

[Federal Register: September 29, 2005 (Volume 70, Number 188)]
[Notices]               
[Page 56961-56962]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr29se05-83]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52495; File No. SR-Phlx-2005-14]

 
Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Order Granting Approval to Proposed Rule Change and Amendment No. 1 
Thereto Relating to Order Matching at the Opening in PACE

September 22, 2005.

I. Introduction

    On March 10, 2005, the Philadelphia Stock Exchange, Inc. (``Phlx'' 
or ``Exchange'') filed with the Securities and Exchange Commission 
(``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 amend Phlx Rule 229 to permit the PACE System 
\3\ to modify the opening process to match certain orders, described 
below, to each other, where possible, instead of matching such orders 
with the specialist. On July 28, 2005, the Phlx filed Amendment No. 1 
to the proposed rule change.\4\ The proposed rule change, as amended, 
was published for comment in the Federal Register on August 17, 
2005.\5\ The Commission received no comments on the proposal. This 
order approves the proposed rule change, as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ PACE is the Exchange's automated order routing, delivery, 
execution and reporting system for equities. See Phlx Rule 229.
    \4\ Amendment No. 1, which replaced and superseded the original 
filing in its entirety, included additional text in the purpose 
section to further clarify the description and operation of the 
proposed rule change, and also included a minor edit to the text of 
Phlx Rule 229.
    \5\ See Securities Exchange Act Release No. 52239 (August 11, 
2005), 70 FR 48457 (``Notice'').
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II. Description of the Proposal

    Currently, eligible market and limit orders received before the 
opening of the listing market \6\ are guaranteed an execution against 
the specialist to whom the order was directed (the ``Directed 
Specialist'') \7\ at the open price. The Exchange has proposed to 
modify the PACE System to match certain eligible orders received before 
the open against other eligible contra-side orders (as available) at 
the opening price, rather than execute such orders against the Directed 
Specialist.\8\ The Directed Specialist would continue to provide 
executions for any orders that would be ineligible for the proposed 
matching feature (as described below) and also for any imbalance of 
directed orders resulting from the proposed matching feature. However, 
the proposal would have the effect of removing the Directed Specialist 
from interaction with orders received before the open when such orders 
would be eligible for matching against other orders. The proposal also 
modifies the conditions for an order to be guaranteed an automatic 
execution at the listing market's opening price (whether matched 
against another order or against the Directed Specialist).
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    \6\ The term ``listing market'' refers to the applicable New 
York listing market.
    \7\ The term ``Directed Specialist'' has the same meaning as in 
Phlx Rule 229A(b)(3), when there is more than one specialist 
assigned in a security. When there is only one specialist assigned 
in a security, the term Directed Specialist means that sole 
specialist.
    \8\ Under the proposal, the Exchange's matching algorithm would 
sort eligible orders by time priority and descending volume, thereby 
minimizing the number of different orders that any one order could 
match against.
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Automatic Execution Guarantee

    Under the proposal, in order to be guaranteed an automatic 
execution at the listing market's opening price, market orders that are 
of a size equal to or smaller than the Directed Specialist's automatic 
execution guarantee size would need to be entered anytime before the 
actual opening of the applicable listing market, but market orders that 
are larger than the Directed Specialist's automatic execution guarantee 
size would need to be entered at least two minutes before the actual 
opening of the listing market.\9\ Limit orders would need to be entered 
at least two minutes prior to the actual opening on the listing market 
and to be traded-through by the listing market's opening price in order 
to receive the automatic execution guarantee. Neither market orders nor 
limit orders would be eligible for an automatic execution guarantee at 
the listing market's opening price if they are marked sell short or 
laid-off by the Directed Specialist.
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    \9\ Under the proposal, a Directed Specialist could elect to 
adopt a shorter time threshold for the receipt of orders in all 
securities traded by the Directed Specialist.
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Orders Types Eligible for Matching

    Under the proposal, only round-lot market and limit orders would be 
eligible for matching at the opening price of the listing market. Other 
order types would not be eligible for the matching feature and would 
continue to be executed against the Directed Specialist, including: 
odd-lot orders, partial round-lot all-or-none orders, the odd-lot 
portion of partial round-lot eligible orders, and round-lot all-or-none 
orders when a single contra-side order with sufficient volume is not 
available. In addition, the imbalance of any directed orders that, 
although eligible for matching, could not match against other orders 
due to the lack of available contra-orders would be executed against 
the Directed Specialist.

Other Changes

    Finally, the proposal would delete existing language in Phlx Rule 
229, Supplementary Material .10(b), relating to the size of market and 
limit orders and the receipt time required to receive the opening 
price, since the treatment of such orders will be covered in 
Supplementary Materials .06 and .10(a), and it would also delete 
Supplementary Material .11 relating to the refusal of orders, as the 
Phlx believes that specialists today have sufficient methods available 
to them to manage the risk associated with orders received before the 
opening.

III. Discussion and Commission Findings

    The Commission finds that the proposed rule change, as amended, is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\10\ In particular, the Commission believes that the proposal 
is consistent with Section 6(b)(5) of the Act,\11\ which requires that 
the rules of an exchange be designed to promote just and equitable 
principles of trade, to perfect the mechanism of a free and open market 
and a national market system, and, in general, to protect investors and 
the public interest.
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    \10\ In approving this proposed rule change, the Commission 
notes that it has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \11\ 15 U.S.C. 78f(b)(5).
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    The Commission notes that the proposal would remove all size 
restrictions on orders guaranteed an automatic execution at the opening 
price, provided that such orders are received within a certain time 
before the opening of the listing market and are not marked sell short 
or laid off at another

[[Page 56962]]

market. The Commission further notes that eligible, round-lot market 
and limit orders would be eligible to be automatically matched against 
other eligible orders at the opening price, without the participation 
of the Directed Specialist. The Commission believes that the proposal, 
by providing the proposed matching feature for eligible customer 
orders, appears to be reasonably designed to increase the automated 
handling of customer orders at the opening and reduce the risk of 
specialists trading ahead of customer orders. The Commission notes that 
the Exchange has represented that the proposal excludes order types 
involving odd-lots (odd-lot orders, partial round-lot all-or-none 
orders, and the odd-lot portion of partial round-lot eligible orders) 
from the proposed matching feature because such orders could otherwise 
match against round-lot orders, thereby generating a succession of 
additional odd-lots and transaction receipts, which would impose an 
undue transaction cost burden on firms entering round-lot orders. The 
Commission also notes that the Exchange has represented that all-or-
none orders are not eligible for the proposed matching feature when a 
single contra-side order with sufficient volume is not available in 
order that, in keeping with the terms of all-or-none orders, such 
orders may be filled through a single execution. The Commission notes 
that the Directed Specialist would be obligated to execute all orders 
that are eligible for an automatic execution guarantee but that are 
ineligible for the proposed matching feature. The Commission also notes 
that the Directed Specialist is responsible for providing executions 
for any imbalance of orders that result from the matching feature. The 
Commission believes that the proposal appears to be reasonably designed 
to ensure the execution of orders entitled to an automatic execution 
guarantee, address the concerns of the Exchange's customers, and 
promote efficient executions.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\12\ that the proposed rule change (SR-Phlx-2005-14), as amended, 
be, and it hereby is, approved.
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    \12\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 05-19496 Filed 9-28-05; 8:45 am]

BILLING CODE 8010-01-P
