[Federal Register: June 4, 2003 (Volume 68, Number 107)]
[Notices]
[Page 33557-33558]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr04jn03-138]
[[Page 33557]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-47942; File No. SR-PHLX-2003-31]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Philadelphia Stock Exchange, Inc. To Amend the Exchange's
Rule 229 To Provide for the Automatic Execution of Odd-Lot Market and
Marketable Limit Orders Received Over PACE During Locked and Crossed
Markets at the PACE Quote
May 29, 2003.
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 April 23, 2003, 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 Exchange proposes to amend Phlx Rule 229,\3\ Supplementary
Material .08 to modify the Philadelphia Stock Exchange Automated
Communication and Execution (``PACE'') System \4\ to provide for the
automated execution of odd-lot market and marketable limit orders
received over PACE during locked markets \5\ and crossed markets \6\ at
the PACE Quote.\7\ Below is the text of the proposed rule change.
Proposed new text is italicized and proposed deleted text is
[bracketed].
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\3\ The Exchange states that its proposed rule change to Phlx
Rule 229, Supplementary Material .08 is substantially similar to a
pilot filed by the American Stock Exchange, LLC (``Amex'') for Amex
Rule 118 (Trading in Nasdaq National Market Securities) and Rule 205
(Manner of Executing Odd-Lot Orders). See Securities Exchange Act
Release No. 46304 (August 2, 2002), 67 FR 51903 (August 9, 2002).
\4\ PACE is the Exchange's automated order routing, delivery,
execution and reporting system for equities.
\5\ A locked market is when the bid and offer for the security
are the same.
\6\ A crossed market is when the bid exceeds the offer.
\7\ The PACE Quote is the best bid/ask quote among the American
Stock Exchange, Boston Stock Exchange, Cincinnati Stock Exchange,
Chicago Stock Exchange, New York Stock Exchange, Pacific Stock
Exchange or Philadelphia Stock Exchange, or the Intermarket Trading
System/Computer Assisted execution System (``ITS/CAES'') quote, as
appropriate.
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* * * * *
Rule 229 Philadelphia Stock Exchange Automated Communications and
Execution System (PACE).
PACE provides a system for the automatic execution of orders on the
Exchange equity floor under predetermined conditions. Orders accepted
under the system may be executed on a fully automated or manual basis
in accordance with the provisions of this Rule. Securities admitted to
dealings on the equity floor are eligible for trading on the PACE
System in which equity specialists and member organizations may choose
to participate. The conditions under which orders will be accepted and
executed are set forth below. When used in the Rule, PRL means a
combined round-lot and odd-lot order, and PACE Quote means the best
bid/ask quote among the American, Boston, Cincinnati, Chicago, New
York, Pacific or Philadelphia Stock Exchange, or the Intermarket
Trading System/Computer Assisted Execution System (``ITS/CAES'') quote,
as appropriate. The PACE rules, conditions and guidelines do not apply
to orders not on the system, and existing rules governing orders not on
the system are not affected hereby.
Supplementary Material
.01-.07 No change.
.08 Odd-lot market orders entered after the opening will be
executed on the PACE [q]Quote. When the PACE Quote is locked, odd-lot
market orders and marketable limit odd-lot orders entered after the
opening will be executed at the locked price. If the PACE Quote is
crossed, and the bid is higher than the offer by $ .05 or less, odd-lot
market and marketable limit orders will be executed at the mean of the
crossed bid and offer. If the mean does not fall at a one-cent
increment, the execution will be rounded up to the nearest $ .01. If a
crossed market exists and the bid is higher than the offer by more than
$ .05, then the odd-lot order will not be automatically executed by the
PACE system, but will be executed manually at the price of the next
unlocked and uncrossed PACE Quote.
.09-.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 change the handling
and execution of certain odd-lot orders sent over the PACE System to
increase efficiency. At the present time, during a locked and/or
crossed market, odd-lot market orders in all securities entered after
the opening of trading are not executed automatically, but instead are
handled manually by the specialist. The Exchange now proposes to change
this by providing for automated handling of these orders. The Exchange
believes that this, in turn, would increase the efficiency of order
handling, relieving the burden of specialists of dealing with manual
orders of less than a round-lot during periods of locked and crossed
markets. Furthermore, the Exchange believes that the quality of
execution of these orders would be improved and enhanced, because
execution time of these orders would be reduced while the orders would
still receive the best bid or offer. The Exchange states that the speed
of execution is an important aspect of the best execution of orders. In
terms of price, the Exchange believes the proposed pricing procedure
for odd-lot market orders after the opening when markets are locked or
crossed should result in a customer receiving execution prices that
accurately reflect market conditions. For instance, an execution at the
PACE Quote when it is locked reflects the current market price,
notwithstanding that it is locked.
In automating the execution of odd-lot market orders during locked
and certain crossed markets, the Exchange determined that such orders
should be executed at the PACE Quote, or in the case of crossed market,
when the bid is higher than the offer by $ .05 or less, at the mean of
the crossed best bid and offer. If the mean does not fall at a one-cent
increment, the execution would be rounded up to the nearest $ .01. The
Exchange states that this simple algorithm may enable the few crossed
market orders that are actually received on the Exchange to be
automatically executed at a fair execution price. The Exchange has
determined that the $ .05
[[Page 33558]]
is a reasonable spread between a crossed market to select a price that
reflects current market conditions. In contrast, in crossed markets
that exceed the $ .05 parameter, true market conditions are less clear
and require manual handling and, perhaps, price discovery, by a trading
professional. The Exchange believes that this proposal may even reduce
such conditions by executing an incoming marketable order against a
locked or crossed bid or offer.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with section 6(b) of the Act \8\ in general, and furthers the
objectives of section 6(b)(5)\9\ in particular, in that it is designed
to prevent fraudulent and manipulative acts and practices, 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, to remove impediments to and perfect the mechanism of a
free and open market and a national market system, and, in general, to
protect investors and the public interest by providing for automatic
execution of certain odd-lot market orders for equities traded over the
PACE system, thereby increasing automated handling.
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\8\ 15 U.S.C. 78f(b).
\9\ 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 burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
Written comments were neither solicited nor received with regard to
the proposed rule change.
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 Phlx consents, the Commission will:
(A) By order approve the 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 proposal 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 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 will also be available for
inspection and copying at the principal office of the Phlx. All
submissions should refer to File No. SR-Phlx-2003-31 and should be
submitted by June 25, 2003.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\10\
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\10\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-14048 Filed 6-3-03; 8:45 am]
BILLING CODE 8010-01-P