[Federal Register Volume 70, Number 158 (Wednesday, August 17, 2005)]
[Notices]
[Pages 48457-48459]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-4490]



[[Page 48457]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52239; File No. SR-Phlx-2005-14]


Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Notice of Filing of Proposed Rule Change and Amendment No. 1 Thereto 
Relating to Order Matching at the Opening in PACE

August 11, 2005.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\, and Rule 19b-4 \2\ thereunder, notice is hereby given 
that on March 10, 2005, 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. On July 28, 
2005, the Phlx submitted Amendment No. 1 to the proposed rule 
change.\3\ The Commission is publishing this notice to solicit comments 
on the proposed rule change, as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1, which replaced and superseded the original 
filing in its entirety, included additional text in the purpose 
section to further clarify the description and operation of the 
proposed rule change, and also included a minor edit to the text of 
Phlx Rule 229.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Phlx proposes to amend Phlx Rule 229 to permit PACE \4\ to 
modify the opening process to match certain orders, described below, to 
each other, where possible, instead of matching such orders with the 
specialist. Specifically, the Exchange proposes to modify Phlx Rule 
229, Supplementary Materials .06 and .10(a)-(b), to effect the matching 
of such orders. The Exchange also proposes to delete Phlx Rule 229, 
Supplementary Material .11.
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    \4\ PACE is the Exchange's automated order routing, delivery, 
execution and reporting system for equities. See Phlx Rule 229.
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    The text of amended Phlx Rule 229 is set forth below. Brackets 
indicate deletions; italics indicate proposed new text.

Rule 229, Supplementary Material:

    .01-.05 No change.
    .06 Market orders [(round-lots, odd-lots and PRL's up to 2099 
shares)] entered prior to the opening will be executed at the New York 
market opening price, unless such order is marked sell short or is laid 
off at another market center prior to the actual New York market 
opening. [To be guaranteed an execution at the New York market opening 
price, such orders must be received at least two minutes prior to the 
actual New York market opening.] Market orders that are equal to or 
smaller than the Directed Specialist's automatic execution guarantee 
size, or larger orders entered two minutes or more (or such shorter 
time, for example, one minute or more, as chosen by the Directed 
Specialist for all securities traded by the Directed Specialist) prior 
to the actual New York market opening will be executed automatically 
against:
    (a) available contra-side orders received by the same Directed 
Specialist that are to be executed at the opening, otherwise they will 
be executed automatically against the Directed Specialist; or
    (b) the Directed Specialist, if such orders are odd-lot orders, 
partial round lot all-or-none orders, round lot all-or-none orders when 
a single contra-side order with sufficient volume is not available and 
the odd lot portion of PRL orders executed in (a) above.
    In the case of delayed openings, execution will occur at the New 
York opening price. Market orders not executed automatically, as above, 
will be available, after the opening, to be executed as an existing 
order pursuant to Supplementary Material .04A(b)(i) above, or receive a 
professional execution in accordance with Supplementary Material, 
.10(b) below. [Execution of market orders of a size greater than 2099 
shares and up to 5000 shares which the specialist agrees to accept must 
be received at least three minutes prior to the actual New York Market 
opening price.]
    .07-.09 No change.
    .10(a)(i)-(iii) No change.
    [In order for round-lot limit orders up to 500 shares and the 
round-lot portion of PRL limit orders up to 599 shares to be guaranteed 
an execution at the New York opening price, such orders must be 
received at least two minutes prior to the actual New York market 
opening and 1000 or more shares must open on the New York market at the 
limit price. The obligations of a specialist under the Rule for the 
execution of round-lot limit orders up to 500 shares and the round-lot 
portion of PRL limit orders up to 599 shares shall not be altered by 
the acceptance of any other limit orders by such specialist.]
    (iv) Limit orders, unless such orders are marked sell short or laid 
off at another market center prior to the actual New York market 
opening, that are traded through by the New York market opening price 
and that are entered two minutes or more (or such shorter time, for 
example, one minute or more, as chosen by the Directed Specialist for 
all securities traded by the Directed Specialist) prior to the actual 
New York market opening will be executed automatically, at the New York 
market opening price, against:
    (A) available contra-side orders received by the same Directed 
Specialist that are to be executed at the opening, otherwise they will 
be executed automatically against the Directed Specialist; or
    (B) the Directed Specialist, if such orders are odd-lot orders, 
partial round lot all-or-none orders, round lot all-or-none orders when 
a single contra-side order with sufficient volume is not available and 
the odd lot portion of PRL orders executed in (A) above.
    Limit orders not executed automatically, as above, will be 
available, after the opening, to be executed as an existing order 
pursuant to Supplementary Material .04A(b)(i) above, or receive a 
professional execution in accordance with Supplementary Material, 
.10(b) below.
    Remainder of .10(a) No change.
    .10(b) Professional Execution Standards--[Market orders and round-
lot limit orders of 600 to 2000 shares, and PRL's of 601 to 2099 shares 
and such limit orders of greater size up to 5000 shares that the 
specialist may accept must be entered at least three (3) minutes prior 
to the opening in order to be guaranteed the opening price.]
    Remainder of .10(b) No change.
    .10(c) No change.
    .11 [Upon written approval of a Floor Procedure Committee member, 
the specialist will have the right to refuse prior to the actual New 
York opening, round-lot and PRL orders which create a net long or net 
short position in excess of 1000 shares. Prior to granting such 
approval, however, the alternate specialists in such security must be 
requested to accept a portion of such orders as may be deemed 
appropriate by the Floor Procedure Committee member.] Reserved.
    .12-.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

[[Page 48458]]

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 increase automated 
order handling and remove the specialist in situations where orders 
could otherwise match at the opening. Currently, when PACE 
automatically executes certain orders received before the opening at 
the opening price, all such orders are matched with the specialist to 
whom the order is directed. The net result of this is that all such 
orders receive an execution (against the Directed Specialist \5\) and 
the Directed Specialist may be left with a position, which is the 
result of the specialist's interaction with the imbalance of buy or 
sell orders, as applicable.
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    \5\ The term ``Directed Specialist'' has the same meaning as in 
Phlx Rule 229A(b)(3), when there is more than one specialist 
assigned in a security. When there is only one specialist assigned 
in a security, the term Directed Specialist means that sole 
specialist.
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    The Exchange proposes to modify the matching functionality so that 
certain Eligible Orders, described below, received by each Directed 
Specialist that could be matched against each other would do so instead 
of matching with the Directed Specialist. In other words, such Eligible 
Orders would still receive an execution, but the execution would not 
involve the participation of a dealer. Directed Specialists would 
continue to match against other Eligible Orders, as described below, as 
well as any imbalance of their directed orders that could not match 
against other orders. Additionally, the Exchange is proposing to modify 
the text of Phlx Rule 229 to depict how the proposed matching 
functionality will operate, including clearly indicating what orders 
would be eligible for matching at the opening price and indicating 
against whom such orders would be matched.
    Market Orders. Under this proposal, certain market and limit orders 
received before the opening will be matched at the New York market \6\ 
opening price.\7\ In order to be matched at the New York opening price, 
market orders could not be marked sell short or laid off \8\ (i.e., 
orders that are being sent to other marketplaces for execution and 
appropriately marked by the specialist within PACE) before the actual 
opening. In addition, if they are equal to or smaller than the Directed 
Specialist's automatic execution guarantee size, they would need to be 
entered before the actual New York market opening. If they are larger 
than the Directed Specialist's automatic execution guarantee size, they 
would need to be entered two minutes or more (or such shorter time, for 
example, one minute or more, as chosen by the Directed Specialist for 
all securities traded by the Directed Specialist) prior to the actual 
New York market opening.\9\ (Market orders that are eligible to be 
matched as described in this paragraph are referred to as ``Eligible 
Market Orders''). The Phlx also proposes to add language to the text of 
Phlx Rule 229, Supplementary Material .06, to implement the preceding 
standards and proposes to remove certain existing language relating to 
the size of market orders and the receipt time required to receive the 
New York opening price that conflicts with the proposed language.
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    \6\ The ``New York market'' refers to the listing market.
    \7\ See Phlx Rule 229, Supplementary Material .06.
    \8\ See 17 CFR 240.11Ac1-4(c)(5).
    \9\ The PACE system historically only executed market orders 
equal to or smaller than the Directed Specialist's automatic 
execution guarantee size entered before the opening at the New York 
opening price. As the PACE functionality evolved, certain limit 
orders and larger sizes were executed at the opening price, but the 
Phlx determined to limit those additional sizes and the additional 
type to those entered a specific time before the opening in order to 
give the Directed Specialist time to assess and handle the risk 
associated with executing those orders. At this time, the Phlx has 
determined not to change the type and size of orders that are 
subject to a time restriction, only to change the party against whom 
those orders match against.
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    Limit Orders. The Exchange's proposal would also provide that limit 
orders, in order to be matched at the New York opening price, could not 
be marked sell short or laid off before the actual opening.\10\ In 
addition, they would have to be traded through by the New York market 
opening price and must be entered two minutes or more (or such shorter 
time, for example, one minute or more, as chosen by the Directed 
Specialist for all securities traded by the Directed Specialist) prior 
to the actual New York market opening.\11\ (Limit orders that are 
eligible to be matched as described in this paragraph, along with 
Eligible Market Orders, are ``Eligible Orders''). The Phlx proposes to 
add language to the text of Phlx Rule 229, Supplementary Material 
.10(a), to implement the preceding standards and proposes to remove 
certain existing language relating to the size of limit orders, the 
receipt time required, and the number of shares needed to print on the 
New York market to receive the New York opening price, which all 
conflict with the proposed language.
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    \10\ See Phlx Rule 229, Proposed Supplementary Material 
.10(a)(iv).
    \11\ The Exchange understands that limit orders priced at the 
opening price are not guaranteed an execution at the opening on the 
primary market. See, e.g., American Stock Exchange Rule 108(a) and 
(b)(1) (providing that market orders, which must receive an 
execution at the opening price, have precedence over limit orders 
and that only limit orders that are priced better than the opening 
price are to be treated as market orders). The Exchange has 
determined not to extend the guarantee under this proposed rule 
change to limit orders priced at the opening price.
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    Matching. The Exchange proposes to match Eligible Orders received 
by each Directed Specialist as follows: odd-lot orders, partial round 
lot (``PRL'') \12\ all-or-none (``AON'') orders, round lot AON orders 
when a single contra-side order with sufficient volume is not 
available, and the odd lot portion of PRL Eligible Orders would all be 
matched against the Directed Specialist. The Phlx is not proposing to 
match odd-lot orders, PRL AON orders, and the odd-lot portion of PRL 
Eligible Orders against other Eligible Orders because the Phlx wishes 
to prevent the creation of yet further orders with odd-lot portions as 
the Phlx believes that order entry firms prefer not to have their round 
lot orders broken into odd-lots and receive odd-lot executions. The 
remaining Eligible Orders received by a Directed Specialist would be 
matched against each other, with any imbalance matching against the 
Directed Specialist.
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    \12\ ``Partial round lot'' means a combined round-lot and odd-
lot order. See Phlx Rule 229.
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    The Exchange's matching algorithm would operate in such a way as to 
minimize the number of different orders that any one order will match 
against. The algorithm would build buy side and sell side order lists 
from the Eligible Orders, sorting them by descending volume with AON 
orders first. After the lists are built, matching would be initiated 
with the largest volume AON order first (buy or sell). The first order 
would then be matched against opposing orders, in order, or if mandated 
by the rule, against the Directed Specialist. This process would then 
be repeated by selecting the next order in volume priority until all 
Eligible Orders are filled. If two orders have the same volume, market 
orders would receive priority before limit orders and if both orders 
are the same type (market or limit), then priority would be based on 
time of entry. The Exchange believes that this matching algorithm 
should minimize the number of customer reports that any one order will 
receive, which the Exchange believes should help to keep the costs 
associated with such multiple reports to a minimum. However, regardless 
of the

[[Page 48459]]

particular method employed to match these orders, all Eligible Orders 
would be matched at the opening price immediately following the New 
York opening.
    Further, the Exchange proposes to delete existing language in Phlx 
Rule 229, Supplementary Material .10(b), relating to the size of market 
and limit orders and the receipt time required to receive the New York 
opening price as the treatment of such orders will be covered in 
Supplementary Materials .06 and .10(a). Finally, the Exchange proposes 
to delete Supplementary Material .11 of Phlx Rule 229, relating to the 
refusal of orders, as the Phlx believes that specialists today have 
sufficient methods available to them to manage the risk associated with 
orders received before the opening.
2. Statutory Basis
    The Exchange believes that its proposal, as amended, is consistent 
with Section 6(b) and Section 11A(a)(1)(C) of the Act \13\ in general, 
and furthers the objectives of Section 6(b)(5) and Section 
11A(a)(1)(C)(v) of the Act \14\ 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 increasing the number of 
investors' orders that are executed at the opening without the 
participation of a dealer.
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    \13\ 15 U.S.C. 78f(b) and 15 U.S.C. 78k-1(a)(1)(C).
    \14\ 15 U.S.C. 78f(b)(5) and 15 U.S.C. 78k-1(a)(1)(C)(v).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change, as 
amended, 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, as amended, or
    (B) institute proceedings to determine whether the proposed rule 
change, as amended, 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-2005-14 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-9303.
    All submissions should refer to File Number SR-Phlx-2005-14. 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 the 
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-2005-14 and should be submitted on or before 
September 7, 2005.
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    \15\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-4490 Filed 8-16-05; 8:45 am]
BILLING CODE 8010-01-P