[Federal Register: January 15, 2003 (Volume 68, Number 10)]
[Notices]
[Page 2098-2100]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr15ja03-100]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-47140; File No. SR-Phlx-2002-76]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Philadelphia Stock Exchange, Inc. Relating to Certain
Rules Governing Participation in Crossing Transactions Effected on the
Exchange
January 8, 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 November 21, 2002, the Philadelphia Stock Exchange, Inc. (``Phlx''
or ``Exchange'') filed with the Securities and Exchange Commission
(``Commission'' or ``SEC'') 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 Phlx, pursuant to Rule 19b-4 of the Act, proposes to amend
certain Phlx Rules governing participation in crossing transactions
effected on the Exchange. Specifically, the Phlx proposes to amend Phlx
Rule 126, adding Supplementary Material (h) instituting an alternative
procedure for crossing certain orders of 10,000 shares or greater (the
``Alternative Procedure''). In addition, the Phlx proposes to amend
Phlx Rule 229B, to allow specialists and floor brokers on the
Exchange's equity floor to take advantage of the Alternative Procedures
electronically.
The text of the proposed rule change is below. Proposed new
language is in italics; proposed deletions are in brackets.
* * * * *
Crossing'' Orders
Rule 126. When a member has an order to buy and an order to sell
the same security, he must offer such security at a price which is
higher than his bid by the minimum variation permitted in such security
before making a transaction with himself.
Supplementary Material
(a)-(g) No Change.
(h) If prior to presenting a cross transaction involving 10,000
shares or more, a member requests that the specialist post the current
market for the security (``Updated Quotation''), the member may execute
a cross transaction:
(i) at the Updated Quotation, if both sides of the cross
transaction are agency orders and the Updated Quotation contains no
agency orders; or
(ii) between the Updated Quotation, without interference by another
member. In no event shall an agency order on the book having time
priority, remain unexecuted after any other order at its price has been
effected pursuant to this rule or otherwise.
* * * * *
[Order Entry Window] Alternative Electronic Order Entry
Rule 229B. (a) Floor Brokers and Specialists may elect to enter
orders through an order entry window (the ``Order Entry Window'' or
``OEW''), which will route orders to the appropriate specialist, in
accordance with Rule 229A, with all OEW orders treated as Non-Directed
Orders, as that term is defined in Rule 229A. Specialists may enter
orders only in those stocks that they have been approved to trade as a
specialist by the Equity Allocation, Evaluation and Securities
Committee. Orders sent through the OEW will be displayed to the
specialist for a period of time to be determined by the Exchange.
During that time, the specialist can choose to interact with the OEW
order. At the end of the time period, absent previous specialist
action, the OEW order will be automatically executed or cancelled.
(b) Specialists and Floor Brokers may enter cross transactions
electronically in accordance with the Phlx Rule 126(h).
* * * * *
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
[[Page 2099]]
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 better allow members
to compete for new and retain existing order flow in large crossed
orders on the Phlx equity floor through use of the Alternative
Procedures.\3\ The Alternative Procedures would allow a member with an
order to buy and an order to sell the identical number of shares of the
same security to cross those orders without interference by another
member under certain circumstances.\4\ In order to use the Alternative
Procedures, the member attempting to cross without interference by
another member must satisfy a number of preconditions. First, the
potential cross must involve orders of greater than 10,000 shares.
Second, prior to introducing the cross, the member attempting to cross
must request that the specialist in the security post the current
market for the security (the ``Updated Quotation''). Upon receiving the
Updated Quotation, the member may execute the cross transaction without
interference by another member either (1) at the Updated Quotation, if
both sides of the cross transaction are agency orders \5\ and the
Updated Quotation contains no agency orders or (2) between the Updated
Quotation in any other case.\6\ If either side of the cross would take
place outside the Updated Quotation or at the Updated Quotation, for
crosses where one or both sides of the cross transaction are non-agency
orders or the Updated Quotation contains an agency order, then member
may not cross utilizing the Alternative Procedures.\7\
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\3\ Crossed orders or crosses are two orders, one to buy and one
to sell the identical number of shares of the same security, which a
member is brokering for his or her customers. This proposed rule
change effects crosses of 10,000 shares or larger.
\4\ The proposed addition of Supplementary Material (h) to Phlx
Rule 126 does not preclude Exchange members from choosing to cross
such orders under another provision of Phlx Rule 126.
\5\ Agency orders are orders that are not for the account of
brokers or dealers.
\6\ As with all other trading on the Exchange, members must
adhere to the trading restrictions contained in Section 11(a) of the
Act, 15 U.S.C. Sec. 78k(a), and Rules 11a-1 et. seq., 17 CFR
240.11a-1 et. seq., pertaining to members trading on the Exchange
floor for their own account.
\7\ The unavailability of the Alternative Procedures does not
restrict how a member may then continue to represent the orders that
otherwise would have been crossed. For instance, a member may choose
to execute part of one of the cross against the trading interest
that caused the unavailability of the Alternative Procedures and
then attempt to execute the remaining portion of the cross using the
Alternative Procedures. A member could also decide to seek execution
for the cross in another market.
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In addition, the Exchange intends to permit members to enter
crosses electronically subject to the Alternative Procedures. Upon
electronic notification of the cross, the specialists in that security
will be requested to submit an Updated Quotation.\8\ The member's cross
will be compared with the Updated Quotation, if any, and will either be
executed pursuant to the Alternative Procedures or the member will be
notified that the cross did not take place.
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\8\ In a telephone conference between John Dayton, Assistant
Secretary and Counsel, Phlx, and Alton Harvey, Chief, Office of
Market Watch, and Mary N. Simpkins, Special Counsel, Division of
Market Regulation, Commission, on January 7, 2003, the Phlx
clarified that as with manual, in-person use of the Alternative
Procedures, a member attempting to cross electronically using the
Alternative Procedures will use the Exchange's trading systems to
request that the specialists submit an Updated Quotation.
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In contrast to this proposal, under current Phlx Rules pertaining
to priority, if a member presents a crossing transaction, another
member may participate, or ``break up,'' the transaction, by offering
(after presentation of the proposed crossing transaction) to improve
one side of the transaction by the minimum price variation. The member
presenting the cross is then effectively prevented from consummating
the transaction as a ``clean cross,'' which may be to the detriment of
the member's customer.\9\ The Exchange notes that the minimum price
variation is one penny, making it relatively inexpensive for another
Exchange member to break up the crossing transaction by simply
improving one side or the other by one penny.
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\9\ Some institutional customers prefer executing large crossing
transactions at a single price and are willing to forego the
opportunity to achieve the piecemeal price improvement that might
result from the break up of the cross transaction by another
Exchange member. Of course, the member will still retain the ability
to present both sides of the order at the post if the customers so
desire.
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In a decimal pricing environment, the Exchange's Floor Procedure
Committee is concerned that a portion of the crossing business and
corresponding Exchange volume could evaporate unless members and their
customers receive the protection offered by the Alternative Procedures.
The Exchange believes that the Alternative Procedures strike a balance
of interests of those members who are impacted by crossing
transactions. Members attempting to execute crosses for their customers
may be interested, on behalf of their customers, in obtaining a rapid
execution of their order at a single price. Members submitting Updated
Quotations may be interested in executing against with a portion of one
side or the other of the cross because they see this as a favorable
trade. This proposal allow both interests to be fulfilled by
streamlining the crossing procedures while retaining the right of
members to represent their best bid or offer through their response to
the request for an Updated Quotation. It also protects the priority of
agency orders by requiring that requiring that in no event shall an
agency order in the book, having time priority, remain unexecuted after
any other order at its price has been effected.
2. Statutory Basis
The Exchange believes that its proposal to amend certain Phlx Rules
governing participation in crossing transactions effected on the
Exchange is consistent with Section 6(b) of the Act \10\ in general,
and furthers the objectives of Section 6(b)(5) of the Act \11\ in
particular, in that it is designed to promote just and equitable
principles of trade, to remove impediments to and 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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\10\ 15 U.S.C. 78f(b).
\11\ 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 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
[[Page 2100]]
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, 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 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 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 number SR-Phlx-2002-76 and
should be submitted by February 5, 2003.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\12\
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\12\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 03-843 Filed 1-14-03; 8:45 am]
BILLING CODE 8010-01-P