[Federal Register Volume 69, Number 249 (Wednesday, December 29, 2004)]
[Notices]
[Pages 78089-78091]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-3876]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50901; File No. SR-Phlx-2004-84]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Philadelphia Stock Exchange, Inc. to Eliminate the Public 
Order Exposure System Functionality From Phlx Rule 229

December 21, 2004.
    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 November 26, 2004, 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 Phlx proposes to eliminate the Public Order Exposure System 
(``POES'') functionality from Phlx Rule 229. The text of amended 
Exchange Rule 229 is set forth below. Brackets indicate deletions; 
italics indicate additions.
* * * * *

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

    Supplementary Material: * * *
    .01--.04 No Change.
    .05--[Public Order Exposure System--]Subject to Supplementary 
Material Section .07, all round-lot market orders up to 500 shares and 
PRL market orders up to 599 shares entered after the opening will be 
automatically executed at the PACE Quote. [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 point spread (the difference 
between the best bid and offer) of $.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.]
     * * *
    .06--No Change.
    .07--(a)-(b) No Change.
    (c) Price Improvement for PACE Orders.
    (i) Automatic Price Improvement--Where the specialist voluntarily 
agrees to provide automatic price improvement to all customers and all 
eligible market orders in a security, automatically executable market 
and marketable limit orders in New York Stock Exchange and American 
Stock Exchange listed securities received through PACE for 599 shares 
or less shall be provided with automatic price improvement from the 
PACE Quote when received either $.01 or a percentage of the PACE Quote 
when the order is received for equities trading in decimals beginning 
at 9:30 A.M., except where:
    (A) A buy order would be improved to a price less than the last 
sale (except as provided in ([F]E) below) or a sell order would be 
improved to a price higher than the last sale (except as provided in 
([E]D) below); or
    (B) A buy order would be improved to the last sale price which is a 
downtick (except as provided in ([F]E) below) or a sell order would be 
improved to the last sale price which is an uptick (except as provided 
in ([E]D) below). The PACE System will determine whether the last sale 
price is a downtick or an uptick. The PACE System does not recognize 
changes from the previous day's close.
    In these situations, the order is not eligible for automatic price 
improvement, and is, instead, automatically executed at the PACE Quote. 
A specialist may voluntarily agree to provide automatic price 
improvement to larger orders in a particular security to all customers 
under this provision.
    A specialist may choose to provide automatic price improvement of: 
(i) $.01 where the PACE Quote is either $.05 or greater, or $.03 or 
greater, or (ii) where the PACE Quote is $.02 or greater, a percentage 
of the PACE Quote when the order is received, up to 50%, rounded to the 
nearest penny, and at least $.01, in a particular security to all 
customers.
    (C) Automatic price improvement will not occur for odd-lot orders, 
nor where the execution price before or after the application of 
automatic price improvement would be outside the primary market high/
low range for the day, if so elected by the entering member 
organization.
    (D) [The POES window of Supplementary Material .05 above does

[[Page 78090]]

not apply where an order is subject to automatic price improvement or 
manual price protection.
    (E)] Sell Order Enhancement I--A specialist may choose to give 
automatic price improvement to all sell orders of 100 shares or more, 
as determined by the specialist, in a particular security which would 
be improved to the last sale on an uptick; or
    Sell Order Enhancement II--A specialist may choose to give 
automatic price improvement to all sell orders of 100 shares or more, 
as determined by the specialist, in a particular security which would 
be improved to a price higher than the last sale.
    ([F]E) Buy Order Enhancement--A specialist may choose to give 
automatic price improvement to all buy orders, as determined by the 
specialist, in any security that is exempted from or otherwise not 
subject to Securities Exchange Act Rule 10a-1.
    (c)(ii)-(iv)--No Change
    .08--.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 reduce the time 
between order receipt and execution for market orders, thereby 
improving order turnaround time, and to reduce the number of manual 
orders. Currently, Phlx Rule 229, Supplementary Material .05, provides 
that if the PACE \3\ Quote \4\ at the time of order entry into the 
system reflects a point spread (the difference between the best bid and 
offer) of more than $.05, round-lot market orders up to 500 shares and 
PRL \5\ market orders up to 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. During that time, 
specialists may, but are not required to, improve the execution price 
of the order to a price better than the Stop Price. 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 point spread of $.05 or less, 
that order would be executed immediately without the 30-second delay.
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    \3\ PACE is the Exchange's automated order routing, delivery, 
execution and reporting system for equities. See Phlx Rule 229.
    \4\ The PACE Quote means the best bid/ask quote among the 
American, Boston, National, Chicago, New York, Pacific, or 
Philadelphia Stock Exchanges, or the Intermarket Trading System/
Computer Assisted Execution System (``ITS/CAES'') quote, as 
appropriate. See Phlx Rule 229.
    \5\ PRL means a combined round-lot and odd-lot order. See Phlx 
Rule 229.
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    Since the creation of POES,\6\ the Exchange has adopted other means 
of price improvement known as automatic price improvement (``API'') and 
manual price protection that may apply in certain situations.\7\ 
Pursuant to Phlx Rule 229, Supplementary Material .07(c)(i)(D), the 
POES window does not apply where an order is subject to API or manual 
price protection. However, some orders are still subject to the window, 
which means that these otherwise automatically executable orders drop 
to manual for a period of 30 seconds waiting for specialists to 
manually price improve them, after which they are executed. Eliminating 
the POES functionality will eliminate the 30 second waiting time for 
automatic execution and allow such orders to be automatically executed 
at the PACE quote. Specialists who are interested in offering automatic 
price improvement will still have the Exchange's API available to them 
on a symbol-by-symbol basis, as they do today.\8\
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    \6\ See Securities Exchange Act Release No. 35283 (January 26, 
1995), 60 FR 6333 (February 1, 1995) (SR-Phlx-94-58).
    \7\ See Securities Exchange Act Release No. 39548 (January 13, 
1998), 63 FR 3596 (January 23, 1998) (SR-Phlx-97-23).
    \8\ Additionally, manual price improvement will continue to be 
available to specialists when certain conditions are met. See Phlx 
Rule 229, Supplementary Material .07(c)(ii). According to the Phlx, 
because of the existence of these other means of price improvement 
(API and manual), the POES system is rarely used by the specialists 
as a method of price improvement. Telephone conversation between 
John Dayton, Assistant Secretary and Counsel, Phlx, and Angela 
Muehr, Attorney, Division of Market Regulation, Commission, on 
December 9, 2004.
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2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act \9\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \10\ in particular, in that it should 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 improving order turnaround time and reducing the 
number of manual orders.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 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 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 either solicited or received.

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 Exchange consents, the Commission will:
    (A) By order approve such 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 proposed rule 
change, as amended, is consistent with the Act. Comments may be 
submitted by any of the following methods:
    Electronic comments:
     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number SR-Phlx-2004-84 on the subject line.
    Paper comments:
     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission,

[[Page 78091]]

450 Fifth Street, NW., Washington, DC 20549-0609.
    All submissions should refer to File Number SR-Phlx-2004-84. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). 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 Section, 450 Fifth 
Street, NW., Washington, DC 20549. Copies of such filing also will be 
available for inspection and copying at the principal office of the 
Phlx. All comments received will be posted without change; the 
Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-
Phlx-2004-84 and should be submitted on or before January 19, 2005.

    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. E4-3876 Filed 12-28-04; 8:45 am]
BILLING CODE 8010-01-P