[Federal Register Volume 67, Number 210 (Wednesday, October 30, 2002)]
[Notices]
[Pages 66187-66189]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-27537]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46706; File No. SR-Phlx-2002-52]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Philadelphia Stock 
Exchange, Inc. To Extend the PACE Price Improvement and Order Execution 
and Price Protection Pilot Programs Until March 31, 2003

October 22, 2002.
    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 September 26, 2002 the Philadelphia Stock Exchange, Inc. (``Phlx'' 
or ``Exchange'') filed a proposed rule change with the Securities and 
Exchange Commission (``SEC'' or ``Commission''). The proposed rule 
change is described in Items I, II, and III below, which Items have 
been prepared by the Exchange. The Exchange filed the proposed rule 
change pursuant to section 19(b)(3)(A) of the Act,\3\ and Rule 19b-
4(f)(6) thereunder,\4\ which renders the proposed rule change 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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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6). The Exchange has requested, and the 
Commission agrees, to waive the pre-filing notice required by Rule 
19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange seeks to extend two PACE (Philadelphia Stock Exchange 
Automated Communication and Execution System) \5\ pilot programs that 
were introduced with the advent of decimal pricing in the securities 
industry.\6\ The first PACE pilot program, which is found in 
Supplementary Material .07(c)(i) to Rule 229, consists of an automated 
price improvement feature that incorporates a percentage of the spread 
between the bid and the offer (the ``price improvement pilot 
program''). It has been in effect since January 30, 2001.\7\
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    \5\ PACE is the Exchange's automated order routing, delivery, 
execution and reporting system for equities.
    \6\ The Exchange is extending both pilot programs pursuant to a 
telephone call on September 19, 2002, between Joseph Morra, Division 
of Market Regulation, Commission, and Jurij Trypupenko, Phlx. The 
Commission has noticed the Exchange's proposed rule change to make 
the pilot programs permanent, but has not yet approved the 
Exchange's request to make the pilot programs permanent. See 
Securities Exchange Act Release No. 45580 (March 18, 2002), 67 FR 
13399 (March 22, 2002)(SR-Phlx-2002-18).
    \7\ The price improvement pilot program was established in SR-
Phlx-2001-12. See Securities Exchange Act Release No. 43901 (January 
30, 2001), 66 FR 8988 (February 5, 2001). It was extended several 
times, currently through September 30, 2002. See Securities Exchange 
Act Release Nos. 44672 (August 9, 2001), 66 FR 43285 (August 17, 
2001)(SR-Phlx-2001-67); 45078 (November 19, 2001), 66 FR 59293 
(November 27, 2001) (SR-Phlx-2001-101); 45284 (January 15, 2002), 67 
FR 3253 (January 23, 2002)(SR-Phlx-2002-01); and 45889 (May 7, 
2002), 67 FR 32076 (May 13, 2002) (SR-Phlx-2002-28).
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    The second PACE pilot program, which is found in Supplementary 
Material .05 and .07(c)(ii) to Rule 229, incorporates immediate 
execution of certain market orders through the Public Order Exposure 
System (``POES'') and mandatory double-up/double-down price protection 
(the ``order execution and price protection pilot program''). It has 
been in effect since August 25, 2000.\8\
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    \8\ The order execution and price protection pilot program was 
established in SR-Phlx-00-08. See Securities Exchange Act Release 
No. 43206 (August 25, 2000), 65 FR 53250 (September 1, 2000). It was 
extended several times, currently through September 30, 2002. See 
Securities Exchange Act Release Nos. 44185 (April 16, 2001), 66 FR 
20511 (April 23, 2001)(SR-Phlx-2001-20); 44818 (September 19, 2001), 
66 FR 49240 (September 26, 2001)(SR-Phlx-2001-81); 45079 (November 
19, 2001), 66 FR 59292 (November 27, 2001)(SR-Phlx-2001-102); 45295 
(January 16, 2002), 67 FR 3624 (January 24, 2002) (SR-Phlx-2002-03); 
and 45889 (May 7, 2002), 67 FR 32076 (May 13, 2002)(SR-Phlx-2002-
28).
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    The Exchange is not making any substantive changes to the price 
improvement or the order execution and price protection pilot programs 
that have previously been authorized by the Commission, with the 
exception of amending language that indicates that the pilot programs 
are extended through March 31, 2003.\9\
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    \9\ Any proposed language changes other than the new date of 
extension are technical, non-substantive amendments to conform the 
language of the pilots and clarify that trading is in decimals only 
and the extension date applies to both pilots. The text of the 
proposed rule change is available at the Exchange and at the 
Commission.
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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 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 prepared summaries, set forth in 
sections A, B, and C below, of

[[Page 66188]]

the most significant aspects of such statements.

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

1. Purpose
    The purpose of the proposed rule change is to extend two PACE pilot 
programs--the Exchange's price improvement pilot program and the 
Exchange's order execution and price protection pilot program.\10\
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    \10\ See Securities Exchange Act Release Nos. 43901 (January 30, 
2001), 66 FR 8988 (February 5, 2001) (SR-Phlx-2001-12) and 43206 
(August 25, 2000), 65 FR 53250 (September 1, 2000)(SR-Phlx-00-08).
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    Price Improvement Pilot Program. Price improvement statistics are 
often used by order floor 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 Exchange 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 automatic price 
improvement pilot based on a percentage of the spread between the bid 
and offer is intended to, and has enabled, price improvement greater 
than one penny.\11\
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    \11\ Prior to the automatic price improvement pilot program, 
specialists could choose to provide automatic price improvement of 
$.01 for equities trading on the PACE System (where the PACE Quote--
the NBBO--was either $.05 or greater, or $.03 or greater). 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 automatic price improvement pilot program is found in 
Supplementary Material .07(c)(i) to Rule 229, such that, for equities 
trading on the PACE System, the price improvement feature automatically 
executes eligible orders at a price better than the PACE Quote. 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 where the PACE Quote is $.02 
or greater, in a particular security to all customers. 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.
    Although participation in automatic price improvement (as well as 
PACE as a whole) is voluntary, the order execution and price protection 
pilot program requires that if specialists do not provide automatic 
price improvement, in certain situations they must manually provide 
double-up/double-down price protection.
    Order Execution and Price Protection Pilot Program. The order 
execution portion of the pilot program is found in Supplementary 
Material .05 to Rule 229, which establishes that market orders up to a 
specified number of shares will be ``stopped'' at the PACE Quote at 
time of entry into the system and delayed up to thirty seconds to allow 
for price improvement. However, if the PACE Quote at time of order 
entry reflects a point spread (the difference between the best bid and 
offer) of $.05 or less, that order will be executed immediately.
    The double-up/double-down price protection portion of the pilot 
program is found in Supplementary Material .07(c)(ii) to Rule 229, 
which establishes that if a specialist chooses not to provide automatic 
price improvement to all customers and all eligible market orders in an 
equity trading on the PACE System, the specialist has to provide manual 
double-up/double-down price protection in any instance where the bid/
ask of the PACE Quote is $.05 or greater. Double-up/double-down is 
defined in Supplementary Material .07(c)(ii) as a trade that would be 
at least $.10 (up or down) from the last regular way sale on the 
primary market, or, $.10 from the regular way sale that was the 
previous intra-day change on the primary market.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with section 
6(b) of the Act,\12\ in general, and furthers the objectives of section 
6(b)(5),\13\ 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 the pilot programs that provide for 
automatic price improvement and automatic execution of certain market 
orders and mandatory double-up/double-down price protection for 
equities traded over the PACE System.\14\
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    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
    \14\ For purposes only of accelerating the operative date of 
this proposal, the Commission has considered the proposed rule's 
impact on efficiency, competition, and capital formation. 15 U.S.C. 
78c(f).
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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 
impose any burden on competition.

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

    The Exchange did not receive any written comments on the proposed 
rule change.

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

    The foregoing rule change has become effective upon filing pursuant 
to section 19(b)(3)(A) of the Act \15\ and Rule 19b-4(f)(6) \16\ 
thereunder because the 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 the proposed rule change was filed, or 
such shorter time as the Commission may designate. At any time within 
60 days of the filing of a rule change pursuant to section 19(b)(3)(A) 
of the Act,\17\ the Commission may summarily abrogate the 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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    \15\ 15 U.S.C. 78s(b)(3)(A).
    \16\ 17 CFR 240.19b-4(f)(6).
    \17\ 15 U.S.C. 78s(b)(3)(A).
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    The Exchange has requested that the Commission waive the 30-day 
operative date. The Commission believes waiving the 30-day operative 
delay is consistent with the protection of investors and the public 
interest. Acceleration of the operative date will permit the Exchange 
to continue the existing pilot programs without delay. Thus, the 
foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) \18\ of the Act and subparagraph (f)(6) of Rule 19b-4.\19\ 
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

[[Page 66189]]

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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    \18\ 15 U.S.C. 78s(b)(3)(A).
    \19\ 17 CFR 240.19b-4.
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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 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 at 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 the File No. SR-Phlx-2002-52 
and should be submitted by November 20, 2002.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-27537 Filed 10-29-02; 8:45 am]
BILLING CODE 8010-01-P