regulatory organizations; proposed rule changes: Philadelphia Stock Exchange, Inc.,

[Federal Register: October 30, 2002 (Volume 67, Number 210)]

[Notices]

[Page 66187-66189]

From the Federal Register Online via GPO Access [wais.access.gpo.gov]

[DOCID:fr30oc02-109]

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'') fileda 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 filedthe 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.

\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).

1. 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\

   \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).

   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\

   \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).

   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\

   \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.

2. 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

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   the most significant aspects of such statements.

   1. 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\

      \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).

      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\

      \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).

      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\

      \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).

   2. 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.

   3. 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.

3. 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.

   \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).

   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

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   necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act.

   \18\ 15 U.S.C. 78s(b)(3)(A).

   \19\ 17 CFR 240.19b-4.

4. 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 filedwith 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\

   \20\ 17 CFR 200.30-3(a)(12).

   Margaret H. McFarland, Deputy Secretary.

   [FR Doc. 02-27537Filed10-29-02; 8:45 am]

   BILLING CODE 8010-01-P