Self-Regulatory Organizations; Notice of Filing and Immediate Effectiveness of Proposed Rule Change by the Philadelphia Stock Exchange, Inc. Relating to Certain PACE Rule Provisions

Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”), and Rule 19b-4 thereunder, notice is hereby given that on June 30, 2000, 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 the Phlx. On July 18, 2000, the Exchange submitted Amendment No. 1 to the proposed rule change. The Exchange has designated the proposed rule change as constituting a “non-controversial” rule change under paragraph (f)(6) of Rule 19b-4 under the Act, which renders the proposal effective upon receipt of this filing by the Commission. 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 Phlx, pursuant to Rule 19b-4 under the Act, proposes to implement a change to the Phlx Automated Communication and Execution (“PACE”) System. By incorporating two provisions into Phlx Rule 229 (concerning PACE), this change will provide an entering member organization with additional elections with respect to certain features of PACE similar to those currently provided for in the Rule. Specifically, the language “unless the entering member organization otherwise elects” is proposed to be added to both Supplementary Material .10(a)(i) and (ii).

The proposed change to Supplementary Material .10(a)(i) provides that round-lot orders up to 599 shares, and the round-lot portion of PRL limit orders up to 599 shares, that are entered at the PACE Quote, shall be executed at the PACE Quote. This proposal would codify that such execution guarantee can either be provided by the PACE System automatically or by the specialist, at the election of the entering member. This amendment does not change the fundamental principle of PACE that the specialist must provide the PACE Quote to eligible orders.

Second, the revision would permit the entering member organization to elect whether certain eligible non-marketable limit orders will be executed via PACE in accordance with the “primary market print protection” provision set forth in Supplementary Material .10(a)(ii) of the PACE Rule.

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

In its filing with the Commission, Phlx 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

The purpose of the proposed rule change is to extend to an entering member organization the ability to control all aspects of the handling of its orders in conjunction with the other elections already provided within the rule. Currently, entering member organizations can make an election regarding the price improvement provisions of Supplementary Material .07. An entering member organization may also elect manual, instead of default automatic execution of market orders if automatic execution would have occurred at a price outside of the day's primary market high-low range (“out-of-range protection”). Finally, under Supplementary Material .10(a)(iii), member organizations that enter limit orders after the opening may elect to have such orders executed manually at or within the New York market high-low range of the day. similar to the proposed elections, these provisions are intended to give member organizations greater flexibility as to the disposition of their orders, which should, in turn, enhance the Exchange's competitive position among firms seeking an appropriate venue for the execution of their order flow.

The PACE System, as described in Rule 229, is the Exchange's automated order routing, delivery, execution and reporting system on the equity floor. PACE is available to member organizations, who are referred to here as either the entering member organizations sending order flow or the specialist on the equity trading floor, both of whom are users of the PACE System.

As stated above, the proposal is designed to provide entering member organizations with two elections similar to those currently noted within the rule. Member organizations may choose not to receive certain guarantees for many different reasons, which are often specific to their types of customers and business, as well as specific to certain securities, order types and sizes.

First, Supplementary material .10(a)(i) generally provides that marketable limit orders up to 599 shares entered at the PACE Quote shall be executed at the PACE Quote. The rule does not currently state that such orders are automatically executed, only that they are to be executed at the PACE Quote. Specifically, the proposal reflects that the automatic execution price guarantee would be available if the order is executed by the specialist or automatically.

Second, the entering member organization could elect not to receive the execution guarantee resulting from primary market trading at that price. A member organization may not wish, for example, to receive a partial execution of 500 shares of a 10,000-share order, if only 1,000 shares trade on the primary market.

The Exchange believes that automatic and other order handling features, such as those provided by PACE, generally facilitate the ability of members firms to satisfy their best execution and other fiduciary obligations to their customers when routing orders to the Phlx. However, as the Commission has recognized, there is no single benchmark for what constitutes “best execution” for all customers, all firms and all orders. Member firms consider a variety of factors in determining whether to route their equity orders to the Phlx or to handle their orders in some other fashion, and the Exchange believes that a “one size fits all” execution and orer handling methodology for PACE-eligible orders could, in certain circumstances, be an impediment to firms in choosing to route eligible orders to the Phlx floor. The Phlx believes that entering members should have the greatest degree of flexibility in determining, based upon their business, their customers' desires, and the specific capabilities and characteristics of the Phlx equity floor, whether PACE-eligible orders would be equally well handled (or handled better) manually in some fashion other than that provided for in the pre-programmed PACE System.

2. Statutory Basis

The Exchange represents that the proposed rule change is consistent with Section 6(b) of the Act in general, and furthers the objectives of Section 6(b)(5) in particular, in that it is designed to remove impediments to and perfect the mechanism of a free and open market and a national market system, as well as to promote just and equitable principles of trade, by extending an entering member organization's election ability to control all aspects regarding the processing of that firm's orders. This flexibility should increase the Exchange's competitive position as well as provide a more tailored execution venue to member organizations.

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

The Phlx does not believe that the proposed rule change will impose any inappropriate burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act.

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

The Exchange neither received nor solicited written comments.

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

The proposed rule change has become effective upon filing pursuant to Rule 19(b)(3)(A) of the Act and Rule 19b-4(f)(6) thereunder, because it: (i) Does not significantly affect the protection of investors or the public interest; (ii) does not impose any significant burden on competition; and (iii) does not become operative for 30 days after the date of filing or such shorter period as the Commission may designate if consistent with the protection of investors and the public interest; provided that the Exchange has given the Commission written notice of its intent to file the proposed rule change at least five business days prior to the filing date of the proposed rule change, or such shorter time as designated by the Commission.

At any time within 60 days of the filing of such 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 purpose 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 20549-0609. 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-00-58 and should be submitted by August 18, 2000.