[Federal Register Volume 68, Number 107 (Wednesday, June 4, 2003)]
[Notices]
[Pages 33557-33558]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-14048]



[[Page 33557]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47942; File No. SR-PHLX-2003-31]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Philadelphia Stock Exchange, Inc. To Amend the Exchange's 
Rule 229 To Provide for the Automatic Execution of Odd-Lot Market and 
Marketable Limit Orders Received Over PACE During Locked and Crossed 
Markets at the PACE Quote

May 29, 2003.
    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 April 23, 2003, 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 
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.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Phlx Rule 229,\3\ Supplementary 
Material .08 to modify the Philadelphia Stock Exchange Automated 
Communication and Execution (``PACE'') System \4\ to provide for the 
automated execution of odd-lot market and marketable limit orders 
received over PACE during locked markets \5\ and crossed markets \6\ at 
the PACE Quote.\7\ Below is the text of the proposed rule change. 
Proposed new text is italicized and proposed deleted text is 
[bracketed].
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    \3\ The Exchange states that its proposed rule change to Phlx 
Rule 229, Supplementary Material .08 is substantially similar to a 
pilot filed by the American Stock Exchange, LLC (``Amex'') for Amex 
Rule 118 (Trading in Nasdaq National Market Securities) and Rule 205 
(Manner of Executing Odd-Lot Orders). See Securities Exchange Act 
Release No. 46304 (August 2, 2002), 67 FR 51903 (August 9, 2002).
    \4\ PACE is the Exchange's automated order routing, delivery, 
execution and reporting system for equities.
    \5\ A locked market is when the bid and offer for the security 
are the same.
    \6\ A crossed market is when the bid exceeds the offer.
    \7\ The PACE Quote is the best bid/ask quote among the American 
Stock Exchange, Boston Stock Exchange, Cincinnati Stock Exchange, 
Chicago Stock Exchange, New York Stock Exchange, Pacific Stock 
Exchange or Philadelphia Stock Exchange, or the Intermarket Trading 
System/Computer Assisted execution System (``ITS/CAES'') quote, as 
appropriate.
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* * * * *
    Rule 229 Philadelphia Stock Exchange Automated Communications 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
    .01-.07 No change.
    .08 Odd-lot market orders entered after the opening will be 
executed on the PACE [q]Quote. When the PACE Quote is locked, odd-lot 
market orders and marketable limit odd-lot orders entered after the 
opening will be executed at the locked price. If the PACE Quote is 
crossed, and the bid is higher than the offer by $ .05 or less, odd-lot 
market and marketable limit orders will be executed at the mean of the 
crossed bid and offer. If the mean does not fall at a one-cent 
increment, the execution will be rounded up to the nearest $ .01. If a 
crossed market exists and the bid is higher than the offer by more than 
$ .05, then the odd-lot order will not be automatically executed by the 
PACE system, but will be executed manually at the price of the next 
unlocked and uncrossed PACE Quote.
    .09-.22 No change.
* * * * *

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 change the handling 
and execution of certain odd-lot orders sent over the PACE System to 
increase efficiency. At the present time, during a locked and/or 
crossed market, odd-lot market orders in all securities entered after 
the opening of trading are not executed automatically, but instead are 
handled manually by the specialist. The Exchange now proposes to change 
this by providing for automated handling of these orders. The Exchange 
believes that this, in turn, would increase the efficiency of order 
handling, relieving the burden of specialists of dealing with manual 
orders of less than a round-lot during periods of locked and crossed 
markets. Furthermore, the Exchange believes that the quality of 
execution of these orders would be improved and enhanced, because 
execution time of these orders would be reduced while the orders would 
still receive the best bid or offer. The Exchange states that the speed 
of execution is an important aspect of the best execution of orders. In 
terms of price, the Exchange believes the proposed pricing procedure 
for odd-lot market orders after the opening when markets are locked or 
crossed should result in a customer receiving execution prices that 
accurately reflect market conditions. For instance, an execution at the 
PACE Quote when it is locked reflects the current market price, 
notwithstanding that it is locked.
    In automating the execution of odd-lot market orders during locked 
and certain crossed markets, the Exchange determined that such orders 
should be executed at the PACE Quote, or in the case of crossed market, 
when the bid is higher than the offer by $ .05 or less, at the mean of 
the crossed best bid and offer. If the mean does not fall at a one-cent 
increment, the execution would be rounded up to the nearest $ .01. The 
Exchange states that this simple algorithm may enable the few crossed 
market orders that are actually received on the Exchange to be 
automatically executed at a fair execution price. The Exchange has 
determined that the $ .05

[[Page 33558]]

is a reasonable spread between a crossed market to select a price that 
reflects current market conditions. In contrast, in crossed markets 
that exceed the $ .05 parameter, true market conditions are less clear 
and require manual handling and, perhaps, price discovery, by a trading 
professional. The Exchange believes that this proposal may even reduce 
such conditions by executing an incoming marketable order against a 
locked or crossed bid or offer.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with section 6(b) of the Act \8\ in general, and furthers the 
objectives of section 6(b)(5)\9\ in particular, in that it is 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 by providing for automatic 
execution of certain odd-lot market orders for equities traded over the 
PACE system, thereby increasing automated handling.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 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 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes 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 with regard to 
the proposed rule change.

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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Phlx consents, the Commission will:
    (A) By order approve the proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

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 No. SR-Phlx-2003-31 and should be 
submitted by June 25, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-14048 Filed 6-3-03; 8:45 am]
BILLING CODE 8010-01-P