[Federal Register: February 25, 2004 (Volume 69, Number 37)]
[Notices]
[Page 8721-8722]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr25fe04-136]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-49277; File No. SR-Phlx-2004-04]
Self-Regulatory Organizations; Notice of Filing and Immediate
Effectiveness of Proposed Rule Change and Amendment No. 1 by the
Philadelphia Stock Exchange, Inc. To Reduce the Minimum Order Size
Required To Use One of the Phlx's Procedures for Crossing Transactions
February 19, 2004.
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 January 12, 2004, the Philadelphia Stock Exchange, Inc. (``Phlx'' or
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I, II, and III, below, which Items have been prepared by the
Exchange. On February 11, 2004, the Phlx amended the proposed rule
change.\3\ The Phlx filed the proposal pursuant to Section 19(b)(3)(A)
of the Act,\4\ and Rule 19b-4(f)(6) thereunder,\5\ which renders the
proposal effective upon filing with the Commission.\6\ 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\ See letter from Carla Behnfeldt, Director, New Product
Development Group, Legal Department, Phlx, to Nancy Sanow, Assistant
Director, Division of Market Regulation (``Division''), Commission,
dated February 10, 2004 (``Amendment No. 1''). In Amendment No. 1,
the Phlx changed all references to Chicago Stock Exchange (``CHX'')
Rule 23 to CHX Article XX, Rule 23, Interpretations and Policies
Section .01. See also, infra notes 12 and 13. For purposes of
calculating the 60-day abrogation period, the Commission considers
the period to have commenced on February 11, 2004, the date the
Exchange filed Amendment No. 1.
\4\ 15 U.S.C. 78s(b)(3)(A).
\5\ 17 CFR 240.19b-4(f)(6).
\6\ The Phlx provided the Commission with notice of its intent
to file the proposed rule change on December 29, 2003. See Rule 19b-
4(f)(6)(iii). 17 CFR 240.19b-4(f)(6)(iii).
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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 126, ``Crossing'' Orders,
Supplementary Material (h). Below is the text of the proposed rule
change. Proposed new language is in italics; proposed deletions are in
brackets.
Rule 126, ``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]
5,000 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.
* * * * *
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
On February 29, 2003, the Commission approved an amendment to Phlx
Rule 126 which added Supplementary Material (h), instituting an
alternative procedure for crossing certain orders of 10,000 shares or
greater (the ``Alternative Procedure'').\7\ The Alternative Procedure
allows 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.\8\
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\7\ See Securities Exchange Act Release No. 47373 (February 19,
2003), 68 FR 8790 (February 25, 2003) (SR-Phlx-2002-76) (approval
order).
\8\ ``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. 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. If a member wishes to effect a crossing transaction other
than pursuant to the Alternative Procedure, another member may
participate, or ``break up,'' the transaction, by offering (after
the 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. 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.
The Alternative Procedure recognizes that 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.
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Currently, in order to use the Alternative Procedure, 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 ask the specialist in the
security to 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 \9\ and the Updated Quotation contains no
agency orders, or (2) between the Updated Quotation in any other
case.\10\ 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, the member may not cross
using the Alternative Procedure.\11\
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\9\ As the Exchange noted in SR-Phlx-2002-76, agency orders are
orders that are not for the account of brokers or dealers. See infra
note 7.
\10\ The Exchange noted in SR-Phlx-2002-76 that, 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.
78k(a), and SEC Rules 11a-1 et. seq., 17 CFR 240.11a-1 et. seq.,
pertaining to members trading on the Exchange floor for their own
account. See infra note 7.
\11\ The unavailability of the Alternative Procedure 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 sides of the cross against the trading
interest that caused the unavailability of the Alternative Procedure
and then attempt to execute the remaining portion of the cross using
the Alternative Procedure. A member could also decide to seek
execution for the cross in another market.
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The Exchange now proposes to reduce the minimum order size required
to use
[[Page 8722]]
the Alternative Procedure from 10,000 shares to 5,000 shares. The
Exchange believes that the reduction in the minimum share size will
permit added flexibility to Phlx market participants in that it will
allow use of the Alternative Procedure in a greater number of
circumstances.
In proposing the Alternative Procedure, the Exchange based the
proposed rule change on CHX Article XX, Rule 23, Interpretations and
Policies Section .01\12\ and American Stock Exchange (``Amex'') Rule
126(g) Commentary .02. The Alternative Procedure is similar to CHX
Article XX, Rule 23, Interpretations and Policies Section .01 in that
it allows members to cross without \13\ interference from another
member following a request for an Updated Quotation.\14\ The Exchange
also noted that the Alternative Procedure is similar to Amex Rule
126(g) Commentary .02 in that the Alternative Procedure allows members
to cross at the Updated Quotation when both sides of the cross
transaction are agency orders and the Updated Quotation contains no
agency orders.
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\12\ When the Exchange originally proposed the Alternative
Procedure, the Exchange incorrectly stated that the proposed rule
change was based on ``Chicago Stock Exchange (``CHX'') Rule 23 and
American Stock Exchange (``Amex'') Rule 126(g) Commentary .02'' when
the Exchange should have stated that the proposed rule change was
based on CHX Article XX Rule 23 and Amex Rule 126(g) Commentary .02.
The incorrect text is in the unpublished portion of the Exchange's
Form 19b-4 filing relating to Securities Exchange Act Release No.
47140 (January 8, 2003), 68 FR 2098 (January 15, 2003) (SR-Phlx-
2002-76), a copy of which is available at the Commission and the
Exchange. See telephone conversation among Carla Behnfeldt,
Director, New Product Development Group, Legal Department, Phlx;
Joseph Morra, Special Counsel, Division, Commission; and David Hsu,
Attorney, Division, Commission, on February 17, 2004.
\13\ In Amendment No. 1, the Exchange corrected an error in SR-
Phlx-2002-76. In SR-Phlx-2002-76, the Exchange stated that ``[t]he
Exchange believes that this proposal is similar to CHX Rule 23 in
that this proposal allows members to cross with interference from
another member following a request for an Updated Quotation'' when
the Exchange should have stated that the proposal allows members to
cross without interference from another member following a request
for an Updated Quotation.
\14\ See CHX Rule 23 Interpretations and Policies Section .01
and Securities Exchange Act Release No. 46533 (September 23, 2002),
67 FR 61360 (September 30, 2003) (SR-CHX-2002-05) (approval order).
See also, Securities Exchange Act Release No. 43203 (August 24,
2000), 65 FR 53067 (August 31, 2000) (SR-CHX-2000-13) (approval
order).
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Both CHX Article XX, Rule 23 Interpretations and Policies Section
.01 and Amex Rule 126(g) Commentary .02 require a minimum share size of
only 5,000 shares (as opposed to the 10,000 share minimum currently
required under the Phlx Alternative Procedure). The instant proposed
rule change will bring the Phlx minimum size in line with the minimum
size required under CHX Article XX, Rule 23 Interpretations and
Policies Section .01 and Amex Rule 126(g) Commentary .02.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b) of the Act \15\ in general, and furthers the
objectives of Section 6(b)(5) of the Act \16\ 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. Specifically, the proposal will make
the choice to use the Alternative Procedure available to market
participants in a wider range of circumstances than is currently
permitted.
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\15\ 15 U.S.C. 78f(b).
\16\ 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 solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing 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 it was
filed, or such shorter time as the Commission may designate, it has
become effective pursuant to Section 19(b)(3)(A) of the Act \17\ and
Rule 19b-4(f)(6) thereunder.\18\ At any time within 60 days of the
filing of the proposed rule change, the Commission may summarily
abrogate such 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.
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\17\ 15 U.S.C. 78s(b)(3)(A).
\18\ 17 CFR 240.19b-4(f)(6).
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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. Persons making written
submissions should file six copies thereof with the Secretary,
Securities and Exchange Commission, 450 Fifth Street, NW., Washington,
DC 20549-0609. Comments may also be submitted electronically at the
following e-mail address: rule-comments@sec.gov. All comment letters
should refer to File No. SR-Phlx-2004-04. 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, comments should be
sent in hard copy or by e-mail but not by both methods. 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-2004-04 and should be
submitted by March 17, 2004.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\19\
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\19\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-4120 Filed 2-24-04; 8:45 am]
BILLING CODE 8010-01-P