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Self-Regulatory Organizations; Notice of Filing of Amendment No. 1 to a Proposed Rule Change by the Philadelphia Stock Exchange, Inc. Relating to Trading Certain Over-the-Counter Securities

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Start Preamble July 10, 2001.

Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”),[1] and Rule 19b-4 thereunder,[2] notice is hereby given that on November 16, 2000, the Philadelphia Stock Exchange, Inc. (“Phlx” or “Exchange”) filed with the Securities and Exchange Commission (“SEC” or “Commission”) a proposed rule change regarding the trading of certain over-the-counter (“OTC”) securities. Notice of the proposed rule change was published in the Federal Register on December 14, 2000.[3] On May 14, 2001, the Exchange submitted Amendment No. 1 to the proposed rule change, as described in Items I, II, and III, below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change, as amended by Amendment No. 1, from interested persons.

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I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change

The Phlx proposes to trade certain OTC securities, Nasdaq National Market (“Nasdaq/NM”) securities, on the Exchange, pursuant to unlisted trading privileges (“UTP”) under Section 12(f) of the Act.[4] As discussed in the original notice, minor changes to Phlx rules are necessary to accommodate such trading, including a revision to the term “Nasdaq/NM securities,” and the addition of a reference to handheld orders received from a floor broker on the floor of the Exchange to Phlx Rule 233(b).

In Amendment No. 1, the Exchange proposes to amend the application of the odd-lot rules to Nasdaq/NM securities and to add provisions relating to the allocation of Nasdaq/NM securities to specialist on a pilot basis. The text of the proposed rule change, including Amendment No. 1, is available at the Office of the Secretary, the Phlx, and at the Commission.

II. Self-Regulatory Organization's Statement Regarding the Purpose of, and Statutory Basis for, the Proposed Rule Change

In its filing with the Commission, the Exchange 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 Exchange 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

In 1992, the Commission approved on a pilot basis a Phlx proposal to permit the trading of Nasdaq/NM securities on the Exchange pursuant to UTP (“Phlx OTC/UTP Pilot Program” or “Pilot”).[5] The Phlx began trading Nasdaq/NM securities pursuant to the Pilot in February 1993. The effectiveness of the Pilot was extended four times [6] before the Phlx determined to cease trading such securities pending reorganization of its OTC/UTP program as a whole. The Phlx OTC/UTP Pilot Program expired on February 12, 1996. The Phlx intends to reinstate OTC/UTP trading in Nasdaq/NM securities in the near future, and, thus, seeks reinstatement of the Phlx OTC/UTP Pilot Program. Such reinstatement requires no changes to Phlx rules except as stated herein, since various rules implicated by OTC/UTP trading were amended in connection with the original Phlx OTC/UTP Pilot Program.

Reinstatement of the Phlx OTC/UTP Pilot Program will enable the trading of Nasdaq/NM securities Phlx specialists. The Phlx proposes to reinstate the Pilot for a six-month period.[7] Initially, Phlx specialists will be provided with quotation generation capability, as well as the ability to manually enter and execute orders through a separate system designed by a third party vendor, TradinGear, separate from the Exchange's PACE System.[8]

In this regard, the Phlx proposes to trade these securities pursuant to its equity rules, where applicable. The following series of provisions that continue to appear in Phlx rules specifically reference Nasdaq/NM securities and are outlined more fully below. They include Phlx Rules 102; 105, Supplementary Material .01; 226; 233; 455 and 606.

  • Phlx Rule 102: Specifies that all Nasdaq/NM securities transactions must be conducted during the applicable Exchange trading floor hours.
  • Phlx Rule 105: Includes language requiring that in the event of unusual market conditions, as determined by the Floor Procedure Committee, quotations in a given issue will not be subject to firmness provided that the Exchange notifies the processor of Nasdaq/NM securities.
  • Phlx Rule 226: Incorporates Nasdaq/NM securities into the rule dealing with round-lot orders.
  • Phlx Rule 233: Enables the Exchange to trade Nasdaq/NM securities pursuant to UTP.
  • Phlx Rule 455: Exempts Nasdaq/NM securities from the short sale rule.
  • Phlx Rule 606: Enables access by telephone or any other such access as may be established between the Exchange and the Nasdaq system to the Phlx assigned specialist for any Nasdaq system market maker.

In addition, the Exchange proposes to amend Phlx Rule 225 (“Odd Lot Orders in Nasdaq/NM Securities and Securities for Which the Exchange is the Primary Market”) to delete the reference to Nasdaq/NM securities. By deleting this reference, odd-lot orders for Nasdaq/NM securities will be governed by Phlx Rule 227 as amended (“Odd Lot Orders in Securities for Which Another Exchange is the Primary Market and in Nasdaq/NM Securities”), which states specifically, in new paragraph (b), the execution parameters for odd-lot market and limit orders in Nasdaq/NM Securities. According to proposed Phlx Rule 227(b), odd-lot market orders would be executed at a price equal to or better than the best bid disseminated pursuant to SEC Rule 11Ac1-1 [9] on a sell order, or the best offer disseminated pursuant to SEC Rule 11Ac1-1 [10] on a buy order, which would be in effect at the time the order is presented at the specialist post. Odd-lot limit orders in Nasdaq/NM securities would be executed at the limit price or better when the consolidated best bid or offer disseminated pursuant to SEC Rule 11Ac1-1 [11] is at the limit price on a sell or buy order respectively.[12]

Finally, the Exchange proposes to add a new rule, Phlx Rule 516, which will govern the allocation of the Nasdaq/NM securities to specialists. Specifically, the proposed rule would permit the Equity Allocation, Evaluation and Securities Committee (“Committee”) to solicit and allocate each Nasdaq/NM security to a specialist on a six-month pilot basis (or such shorter period as determined by the Committee). At the expiration of the pilot period, the Committee would resolicit specialists for the security. During the resolicitation period, the existing specialist would receive a preference in the allocation process.[13] The allocation criteria of Phlx Rule 511(b) would apply to each applicant, however the 90-day evaluation procedure of Phlx Rule 511 would not automatically apply, but could be invoked by the Exchange in its discretion. This provision is intended to coincide with its vendor contract as well as enable the Committee to resolicit Start Printed Page 37085such securities more widely, because this program represents a new business for the Exchange (albeit a re-entry) as well as a new technology platform.

2. Statutory Basis

The Exchange believes that reinstatement of the Phlx OTC/UTP Pilot Program with the above-noted changes is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange, including sections 6(b)(5),[14] 11A [15] and 12(f) [16] of the Act. Specifically, the Phlx believes that the proposed rule change, as amended, is consistent with section 6(b)(5) [17] of the Act, because permitting Phlx specialists to trade Nasdaq/NM securities should promote just and equitable principles of trade and facilitate transactions in securities, thereby removing impediments to and perfecting the mechanism of a free and open market in a manner consistent with the protection of investors and the public interest.

B. Self-Regulatory Organization's Statement on Burden on Competition

The Exchange does not believe that the proposed rule change will impose any inappropriate burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received from Members, Participants, or Others

No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing For Commission Action

Within 35 days of the date of publication of this notice in the Federal Register or within such longer period (i) as the Commission may designate up to 90 days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the PHLX consents, the Commission will:

A. by order approve such proposed rule change, or

B. institute proceedings to determine whether the proposed rule change should be disapproved.[18]

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. 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-00-20 and should be submitted July 31, 2001.

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For the Commission, by the Division of Market Regulation, pursuant to delegated authority.[19]

Margaret H. McFarland,

Deputy Secretary.

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3.  Securities Exchange Act Release No. 43692 (December 8, 2000), 65 FR 78240.

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5. See Securities Exchange Act Release No. 31672 (December 30, 1992), 58 FR 3054 (January 7, 1993).

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6.  Most recently, the Pilot was extended through February 12, 1996. See Securities Exchange Act Release No. 36087 (August 10, 1995), 60 FR 42637 (August 16, 1995).

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7.  The current number of Nasdaq/NM securities that may be traded on an unlisted trading privileges basis is 1,000 securities. See Securities Exchange Act Release No. 41392 (May 12, 1999), 64 FR 27839 (May 21, 1999).

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8.  PACE is the Exchange's Automated Communication and Execution System. PACE provides a system for the automatic execution of orders on the Exchange equity floor under predetermined conditions. See generally Phlx Rule 229 which includes the ability, if available, to use PACE as an order delivery system for Nasdaq/NM securities.

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12.  For a similar rule, see Chicago Stock Exchange Article XXXI, Rule 9.

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13.  This is similar to an existing Phlx provision respecting foreign currency option specialists who apply to trade their option during a different trading hours segment.

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18.  The Commission notes that the Exchange has requested accelerated approval of Amendment No. 1 to the proposed rule change.

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[FR Doc. 01-17709 Filed 7-13-01; 8:45 am]