choose to handle 
more orders manually, and voluntarily, in accordance with Supplementary 
Material .05 and .10, thereby alleviating some of the burdens of 
mandatory execution guarantees. In addition, when an order is greater 
than the size of the PACE Quote, the proposal will offer the specialist 
the option to give the order an execution at the PACE Quote, either 
manually or automatically, up to the PACE Quote size. In other words, 
the specialist may choose manual or automatic execution up to the PACE 
Quote size portion of his order, but it remains his choice, just as he 
may still choose to guarantee an automatic execution at the PACE Quote 
for orders up to the size of his elected ``automatic execution 
guarantee,'' as stated in Supplementary Material .05. As such, the 
automatic execution guarantee will be more sensitive to the size of the 
PACE Quote.
    For these reasons, the Exchange believes that this proposal is 
consistent with section 6(b) of the Act in general, and furthers the 
objectives of section 6(b)(5) in particular, in that it should promote 
just and equitable principles of trade, by fostering fair and orderly 
markets while relieving specialists of the duty to execute certain 
orders at a guaranteed price, where that price would otherwise not be 
available for the size that the specialist must guarantee.

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.

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

    No written comments were received.

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

    The foregoing proposed rule change has been designated as a rule 
effecting a change in an existing order-entry or trading system of a 
self-regulatory organization, pursuant to section 19(b)(3)(A) of the 
Act and Rule 19b-4(f)(5) thereunder. Accordingly, the proposal will 
take effect upon filing with the Commission. 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.

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 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-2001-46 and 
should be submitted by July 3, 2001.\10\
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    \10\ The Commission notes the Exchange's obligation to submit to 
the Commission (individually or jointly with other exchanges) a 
study regarding the impact of decimal pricing on systems capacity, 
liquidity, and trading behavior (``Decimals Study''), pursuant to a 
Commission Order dated June 8, 2000. See Securities Exchange Act 
Release No. 42914 (June 8, 2000); 65 FR 38010 (June 19, 2000), as 
amended by Securities Exchange Act Release No. 44336 (May 22, 2001); 
66 FR 29368 (May 30, 2001) (extending the deadline to submit the 
Decimals Study). The Commission expects the Exchange to evaluate in 
the Decimals Study the effect of amended Rule 229 on equity 
specialists' handling of customer limit orders for more than 299 
shares.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-14735 Filed 6-11-01; 8:45 am]
BILLING CODE 8010-01-M