3596 Federal Register / Vol. 63, No. 15 / Friday, January 23, 1998 / Notices

5 17 CFR 200.30-3(a)(12).

1 15 U.S.C. § 78s(b)(1).

2 17 CFR 240.19b–4.

3See Letter from Philip H. Becker, Senior Vice

President and Chief Regulatory Officer, Phlx, to

Michael Walinskas, Senior Special Counsel,

Division of Market Regulation, SEC, dated August

1, 1997 (‘‘Amendment No. 1’’).

4See Letter from Philip H. Becker, Senior Vice

President, Phlx, to Michael Walinskas, Senior

Special Counsel, SEC, dated October 17, 1997

(‘‘Amendment No. 2’’). Amendment No. 2 revises

the proposal to provide that relief from the

requirements concerning double-up/down

guarantee sizes may be granted pursuant to the

extraordinary circumstances language contained in

the text of proposed Rule 229.07(c)(iii), rather than

that of existing Rule 229.13. Moreover, the text of

Rule 229.07(c)(iii) is proposed to be amended to

state that extraordinary circumstances also include

situations where the Exchange is unable to receive

market quotations in a timely and accurate manner.

In addition, while the Form 19b–4 filing containing

the proposed rule change stated that member

organizations may decline to participate in both

double-up/down automatic price improvement and

manual price protection, the text of proposed Rule

229.07(c)(i)(D) did not reflect this option.

Amendment No. 2 adds such language to the text.

5Rule 229.05 provides that round-lot market

orders up to 500 shares and partial round-lot

(‘‘PRL’’) market orders of up to 599 shares, which

combine a round-lot with an odd-lot, are stopped

at the PACE Quote at the time of their entry into

PACE (‘‘Stop Price’’) for a 30 second delay to

provide the Phlx specialist with the opportunity to

effect price improvement when the spread between

the PACE Quote exceeds 1⁄8 of a point. This feature

is known as the Public Order Exposure System

(‘‘POES’’) ‘‘window.’’ Rule 229.05 further provides

that market orders for more than 599 shares that a

specialist voluntarily has agreed to execute

automatically also are entitled to participation in

POES. If orders eligible for POES are not executed

within the POES 30 second window, the order is

automatically executed at the Stop Price.

6The PACE Quote consists of the best bid/offer

among the American Stock Exchange (‘‘Amex’’);

New York Stock Exchange (‘‘NYSE’’); Pacific

Exchange; Phlx, Boston Stock Exchange, Cincinnati

Stock Exchange, and Chicago Stock Exchange, as

well as the Intermarket Trading System/Computer

Assisted Execution System (‘‘ITS/CAES’’). See Rule

229.

7A market order is an order to buy or sell a stated

amount of a security at the best price obtainable

when the order is received. A marketable limit

order is an order to buy or sell a stated amount of

a security at a specified price, which is received at

a time when the market is trading at or better than

such specified price.

IV. Solicitation of Comments

Interested persons are invited to

submit written data, views, and

arguments concerning the foregoing.

Persons making written submissions

should file six copies thereof with the

Secretary, Securities and Exchange

Commission, 450 Fifth Street, N.W.,

Washington, D.C. 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 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 NASD. All

submissions should refer to File No.

SR–NASD–97–98 and should be

submitted by February 13, 1998.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.5

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98–1645 Filed 1–22–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–39548; File No. SR–Phlx–

97–23]

Self-Regulatory Organizations:

Philadelphia Stock Exchange, Inc.;

Order Granting Approval to Proposed

Rule Change and Notice of Filing and

Order Granting Accelerated Approval

to Amendment No. 2 Relating to the

Treatment of PACE Orders in Doubleup/Double-down Tick Situations

January 13, 1998.

I. Introduction

On May 2, 1997, 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

relating to double-up/double-down

automatic price improvement and

manual price protection. On August 4,

1997, the Exchange submitted to the

Commission Amendment No. 1 to the

proposed rule change.3

The proposed rule change was

published for comment in Securities

Exchange Act Release No. 39000

(September 2, 1997), 62 FR 47865

(September 11, 1997). No comments

were received on the proposal. On

October 20, 1997, the Exchange

submitted to the Commission

Amendment No. 2 to the proposed rule

change.4 This order approves the

proposal, including Amendment No. 2

on an accelerated basis.

II. Description

A. Background

The Exchange, pursuant to Rule 19b–

4 of the Act, proposes to adopt

Supplementary Material .07(c) to Phlx

Rule 229, Philadelphia Stock Exchange

Automatic Communication and

Execution (‘‘PACE’’) System, relating to

automatic double-up/double-down price

improvement and manual double-up/

double-down price protection. The

PACE System accepts orders for

automatic or manual execution in

accordance with the provisions of Phlx

Rule 229, which governs the operation

of the PACE System and defines its

objectives and parameters. Agency

orders received through PACE are

subject to certain minimum execution

parameters and non-agency orders are

subject to the provisions of

Supplementary Material .02 of Rule 229.

In addition, Rule 229 establishes

execution parameters for orders

depending on type (market or limit),

size, and the guarantees offered by

specialists.5

B. Automatic Double-up/Double-down

Price Improvement

The Exchange proposes to adopt Rule

2929.07(c)(i), Automatic Double-up/

Double-down Price Improvement,

which would state 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 spread of the

PACE Quote 6 is a 1⁄4 point or greater,

market and marketable limit orders 7 in

NYSE-listed or Amex-listed securities

for 599 shares or less that are received

through PACE in double-up/doubledown situations shall be provided with

automatic price improvement of 1⁄8 of a

point, beginning at 9:45 a.m.

Under the proposal, a ‘‘double-up/

double-down situation’’ is defined as a

trade that would be at least: (i) 1⁄4 point

(up or down) from the last regular way

sale on the primary market; or (ii) 1⁄4

point from the regular way sale that was

the previous intra-day change on the

primary market. The term ‘‘double’’

originated with two 1⁄8 point ticks,

meaning 1⁄4 of a point. Under the

proposal, a down tick of 1⁄16 of a point

followed by a down tick of 3⁄16 of a point

would be a double-down situation,

because it equals 1⁄4 of a point.

As an example of the part (i) of the

definition of a double up/double-down

situation, assuming that the specialist

has agreed to participate in this feature,

where the PACE Quote is 221⁄2–223⁄4, if

the last sales on the primary market

were 223⁄4 followed by a down tick at

225⁄8, a double-up/double-down

situation would not occur for a market

order to buy, because buying at 223⁄4 is

a single up tick of 1⁄8 of a point and,
Federal Register / Vol. 63, No. 15 / Friday, January 23, 1998 / Notices 3597

8The first down tick was from 321⁄2 to 323⁄8, and

the second down tick would have been from 323⁄8

to 321⁄4 had the order been executed. The

intervening sale at 323⁄8 does not change this result.

thus, does not meet the 1⁄4 point

requirement. Under the proposal,

because no double-up/double-down

situation occurred, no automatic price

improvement would be afforded.

However, applying part (ii) of the

definition, a double-up/double-down

situation would occur for a sell order,

because a sale at 221⁄2 is a 1⁄4 point away

from the next-to-last intra-day change,

executed at 223⁄4. Under the proposal,

the market order to sell would be

automatically executed at 225⁄8,

providing an 1⁄8 point price

improvement over the otherwiseautomatic execution at 221⁄2.

Where the PACE Quote is 221⁄4–223⁄4,

with the last sale at 221⁄2, part (i) of the

definition would apply to a market

order to buy or sell, because buying at

223⁄4 creates a double-up tick (1⁄4 of a

point away from 221⁄2) and selling at

221⁄4 creates a double-down tick (also 1⁄4

of a point away from 221⁄2).

If the last sale was at 223⁄4 and the

next-to-last sale was at 221⁄2, part (i) of

the definition would apply to a market

order to sell, because selling at 221⁄4

creates a double-down tick 1⁄2 of a point

away from 223⁄4, and part (ii) of the

definition would apply to a buy order,

because buying at 223⁄4, although not an

up or down tick from the last sale of

223⁄4, is 1⁄4 of a point away from the next

to last change, executed at 221⁄2.

If the last sale was at 225⁄8 and the

next-to-last sale was at 221⁄2, part (ii) of

the definition would apply to a market

order to buy, because buying at 223⁄4

creates a double-up tick (1⁄4 of a point

away) from 221⁄2, as well as to a market

order to sell, because selling at 221⁄4

creates a double-down tick (1⁄4 of a point

away) from 221⁄2.

Pursuant to part (ii) of the definition

of a double-up/double-down situation,

this term includes qualifying changes

from the last change, not just the two

previous last sales. For example, where

the last sales on the primary market

were: 221⁄2; 223⁄8; and 223⁄8, with the

PACE Quote at 221⁄4–221⁄2, a market

order to sell that would otherwise be

executable at 221⁄4 should be priceimproved to 223⁄8, because it is a

double-down tick (1⁄4 of a point away)

from the last ‘‘change’’ or sale that was

the previous change (meaning the

change from 221⁄2 to 223⁄8).8 Under part

(i) of the definition, this order would

not qualify as a double-up/double-down

situation, because an execution at 221⁄4

would be only 1⁄8 of a point away from

the last sale of 223⁄8.

To explain the interaction between

the POES window and the automatic

double-up/double-down price

improvement feature, assuming that the

PACE Quote is 151⁄2–3⁄4 and the last sale

was at 151⁄2, an order to buy 500 shares

would be subject to automatic price

improvement, because buying at 153⁄4

creates a double up tick (1⁄4 of a point

away) from the last sale at 151⁄2. The

order would be automatically executed

under the proposal at 155⁄8 (giving 1⁄8 of

a point price improvement over the

PACE Quote of 153⁄4) and no POES

window would occur. The proposed

automatic double-up/double-down price

improvement feature results in an

automatic execution, with no window,

timer or delay. If, on the other hand, the

order was to sell 500 shares, a doubleup/double-down situation would not

occur, because selling at 151⁄2 is not a

double-up/double-down situation (not

1⁄4 of a point away from the last sale);

this order would be POES-eligible such

that the POES window would apply. At

the expiration of the POES window,

absent manual specialist intervention,

this order would be manually executed

at 151⁄2, its Stop Price.

Automatic double-up/double-down

price improvement also would be

available for marketable limit orders. As

an example, assuming that the specialist

has agreed to participate in this feature,

where the PACE Quote is 151⁄2–153⁄4,

and the last sale was at 151⁄2, an order

to buy 500 shares at 153⁄4 would be

subject to automatic price improvement,

because buying at 153⁄4 creates a double

up tick (1⁄4 of a point away) from the last

sale at 151⁄2. The order to buy 500 shares

at 153⁄4 is a marketable limit order,

because it is immediately executable on

the offer. Under this proposal, this order

would be automatically executed at

155⁄8, receiving price improvement of 1⁄8

of a point.

The Exchange notes that the

execution resulting from the automatic

price improvement feature can create a

double-up/double-down situation; for

instance, where the PACE Quote is 32–

321⁄4 and the last sale was at 323⁄8, a sell

order that would be executable at 32

would be improved to 321⁄8, which is a

double-down tick (1⁄4 point from 323⁄8 to

321⁄8).

Automatic double-up/double-down

price improvement will not occur where

the execution price would be outside

the primary market high/low range for

the day, if out-of-range protection was

elected by the member organization

entering the order pursuant to Rule

229.07(a). The following example

illustrates how the execution price

before automatic price improvement can

be out-of-range. Where the primary

market high and low for the day are

221⁄2 and 221⁄4, the last sale was at 223⁄8

and the PACE Quote is 225⁄8–227⁄8, an

incoming market order to sell would

revert to manual status since an

execution at 225⁄8 (or 223⁄4, if automatic

price improvement would have been

applied) would constitute an out-ofrange execution (i.e., an execution at

225⁄8 would have been at a price about

the 221⁄2 high for the day). The next

example illustrates how the execution

price could be out-of-range as a result of

automatic price improvement. Where

the primary market high and low for the

day are 225⁄8 and 221⁄4, the last sale was

at 223⁄8 and the PACE Quote is 225⁄8–

227⁄8, an incoming sell order executable

at 225⁄8 would not be improved to 223⁄4,

because such price would be out-ofrange (i.e., an execution at 223⁄4 would

have been at a price above the 225⁄8 high

for the day). Instead, the order would

revert to manual status, and the

specialist would either stop the order or

execute if at 225⁄8. Absent out-of-range

protection, the 225⁄8 execution would

have been a double-up situation (1⁄4 of

a point away from the last sale of 223⁄8).

The Exchange represented that it is

proposing to extend its price

improvement initiative to double-up/

double-down situations, because these

are particularly suitable for price

improvement. Instead of affording an

automatic execution at the PACE Quote,

the proposal results in an automatic

execution that improves on that price by

an 1⁄8 of a point.

The Exchange has determined that, as

with many PACE features and

participation in the PACE System itself,

automatic double-up/double-down price

improvement should be made available

on a voluntary, symbol-by-symbol basis,

so that specialists can determine which

securities are suitable for the program.

Moreover, the Exchange has asserted

that the availability of a price

improvement feature benefits the

specialist function, especially in highvolume securities, where stopping

orders and effecting manual

intervention are time-consuming, can

delay execution, and do not necessarily

result in price improvement.

C. Manual Double-up/Double-down

Price Protection

The Exchange also proposes to adopt

a manual double up/double-down price

protection provision as Rule

229.07(c)(ii). Currently, a form of

manual double-up/double-down price

protection is a feature of the PACE

System, but is neither mandatory, nor
3598 Federal Register / Vol. 63, No. 15 / Friday, January 23, 1998 / Notices

9The Exchange has represented that the current

double-up/down price protection feature has been

in use since 1991. If elected by the entering member

organization in a security selected by the specialist

as eligible for this feature, orders within the

specialist’s automatic execution guarantee size are

stopped in double/up/down situations.

10Telephone conversation between Philip Becker,

Senior Vice President and Chief Regulatory Officer,

Phlx, and Jon Kroeper, Special Counsel, Division of

market Regulation, SEC, dated November 7, 1997.

The Phlx proposal also states that the POES

window is not applicable where the automatic

double up/down price improvement feature is

applicable.

11Specifically, the Exchange has stated that its

reference to trading patterns may cover stocks

where the spread between the bid and offer is very

narrow, with little trading occurring between such

bid/offer spread, or very wide, with most trading on

the bid/offer. Moreover, the Exchange has stated its

belief that low volatility stocks may not be

appropriate for automatic price improvement,

because little movement in the stock may also

indicate that little trading is occurring between the

bid and offer price.

12 15 U.S.C. § 78f(b).

13 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. § 78c(f).

available in all securities.9 Nor has it

been incorporated into Exchange rules.

Thus, the Exchange is proposing to

replace the existing voluntary feature

with the proposed mandatory feature.

This aspect of the proposal is intended

to impose a double-up/double-down

price protection requirement upon

specialists that choose not to participate

in the automatic price improvement

feature. Manual price protection would

apply in 1⁄8 point-wide markets or

greater in double-up/double-down

situations; thus, unlike automatic price

improvement, which is triggered only

by 1⁄4 point-wide or greater markets, a 3⁄16 point-wide market would trigger

manual price protection. Further, the

Exchange has represented that in

situations where both manual doubleup/double-down price protection and

POES would otherwise apply, an order

will receive manual price protection,

but will not be eligible for POES.10

The proposed manual double-up/

double-down price protection provision

would stop eligible orders (i.e.,

automatically executable market and

marketable limit orders of 599 shares or

less in NYSE- or Amex-listed securities

received through PACE in double-up/

double down situations, beginning at

9:45 a.m.) to give such orders the

possibility of receiving manual price

improvement from the specialist. Under

this proposal, an eligible order would be

‘‘stopped’’ by the specialist at the PACE

Quote at the time of its entry into PACE,

meaning that the order is guaranteed to

receive at least the price by the end of

the trading day. Consistent with Phlx

Equity Floor Procedure Advice A–2

(‘‘Advice A–2’’) specialists are required

to display stopped orders at an

improved price and any contra-side

orders received by the specialist will be

taken into account for purposes of

determining when to execute a stopped

order and at what price.

The Exchange has represented that

the purpose of a manual price

protection provision is to provide an

alternative double-up/double-down

feature, which allows for price

improvement, albeit not automatic, for

securities which the specialist has

determined are not appropriate for the

automatic feature, due to, for example,

liquidity, trading patterns, and

volatility. In this regard, the Exchange

has stated that less liquid stocks may

trade in sizes that render it unfair to

specialists to afford automatic price

improvement to such orders and

manage the resulting positions.11

D. Both Features

For both automatic price

improvement and manual price

protection, specialists may establish

higher sizes than the 599 share

minimum (but less than or equal to the

specialist’s automatic execution

guarantee), which may be changed

effective the next day. Member

organizations entering PACE orders

(‘‘PACE Users’’) will be notified of any

such changes.

Specialists choosing to activate the

automatic feature would also be subject

to the procedure described above (i.e., it

would become effective the next day). In

addition, switching between the

automatic and manual features triggers

this procedure. Signing up for the

manual price protection feature is not

required, because all specialists will be

required to participate.

PACE Users entering orders may

decline to participate in the automatic

and manual double-up/double-down

features; however, they may not choose

to participate in only one of the two

features. Moreover, odd-lot orders are

not eligible for either proposed feature.

Further, the proposed features are

available only for orders that are eligible

for automatic execution. For instance,

non-marketable limit orders and orders

exceeding a specialist’s automatic

execution guarantee size are not eligible

for either proposed feature, because the

features depend upon either stopping or

automatically improving orders

guaranteed a certain automatic

execution price.

Finally, the proposed rule change

provides that both proposed features

may be disengaged in a security or floorwide in extraordinary circumstances. In

addition to fast market conditions,

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.

III. Discussion

For the reasons discussed below, 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).12 In particular, the

Commission believes the proposal is

consistent with the Section 6(b)(5)

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.13

Over the years, the Commission has

recognized 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.

Accordingly, the Commission believes

that the Exchange’s present proposal,

which would adopt both automatic

price improvement and manual price

protection features in double-up/

double-down situations, may enhance

both intermarket competition and order

execution quality on the Exchange. In

addition, the Commission believes that

both features should contribute to the

maintenance of orderly markets by Phlx

specialists because they help to reduce

the price variations occurring from trade

to trade on low volume.

A. Automatic Double-up/Double-down

Price Improvement

Under the proposal, specialists

voluntarily may agree to provide

automatic price improvement of 1⁄8 of a

point from the PACE Quote to all

customers and all market and

marketable limit orders of up to 599 (or

higher, if elected by the specialist)
Federal Register / Vol. 63, No. 15 / Friday, January 23, 1998 / Notices 3599

14See supra note 5.

15See, Division of Market Regulation, SEC,

Market 2000: An Examination of Current Equity

Market Developments (January 1994), at Study V,

n.19.

16See SEC, Report on the Practice of Preferencing

(April 11, 1997) at Tables V–8A to V–8C.

17As stated above, the Exchange has represented

that its existing manual double-up/double-down

price improvement feature has been in use since

1991. See supra note 9 and accompanying text.

The Commission notes that Section 19(b) of the

Act provides that each self-regulatory organization

is required to file any proposed rule change with

the Commission and that no proposed rule change

shall take effect unless approved by the

Commission or otherwise permitted in accordance

with its provisions.

18See SEC, Report of Special Study of Securities

Markets, 88th Cong., 1st Sess., H.R. Doc. No. 95, pt.

2, at 150–154; Preferencing Report, supra note 16,

at Part II.B.4. For example, in a market quoted 20–

201⁄8 (with a minimum variation of 1⁄16 of a point),

1000 shares bid and offered, the offer representing

a customer limit order, the specialist receives a

market order to buy 500 shares. If the specialist

decides to stop the market order, the specialist will

change his or her quote to 201⁄16–201⁄8, 500 shares

bid and 1000 shares offered, the bid representing

the stopped market order. If the specialist

subsequently receives a market order to sell 500

shares, the specialist will execute the sell order

against the stopped order at 201⁄16, improving the

price for the stopped order. However, the sell limit

order at 201⁄8 with priority on the book is bypassed

and does not receive the execution it would have

had if the stop had not been granted. In addition,

if the market turns away from the limit price (i.e.,

moves to 20–201⁄16 or lower), the limit order may

never be executed.

The Commission notes, however, that because

manual double-up/double-down price protection

only is available in 1⁄8 point markets and greater,

and the minimum trading variation on the Phlx

currently is 1⁄16, the proposal does not implicate the

Commission’s particular and continuing concerns

with the practice of stopping stock in minimum

variation markets that were set forth in the

Preferencing Report. See Preferencing Report, supra

note 16, at Part II.B.4.

19The Commission notes that the Exchange has

represented that in situations where both manual

double-up/double-down price protection and POES

would otherwise apply, an order will receive

manual price protection, but will not be eligible for

POES. See supra note 9. The Commission believes

that this aspect of the proposal should increase

order exposure on the Exchange, as orders stopped

for manual price protection will be required to be

displayed in the specialist’s quote, whereas orders

eligible for POES are displayed only to the

specialist. See supra note 5.

20See Phlx Rule 203.

21 In approving the Phlx’s adoption of Advice A–

2 in 1994, the Commission stated its belief that

‘‘further action could be taken [by the Exchange] to

ensure proper handling of stopped stock.’’ See

Securities Exchange Act Release No. 34614 (August

30, 1994), 59 FR 46280 (September 7, 1994) (File

No. SR–Phlx–93–41). Specifically, the Commission

stated that it expected the Phlx to submit a

proposed rule change to complement its floor

procedure advice. The Commission set forth a

number of elements that the Exchange should

consider including in such a rule, namely: a

definition of the agreement to ‘‘stop’’ stock and the

obligations of the member who agrees to grant the

stop; the market conditions under which a stop

should be granted; a policy for the execution of

stopped stock and, in particular, for determining

the price at which the order should be executed;

and pilot procedures for minimum variation

Continued

shares in a particular security on a

stock-by-stock basis, in any instance

where the bid/ask spread of the PACE

Quote is 1⁄4 point or greater and an

automatic execution at the PACE Quote

would create a double-up/double-down

situation from the last primary market

sale. The Commission believes that the

adoption of this proposed feature by the

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. As stated above,

certain market orders already are

stopped in the POES window for 30

seconds to give the specialist the

opportunity to provide price

improvement to such orders.14 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.15 The Exchange’s proposal

should enhance the price improvement

opportunities available for such orders

as it will provide automatic price

improvement to eligible orders in

double-up/double-down situations.

The Commission’s recent Report on

the Practice of Preferencing found that

the frequency of price improvement for

marketable limit orders was

significantly lower than that for market

orders when measured across

exchanges, spreads, and order size

ranges.16 As marketable limit orders

currently are not eligible for the POES

window, the Commission finds that the

proposed automatic price improvement

feature should have a beneficial impact,

in that it should increase significantly

the price improvement opportunities

available to marketable limit orders, as

such orders otherwise would be

executed automatically at the PACE

Quote upon their entry into PACE.

B. Manual Double-up/Double-down

Price Protection

The Exchange also has proposed to

adopt a mandatory manual double-up/

double-down price protection feature.17

In situations where a specialist has not

agreed to provide automatic double-up/

double-down price improvement, this

feature would stop all market and

marketable limit orders of up to 599

shares (or higher, if elected by the

specialist) to all customers in all stocks

in instances where the bid/ask spread of

the PACE Quote is 1⁄8 or greater in

double-up/double-down situations,

making it possible for the specialist to

provide price improvement to such

orders.

The Commission historically has been

concerned that the practice of stopping

stock may compromise the specialist’s

fiduciary duties to unexecuted limit

orders on the specialist’s limit order

book.18 The Commission, however, has

approved the practice in instances

where the harm to existing orders on the

specialist’s limit order book was

believed to be offset by the resulting

reduced spread and possibility of price

improvement for the stopped order. The

Commission believes that the instances

in which the Exchange’s proposal is

intended to apply are appropriate for

the use of stopping stock procedures.

Further, the Commission notes that

the proposal and existing Phlx

procedures provide for the display of

stopped orders by Phlx specialists.

Specifically, Advice A–2, which

governs the handling of stopped orders

on the Phlx equity floor, requires a Phlx

specialist who stops an order pursuant

to the feature to display such an order

in his or her quote at an improved

price.19

Moreover, as was stated above in

connection with double-up/doubledown price improvement, the proposed

manual double-up/double-down price

protection feature gives the specialist

the opportunity to provide price

improvement to orders that would

otherwise be subject to immediate

automatic execution at the PACE Quote.

Additionally, a specialist voluntarily

may extend automatic price

improvement or manual price

protection in double-up/double-down

situations to orders for more than 599

shares, provided the level is at or below

the specialist’s automatic execution

guarantee. This aspect of the proposal

should have a beneficial impact as it

appears to be specifically targeted to

provide the possibility of price

improvement by the specialist to orders

currently lacking such opportunities.

The Commission also believes that the

proposal, taken together with Advice A–

2, the proposal provides adequate

guidelines for a specialist’s handling of

orders that are stopped in double-up/

double-down situations in a manner

consistent with his or her obligation to

maintain fair and orderly markets.20 In

particular, proposed Rule 229.07(c)(ii)

provides that orders that are stopped for

manual double-up/double-down price

protection are guaranteed to receive at

least the Stop Price by the end of the

trading day. While the specialist’s

provision of this guarantee is implicit in

the concept of stopping stock, it is not

stated explicitly in Advice A–2.21
3600 Federal Register / Vol. 63, No. 15 / Friday, January 23, 1998 / Notices

markets that are consistent with the rules of

priority, parity, and precedence. The Commission

continues to believe strongly that the Exchange

should submit a proposed rule change pursuant to

Section 19(b) of the Act and Rule 19b-4 thereunder

to adopt such a stopping stock rule.

22A firm’s election to not participate in the

double up/double down features will apply to

trading in all Phlx stocks; the firm will not be able

to make separate elections on a security by security

basis. Phone conversation between Michael

Walinskas, SEC and Edith Hallahan, Phlx, January

13, 1998.

23 In addition, the Commission expects the

Exchange to monitor the performance of Floor

Officials in granting any requests by specialists to

disengage the double-up/double-down features.

C. Provisions Common to Both Proposed

Features

Under Rule 229.07(a), PACE Users

may elect that if an automatic execution

of their orders at the PACE Quote would

result in an execution price that is

outside the primary market high-low

range for that trading day, such orders

would be routed to the specialist for

manual execution at or within the highlow range of the day. The proposal

provides that PACE Users may elect that

neither automatic double-up/doubledown price improvement nor manual

double-up/double-down price

protection will occur where the

execution price (before or after the

application of automatic price

improvement) or Stop Price,

respectively, would be outside the highlow range for the day. In such instances,

orders would be handled manually by

the specialist and be subject to an

execution at or within the primary

market high-low range of the day. The

Commission believes that this aspect of

the proposal is appropriate in that it

provides PACE Users with greater

flexibility as to the disposition of their

orders. Moreover, providing such

flexibility could enhance the Exchange’s

competitive position among firms

seeking an appropriate venue for the

execution of their order flow.

In addition, under proposed Rule

229.07(c)(i)(D), PACE Users may decline

to participate in the automatic and

manual double-up/double-down

features; however, they may not choose

to participate in only one of the two

features.22 The Commission believes

that such a provision is appropriate in

that it should offer a preferred

alternative to PACE Users for whom a

prompt execution at a definitive price is

most important. As described above,

when the manual double up/double

down price protection feature is

applicable, a significant time delay may

occur when an order is stopped and

price improvement is attempted. In

addition, as with offering PACE Users

the alternative between double-up/

double-down features and out-of-range

services, offering PACE Users the option

to decline both features may enhance its

competitive position among order

execution venues. The Commission

further believes that the Exchange’s

decision to require that PACE Users

only may decline to participate in both

features, not a particular one, is a

decision that appropriately falls within

the business judgment of the Exchange.

Further, proposed Rule 229.07(c)(i)

and (c)(ii) set forth procedures through

which specialists may activate

automatic double-up/double-down price

improvement in a particular stock,

switch between the automatic and

manual features, and change the size of

the orders that will be eligible for either

feature. In each instance, the change

will be effective the next trading day,

and PACE Users will be notified of any

such changes. The Commission believes

the proposal provides satisfactory

procedures in this regard. In particular,

the Commission believes that making

these changes effective on the next

trading day is appropriate in that it

grants specialists the necessary

flexibility to manage the proposed

features in light of changing market

conditions. At the same time, it

alleviates concerns that specialists

potentially may take advantage of their

unique knowledge with respect to

incoming PACE order flow to make

intra-day modifications to the doubleup/double-down features that would be

to the detriment of other market

participants.

Finally, proposed PACE Rule

229.07(c)(iii) provides that both doubleup/double-down features may be

disengaged in one or more securities,

upon the presence of extraordinary

circumstances, as determined by two

Phlx Floor Officials. Extraordinary

circumstances are defined to include

fast market conditions, systems

malfunctions and other circumstances

that limit the Exchange’s ability to

receive, disseminate, or update market

quotations in a timely manner. The

Commission believes that this aspect of

the proposal is appropriate in that it

provides sufficient guidance to the Phlx

membership by clearly delineating the

circumstances under which the doubleup/double down features may be

disengaged and the procedure to be

followed in seeking such

disengagement. The Commission further

believes that the provision requiring two

Floor Officials to approve the

disengagement of both double-up/

double-down features is important.

Specifically, while the particular

categories of events covered in the

proposed paragraph generally are

appropriate grounds for the

disengagement of the double-up/doubledown features, the Commission believes

that requiring Floor Officials to confirm

that such conditions exists is a

necessary safeguard to ensure the

appropriate treatment of PACE orders

eligible for these features.23

The Commission finds good cause for

approving Amendment No. 2 to the

proposed rule change prior to the

thirtieth day after the date of

publication of notice of filing thereof in

the Federal Register. Amendment No. 2

revises the proposals to provide that

relief from the requirements concerning

double-up/double-down guarantee sizes

may be granted pursuant to the

extraordinary circumstances language

contained in the text of proposed Rule

229.07(c)(iii) to the PACE Rule, rather

than that of existing PACE Rule 229.13.

The Commission believes that amending

the proposal to utilize Rule 229.07(c)(iii)

for this purpose is a reasonable

approach, as this provision has been

formulated specifically for use in

double-up/double-down situations,

whereas Rule 229.13 was developed to

apply in the context of specialist

performance obligations. In addition,

Amendment No. 2 revises the text of

proposed Rule 229.07(c)(iii) to state that

extraordinary circumstances also

include situations where the Exchange

is unable to receive market quotations in

a timely and accurate manner, as well

as where it is unable to disseminate or

update such quotations. The

Commission finds that the addition of

this provision is appropriate in that

such instances may interfere with the

ability of PACE to determine whether a

double-up/double-down situation

actually has occurred, and the ability of

specialists to handle orders stopped

pursuant to the manual feature. Further,

Amendment No. 2 adds language to the

text of proposed Rule 229.07(c)(i)(D) to

state specifically that member

organizations may decline to participate

in both double-up/double-down

features. While this alternative was set

forth in the Form 19b–4 filing

containing the proposed rule change, it

was not reflected in the text of proposed

Rule 229.07(c)(i)(D). The Commission

finds that this aspect of the change is

appropriate in that it will serve as a

reminder to member organizations of

the availability of this alternative.

Finally, the Commission notes that the

proposed rule change was noticed

previously in the Federal Register for

the full statutory period and the

Commission did not receive any

comments on it. Therefore, the

Commission believes that it is
Federal Register / Vol. 63, No. 15 / Friday, January 23, 1998 / Notices 3601

24 15 U.S.C. § 78s(b)(2).

25 17 CFR 200.30–3(a)(12).

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

2 17 CFR 240.19b–4.

3See Securities Exchange Act Release No. 37691

(September 17, 1996), 61 FR 50060.

4 In Amendment No. 1 to its proposed rule

change, the Phlx restated the original proposal and

proposed several changes as set forth in detail in

Section III of this release.

5See Securities Exchange Act Release No. 38519

(April 17, 1997), 62 FR 20048.

6 In Amendment No. 2, the Exchange amended

the Request for Quote process to require a

Requesting Member to indicate the size of an order

and the intention to cross, if applicable. In addition,

the Phlx proposes specific position limits of 22,000

contracts for Super Cap Index options. See Letter

from Edith Hallahan, Director and Special Counsel,

Regulatory Services, Phlx, to Sharon Lawson,

Senior Special Counsel, Office of Market

Supervision (‘‘OMS’’), Division of Market

Regulation (‘‘Market Regulation’’), Commission,

dated June 25, 1997 (‘‘Amendment No. 2’’).

7See Letter from Theresa McCloskey, Vice

President, Phlx, to Sharon Lawson, Senior Special

Counsel, OMS, Market Regulation, Commission,

dated August 26, 1997 (‘‘Amendment No. 3’’).

8The Phlx replaces Amendment No. 3, in its

entirety, with Amendment No. 4, and proposes to:

(1) eliminate the application of position and

exercise limits to FLEX equity options; (2) reduce

the minimum size applicable to a Request-for-Quote

for a closing transaction in already-opened FLEX

equity options from 100 to 25 contracts; (3) clarify

the parity and priority principles for FLEX options

transactions; (4) amend the proposed rule change to

refer consistently to ‘‘FLEX index and equity

options’’ (as opposed to index FLEX options); (5)

correct the text of proposed Rule 1079(b)(6)

regarding the crossing procedure to reflect that the

crossing intention has already been announced as

part of the RFQ, as amended by Amendment No.

2; and (6) amend proposed Rule 1079(a)(1) to

clearly state that any options-eligible security

pursuant to Rule 1009 is eligible to underlie FLEX

equity options trading and any index underlying

Non-FLEX options trading is also eligible for FLEX

index options trading. These proposed changes are

described more fully herein. See Letter from Philip

H. Becker, Senior Vice President, General Counsel

and Chief Regulatory Officer, Phlx, to Sharon

Lawson, Senior Special Counsel, OMS, Market

Regulation, Commission, dated November 3, 1997.

9The Phlx proposes in Amendment No. 5 to

replace section 3 of Amendment No. 4 and

withdraw the examples provided in Amendment 4.

In Amendment No. 5, the Phlx clarifies: (1) the

parity and priority principles for FLEX options

transactions; and (2) that each assigned ROT or

assigned Specialist is not required to respond with

a quote in every instance, unless requested by a

Floor Official. See Letter from Michele R.

Weisbaum, Vice President and Associate General

Counsel, Phlx, to Sharon Lawson, Senior Special

Counsel, OMS, Market Regulation, Commission,

dated December 9, 1997 (‘‘Amendment No. 5’’).

consistent with Section 6(b)(5) of the

Act to approve Amendment No. 2 to the

proposed rule change on an accelerated

basis.

IV. Solicitation of Comments

Interested persons are invited to

submit written data, views and

arguments concerning Amendment No.

2 to the proposed rule change. 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

rules changes that are filed with the

Commission, and all written

communications relating to Amendment

No. 2 between the Commission and any

persons, 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 Section, 450 Fifth Street,

NW., Washington, DC 20549. Copies of

such filing will also be available at the

principal office of the Exchange. All

submissions should refer to File No.

SR–Phlx–97–23 and should be

submitted by February 13, 1998.

V. Conclusion

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act,24 that the

proposed rule change (SR–Phlx–97–23),

as amended, is approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.25

Jonathan G. Katz,

Secretary.

[FR Doc. 98–1551 Filed 1–22–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–39549; File No. SR–Phlx–

96–38]

Self-Regulatory Organizations; Order

Approving Proposed Rule Change and

Notice of Filing and Order Granting

Accelerated Approval of Amendment

Nos. 2, 4 and 5 to the Proposed Rule

Change by the Philadelphia Stock

Exchange, Inc., Relating to the Listing

of Flexible Exchange Traded Equity

and Index Options

January 14, 1998.

I. Introduction

On August 21, 1996, the Philadelphia

Stock Exchange, Inc. (‘‘Phlx’’ or

‘‘Exchange’’) filed a proposed rule

change with 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 to provide for the listing

and trading of Flexible Exchange

Options (‘‘FLEX options’’) on specified

indexes (‘‘FLEX index options’’) and

equity securities (‘‘FLEX equity

options’’).

Notice of the proposal was published

for comment and appeared in the

Federal Register on September 24,

1996.3 The Phlx submitted to the

Commission Amendment No. 1 to its

proposal on March 6, 1997.4 Notice of

Amendment No. 1 was published for

comment and appeared in the Federal

Register on April 24, 1997.5 The Phlx

submitted to the Commission

Amendment No. 2 to its proposal on

July 1, 1997.6 The Phlx submitted

Amendment No. 3, on August 27, 1997,7

which was subsequently replaced in its

entirety by Amendment No. 4, which

the Phlx submitted to the Commission

on November 7, 1997.8

The Phlx submitted Amendment No.

5 to the Commission on January 6,

1998.9

No comment letters were received on

the proposed rule change or on

Amendment No. 1 to the proposed rule

change. This order approves the

Exchange’s proposal, as amended by

Amendment Nos. 1 through 5.

II. Background

The purpose of the Exchange’s

proposal is to provide a framework for

the Exchange to list and trade equity

and index options that give investors

the ability, within specified limits, to

designate certain of the terms of the

options. In recent years, an over-thecounter (‘‘OTC’’) market in customized

options has developed which permits

participants to designate the basic terms

of the options, including size, term to

expiration, exercise style, exercise price,

and exercise settlement value, in order

to meet their individual investment

needs. Participants in this OTC market

are typically institutional investors, who

buy and sell options in large-size

transactions through a relatively small

number of securities dealers. To

compete with this growing OTC market

in customized options, the Exchange