[Federal Register Volume 70, Number 100 (Wednesday, May 25, 2005)]
[Notices]
[Pages 30170-30171]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-2635]
[[Page 30170]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-51715; File No. SR-Phlx-2004-83]
Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.;
Order Granting Approval to Proposed Rule Change and Amendment No. 1
Thereto and Notice of Filing and Order Granting Accelerated Approval to
Amendment No. 2 Thereto Relating to the Matching of Certain Incoming
Orders With Certain Phlx Existing Orders Through the PACE System
May 19, 2005.
I. Introduction
On November 26, 2004, the Philadelphia Stock Exchange, Inc.
(``Phlx'' or ``Exchange'') filed with the Securities and Exchange
Commission (``Commission''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to modify Phlx Rule 229 to permit
the PACE System \3\ to match certain incoming orders with certain Phlx
existing orders (the ``Matching Rule''). On March 10, 2005, the Phlx
filed Amendment No. 1 to the proposed rule change.\4\ The proposed rule
change, as amended, was published for comment in the Federal Register
on March 24, 2005.\5\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ PACE is the Exchange's automated order routing, delivery,
execution and reporting system for equities. See Phlx Rule 229.
\4\ In Amendment No. 1, which replaced the original proposal in
its entirety, Phlx modified two concepts contained in the original
proposed rule change (those of the Midpoint Price and the Modified
PACE Quote), clarified the operation of the proposed rule change,
reorganized the rule text of proposed new Supplementary Material
.04A to Phlx Rule 229 into subsections, and made corresponding
changes to other portions of the Supplementary Material to Phlx Rule
229 to reflect the applicability of the proposed rule change.
\5\ See Securities Exchange Act Release No. 51394 (Mar. 18,
2005), 70 FR 15141 (Mar. 24, 2005) (``Notice'').
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The Commission received no comments on the proposal. On May 6,
2005, the Phlx filed Amendment No. 2 to the proposed rule change.\6\
This order approves the proposed rule change as amended.
Simultaneously, the Commission provides notice of filing of Amendment
No. 2, grants accelerated approval to Amendment No. 2, and solicits
comments from interested persons on Amendment No. 2.
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\6\ In Amendment No. 2, which supplemented the proposal as
noticed, the Phlx modified Supplementary Material .02 to Phlx Rule
229 to clarify that if specialists offer access to PACE for orders
without participating in the PACE execution guarantees for agency
orders, where the entering member organization has generally elected
not to receive automatic execution or primary market print
protection for electronically delivered limit orders, those orders
will be eligible for enhanced matching under Supplementary Material
.04A to Phlx Rule 229.
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II. Description of the Proposal
Under the proposal, the Phlx PACE System will check incoming orders
against existing orders, and if possible, automatically execute those
incoming orders against the existing orders prior to submitting them
for execution by the specialist. The Phlx has represented that the
purpose of the proposal is to help preserve the priority of orders and
reduce incidents of inadvertent trading ahead of customer orders, and
believes the proposal, among other things, will protect investors by
increasing the number of orders that are matched without the
participation of a dealer.
To this end, under the proposed rule change, as amended, round-lot
market and limit orders and the round-lot portion of non-all-or-none
PRL \7\ market and limit orders entered after the opening will
generally execute against existing round-lot market and limit orders
and the round-lot portion of existing non-all-or-none PRL market and
limit orders that have not been marked for layoff, if executable within
the Modified PACE Quote.\8\ Incoming round lot all-or-none orders will
be eligible for matching only if the size of the incoming all-or-none
order is equal to or smaller than the first existing order it would
match against. Conversely, if the incoming all-or-none order is larger
than the first existing order it could match against, the incoming
order will not automatically match, but will be handled by the
specialist.\9\
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\7\ ``PRL'' refers to a combined round-lot and odd-lot order.
See Phlx Rule 229.
\8\ The ``PACE Quote'' means the best bid/ask quote among the
American, Boston, National, Chicago, New York, or Philadelphia Stock
Exchanges, the Pacific Exchange, or the Intermarket Trading System/
Computer Assisted Execution System (``ITS/CAES'') quote, as
appropriate. See Phlx Rule 229. The ``Modified PACE Quote'' is
defined in the proposed rule change to mean the PACE Quote, unless
the PACE Quote is comprised of another market's quote of 100 shares
or less, in which case the Modified PACE Quote will be one cent away
from such 100 share away quote.
\9\ Orders that have been marked for lay-off (i.e., orders that
are being sent to other marketplaces for execution and appropriately
marked by the specialist within PACE) would not be eligible under
the proposal to be matched against an incoming order. Further, no
order for which the entering member organization has elected primary
market high-low protection (as provided in Phlx Rule 229,
Supplementary Material .07(a)(ii)) would be matched if the execution
price of such execution would be outside the primary market high-low
range for the day. In addition, notwithstanding Phlx Rule 229,
Supplementary Material .01 regarding priority, existing Phlx orders
would be executed in price/time priority with the highest bid/lowest
offer executed first, with existing market orders, for purposes of
enhanced matching priority, being treated as limit orders priced at
the Midpoint Price (defined below). See Notice for examples and
further details.
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Under the Matching Rule, the price of the execution will be
dependent on the Midpoint Price, meaning the midpoint of the Modified
PACE Quote as rounded (if applicable),\10\ and the type of orders that
are being matched.\11\ Existing Phlx orders generally will be executed
in price/time priority with the highest bid/lowest offer executed
first, with existing market orders, for purposes of enhanced matching
priority, being treated as limit orders priced at the Midpoint Price.
As part of the proposed rule change, the Phlx is also modifying
language in other sections of Phlx Rule 229 to reflect and account for
the operation of the new Matching Rule.
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\10\ Rounding of the Modified PACE Quote will be applicable if
the midpoint of the Modified PACE Quote is not a penny increment, in
which case the Midpoint Price shall be rounded down (up) to the
nearest penny if the existing Phlx order is an order to buy (sell).
\11\ When one or more of the orders to be matched are limit
orders, the execution price would be the price closest to the
Midpoint Price that will allow the limit order(s) to execute. See
Notice for examples and further details.
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III. Discussion and Commission Findings
The Commission finds that the proposed rule change, as amended, is
consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities
exchange.\12\ In particular, the Commission believes that the proposal
is consistent with Section 6(b)(5) of the Act,\13\ which requires that
the rules of an exchange be designed to promote just and equitable
principles of trade, to perfect the mechanism of a free and open market
and a national market system, and, in general, to protect investors and
the public interest.
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\12\ In approving this proposed rule change, the Commission
notes that it has considered the proposed rule's impact on
efficiency, competition, and capital formation. See 15 U.S.C.
78c(f).
\13\ 15 U.S.C. 78f(b)(5).
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Under the proposal, the PACE System will seek to execute eligible
incoming customer orders against existing customer orders
automatically, prior to submitting them for execution by the
specialist. The Matching Rule will apply generally to non-all-or-none
round-lot market and limit orders and the round-lot portions of non-
all-or-none PRL orders entered after the opening, as well as to round-
lot all-or-none orders and the round-lot portion of PRL all-or-none
orders to the extent that such orders are smaller in size than an
available contra-side order. Moreover, it will apply to
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non-agency orders in PACE securities, even in the event that the PACE
specialist does not agree to provide PACE execution guarantees for such
non-agency orders. The Commission believes that, by thus increasing the
automated handling of customer orders and matching incoming orders with
existing orders without the participation of the specialist, the
proposed rule change should better facilitate a wide range of
transactions, help preserve the priority of existing orders, and reduce
incidents of inadvertent trading ahead of customer orders as
contemplated by the Exchange.
The Commission believes that the midpoint of the Modified PACE
Quote, the best bid/ask quote among the equities exchanges except in
the case where the best bid/ask quote is comprised of an away market
quote of 100 shares or less, is a reasonable price upon which to base
the price at which customer orders are executed pursuant to the
Matching Rule, subject to the rounding principles and provisions
designed to accommodate the matching of limit orders, as described
above.\14\ Moreover, the proposed rule change sets forth in detail for
investors the procedures by which orders will be matched in the PACE
System and the basis upon which the execution prices for such
transactions will be determined.
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\14\ See supra notes 10 and 11.
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The Commission finds good cause for approving Amendment No. 2 to
the proposed rule change prior to the thirtieth day after the date of
the publication of notice thereof in the Federal Register. The
Commission notes that Amendment No. 2 does not modify the proposed
Matching Rule itself, but merely extends the improvements it offers to
non-agency orders entered into the PACE System. The Commission
therefore believes that it is appropriate to accelerate approval of
Amendment No. 2 so that the proposed rule change, as amended, may be
implemented without delay.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether Amendment No. 2
to the proposed rule change 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-2004-83 on the subject line.
Paper Comments
Send paper comments in triplicate to Jonathan G. Katz,
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW.,
Washington, DC 20549-0609.
All submissions should refer to File Number SR-Phlx-2004-83. 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 Room. Copies of such
filing also will be available for inspection and copying at the
principal offices of the Exchange. 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-2004-83 and should be submitted on or before June
15, 2005.
V. Conclusion
For the foregoing reasons, the Commission finds that the proposed
rule change, as amended, is consistent with the requirements of the Act
and the rules and regulations thereunder applicable to a national
securities exchange.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\15\ that the proposed rule change (SR-Phlx-2004-83), as amended,
be, and it hereby is, approved, with Amendment No. 2 being approved on
an accelerated basis.
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\15\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\16\
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\16\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-2635 Filed 5-24-05; 8:45 am]
BILLING CODE 8010-01-P