[Federal Register Volume 66, Number 135 (Friday, July 13, 2001)]
[Notices]
[Pages 36816-36818]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-17521]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44514; File No. SR-Phlx-2001-53]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Philadelphia Stock 
Exchange, Inc. Relating to PACE Delivery of Certain Orders Without 
Agency Execution Guarantees

July 5, 2001.
    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 May 15, 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 Phlx. The Phlx 
submitted Amendment No. 1 on June 14, 2001,\3\ Amendment No. 2 on June 
26, 2001,\4\ and Amendment No. 3 on June 29, 2001.\5\ 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 letter from Edith Hallahan, First Vice President and 
Deputy General Counsel, Phlx, to Nancy Sanow, Assistant Director, 
Division of Market Regulation, Commission, dated June 11, 2001 
(``Amendment No. 1''). In Amendment No. 1, the Phlx clarified the 
procedures required to permit the specialist to choose to accept 
orders through the Philadelphia Stock Exchange Automated 
Communications and Execution System (``PACE'') without participating 
in PACE execution guarantees for agency orders.
    \4\ See letter from Edith Hallahan, First Vice President and 
Deputy General Counsel, Phlx, to Nancy Sanow, Assistant Director, 
Division of Market Regulation, Commission, dated June 25, 2001 
(``Amendment No. 2'').
    \5\ See letter from Edith Hallahan, First Vice President and 
Deputy General Counsel, Phlx, to Nancy Sanow, Assistant Director, 
Division of Market Regulation, Commission, dated June 27, 2001 
(``Amendment No. 3''). Amendment No. 3 replaced Amendment No. 2 in 
its entirety and deleted the term ``generally'' from the proposed 
rule text.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Phlx proposes to modify the order delivery aspect of PACE \6\ 
to permit the specialist to choose to accept orders through PACE, 
without participating in the PACE execution guarantees for agency 
orders, where the entering member organization has elected not to 
receive automatic execution or primary market print protection for 
electronically delivered limit orders, in accordance with the 
procedures established by the Floor Procedure Committee. The text of 
the proposed rule change is below. Proposed new language is in italics.
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    \6\ PACE is the Exchange's electronic order routing, delivery, 
execution and reporting system. See Phlx Rule 229.
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* * * * *

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

    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 Member organizations wishing to participate in PACE may send 
to the Philadelphia trading floor market and limit orders up to the 
maximum number of shares in securities traded under PACE as shall be 
fixed by the Exchange from time to time. All orders in eligible 
securities shall be executed in whole or in part on a first in first 
out basis.
    .02 Specialists are required to provide, at a minimum, PACE 
execution parameters, as defined by the Rule, to agency orders 
received through the system, except as provided below.
    Although specialists are not required to provide PACE execution 
parameters to non-agency orders received through PACE, if the 
specialists choose to execute non-agency orders automatically 
through PACE, they must provide the same PACE executions to non-
agency orders as they provide to agency orders. If however, the 
specialists choose to execute non-agency orders manually, the must 
adhere to existing Exchange rules governing orders not on the system 
with respect to such orders.
    For purposes of the PACE System, an agency order is any order 
entered on behalf of a public customer, and does not include any 
order entered for the account of a broker-dealer, or any account in 
which a broker-dealer or an associated person of a broker-

[[Page 36817]]

dealer has any direct or indirect interest. Non-agency orders are 
not permitted on PACE except where the Exchange has been provided 
with a Specialist Agreement, signed by the respective specialist, 
acknowledging the acceptance of such non-agency orders from the 
specific firm(s), and any minimum execution parameters (order size 
guarantees) agreed to be provided to such orders by the respective 
specialist. Any such Specialist Agreement must provide the same 
minimum execution parameters to all non-agency orders by that 
specialist and will not provide for greater order size guarantees to 
non-agency orders than those provided to agency orders.
    The specialist may choose to accept orders through PACE, without 
participating in the PACE execution guarantees for agency orders, 
where the entering member organization has elected not to receive 
automatic execution or primary market print protection for 
electronically delivered limit orders, in accordance with the 
procedures established by the Floor Procedure Committee.

* * * * *

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 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 Phlx 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 purpose of the proposed rule change is to permit equity 
specialists to accept orders for delivery over PACE, without 
necessarily having to provide them with the agency execution guarantees 
detailed within Phlx Rule 229.
    PACE is a voluntary system, meaning order-entry (entering) member 
organizations may choose to establish PACE connectivity and deliver 
orders to the Exchange's equity floor via PACE. Similarly, Phlx equity 
specialists may choose to participate in PACE with respect to specialty 
securities. Currently, under Phlx Rule 229, specialists are required to 
provide, at a minimum, PACE execution parameters, as defined by the 
rule, to agency orders received through the system. Specialists may 
also choose to accept non-agency (broker-dealer) orders, as long as 
they also receive agency orders, pursuant to the rule. This proposal 
modifies the order delivery aspect of PACE to provide a third category 
of PACE processing that would be available to specialists who could 
choose to receive orders from member organizations who, in turn, choose 
not to elect certain execution guarantees. This proposal is intended to 
permit specialists to choose the third category of PACE processing, 
without either: (i) Agency orders entitled to PACE execution 
parameters; or (ii) agency and broker-dealer orders.
    Specifically, the new paragraph in Commentary .02 to Phlx rule 229 
permits the specialist to accept electronically-delivered orders over 
PACE, pursuant to procedures determined by the Floor Procedure 
Committee.\7\ This provision would apply where the entering member 
organization has elected not to receive automatic execution or primary 
market print protection for limit orders.\8\
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    \7\ Under the proposal, the specialist will be required to 
submit a letter to the appropriate Exchange department stating the 
specialist's intentions to accept orders over the modified PACE 
system and to specify that the specialist is accepting orders over 
PACE under the proposal without agency guarantees. In addition, the 
proposal provides that the Floor Procedure Committee may change this 
procedure. See supra note 3.
    \8\ See Phlx Rules 229.10 (a)(i) and (ii), respectively, 
containing those guarantees. Under the proposal, the entering member 
organization would communicate its election not to receive certain 
automatic execution or primary market print protection guarantees by 
submitting a letter to the Exchange. See supra note 3.
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    Over time and in response to various market developments, the 
Exchange has modified various aspects of the PACE system, such as the 
order delivery size, automated price improvement features and, most 
recently, the elections of order-entry member organizations respecting 
PACE guarantees.\9\ The Exchange believes that the proposal and hand to 
provide a third category of PACE processing is similar in that it 
addresses the specific requests and needs of order delivery firms 
respecting their particular order flow character and demands.
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    \9\ See Securities Exchange Act Release Nos. 41081 (February 22, 
1999), 64 FR 10053 (March 1, 1999) (SR-Phlx-1998-46); 42973 (June 
21, 2000), 65 FR 39974 (June 28, 2000) (SR-Phlx-2000-43); and 43059 
(July 20, 2000), 65 FR 46541 (July 28, 2000) (SR-Phlx-2000-58).
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    Under the proposal, equity specialists are afforded a third 
alternative respecting PACE processing. Thus, a specialist may 
determine to accept PACE orders in a security under this provision, in 
lieu of eliminating the security from the PACE eligibility list (noting 
that the PACE system is voluntary). The Phlx represents that many 
factors drive whether a specialist chooses to accept orders over PACE, 
including customer demand and competitive pressures (such as what other 
exchanges guarantee). some of these factors are unique to a particular 
security, such as its votalility, liquidity, volume, and and trading 
patterns. Where a specialist believes that a security may not be well-
suited for automatic execution, or primary market print protection, the 
proposal preserves the specialist's ability to accept orders 
electronically over PACE, without the concomitant execution guarantees. 
Thus, the Exchange believes that the proposal should assist a 
specialist's ability to accept orders electronically, without impairing 
the ability to make fair and orderly markets.
2. Statutory Basis
    The Phlx believes the proposed rule change is consistent with the 
provisions of section 6(b) of the Act \10\ in general, and furthers the 
objectives of section 6(b)(5) \11\ 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 encouraging specialists to 
participate in PACE order delivery, even where a security may not be 
appropriate for agency-type guarantees.
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    \10\ 15 U.S.C. 78f(b).
    \11\ 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 
result in any burden on competition that is not necessary or 
appropriate in furtherance of the purpose of the Act.

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

    Written comments were neither solicited nor received.

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

    The proposed rule change, as amended, has become effective pursuant 
to section 19(b)(3)(A) of the Act \12\ and subparagraph (f)(5) of Rule 
19b-4 thereunder\13\ because it effects a change in an existing order-
entry or trading system of the Exchange that (i) does not significantly 
affect the protection of investors or the public interest; (ii) does 
not impose any significant burden on

[[Page 36818]]

competition; and (iii) does not have the effect of limiting the access 
to or availability of the system. At any time within 60 days of the 
filing of the proposed rule change as amended, 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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    \12\ 15 U.S.C. 78s(b)(3)(A).
    \13\ 17 CFR 240.19b-4(f)(5).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposal, as 
amended, 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-2001-53 
and should be submitted by August 3, 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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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-17521 Filed 7-12-01; 8:45 am]
BILLING CODE 8010-01-M