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Notice

Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change and Amendment No. 1 Thereto by the Philadelphia Stock Exchange, Inc. Relating to Automatic Price Improvement for Buy Orders in Securities Exempt for the Short Sale Rule

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Start Preamble April 22, 2003.

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 April 3, 2003, the Philadelphia Stock Exchange, Inc. (“Phlx” or “Exchange”), filed with the Securities and Exchange Commission (“Commission”), the proposed rule change as described in items I, II, and III below, which items have been prepared by Phlx. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons.

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

The Exchange proposes to amend Supplementary Material .07 to Phlx rule 229 to modify the Exchange's Automatic Price Improvement (“API”) program to allow specialists to choose to improve buy orders in securities that are exempted from or otherwise not subject to rule 10a-1 under the Act [3] (the “Short Sale rule”).

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The text of the proposed rule change is set forth below. Additions are in italics. Deletions are in brackets.

Rule 229. Philadelphia Stock Exchange Automated Communication and Execution System (PACE)

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Supplementary Material

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.01-.06 No Change

.07 (a)-(b) No Change

(c) Price Improvement for PACE Orders

(i) Automatic Price Improvement—Where the specialist voluntarily agrees to provide automatic price improvement to all customers and all eligible market orders in a security, automatically executable market and marketable limit orders in New York Stock Exchange and American Stock Exchange listed securities received through PACE for 599 shares or less shall be provided with automatic price improvement from the PACE Quote when received either $.01 or a percentage of the PACE Quote when the order is received for equities trading in decimals beginning at 9:30 a.m., except where:

(A) A buy order would be improved to a price less than the last sale (except as provided in (F) below) or a sell order would be improved to a price higher than the last sale (except as provided in (E) below); or

(B) A buy order would be improved to the last sale price which is a downtick (except as provided in (F) below) or a sell order would be improved to the last sale price which is an uptick (except as provided in (E) below). The PACE System will determine whether the last sale price is a downtick or an uptick. The [Pace] PACE System does not recognize changes from the previous day's close.

In these situations, the order is not eligible for automatic price improvement, and is, instead, automatically executed at the PACE Quote. A specialist may voluntarily agree to provide automatic price improvement to larger orders in a particular security to all customers under this provision.

A specialist may choose to provide automatic price improvement of: (i) $.01 where the PACE Quote is either $.05 or greater, or $.03 or greater, or (ii) where the PACE Quote is $.02 or greater, a percentage of the PACE Quote when the order is received, up to 50%, rounded to the nearest penny, and at least $.01, in a particular security to all customers.

(C) Automatic price improvement will not occur for odd-lot orders, nor 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.

(D) The POES window of Supplementary Material .05 above does not apply where an order is subject to automatic price improvement or manual price protection.

(E) Sell Order Enhancement I—A specialist may choose to give automatic price improvement to all sell orders of 100 shares or more, as determined by the specialist, in a particular security which would be improved to the last sale on an uptick; or

Sell Order Enhancement II—A specialist may choose to give automatic price improvement to all sell orders of 100 shares or more, as determined by the specialist, in a particular security which would be improved to a price higher than the last sale.

(F) Buy Order Enhancement—A specialist may choose to give automatic price improvement to all buy orders, as determined by the specialist, in any security that is exempted from or otherwise not subject to Securities Exchange Act rule 10a-1.

.08-.22 No Change.

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

In its filing with the Commission, the 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 Phlx has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements.

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

1. Purpose

The purpose of the proposed rule change is to expand the number of orders eligible to receive price improvement by allowing Exchange equity specialists to offer API to all buy orders in securities that are exempted from or otherwise not subject to the Short Sale rule.[4] The Exchange's API program allows specialists to provide automatic price improvement to automatically executable market and marketable limit orders in New York Stock Exchange, Inc. and American Stock Exchange LLC listed securities received through Phlx's Automated Communication and Execution System (“PACE”) [5] for 599 shares or less of either $.01 or a percentage of the PACE Quote when the order is received.[6] Specialists may choose to offer API in each individual specialty security. If API is offered in an individual security, then it must offer it to all customers and all eligible market orders in that security.

Currently, API is not available to certain buy orders if the execution price of those buy orders would be less than the last sale or at the last sale, provided such execution would create a downtick.[7] The purpose of these restrictions is to prevent the possibility of a violation of the Short Sale rule on the part of a specialist selling against the buy order. In securities that are exempted from or otherwise not subject to the Short Sale rule (such as many of the Index Fund Shares, Trust Shares and Trust Issued Receipts that are traded or may be traded on the Phlx),[8] the Exchange believes that there is no possibility of a violation of the Short Sale rule by the specialist when selling to buy orders in these securities.[9] By allowing API for buy orders in these securities, the Exchange believes that customers should receive more opportunities for price improvement. While specialists in such securities may choose to give price improvement to all such buy orders under this proposal, this is a voluntary additional feature of API. The Exchange states that participation in the API program will remain voluntary, as is participation in PACE.[10]

2. Statutory Basis

The Exchange believes that the proposed rule change is consistent with the Act, including section 6(b) of the Start Printed Page 22449Act,[11] and furthers the objectives of section 6(b)(5) of the Act,[12] in particular, in that it is intended 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 to protect investors and the public interest by expanding the opportunity for price improvement.

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.

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 20549-0609. 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-2003-25 and should be submitted by May 19, 2003.

Start Signature

For the Commission, by the Division of Market Regulation, pursuant to delegated authority.[13]

J. Lynn Taylor,

Assistant Secretary.

End Signature End Preamble

Footnotes

4.  The Exchange also proposes to correct a typographical error in the presentation of the word “PACE” in Supplementary Material .07(c)(i)(B) to Phlx rule 229.

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5.  PACE is the Exchange's automated order routing, delivery, execution and reporting system for listed securities. See Phlx rule 229.

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6.  See Supplementary Material .07 to Phlx rule 229.

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7.  See Supplementary Material .07(c)(i)(A) to Phlx rule 229.

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8.  See Phlx rule 803(i)-(j), (l).

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9.  The Exchange states that it would issue a regulatory circular to its members informing them of which securities are exempt from the Short Sale rule, and thus available for API under the proposed rule change. Telephone conversation between John Dayton, Assistant Secretary and Counsel, Phlx, and Christopher Solgan, Attorney, Division, Commission, on April 16, 2003.

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10.  See Phlx rule 229.

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[FR Doc. 03-10380 Filed 4-25-03; 8:45 am]

BILLING CODE 8010-01-P