29288 Federal Register / Vol. 63, No. 102 /Thursday, May 28, 1998 / Notices

7Supra, note 2.

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

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

10 15 U.S.C. 78k–1.

11 In approving these rules, the Commission has

considered the proposed rule’s impact on

efficiency, competition, and capital formation. 15

U.S.C. 78c(f).

12 15 U.S.C. 78s(b)(3)(A)(i).

1317 CFR 240.19b–4(e)(6).

14 17 CFR 200.30–3(a)(12).

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

2 17 CFR 240.19b–4.

industry to reduce the minimum trading

and quotation increments for equity

securities imposed by the various selfregulatory organizations.7 As derivative

securities, the price of options are

determined in reference to the

underlying securities. Consequently, the

Exchange believes that where

practicable, the Exchange should have

minimum increments comparable to

those applicable to the securities

underlying the Phlx options.

The Exchange also believes that the

proposed rule change would give the

Exchange the flexibility to follow the

suit of the principal exchanges for the

underlying securities without having to

update its rules continually, but at the

same time would give the Exchange the

flexibility it needs to deviate from the

minimum increments established by the

principal markets for the underlying

securities in the event that the Phlx’s

systems were not immediately able to

handle such increments. The Exchange,

therefore, believes the quality of the

market for Phlx options will be

enhanced by allowing more accurate

pricing of Phlx options.

Further, the Exchange is proposing to

retitle Rule 1034 ‘‘Minimum Trading

Increments’’ for consistency with other

exchange’s rules. The Exchange is also

proposing to add express reference to

index options for clarity, noting that

Rule 1034 currently applies to index

options pursuant to Rule 1000A(a).

Lastly, the Exchange is proposing to

delete Commentary .01 regarding the

minimum trading increment for Value

Line LEAPs. If needed, any such new

product-specific trading increment

could be adopted pursuant to the

paragraph proposed to be renumbered

as Rule 1034 (iii), which provides that

different increments may be fixed by the

Exchange. The proposal should extend

the benefits of trading in a narrower

increment to Phlx options, which

should, in turn, promote more accurate

pricing of options and tighter

quotations.

2. Statutory Basis

The Exchange represents that the

proposed rule change is consistent with

Section 6 of the Act 8 in general, and in

particular, with Section 6(b)(5),9 in that

it is designed to promote just and

equitable principles of trade, prevent

fraudulent and manipulative acts and

practices, 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 by

permitting narrower minimum trading

increments in Phlx options. The

proposal is also consistent with Section

11A of the Act,10 in that it promotes

competition among the exchanges and

market makers.11

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

The Exchange has neither solicited

nor received written comments on the

proposed rule change.

III. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Action

This proposed rule filing has been

filed by the Exchange as a ‘‘noncontroversial’’ rule change pursuant to

Section 19(b)(3)(A)(i) of the Act 12 and

subparagraph (e)(6) of Rule 19b–4

thereunder.13 Consequently, because the

foregoing proposed rule change: (1)

Does not significantly affect the

protection of investors or the public

interest; (2) does not impose any

significant burden on competition; and

(3) does not become operative until May

23, 1998, more than 30 days from April

22, 1998, the date on which it was filed,

and the Exchange provided the

commission with written notice of its

intent to file the proposed rule change

at least five days prior to the filing date,

it has become effective pursuant to

Section 19(b)(3)(A) of the act and Rule

19b–4(6) thereunder.

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.

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. 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 U.S.C. 552, will be

available for inspection and copying at

the Commission’s Public Reference

Room. Copies of such filing also will be

available for inspection and copying at

the principal office of the Phlx.

All submissions should refer to File

No. SR–PHLX–98–12 and should be

submitted by June 18, 1998.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.14

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98–14023 Filed 5–27–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–40006; File No. SR–PHLX–

98–10]

Self-Regulatory Organizations;

Philadelphia Stock Exchange, Inc.;

Order Granting Approval to Proposed

Rule Change Relating to Automatic

Price Improvement for Certain PACE

Orders

May 19, 1998.

I. Introduction

On February 10, 1998, the

Philadelphia Stock Exchange, Inc.

(‘‘Phlx’’ or ‘‘Exchange’’) submitted to 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 rules relating to a new
Federal Register / Vol. 63, No. 102 /Thursday, May 28, 1998 / Notices 29289

3Securities Exchange Act Release No. 39740

(March 10, 1998), 63 FR 13083 (March 17, 1998).

4For a more complete description of how the

Exchange’s Automatic Double-Up/Double-Down

price improvement feature operates see Securities

Exchange Act Release No. 39548 (January 13, 1998),

63 FR 3596 (January 23, 1998) (‘‘Double-Up/DoubleDown Order’’).

5The PACE Quote consists of the best bid/offer

among the American, Boston, Cincinnati, Chicago,

New York, Pacific and Philadelphia Stock

Exchanges as well as the Intermarket Trading

System/Computer Assisted Execution System

(‘‘ITS/CAES’’). See Phlx Rule 229.

6These examples consist of the PACE Quote, the

last sale price with an up or down tick indicator,

and the price at which a buy and sell order,

respectively, would be executed.

7See Securities Exchange Act Release No. 39640

(February 10, 1998), 63 FR 8510 (February 19,

1998), which creates an exception where such price

improvement would be better than the last sale

price (for instance, a buy order would be improved

to a price less than the last sale or a seller order

would be improved to a price higher than the last

sale); pursuant to this exception, such orders are

stopped by the specialist at the PACE Quyote when

received, meaning that the order is guaranteed to

receive at least that price by the end of the trading

day.

8See Phlx Rule 125.

automatic price improvement initiative

for PACE orders.

In proposed rule change was

published for comment in the Federal

Register on March 17, 1998.3 No

comments were received on the

proposal. This order approves the

proposal as amended.

II. Description of the Proposal

PACE is the Exchange’s automated

order routing and execution system on

the equity trading floor. PACE accepts

orders for automatic or manual

execution in accordance with the

provisions of Rule 229, which governs

the PACE System and defines its

objectives and parameters. The PACE

Rule establishes execution parameters

for orders depending on type (market or

limit), size and the guarantees offered by

specialists.

Currently, paragraph (c)(i), Automatic

Double-up/Double-down Price

Improvement,4 states that where the

specialist voluntarily agrees to provide

automatic double-up/double-down price

improvement to all customers and all

eligible orders in a security, in any

instance where the bid/ask of the PACE

Quote 5 is 1⁄4 or greater, market and

marketable limit orders in New York

Stock Exchange or American Stock

Exchange listed securities received

through PACE in double-up/doubledown situations for 599 shares or less

shall be provided with automatic price

improvement of 1⁄8, beginning at 9:45

a.m. A specialist may also voluntarily

agree to provide automatic double-up/

double-down price improvement to

larger orders in a particular security to

all customers under this provision.

As a further effort to champion the

principle of best execution, the

Exchange is proposing a more

comprehensive automatic price

improvement initiative. Specifically,

specialists could choose to provide 1⁄16

automatic price improvement to eligible

orders in 1⁄8 or greater markets, or 3⁄16 or

greater markets. Thus, as compared to

the current automatic price

improvement feature for double-up/

double-down situations which is

limited to 1⁄4 wide markets or greater,

the universe of orders eligible for the

proposed feature would be expanded.

Further, the proposal involves

automatic price improvement without

requiring a double-up/double-down

situation. This again expands the

benefits of price improvement to a larger

universe of eligible orders.

Second, where a buy order would be

improved to the last sale price which is

a down tick, or where a sell order would

be improved to the last sale price which

is an up tick, the order is also not

eligible for automatic price

improvement, and is, instead,

automatically executed at the PACE

Quote. The following are examples of

the exception to automatic price

improvement respecting improvement

to the last sale:

23–231⁄8

LS 1⁄16¥

Buy executed at 1⁄8

Sell improved to 1⁄16

23–231⁄8

LS 1⁄16+

Buy improved to 1⁄16

Sell executed at 23

23–233⁄16

LS 1⁄8¥

Buy executed at 3⁄16

Sell improved to 1⁄16

23–233⁄16

LS 1⁄8+

Buy improved to 1⁄8

Sell improved to 1⁄16

23–233⁄16

LS 1⁄16¥

Buy improved to 1⁄8

Sell improved to 1⁄16

23–233⁄16

LS 1⁄16+

Buy improved to 1⁄8

Sell executed at 23

23–231⁄4

LS 1⁄8 + or¥

Buy improved to 3⁄16

Sell improved to 1⁄16

These exceptions are intended to

cover situations where automatic price

improvement may not be appropriate in

light of overall market conditions. In

this regard, the Exchange does not

believe it is customary or appropriate to

provide price improvement over the last

sale price, or, in every case, to the last

sale price. Despite these exceptions to

automatic price improvement under this

proposal, the Exchange believes that

automatic price improvement would be

afforded in a meaningful way,

considering the wider breadth of eligible

orders.

Under the proposal, automatic price

improvement would not occur in two

situations. First, automatic price

improvement would not occur to a price

better than the last sale. More

specifically, where a buy order would

be improved to a price less than the last

sale or a sell order would be improved

to a price higher than the last sale, the

order is not eligible for automatic price

improvement, and is, instead,

automatically executed at the PACE

Quote. The following are examples 6 of

this exception (not improving over the

last sale):

23–231⁄8

LS 23 + or ¥

Buy improved to 1⁄16

Sell executed at 23

23–231⁄8

LS 1⁄8 + or ¥

Buy improved to 1⁄8

Sell improved to 1⁄16

23–233⁄16

LS 23 + or ¥

Buy improved to 1⁄8

Sell executed at 23

23–233⁄16

LS 3⁄16 + or ¥

Buy improved to 3⁄16

Sell executed at 1⁄16

This is similar to the current

exception from automatic double-up/

double-down price improvement; 7

however, currently where an improved

price would be better than the last sale,

the order would be stopped at the PACE

Quote when received. Under this

proposal, the order would be

automatically executed at the PACE

Quote when received.

This proposal would result in

automatic price improvement of 1⁄16, as

opposed to the current automatic

double-up/double-down price

improvement, which provides for 1⁄8

price improvement. Although the

amount of automatic price improvement

will be less under the proposal for a

particular order, the number of orders

receiving price improvement of 1⁄16

should increase, as explained above.

Price improvement of 1⁄16 recognizes

that 1⁄16 is the current minimum trading

increment for PACE issues on the

Exchange’s equity trading floor.8 Thus,

it reflects the reality of today’s
29290 Federal Register / Vol. 63, No. 102 /Thursday, May 28, 1998 / Notices

9See Double-Up/Double-Down Order, supra note

4, at note 10; and Securities Exchange Act Release

No. 39640 (February 10, 1998), 63 FR 8510

(February 9, 1998).

10This election must be made for all Phlx stocks,

not security-by-security. See Double-Up/DoubleDown Order, supra note 4, at note 22.

11A firm’s election continues to apply to all Phlx

stocks, not security-by-security.

12Some securities are not appropriate for

automatic price improvement due to, for instance,

liquidity, trading patterns and volatility situations

rendering it unfair for specialists to afford price

improvement automatically and then manage the

resulting positions. See Double-Up/Double-Down

Order, supra note 4, at note 11.

13 15 U.S.C. 78f(b).

14 15 U.S.C. 78f(b)(5).

15 In approving the proposed rule change, the

Commission notes that it has considered the

proposed rule’s impact on efficiency, competition,

and capital formation. 15 U.S.C. 78f(b).

16Securities listed on the New York Stock

Exchange or the American Stock Exchange are

eligible for this feature. See Phlx Rule 229.07.

marketplace, including other price

improvement initiatives in the industry.

Because the proposal would provide

automatic price improvement, no POES

window would occur, similar to the

current automatic double-up/doubledown price improvement provision.9

Instead, an automatic execution occurs

at an improved price, with no window,

timer or delay. Orders not eligible for

automatic price improvement due to the

two exceptions relating to the last sale

price are automatically executed at the

PACE Quote and not subject to the

POES delay.

Automatic price improvement will

not occur where the execution price

before or after the application of

automatic price improvement would be

outside the primary market high/low

range for the day, if so elected by the

entering member organization. This

limitation currently appears in Rule

229.07(c)(i)(C), and has applied to both

automatic double-up/double-down price

improvement and manual double-up/

double-down price protection.

Similarly, pursuant to paragraph (c)(iii),

the provision that member organizations

entering orders may elect to participate

in manual double-up/double-down

price protection continues to apply.

However, member organizations will

not have the ability to elect the

proposed automatic price improvement

feature.

Currently, both the automatic doubleup/double-down price improvement

and manual price protection features are

jointly subject to the entering firm’s

election.10 As a result, electing these

features where the specialist has not

chosen automatic double-up/doubledown price improvement in that

security may currently cause a firm’s

orders to be stopped. Thus, firms who

do not want their orders stopped

because they prefer a prompt execution

can currently elect out of both features.

Once automatic price improvement is

no longer limited to double-up/doubledown situations, the election for

automatic price improvement will end,

because the reason for allowing a firm’s

choice will no longer exist. Under this

proposal, firms electing out of manual

price protection could nevertheless

receive automatic price improvement.

For instance, where a specialist

switches from manual to automatic

price improvement for a security, the

automatic feature would be activated

even for firms that elected out of the

manual feature.

The Exchange notes that the manual

double-up/double-down price

protection provision, which is

mandatory for specialists, will continue

to be subject to an election by entering

member organizations,11 who may

continue to prefer a prompt execution

over the opportunity for price

improvement. Failure to elect will result

in the activation of the double-up/

double-down feature for that User.

Specialists continue to determine

whether to provide automatic price

improvement in a particular security.

The extraordinary circumstances

provision currently in the Rule would

also apply to the new feature, such that

automatic price improvement may be

disengaged in a security or floor-wide in

extraordinary circumstances with the

approval of two Floor Officials. In

addition to fast market conditions, for

purposes of this paragraphs,

extraordinary circumstances also

include systems malfunctions and other

circumstances that limit the exchange’s

ability to receive, disseminate or update

market quotations in a timely and

accurate manner.

The Exchange has determined that, as

with many PACE features and

participation in the PACE System itself,

automatic price improvement should be

made available on a voluntary, symbolby-symbol basis, so that specialists can

determine which securities are suitable

for the program.12 The availability of a

price improvement feature benefits the

specialist function, especially in highvolume securities, where stopping

orders and manual intervention are

time-consuming, delay execution and

do not necessarily result in price

improvement.

III. Discussion

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).13 In

particular, the Commission believes that

the proposal is consistent with the

Section 6(b)(5) 14 requirements that the

rules of an Exchange be designed to

prevent fraudulent and manipulative

acts and practices, to promote just and

equitable principles of trade, 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.15

The Commission continues to

recognize that the increased competition

for order flow that results from

permitting regional specialists to attract

orders from other markets by providing

price improvement opportunities and

superior quotations enhances market

making ability and the quality of

customer order execution. The

Commission has approved proposals by

national securities exchanges to

integrate price improvement

opportunities, on both an automatic and

manual basis, into their automatic

execution systems. Approval of the

Exchange’s automatic price

improvement initiative will allow small

orders to receive an execution at a price

that may be better than the PACE Quote

according to certain predefined criteria.

Accordingly, the Commission believes

that the Exchange’s present proposal

may enhance both intermarket

competition and order execution quality

on the Exchange.

Under the proposal, specialists

voluntarily may agree to provide

automatic price improvement of 1⁄16 of

a point from the PACE Quote to all

customers and all market and

marketable limit order of up to 599

shares (or higher, if elected by the

specialist) in a particular security 16 on

a stock-by-stock basis, in any instance

where the bid/ask spread of the PACE

Quote is either 1⁄8 or greater than 3⁄16 or

greater. As explained above, this

automatic price improvement feature is

subject to two restrictions. First, no

order may be improved to a price better

than the last sale price; in this situation,

the orders would be automatically

executed at the PACE Quote. Second,

where a buy order would be improved

to the last sale price which is a down

tick, or where a sell order would be

improved to the last sale price which is

an up tick, the order is also not eligible

for automatic price improvement, and

is, instead, automatically executed at

the PACE Quote.

The Commission believes that the

adoption of this proposed automatic

price improvement feature by the
Federal Register / Vol. 63, No. 102 /Thursday, May 28, 1998 / Notices 29291

17See, Division of Market Regulation, SEC,

Market 2000: An Examination of Current Equity

Market Developments (January 1994), at Study V, n.

19.

18 15 U.S.C. 78s(b)(2). 19 17CFR 200.30–3(a)(12).

Exchange is appropriate in that its use

by Phlx specialists should increase the

likelihood that eligible customer orders,

particularly marketable limit orders,

will be executed at an improved price

over the PACE Quote. With respect to

the two conditions above that would

cause an order to be automatically

executed at the PACE Quote, the

Commission believes that it is

reasonable for the Exchange to

automatically execute such orders at the

PACE Quote rather than subjecting them

to the POES window or stopping them

at the PACE Quote. Overall, the

Commission’s Division of Market

Regulation previously has noted that

price improvement windows, such as

POES, by themselves rarely provide an

execution that betters the quoted

market.17 The Exchange’s proposal

should enhance the price improvement

opportunities available for PACE orders

since a greater number of orders will be

eligible for automatic price

improvement than afforded under the

current Double-Up/Double-Down

automatic price improvement feature.

In addition, the Commission believes

that the Exchange’s automatic price

improvement initiative is consistent

with the maintenance of fair and orderly

auction markets on national securities

exchanges. As the examples provided by

the Exchange illustrate, the execution

criteria of the automatic price

improvement initiative should

contribute to the maintenance of an

orderly market by Phlx specialists

because it helps to reduce price

variations occurring from trade to trade

on low volume. Finally, because

automatic price improvement may be

disengaged under extraordinary

circumstances for an individual stock or

floor-wide with the approval of two

floor officials, the Exchange is able to

increase overall systems capacity for

systematized orders routed through

PACE, as well as reduce the market risk

exposure to specialists who participate

in the automatic price improvement

initiative. The Commission believes that

both of these aspects of the automatic

price improvement initiative are

consistent with the maintenance of fair

and orderly auction markets on national

securities exchanges and the protection

of investors.

IV. Conclusion

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act,18 that the

proposed rule change (SR–PHLX–98–

10) is approved as amended.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.19

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98–14120 Filed 5–27–98; 8:45 am]

BILLING CODE 8010–01–M

DEPARTMENT OF TRANSPORTATION

Coast Guard

[USCG–1998–3873]

Prevention Through People

AGENCY: Coast Guard, DOT.

ACTION: Notice.

SUMMARY: Prevention Through People

(PTP) is a Coast Guard initiated program

to address marine safety and

environmental protection through a

focus on the human element. Since the

program’s inception in 1994, there has

been a steady growth of support in the

marine community. Current marine

industry practices reflect the increased

commitment to PTP. This notice

informs the public of some of the major

PTP efforts taking place within the

Coast Guard and includes the response

to comments from the four PTP public

meetings held during the spring of 1997.

ADDRESSES: The Docket Management

Facility maintains the public docket for

this notice. Documents, as indicated in

this notice, will become part of this

docket and will be available for

inspection or copying at room PL–401,

located on the Plaza Level of the Nassif

Building, 400 Seventh Street SW.,

Washington DC 20590–0001, between

10 a.m. and 5 p.m., Monday through

Friday, except Federal holidays. You

many electronically access the public

docket for this rulemaking on the

Internet at http://dms.dot.gov.

The Marine Board of the National

Academy of Science study, Advancing

the Principles of the Prevention Through

People Program, was published in

August 1997 and is available at the

National Academy Press Bookstore 2001

Wisconsin Ave. NW., Washington, DC

20418–0005; phone 800–624–6242, or

202–334–3313.

FOR FURTHER INFORMATION CONTACT: For

information on the public docket,

contact Carol Kelly, Coast Guard

Dockets Team Leader, or Paulette

Twine, Chief, Documentary Services

Division, U.S. Department of

Transportation, telephone 202–366–

9328. For questions on this notice,

contact LT Duane Boniface, Human

Element and Ship Design Division (G–

MSE–1), 202–267–2997.

SUPPLEMENTARY INFORMATION:

Background of PTP

The PTP initiative began in 1994 with

the chartering of a Quality Action Team

(QAT) to develop a long-term strategy to

address the role of human and

organizational factors in marine safety

and environmental protection. The QAT

conducted an extensive literature

review and analysis of marine casualty

data, conducted mariner surveys, and

examined operations from a maritime

systems perspective that included an

assessment of vessels, facilities, and

waterways.

On July 15, 1995, the QAT generated

a report, ‘‘Prevention Through People

Quality Action Team Report.’’ This

report provided the first step towards rebalancing prevention efforts between

technical, human, and organizational

issues related to marine safety.

Subsequent focus on human and

organizational factors in safety and

environmental protection led to these

issues becoming top priorities for many

organizations, both within the

government and industry.

After the report was published, the

Coast Guard and industry pursued a

host of initiatives. These initiatives

include partnerships with industry,

studies of fatigue and communications,

and introductions of risk assessment

and risk management approaches. The

PTP Strategic Plan (available in the

docket; or contact the person under FOR

FURTHER INFORMATION CONTACT) exposed

a wider audience to the PTP

philosophy, while the PTP

Implementation Plan set high goals with

various PTP objectives and activities for

the Coast Guard to accomplish.

Additionally, the Coast Guard held

four public meetings that allowed it to

hear valuable industry comments

concerning safety in the marine

community.

PTP Focus Plan

There are many projects and

initiatives under the umbrella of PTP. A

list of the current projects and

initiatives under the umbrella of PTP

can be found on the PTP web site at the

following website: http://www.uscg.mil/

hq/g-sm/nmc/ptp/index.htm. From the

list of these projects and initiatives, the

Coast Guard is focusing on five major

initiatives during 1998 referred to as the

PTP Focus Plan. These initiatives were

chosen based on public comments,

marine industry input, and the results of

the Marine Board of the National