[Federal Register Volume 67, Number 150 (Monday, August 5, 2002)]
[Notices]
[Pages 50739-50743]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-19666]


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SECURITIES AND EXCHANGE COMMISSION

(Release No. 34-46280; File Nos. SR-Amex-2002-02, SR-BSE-2002-02, SR-
CBOE-2002-02, SR-CHX-2002-06, SR-CSE-2002-02, SR-ISE-2002-06, SR-NASD-
2002-08, SR-NYSE-2002-12, SR-PCX-2002-04, SR-Phlx-2002-05)


Self-Regulatory Organizations; American Stock Exchange LLC, 
Boston Stock Exchange, Inc., Chicago Board Options Exchange, Inc., 
Chicago Stock Exchange, Inc., Cincinnati Stock Exchange, Inc., 
International Securities Exchange LLC, National Association of 
Securities Dealers, Inc., New York Stock Exchange, Inc., Pacific 
Exchange, Inc., and the Philadelphia Stock Exchange, Inc.; Order 
Approving Proposed Rule Changes and Amendments Thereto Relating to 
Decimal Pricing

July 29, 2002.

I. Introduction

    On June 8, 2000, the Securities and Exchange Commission 
(``Commission''), pursuant to Section 11A(a)(3)(B) of the Securities 
Exchange Act of 1934 (``Act''),\1\ ordered the American Stock Exchange 
LLC (``Amex''), the Boston Stock Exchange, Inc. (``BSE''), the Chicago 
Board Options Exchange, Inc. (``CBOE''), the Chicago Stock Exchange, 
Inc. (``CHX''), the Cincinnati Stock Exchange, Inc. (``CSE''), the 
International Securities Exchange, LLC (``ISE''), the National 
Association of Securities Dealers, Inc. (``NASD''), the New York Stock 
Exchange, Inc. (``NYSE''), the Pacific Exchange, Inc. (``PCX'') and the 
Philadelphia Stock Exchange, Inc. (``Phlx'') (``Participant'' or 
``Participants'') to act jointly in planning, discussing, developing, 
and submitting to the Commission a plan that would begin phasing in the 
implementation of decimal pricing in equity securities and options on 
or before September 5, 2000, and to fully implement the conversion to 
decimal pricing by April 9, 2001.\2\ In its June 2000 Order, the 
Commission also suggested that the Participants discuss the development 
and implementation of a phase-in plan with interested market 
participants, including, but not limited to, the Securities Industry 
Association (``SIA'') and its members, the National Securities Clearing 
Corporation, the Depository Trust and Clearing Corporation (``DTCC''), 
the Options Clearing Corporation (``OCC''), the Securities Industry 
Automation Corporation, the Intermarket Trading System Operating 
Committee, the Options Price Reporting Authority, the Consolidated Tape 
Association, and the Consolidated Quote Operating Committee 
(collectively the ``Interested Parties''). In its June 2000 Order, the 
Commission indicated that the Participants' phase-in plan could 
establish a minimum price variation (``MPV'') for quoting equity 
securities during the conversion, provided that the MPV was set no 
greater than $0.05 and no less than $0.01. The Commission directed the 
Participants to submit studies to the Commission two months after full 
implementation of decimal pricing, analyzing the impact of decimal 
pricing on systems capacity, liquidity, and trading behavior, including 
an analysis of whether there should be a uniform minimum increment for 
a security (``Study'' or ``Studies''). The June 2000 Order also 
directed each Participant, within 30 days after submitting its Study, 
to file for notice, comment, and Commission consideration, proposed 
rule changes to permanently establish its choice of the MPVs by which 
equities and options are quoted on their respective markets. By its 
terms, the June 2000 Order would remain in effect until the Commission 
acts on the proposed rule changes filed by the individual Participants 
pursuant to Section 19(b)(2) of the Act \3\ permanently establishing 
the MPVs by which equities and options are quoted on their respective 
markets or until otherwise ordered by the Commission.
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    \1\ Section 11A(a)(3)(B) of the Act authorizes the Commission, 
in furtherance of its statutory directive to facilitate the 
establishment of a national market system, by rule or order, ``to 
authorize or require self-regulatory organizations to act jointly 
with respect to matters as to which they share authority under the 
Act in planning, developing, operating, or regulating a national 
market system (or a subsystem thereof) or one or more facilities 
thereof.'' 15 U.S.C. 78k-1(a)(3)(B).
    \2\ See Securities Exchange Act Release No. 42914 (June 8, 
2000), 65 FR 38010 (June 19, 2000) (``June 2000 Order'').
    \3\ 15 U.S.C. 78s(b)(2).
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    The NYSE, on behalf of the Participants, submitted to the 
Commission the Decimals Implementation Plan for the Equities and 
Options Markets on July 26, 2000 (the ``Plan'').\4\ The Plan indicated 
that the phase-in of decimal pricing for equities would begin on August 
28, 2000, and that decimal pricing would be fully implemented for all 
equities and options by April 9, 2001. In the Plan, the Participants 
adopted on a pilot basis a uniform MPV of $0.01 for quoting equity 
securities.\5\ Due to capacity limitations in quoting and trading 
options, however, the Plan selected uniform MPVs for quoting options 
that were closer to existing fractional MPVs: $0.05 for quoting equity 
options quoted under $3.00 and $0.10 for quoting equity options at 
$3.00 or greater.
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    \4\ See letter from Dennis L. Covelli, Vice President, NYSE, to 
Annette Nazareth, Director, Division of Market Regulation 
(``Division''), Commission, dated July 25, 2000.
    \5\ While the Plan set an MPV of $0.01 for consolidated 
quotations in equity securities, the Plan did not address the 
limited amount of stock trading at smaller price increments that had 
developed over recent years. For example, the last sale tape 
operated by Nasdaq records trade prices in increments of less than 
$0.01.
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    As a result of the careful planning, preparation, and coordination 
among the markets, clearing agencies, vendors, and the securities 
industry, the phase-in of decimal pricing was completed on schedule and 
without significant operational problems or trading disruptions. 
Moreover, preliminary reviews by the Commission's Office of Economic 
Analysis (``OEA'') and Nasdaq indicated that some of the anticipated 
benefits of decimalization, such as the significant narrowing of quoted 
spreads, were evident almost immediately. For example, OEA estimated 
that, from December 2000 to March 2001, quoted spreads in securities 
listed on the NYSE narrowed an average of 37%. An even more dramatic 
reduction in quoted spreads was observed in Nasdaq securities, with 
spreads narrowing an average of 50% following decimalization. The 
overall narrowing of spreads was consistent with the view that 
decimalization had the potential to reduce trading costs for investors 
entering small orders that are executed at or within the quotes.
    Nevertheless, the Commission has long recognized that the shift 
from fractional to decimal prices had the potential to influence market 
dynamics and trading behavior in ways that could affect the 
transparency, liquidity, and fairness of the markets. In view of the 
complexities of some of issues that were raised during the decimal 
conversion process, therefore, the Commission extended the deadline for 
submission of the Studies to September 10, 2001.\6\
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    \6\ See Securities Exchange Act Release No. 44336 (May 22, 
2001), 66 FR 29368 (May 30, 2001). The Commission also extended the 
deadline for the Participants' MPV rule filings to November 5, 2001, 
and again to January 14, 2002. See Securities Exchange Act Release 
Nos. 44336 (May 22, 2001), 66 FR 29368 (May 30, 2001); and 44846 
(September 25, 2001), 66 FR 49983 (October 1, 2001).
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    In general, the Studies addressed the issues the Commission 
directed the Participants to analyze.\7\ For example,

[[Page 50740]]

the Studies submitted by the NYSE and Nasdaq confirmed preliminary 
estimates on the reduction of quoted spreads following decimalization. 
The NYSE Study found that bid-ask spreads in NYSE-listed stocks fell to 
less than half their pre-decimalization average size and effective 
spreads \8\ averaged 43% lower. \9\ Nasdaq also found that quoted and 
effective spreads declined for most Nasdaq stocks by an average of 
about 50%.\10\
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    \7\ See The Impact of Decimalization on the Nasdaq Stock Market, 
Final Report to the SEC, submitted by the Nasdaq Stock Market 
(``Nasdaq'') on behalf of the NASD, dated June 11, 2001 (``Nasdaq 
Study''); Decimalization Impact Report, submitted by the CHX on 
September 7, 2001 (``CHX Study''); Decimalization of Trading on the 
New York Stock Exchange, A Report to the Securities and Exchange 
Commission, submitted by the NYSE on September 7, 2001 (``NYSE 
Study''); Decimal Pricing Impact Study for Equities and Options, 
submitted by the Phlx on September 7, 2001 (``Phlx Study''); Report 
on the Impact of Decimal Pricing, submitted by the CBOE on September 
10, 2001 (``CBOE Study''); letter from Jeffrey T. Brown, CSE, Vice 
President Regulation and General Counsel, to Jonathan G. Katz, 
Secretary for the Commission, dated September 10, 2001 (``CSE 
Study''); letter from David Krell, ISE, President & Chief Executive 
Officer, to Jonathan G. Katz, Secretary for the Commission, dated 
September 10, 2001 (``ISE Study''); Report on Decimal Pricing, 
submitted by the PCX on September 10, 2001 (``PCX Study''); The 
Impact of Decimalization at the Boston Stock Exchange, submitted by 
the BSE on September 26, 2001; and The Impact of Decimalization, 
Final Report to the SEC, dated September 10, 2001, but submitted on 
October 25, 2001, due to the effects on the Amex from the events of 
September 11, 2001 (``Amex Study'').
    \8\ The quote spread is the difference between the national best 
ask price and the national best bid price. The effective spread is 
twice the difference between the midpoint of the bid-ask spread and 
the price paid (or received) by investors, and accounts for trading 
that occurs at prices other than the quoted prices. Effective 
spreads are generally viewed as giving a more accurate view of 
trading costs and liquidity than do quoted spreads.
    \9\ See NYSE Study at 1.
    \10\ See Nasdaq Study at i.
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    Despite the liquidity improvements implied by smaller effective 
spreads, the Studies offered more mixed conclusions regarding liquidity 
and transparency. For example, the NYSE Study found that the amounts of 
buying or selling interest displayed at the quoted prices fell by an 
average of two-thirds for NYSE-listed securities, and that the 
cumulative amount of displayed liquidity on the overall limit order 
book also fell by two-thirds. \11\ While the Nasdaq Study also found 
that the quoted size posted at the best bid or offer in Nasdaq 
securities also fell by about two-thirds, the cumulative displayed 
depth (measured by a specific distance from the bid-ask mid-point) fell 
by a much smaller percentage.\12\ Moreover, Nasdaq found that there was 
no evidence to indicate that liquidity for large institutional 
investors had diminished, although there was evidence that large 
institutional orders may take longer to be ``worked.''Sec. \13\
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    \11\ See NYSE Study at 2.
    \12\ See Nasdaq Study at i.
    \13\ See Nasdaq Study at 2.
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    The Studies also discussed a number of other issues related to the 
decimal conversion experience. For example, the NYSE and Nasdaq Studies 
indicated that, while decimalization had increased quote traffic in 
their stocks, these increases were not of a magnitude to strain systems 
capacity.\14\ In addition, while some of the Studies also discussed 
some of the reported negative effects of decimalization, such as 
complaints by some institutional traders that professional traders were 
using penny increments to trade ahead of large orders (so-called 
``penny jumping''),\15\ none of the Studies offered compelling 
empirical evidence to suggest that the $0.01 MPV for stocks \16\ or the 
$0.05 and $0.10 MPVs for options \17\ should be changed.
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    \14\ See NYSE Study at 1, 24, and 25, and Nasdaq Study at 1. 
While the NYSE Study found a very large rise in the number of 
transactions with a reduction in the size of limit orders and an 
increase in order cancellations, the Nasdaq Study found little 
change in the number of trades or share volume in Nasdaq stocks. See 
NYSE Study at 2, and Nasdaq Study at i, respectively.
    \15\ See, e.g., NYSE Study at 2.
    \16\ Some of the Studies that cited apparent negative effects 
from decimalization in terms of market liquidity, transparency, and 
trading behavior (such as penny jumping) suggested that these 
effects would be exacerbated if the MPV for quoting stocks was 
reduced to less than $0.01. Moreover, these Studies opined that the 
use of ``sub-penny'' quotes across markets would likely lead to a 
large increase in the number of trades, cancellations, and quotes 
that would imply a need for substantially higher communications 
capacity and infrastructure. See, e.g., id., at 3. The Commission 
has separately solicited public comments on the market structure and 
investor protection issues that could be raised if the current 
limited extent of sub-penny quoting and trading in stocks were 
significantly expanded. See Securities Exchange Act Release No. 
44568 (July 18, 2001), 66 FR 38390 (July 24, 2001); as extended by 
Securities Exchange Act Release No. 44845 (September 25, 2001), 66 
FR 49877 (October 1, 2001). The Commission received a total of 29 
comment letters on this subject.
    \17\ Because the $0.05 and $0.10 MPVs selected by the 
Participants for options during the conversion process were not 
significantly different from the fractional MPVs used prior to the 
conversion, the studies submitted by the options exchanges could 
cite little or no evidence based on post-decimalization trading to 
argue for retaining or changing the decimal MPVs for options. See 
generally Amex Study, CBOE Study, ISE Study, PCX Study, and Phlx 
Study. The Amex Study, however, provided findings from a penny pilot 
simulation (based on a theoretical $0.01 MPV for options) that the 
Amex believed counseled against penny increments in options at this 
time. See Amex Study at 18.
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    The Participants individually filed proposed rule changes to 
implement the Plan, and individually submitted Studies as required by 
the Commission's June 2000 Order. As set forth below, the Participants 
submitted proposed rule changes necessary to make permanent the pilot 
rule changes previously adopted to implement decimal pricing.

II. Description of the Proposed Rule Changes

SR-Amex-2002-02

    On January 14, 2002, the Amex filed SR-Amex-2002-02 to amend its 
equities and options rules to make permanent the pilot rules adopted in 
SR-Amex-2000-41.\18\ On March 18, 2002, the Amex amended the proposed 
rule change.\19\ The Amex again amended the proposal on April 18, 
2002.\20\ On May 8, 2002, notice of the proposed rule change, as 
amended, was published in the Federal Register.\21\ The Commission 
received no comments on the proposal.
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    \18\ See Securities Exchange Act Release No. 43231 (August 30, 
2000), 65 FR 54574 (September 8, 2000) (SR-Amex-2000-41).
    \19\ See letter from Geraldine Brindisi, Vice President and 
Corporate Secretary, Amex, to Alton S. Harvey, Assistant Director, 
Division, Commission, dated March 14, 2002 (``Amendment No. 1''). In 
Amendment No. 1, the Amex made technical corrections to the proposed 
rule text.
    \20\ See letter from Claire P. McGrath, Senior Vice President 
and Deputy General Counsel, Amex, to Alton S. Harvey, Assistant 
Director, Division, Commission, dated April 17, 2002 (``Amendment 
No. 2''). In Amendment No. 2, the Amex: (1) deleted the term 
``Trading Increment'' from Amex Rule 1000, Commentary .03(e) and 
Amex Rule 1000A, Commentary, .02(e); and (2) amended Amex Rule 
952(a) to replace the term ``trading increments'' with ``quoting 
increments.''
    \21\ See Securities Exchange Act Release No. 45858 (May 1, 
2002), 67 FR 30984.
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    The Amex proposes to make permanent the MPVs for equities and 
options established on a pilot basis in SR-Amex-2000-41\22\ of: $0.01 
MPV for equities, exchange traded funds, and trust issued receipts; 
$0.05 MPV for option issues quoted under $3 a contract; and $0.10 MPV 
for option issues quoted at $3 a contract or greater. The proposal also 
deletes any remaining references to quoting in fractions.
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    \22\ See supra note 15.
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SR-BSE-2002-02

    On February 15, 2002, the BSE filed SR-BSE-2002-02 to amend its 
rules to delete all references to fractional pricing and to permanently 
the pilot rules established in SR-BSE-2000-11.\23\ On March 1, 2002, 
the BSE amended the proposed rule change.\24\ On March 18, 2002, notice 
of the proposed rule change, as amended, was published in

[[Page 50741]]

the Federal Register.\25\ The Commission received no comments on the 
proposal.
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    \23\ See Securities Exchange Act Release No. 43255 (September 6, 
2000), 65 FR 54574 (September 14, 2000) (SR-BSE-2000-11).
    \24\ See letter from John A. Boese, Assistant Vice President, 
Legal and Regulatory, BSE, to Alton S. Harvey, Chief, Office of 
Market Watch, Division, Commission, dated February 28, 2002 
(``Amendment No. 1''). In Amendment No. 1, the BSE asked that the 
proposed rule change be considered pursuant to Section 19(b)(2) of 
the Act. 15 U.S.C. 78s(b)(2).
    \25\ See Securities Exchange Act Release No. 45537 (March 12, 
2002), 67 FR 12067.
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SR-CBOE-2002-02

    On January 14, 2002, the CBOE filed SR-CBOE-2002-02 to permanently 
adopt the pilot MPV rules currently in place on the CBOE established in 
SR-CBOE-2000-07.\26\ On March 20, 2002, notice of the proposed rule 
change was published in the Federal Register.\27\ The Commission 
received no comments on the proposal.
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    \26\ See Securities Exchange Act Release No. 43238 (August 31, 
2000), 65 FR 54582 (September 8, 2000) (SR-CBOE-2000-07).
    \27\ See Securities Exchange Act Release No. 45543 (March 12, 
2002), 67 FR 13029.
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    The CBOE's MPVs established in CBOE-2000-07 are: $0.05 MPV for 
option issues quoted under $3 a contract; $0.10 MPV for option issues 
quoted at $3 a contract or greater; and a $0.01 MPV for the quoting of 
CBOE's equity products. The proposed rule change would also provide 
that future changes to the CBOE's MPVs would be handled as they were 
handled before the conversion to decimal pricing, namely that the CBOE 
Board of Directors may determine to change the minimum increments and 
that the CBOE will designate any such change as a stated policy, 
practice, or interpretation with respect to the administration of the 
CBOE minimum increment rule for bids and offers (CBOE Rule 6.42) within 
the meaning of Section 19(b)(3)(A) of the Exchange Act \28\ and will 
file a rule change for effectiveness upon filing with the Commission. 
Lastly, the CBOE also seeks to formally eliminate CBOE Rule 15.11 
(Mandatory Year 2000 Testing) and CBOE Rule 15.22 (Mandatory Decimal 
Pricing Testing), both of which have expired.
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    \28\ 15 U.S.C. 78s(b)(3)(A).
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SR-CHX-2002-06

    On March 1, 2002, the CHX filed SR-CHX-2002-06 to make permanent 
the pilot rule changes established in SR-CHX-2000-25\29\ during the 
securities industry transition to a decimal pricing environment. On 
March 22, 2002, notice of the proposed rule change was published in the 
Federal Register.\30\ The Commission received no comments on the 
proposal.
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    \29\ See Securities Exchange Act Release No. 43256 (September 6, 
2000), 65 FR 55659 (September 14, 2000) (SR-CHX-2000-25).
    \30\ See Securities Exchange Act Release No. 45585 (March 18, 
2002), 67 FR 13385.
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    The CHX proposal would: (1) Make permanent the CHX's MPV of $0.01; 
(2) delete references to the procedures and conventions that were used 
during the conversion from quoting in fractions to quoting in decimals; 
and (3) remove all references to fractional price increments.\31\
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    \31\ See supra note 17. SR-CHX-2000-25 contained language that 
sought to remove fractional references automatically once the 
transition to decimal trading had been completed. SR-CHX-2002-06 
recognizes that that automatic removal was not an available 
alternative and formally removes the fractional references from the 
Exchange's rules.
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SR-CSE-2002-02

    On March 4, 2002, the CSE filed SR-CSE-2002-02 to make permanent 
the pilot rule changes established in SR-CSE-2000-01\32\ and eliminate 
references to fractional price variations in stocks traded on the CSE. 
On March 18, 2002, notice of the proposed rule change was published in 
the Federal Register.\33\ The Commission received no comments on the 
proposal.
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    \32\ See Securities Exchange Act Release No. 43408 (October 3, 
2000), 65 FR 60708 (October 12, 2000) (SR-CSE-2000-01).
    \33\ See Securities Exchange Act Release No. 45538 (March 12, 
2002), 67 FR 12069.
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    The CSE proposes to activate the provisions of CSE Rules 11.3(a) 
and (c) to eliminate Rules 11.3(a) and (c). With regard to all equity 
securities, CSE Rule 11.3 will reflect only decimal pricing upon 
approval of this proposed rule change.

SR-ISE-2002-06

    On February 12, 2002, the ISE filed SR-ISE-2002-06 to make 
permanent the pilot rule changes established in SR-ISE-2001-14 \34\ 
setting forth its current minimum pricing increments for quotations as 
$0.05 for options trading at less than $3.00 and $0.10 for options 
trading at $3.00 or more. On March 18, 2002, notice of the proposed 
rule change was published in the Federal Register.\35\ The Commission 
received no comments on the proposal.
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    \34\ See Securities Exchange Act Release No. 44349 (May 24, 
2001), 66 FR 9617 (May 31, 2001) (SR-ISE-2001-14).
    \35\ See Securities Exchange Act Release No. 45541 (March 12, 
2002), 67 FR 12071.
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SR-NASD-2002-08

    On January 15, 2002, the NASD, through its subsidiary Nasdaq, filed 
SR-NASD-2002-08 to make permanent the pilot rule changes established in 
SR-NASD-2001-07.\36\ On March 28, 2002, Nasdaq amended the proposed 
rule change.\37\ On April 22, 2002, notice of the proposed rule change, 
as amended, was published in the Federal Register.\38\ The Commission 
received no comments on the proposal.
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    \36\ See Securities Exchange Act Release No. 43876 (January 23, 
2001), 66 FR 8251 (January 30, 2001) (SR-NASD-2001-07).
    \37\ See letter from Thomas P. Moran, Associate General Counsel, 
Nasdaq, to Katherine A. England, Assistant Director, Division, 
Commission, dated March 28, 2002 (``Amendment No. 1''). In Amendment 
No. 1, Nasdaq made technical corrections to the proposed rule text.
    \38\ See Securities Exchange Act Release No. 45763 (April 16, 
2002), 67 FR 19608.
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    The proposed rule change would amend NASD Rule 4613 to permanently 
adopt a $0.01 minimum quotation increment for Nasdaq securities. The 
proposed rule change would also permit Nasdaq to continue to display 
and disseminate quotations in Nasdaq securities in decimal-based 
increments to two places beyond the decimal point (i.e., to the penny). 
This proposed rule change again reminds market participants that 
decimal quotations submitted to Nasdaq that do not comport with the 
penny minimum quotation increment standard will be rejected by Nasdaq 
systems.

SR-NYSE-2002-13

    On March 5, 2002, the NYSE filed SR-NYSE-2002-13 to make permanent 
the pilot rules established in (SR-NYSE-2000-22), \39\ and to amend its 
rules to eliminate references to fractional pricing increments and to 
make such rules compatible with quoting in decimals. On March 20, 2002, 
notice of the proposed rule change was published in the Federal 
Register.\40\ The Commission received no comments on the proposal.
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    \39\ See Securities Exchange Act Release No. 43230 (August 30, 
2000), 65 FR 54589 (September 8, 2000) (SR-NYSE-2000-22).
    \40\ See Securities Exchange Act Release No. 45547 (March 12, 
2002), 67 FR 13031.
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    In SR-NYSE-2000-22,\41\ the NYSE established an MPV of $0.01 for 
equities. In SR-NYSE-2002-13, the NYSE proposes to continue the MPV for 
equities of $0.01. The NYSE proposes to delete references to quoting in 
fractions that were retained in NYSE rules to accommodate securities 
that continued quoting in fractions during the phase in of full 
decimalization.
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    \41\ See supra note 36.
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SR-PCX-2002-04

    On January 15, 2002, the PCX filed SR-PCX-2002-04 to permanently 
adopt the pilot rule changes the PCX made in SR-PCX-2000-23 \42\ and 
SR-PCX-2001-39.\43\ On March 18, 2002, notice of the proposed rule 
change was published in the Federal Register.\44\ The Commission 
received no comments on the proposal. The PCX is not making

[[Page 50742]]

any changes to its rules; rather, the PCX is permanently adopting the 
rule changes that were initially implemented on a pilot basis.
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    \42\ See Securities Exchange Act Release No. 43369 (September 
27, 2000), 65 FR 59485 (October 5, 2000) (SR-PCX-2000-23).
    \43\ See Securities Exchange Act Release No. 45077 (November 19, 
2001), 66 FR 59280 (November 27, 2001) (SR-PCX-2001-39) (eliminating 
all references to fractional pricing from its rules).
    \44\ See Securities Exchange Act Release No. 45544 (March 12, 
2002), 67 FR 12074.
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SR-Phlx-2002-05

    On January 14, 2002, the Phlx filed SR-Phlx-2002-05 with the 
Commission make permanent the pilot rule changes established in SR-
Phlx-2000-05\45\ that amended certain Phlx rules and Phlx Options Floor 
Procedure Advices and Order and Decorum Regulations (``Options 
Advices''), and to remove references to fractional pricing and 
references dual pricing in fractions and in decimals. On March 8, 2002, 
the Phlx amended the proposed rule change.\46\ On March 22, 2002, 
notice of the proposed rule change, as amended, was published in the 
Federal Register.\47\ The Commission received no comments on the 
proposal.
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    \45\ See Securities Exchange Act Release No. 43421 (October 6, 
2000), 65 FR 61207 (October 16, 2000) (SR-Phlx-;2000-05).
    \46\ The Phlx submitted a new Form 19b-4, which replaced and 
superseded the original filing in its entirety.
    \47\ See Securities Exchange Act Release No. 45581 (March 18, 
2002), 67 FR 12067.
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    The Phlx proposes to continue the $0.01 MPV for equities, and the 
$0.05 and $0.10 MPVs for options and Exchange-Traded Fund Shares. The 
Phlx proposes to delete references to fractions and dual pricing from 
its options rules and Options Advices. According to the Phlx, the 
proposed amendments are non-substantive, technical changes for the 
purpose of conforming Phlx rules to the development of full 
decimalization in the securities industry.
    This order approves all the proposed rule changes, as amended.

III. Discussion

    The Commission has reviewed carefully the proposed rule changes, as 
amended, and the Studies, and finds, for the reasons set forth below, 
that the proposals are consistent with the requirements of the Act and 
the rules and regulations thereunder applicable to a national 
securities exchange and a registered national securities association, 
and, in particular, with the requirements of Sections 6(b)(5)\48\ and 
15A(b)(6)\49\ of the Act. Section 6(b)(5) of the Act \50\ requires the 
rules of a national securities exchange be designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to foster cooperation and coordination 
with persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and, in general, to 
protect investors and the public interest. Section 15A(b)(6) of the Act 
\51\ imposes the same requirements on a registered national securities 
association.
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    \48\ 15 U.S.C. 78f(b)(5).
    \49\ 15 U.S.C. 78o-3(b)(6).
    \50\ 15 U.S.C. 78f(b)(5).
    \51\ 15 U.S.C. 78o-3(b)(6).
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    The Commission finds that the proposed rule changes are consistent 
with these Sections of the Act.\52\ The Commission also finds that the 
proposed rule changes accurately and reasonably implement the 
requirements of the June 2000 Order.
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    \52\ In approving these rules, the Commission has considered 
their impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
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    Specifically, the Commission finds that the Participants complied 
with the June 2000 Order by jointly developing a phase-in plan for the 
implementation of decimal pricing, by submitting the Studies evaluating 
the impact of decimalization on the marketplace, and by filing proposed 
rule changes to permanently adopt pilot rules that were established 
during the initial phase-in of decimal pricing. After careful review of 
the Studies, discussions with the Participants and the with the 
Interested Parties, and complete review of the proposed rule changes, 
as amended, the Commission finds that the proposed rule changes to make 
permanent the pilot rules established during the phase-in of decimal 
pricing by the Participants, and to remove any remaining references to 
fractional pricing, are consistent with the Act.
    The Commission notes that the Participants selected the MPVs, and 
agreed to abide by the MPV schedule set forth in the Plan while the 
Plan remained in effect. Specifically, the Participants chose an MPV of 
$0.01 MPV for equity issues, a $0.05 MPV for option issues quoted under 
$3.00 a contract, and a $0.10 MPV for option issues quoted at $3.00 a 
contract or greater. Notably, the Studies did not provide any 
compelling empirical evidence to suggest that the Commission should 
require the Participants to alter the MPVs they selected and used 
during implementation. Further, the Commission notes that the proposed 
rule changes described herein represent each Participant's individual 
choice permanently establishing the MPVs by which equities and/or 
options are quoted on its market.
    Moreover, the Commission notes that, since the full implementation 
of decimal pricing, there have been no significant systems or capacity 
problems as a result of the conversion from quoting in fractions to 
decimals. The Commission received no comment letters on any of the 
proposed rule changes to make permanent the pilot proposed rule changes 
that the Participants established during the conversion to decimal 
pricing.
    The Commission believes that the full implementation of decimal 
pricing, as represented by the proposed rule changes set forth herein, 
is consistent with the Act, because decimal pricing promotes just and 
equitable principles of trade, fosters cooperation and coordination 
with persons engaged in regulating, clearing, settling, processing 
information with respect to and facilitating transactions in 
securities, removes impediments to and perfects the mechanism of a free 
and open market and a national market system, is designed to prevent 
fraudulent and manipulative acts and practices, and, in general, 
protects investors and the public interest.\53\ The Commission 
acknowledges that, as the marketplace continues to evolve, and 
unforeseen issues arise, additional rule changes may be necessary to 
ensure the operation of a free and open market and a national market 
system in a decimals pricing environment. The Commission fully expects 
that the Participants will continue to review their rules and will make 
any changes necessary to further the public interest.
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    \53\ 15 U.S.C. 78f(b)(5); 15 U.S.C. 78o-3(b)(6).
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    Moreover, the Commission notes that, while some Participants have 
rules that would permit changes to their MPVs by filing proposed rule 
changes under Section 19(b)(3)(A) of the Act,\54\ the Commission 
believes if a proposed change raised significant capacity concerns or 
other issues that had the potential to disrupt the orderly operation of 
the national market system, it would not be appropriately filed under 
Section 19(b)(3)(A) of the Act.\55\ Accordingly, any proposed change to 
a Participant's MPV that has the potential to raise such concerns 
should be implemented only after notice, comment, and Commission

[[Page 50743]]

consideration pursuant to Section 19(b)(2) of the Act.\56\
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    \54\ 15 U.S.C. 78s(b)(3)(A).
    \55\ Id. Section 19b(3)(C) of the Act provides that ``the 
Commission summarily may abrogate the change in the rules of the 
self-regulatory organization made thereby and require that the 
proposed rule change be refiled in accordance with the provisions of 
paragraph (1) of this subsection and reviewed in accordance with the 
provisions of Section (2) of this subsection, 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 this title.'' 15 U.S.C. 78s(b)(3)(C).
    \56\ 15 U.S.C. 78s(b)(2).
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    Finally, the Commission notes that this approval order marks the 
official end of the decimalization phase-in plan, established in the 
June 2000 Order. Any antitrust immunity conferred upon the Participants 
by the June 2000 Order is terminated as of the effective date of this 
order.\57\
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    \57\ In issuing the June 2000 Order, the Commission instructed 
the Participants to act jointly in planning, discussing, developing, 
and submitting to the Commission the Plan, as discussed herein. See 
supra note 1. The June 2000 Order did not address: (a) any joint or 
other conduct that occurred prior to the issuance of the June 2000 
Order or prior orders; and (b) any joint or other conduct occurring 
after June 8, 2000, that was not ordered or requested by the June 
2000 Order.
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\58\ that the proposals SR-Amex-2002-02, SR-BSE-2002-02, SR-CBOE-
2002-02, SR-CHX-2002-06, SR-CSE-2002-02, SR-ISE-2002-06, SR-NASD-2002-
08, SR-NYSE-2002-12, SR-PCX-2002-04, and SR-Phlx-2002-05 be and hereby 
are approved.
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    \58\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\59\
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    \59\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-19666 Filed 8-2-02; 8:45 am]
BILLING CODE 8010-01-P