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

[Federal Register: December 9, 1998 (Volume 63, Number 236)]

[Notices]

[Page 67972-67973]

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

[DOCID:fr09de98-147]

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40728; File No. SR-PHLX-98-37]

Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; Order Granting Approval to Proposed Rule Change Relating to Rule 220 Regarding Stopping Stock

November 30, 1998.

1. Introduction

   On September 28, 1998, the Philadelphia Stock Exchange, Inc. (``Phlx'' or ``Exchange'') filedwith the Securities and Exchange Commission (``SEC'' or ``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 adopt Rule 220, which concerns stopping stock.

   \1\ 15 U.S.C. 78s(b)(1).

   \2\ 17 CFR 240.19b-4.

   The proposed rule change was published for comment in the Federal

   [[Page 67973]]

   Register on October 29, 1998.\3\ No comments were received on the proposal. This order approves the proposal.

   \3\ Securities Exchange Act Release No. 40593 (October 22, 1998), 63 FR 58083 (File No. SR-PHLX-98-37).

2. Description of the Proposal

   The Phlx proposes to adopt Rule 220 regarding stopping stock.\4\ This rule codifies and enhances the procedures for stopping stock on the Exchange floor outlined in Phlx Advice A-2.\5\

   \4\ The proposed stopping stock rule is substantially similar to the stopping stock rules adopted by the Boston Stock Exchange (``BSE'') and the Chicago Stock Exchange (``CHX''). See BSE Chapter II, Section 38 and CHX Article XX, Rule 28.

   \5\ See Securities Exchange Act Release No. 34614 (August 30, 1994), 59 FR 46280 (September 7, 1994).

   Under the proposed rule change, an agreement by a Phlx specialist to ``stop'' securities at a specified price will constitute a guarantee by a member or member organization of the purchase or sale of the securities at the specified price or better.\6\ Further, the specialist will be permitted to stop stock upon the unsolicited request of another member when the member is acting on behalf of either a public customer account or an account in which the member or another member has an interest. After granting the stop, the specialist must display the order in his or her quote, including representative size, and reduce the spread by bidding (offering) at a price higher (lower) than the prevailing bid or offer if not executed immediately after being stopped.\7\ This procedure applies in other than minimum variation markets, that is, where the spread in the quotation is greater than twice the minimum variation.

   \6\ See Proposed Rule 220(a).

   \7\ See Proposed Rule 220(b)(1).

   Proposed Rule 220(b)(2) will prohibit the specialist from trading for his own account with any order he stopped while he is in possession of an order at an equal or better price than the price of the stopped order. The specialist must exercise due diligence to match the stopped order with such other order in his possession in accordance with Exchange Rules 119 and 120.

   Proposed Rule 220(c) will provide that the member or member organization which agreed to stop the securities in order to obtain a favorable price will either provide price improvement or guarantee the stop price. If the order is executed at a less favorable price, then the member will be liable for the adjustment of the difference between the two prices.

   Under proposed Rule 220(d), stopping orders in minimum variation markets will occur primarily when the bid (offer) is at a price higher (lower) than the primary market for the day. Specifically, the rule will provide that in minimum variation markets, the specialist must change his or her quoted bid (offer) in order to reflect the size of the order being stopped. In cases of minimum variation markets, a stopped order to buy (sell) will be filled: (1) after a transaction takes place on the primary market at the stop price or higher (lower) or (2) when the share volume on the Exchange at the bid (offer) is exhausted. All orders stopped in minimum variation markets shall be executed by the end of the trading day on which the order was stopped at no worse than the stopped price. In granting a stop in a minimum variation market, a specialist should change the quoted bid (offer) size in order to reflect the size of the order being stopped.

3. Discussion

   After careful review, the Commission finds that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange and, in particular, with the requirements of Section 6(b).\8\ Specifically, the Commission believes the proposal is consistent with the Section 6(b)(5) \9\ requirements that the rules of an exchange be designed 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 and, in general, to protect investors and the public interest.\10\

   \8\ 15 U.S.C. 78f(b).

   \9\ 15 U.S.C. 78f(b)(5).

   \10\ In approving this rule, the Commission has considered the proposed rule's impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).

   In approving Phlx Advice A-2, the Commission urged the Phlx to submit a proposed rule which would ensure the proper handling of stopped stock.\11\ The Commission suggested that any such rule should include, inter alia, the obligations of the member who agrees to grant the stop, a policy for determining the price at which the order should be executed and procedures for minimum variation markets that are consistent with the rules of priority, parity and precedence. The proposed rule change is fully responsive to the Commission's suggestions.

   \11\ See Securities Exchange Act Release No. 34614 (August 30, 1994), 59 FR 46280 (September 7, 1994).

   The practice of stopping stock enables exchange specialists to offer primary market price protection, an important price improvement function of specialists, by executing orders at better prices away from the primary market. Further, the practice of stopping stock provides the opportunity for the specialist to improve upon the market and narrow the bid/offer spread. The Commission believes the requirements of Rule 220, in particular, should increase the likelihood that a customer whose order is stopped will receive price improvement. The stop order procedures codified in Rule 220 provide that where ``the spread in the quotation is greater than the minimum variation of trading in the stock, the specialist is required to reduce the spread by bidding (offering) at a price higher (lower) than the prevailing bid or offer. Specifically each order on the book which has been stopped by the Specialist must be displayed, including a representative size, at its price or better if not executed immediately after being stopped.'' \12\ Accordingly, the Commission believes that the proposed rule change is consistent with the objectives of Section 6(b)(5) of the Act.

   \12\ See Proposed Rule 220(b)(1).

4. Conclusion

   It is therefore ordered, pursuant to Section 19(b)(2) of the Act,\13\ that the proposed rule change (SR-PHLX-98-37) is approved.

   \13\ 15 U.S.C. 78s(b)(2).

   For the Commission, by the Division of Market Regulation, pursuant to delegated authority.\14\

   \14\ 17 CFR 200.30-3(a)(12).

   Margaret H. McFarland, Deputy Secretary.

   [FR Doc. 98-32607Filed12-8-98; 8:45 am]

   BILLING CODE 8010-01-M