[Federal Register Volume 62, Number 250 (Wednesday, December 31, 1997)]
[Notices]
[Pages 68339-68347]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-33992]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-39481; File No. SR-Phlx-96-14]
Self-Regulatory Organizations; Notice of Filing of Amendment No.
2 to Proposed Rule Change by the Philadelphia Stock Exchange, Inc.
Relating to the Universal Trading System's Morning Session
December 22, 1997.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''), 15 U.S.C. Sec. 78s(b)(1), notice is hereby given that on
April 29, 1996 the Philadelphia Stock Exchange, Inc. (``Phlx'' or
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') a proposed rule change, and on July 26,
1996, submitted to the Commission Amendment No. 1 to the proposed rule
change.\1\ The original filing, as amended by Amendment No. 1, was
published for comment in Securities Exchange Act Release No. 37640
(September 4, 1996), 61 FR 47993 (September 11, 1996). No comment
letters were received. On October 29, 1997, the Exchange submitted to
the Commission Amendment No. 2 to the proposed rule change. The
proposed rule change, as amended, is described in Items I, II, and III
below, which Items have been prepared by the self-regulatory
organization. The Commission is publishing this notice to solicit
comments on the proposed rule change, as amended, from interested
persons.
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\1\ See Letter from Gerald D. O'Connell, Senior Vice President,
Market Regulation and Trading, Operations, Phlx, to Jennifer Choi,
Division of Market Regulation, SEC, dated July 26, 1996 (``Amendment
No. 1'').
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange, pursuant to Rule 19b-4 under the Act,\2\ proposes to
implement a daily pre-opening order matching session (``Morning
Session'' or ``Session'') for the execution of large-sized stock orders
on a volume weighted average price (``VWAPTM'') basis. This
amendment restates the original proposal and proposes to: (1) Clarify
the system functions of the Exchange and the Universal Trading System
(``System'' or ``UTSTM''); (2) delete references to over-
the-counter (``OTC'') securities; (3) provide for an equity trading
floor UTS terminal and prohibit floor members from UTS trading in non-
specialty issues; (4) update and detail matching priority provisions;
(5) update and detail order types and order entry procedures; (6)
clarify participation and subscriber access; (7) separate and elaborate
``upon extraordinary circumstances'' language; and (8) expand upon the
liability provisions.
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\2\ 17 CFR 240.19b-4.
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The Morning Session has been designed to provide investors with the
means to execute large-sized stock orders anonymously and at fair
market prices approximately 15 minutes prior to the opening of the
``regular trading session'' (i.e., 9:30 A.M.-4:00 P.M.).\3\ The price
of Morning Session transactions will be determined at approximately
4:15 P.M. on the same day. At that time, the Exchange shall assign the
applicable VWAP and report each such trade to the appropriate reporting
authority, the Consolidated Tape or other, as ``VWAP'' trades.
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\3\ All times refer to Eastern Time (ET).
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The receipt and matching of orders for the Morning Session will be
handled electronically through the UTS. The UTS is a system which was
devised for facilitating the operational aspects of the Morning
Session. The UTS was developed by Universal Trading Technologies
Corporation (``UTTC'') by agreement with the Exchange. This proposal
relates only to the first product of the UTS, the VWAP Trading System
(``VTSTM'').\4\
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\4\ VTS and UTS are trademarks of UTTC and VWAP is a trademark
of the Dover Group.
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Each of the approximately 2,700 equity securities currently
available for trading on the Exchange, both listed and traded pursuant
to Unlisted Trading Privileges (``UTP'') (except OTC securities) will
be eligible for the Morning Session. However, the Exchange will publish
a list of securities trading on the UTS, periodically reflecting
additions and deletions. Upon implementation of this proposal, a
certain number of Phlx issues will be activated for UTS trading, as a
phase-in of the System, and a list of these securities will be
published.
The present proposal consists of the adoption of a new rule
applicable solely to the Morning Session, Rule 237--UTS Morning Session
(``Rule''). In addition, Phlx Rule 101 is proposed to be amended to add
the Morning Session as an exception to regular trading hours.\5\
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\5\ The Exchange also proposes several minor amendments to Rule
101, including placing ``A.M.'' and ``P.M.'' in capital letters and
adding a heading to each commentary.
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The Rule is organized as follows: an introductory paragraph,
followed by paragraphs: (a) Explaining reporting; (b) defining the UTS;
(c) governing who the participants are; (d) explaining order entry; (e)
specifying order priority; (f) defining the VWAP; (g) governing short
sales in the UTS; (h) concerning disputes; (i) containing provisions
relating to limitation of liability; (j) pertaining to trading halts;
and (k) governing extraordinary circumstances.
UTS trades will be subject to transaction and access fees as
established in the Exchange's fee schedule.
The Universal Trading System
The UTS will operate as a separate system, linked to Exchange
systems at the reporting stage. UTS access will be available to direct
subscribers, by dial-up into the UTS system, utilizing software and a
log-on procedure dependent upon whether the subscriber is accessing UTS
through a personal computer or main-frame system. UTS access is also
available through subscribers acting as brokers. Participation is
described more fully below. Thus, UTS access may include various types
of computer hardware, software and handheld devices.
[[Page 68340]]
The System links off-floor and on-floor computer terminals to a
communications base unit. The UTS base unit will: (i) Accept orders and
commitments, (ii) match buyers with sellers, (iii) give execution
reports to matched participants, (iv) calculate the back-up VWAP for
each traded security, (v) report VWAP trades to the entering
Participant, and (vi) create the necessary audit trail, recording order
and commitment entry and execution of Morning Session orders. Other
Exchange systems will calculate the official VWAP and report trades to
the appropriate reporting authority.
Participation in the Morning Session may occur by way of a
commitment from a ``Committer'' or an order from a ``User''
(collectively, ``Participants''). Exchange members may participate as
either Committers or Users, but may not participate as both Committer
and User in the same security for the same account during the same
Morning Session.
Commitments must be entered directly by UTS subscribers or through
the UTS trading floor terminal at the Exchange. Committers can be
either Phlx Floor Traders or Phlx Off-Floor Liquidity Providers who may
commit (on a proprietary basis) to provide contra-side liquidity. UTS
commitments may only be made by Exchange members, either Phlx Floor
Traders or Phlx Off-Floor Liquidity Providers, who must register with
the Exchange in a prescribed manner prior to acting in the capacity of
a Committer. Phlx floor members qualify as Phlx Floor Traders if they
are either the Phlx Specialist or Phlx Alternate Specialist in the
particular stock that is the subject of the commitment. Phlx Off-Floor
Liquidity Providers must be Phlx members and may only engage as
Committers for their proprietary accounts. Committers will be able to
choose which, if any, issues they wish to make commitments, but for
each chosen issue must provide a minimum volume guarantee of 2,500
shares on each side of the market. Commitment sizes can vary on each
side of the market, such as a commitment to buy 2,500 shares and sell
10,000 shares at the VWAP. Commitments may be restricted to execution
against non-members only.
Commitments are only executable through the UTS. Commitments may be
entered and modified in the UTS during the Order Entry Time Period and
also during any other periods which the Exchange may make available for
that purpose. For instance, in order to reflect the busy pre-opening
time before 9:15 A.M., the Exchange may allow commitments to be entered
or modified during certain times the previous day, effective for the
next Morning Session. In such an event, UTS trading still would occur
only during the Morning Session; the extra time period merely provides
additional time for the entry of commitments. Committers may make such
contra-side liquidity commitments through the UTS as day or good-till-
cancelled (GTC) commitments; GTC commitments remain in effect for each
Morning Session until cancelled and must be established (and cancelled)
through the enrollment process.\6\
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\6\ The enrollment process is the formal mechanism by which
participants specify their contractual arrangements for using the
UTS, specifying the information needed to establish UTS access. UTS
activation is dependent upon completing the enrollment process and
submitting the requisite agreements and forms. Enrollment
parameters, including GTC commitments, may be modified through
procedures established by the Exchange.
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Users are participants who enter orders, as opposed to commitments,
into the UTS. UTS orders may only be placed for and by Users who are
enrolled and activated for the UTS. Users may be either Phlx members or
non-members. Users may enter orders for customer or proprietary (dealer
or principal) accounts. Paragraph (c) of the Rule is proposed to be
amended to reflect that Users may enter orders directly into UTS
terminals as subscribers or through subscribing brokers. The
participation method may affect matching priority, pursuant to
paragraph (e) of the Rule. A UTS terminal may be available on the
equity trading floor for the entry and reporting of UTS orders and
commitments. Exchange floor members may participate as Users in their
specialty issues only.
All UTS trades will be processed for clearing like any other
Exchange equity floor trade. The Exchange and the Stock Clearing
Corporation of Philadelphia (``SCCP'') perform trade reconciliation and
confirmation functions; once complete, the trades are forwarded to the
National Securities Clearing Corporation (``NSCC'') for clearance and
settlement.\7\ For jurisdictional and compliance purposes, Phlx
membership is also required for all UTS trades, as with all Phlx
trades. Thus, all Committers and Users must provide both an executing
and clearing account during the enrollment process.
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\7\ UTS trades, as all Phlx trades, will require both a Phlx and
SCCP member to be involved. See Securities Exchange Act Release No.
39223 (October 8, 1997) (SR-SCCP-97-04).
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All non-member UTS orders entered through a broker must be entered
either through a Phlx member or through a non-member broker with the
appropriate give-up and three-way agreements in place. UTS non-member
orders may also be entered directly by subscribing non-members, who
have both agreements with a Phlx member in place. In the three-way
agreement between the Exchange, the Phlx member and the non-member
User, the Phlx member must agree to be jointly and severally liable for
actions of the non-member through the UTS and the non-member must agree
to adhere to all applicable by-laws and rules of the Exchange. The
three-way agreement is in addition to the clearing or ``give-up''
agreement. The give-up agreement is intended to ensure that a SCCP
member, who must also be a Phlx member, has assumed responsibility for
the order. Give-up agreements with non-members must be submitted in
advance to the Exchange's Examinations Department, and must include a
delineation of the credit limits for the respective customer.
All Users and Committers must provide proof of compliance officer
review and approval of enrollment parameters prior to UTS activation.
UTS Order Entry
Only orders and commitments placed through UTS will be eligible for
execution during the Morning Session; similarly, orders and commitments
entered into the UTS are only eligible for execution through the UTS.
Thus, UTS orders do not automatically migrate to the Exchange's regular
equity trading session. UTS orders will only be accepted during the UTS
order entry time period, 5:00 A.M. to 9:15:00 A.M., except that the
Exchange may establish a different period respecting the UTS trading
floor terminal. The proposed establishment of an equity trading floor
terminal amends the original proposal and is intended to facilitate
Floor Trader participation. The Phlx believes that trading floor real
estate concerns \8\ may discourage direct subscription, such that the
floor terminal would provide an alternate means for access. Unlike UTS
commitments, all UTS orders will only be eligible for a UTS execution
on the day the order has been placed. UTS orders and commitments may be
cancelled until 9:15 A.M. Confirmation of order placement and
cancellation occurs electronically through the UTS.
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\8\ Phlx represents that physical space for additional screens
or computers on the floor is extremely limited. Telephone
conversation between Edith Hallahan, Director, Associate General
Counsel, Phlx, and Mike Walinskas, Senior Special Counsel, Division
of Market Regulation, SEC, on December 17, 1997.
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As discussed above, Morning Session trading interest may be entered
into UTS in the form of either: (i) An order
[[Page 68341]]
to trade as a User; or (ii) as a commitment to provide contra-side
liquidity to User orders. The minimum order size for individual User
orders shall be 5,000 shares, while Committers will be permitted to
commit in sizes of 2,500 or greater. In addition to these minimums, all
orders and commitments must be in 500 share increments, including any
``AON'' or ``MON'' designations, as defined below. This amendment
eliminates reference to round-lots, meaning 100 shares. Further, the
Exchange's Floor Procedure Committee (``FPC'') may determine whether
different sizes should be established. This ability is intended to be
responsive to adjustments based on market and participant need, which
would be subject to prior written notice.
In placing orders and commitments on the System, Participants will
be required to provide order/commitment description and account
identification information necessary for UTS to establish the priority
and eligibility of orders on the System. Specifically, UTS orders and
commitments are to be placed with the following designations: (i) Buy/
sell; (ii) volume; (iii) stock symbol; (iv) Participant status:
Committer or User; (v) Committer account status: Off-Floor Liquidity
Provider, Specialist or Alternative Specialist; (vi) User account
status: member or non-member, and order type (basic, cross,
facilitation, constraints, restrictions); (vii) clearing account
number; (viii) trade account information; and (iv) subscriber
identification number.
Order Types
The UTS order types in paragraph (i) of the Rule are being amended
for better organization and definition within the Rule. Eligible order
types for the Morning Session are divided into three categories: basic,
facilitation and cross. Basic and facilitation orders can be
unconstrained, meaning executable to the extent possible, or
constrained. The following two constraints are proposed: All-or-none
(AON), meaning execute all shares of the order or none at all; and
Minimum-or-none (MON), meaning execute at least a specified number of
shares or none at all. Basic orders can also be restricted, meaning
executable against non-members only.
Facilitation orders, on the other hand, are two-sided orders with
an identified Phlx member contra-side, who acts as a facilitator to
that order, and is known as a ``Guarantor.'' The Guarantor definition
has also been added to paragraph (c) of the Rule, which delineates the
categories of access to the UTS. The contra-side may be entered
together with or separate from the facilitation order; if the sizes do
not match, the remainder is unexecuted. Facilitation orders can be
submitted on behalf of Phlx members or non-members. There are three
types of facilitation orders. The first type is an unconditional
facilitation, which is to be executed against an identified Guarantor
or not at all; as such, the order is a type of cross, involving a Phlx
member Guarantor. The second type of facilitation order is a
conditional facilitation order, which is executable against an
identified Guarantor after attempting to be executed against non-
members to the extent possible. For instance, User A may enter an order
designating X as its conditional Guarantor, such that if no non-member
orders are matched with this order, User A is matched with X, even if
other Phlx members would have matched. Third, a last resort
facilitation order is executable against an identified Guarantor only
after attempting to execute against all other orders and commitments to
the extent possible. Extending the previous example, the last resort
Guarantor X would only match with User A after all other orders and
commitments have had the opportunity to match, not just non-member
orders. Facilitation orders cannot be restricted to non-members in
general, because they contain a contra-side.
A cross order is a two-sided order, with both sides comprised of
non-member interest, with instructions to match the identified buy-side
with the identified sell-side. The two sides of a cross can be entered
separately, with the contra-side identified. If the sizes do not match,
the remainder is unexecuted.
Execution and Priority of Orders
Orders for the Morning Session will be matched at approximately
9:16 A.M. Trades executed through the UTS are printed and cleared as
Phlx transactions, executed on the Exchange and processed through SCCP,
as explained above. In matching VWAP orders for execution during the
Morning Session, execution priority is determined in accordance with 23
matching steps, which appear below. Commitments are not matched with
other Commitments.
Generally, User orders are afforded priority by account type, then
by order size (largest first); and for orders of the same size and
account type, on a chronological basis by time-of-entry. As outlined
below, account types are based on status as a non-member or Phlx
member, type of non-member account, constraints, and direct
subscription versus broker access.
Similarly, commitments are prioritized, first, on the basis of sub-
account types, meaning Phlx Off-Floor Liquidity Providers then
Specialists and then Alternate Specialists; then, on the basis of
commitment size (largest first); and among those commitments at the
same size, priority rotates among Committers with the fewest aggregate
UTS shares (in all securities) matched at that time. For example, among
three 5,000 share specialist commitments in stock XYZ, priority would
be afforded to A who has received 10,000 shares of stock XYZ so far,
then B who has 15,000 shares of TTT, and lastly to C who has 3,000
shares of XYZ and 20,000 of TTT. In the previous version of this
proposal, the matching was proposed to occur on a rotational basis
among those of the same size and sub-account type.
An additional amendment to the original proposal is the
incorporation of a Liquidity Rotation Parameter (``LRP''), also known
as the ``anti-bully'' rule. Even though priority is generally based on
size, the LRP provides that order an commitment participation will
rotate in 25,000 share increments, to more fairly allocate order flow,
as opposed to filling the largest first. The LRP operates within each
matching step (after step 1) to match in 25,000 share increments,
moving to the next order/commitment after 25,000 shares have been
matched, and then returning to the remainder of that unfilled portion
once all other orders/commitments have received their first 25,000
share match. For example, where there is one large buyer (``buyer 1'')
for 100,000 shares and three buyers of 10,000 shares of ABC (``buyers
2-4''), without this provision, a seller of 100,000 shares would match
with the buyer 1 for all 100,000 shares, thereby excluding the other
buyers. Instead, the LRP results in a match of 25,000 shares for buyer
1, 10,000 shares each for buyers 2-4 (sub-totaling 55,000), 25,000
shares more for buyer 1, with the remainder of 20,000 shares going to
buyer 1 (as there are no other buyers with which to rotate liquidity);
the LRP ensured that buyers 2-4 participated, while buyer 1 received
70,000 shares. The proposal would permit the FPC to establish a
different size (than 25,000 shares) based on operational experience,
practicality and demonstrated market need.
As a follow-up to these introductory paragraphs respecting the
order matching principles of UTS, the specific matching steps to be
conducted in each security are outlined below. First, the following
two-sided orders are matched: non-member/non-member crosses, then non-
member/member unconditional facilitation orders and then member/
[[Page 68342]]
member unconditional facilitation orders. Any partially unmatched
orders due to excess size entered by one side remains unexecuted.
Second, non-member unconstrained orders (both basic and
facilitation) are matched with each other. For example, a buy of 10,000
shares of XYZ would be matched with a sell of 10,000 shares of XYZ by
non-members. Within this step 2, as within all matching steps, priority
is determined based on size and time of entry. Although step 2 refers
to non-member unconstrained orders, including facilitation orders,
unconditional facilitation orders are not matched at this step, because
they have already been matched in step 1. Non-member unconstrained
orders for non-member broker-dealers are matched in step 6.
Third, any remaining non-member unconstrained orders are matched
with non-member constrained (AON and MON) orders. Any such non-member
constrained orders not matched with the unconstrained orders left over
from step 1 are then matched with other non-member constrained orders.
Non-member constrained orders for non-member broker-dealers are matched
in step 6.
Fourth, any remaining non-member orders from steps 2 and 3 are
matched with non-member institutions' orders participating through a
broker. Brokers may be members or non-members as explained in the
participation and access portions of this proposal. Such non-member
institutions' orders are then matched with each other. Non-member
institutions entering orders directly would have participated in steps
2 or 3 above, depending on whether the order is constrained;
constraints are not relevant to determining priority in step 4 among
institutions participating through a broker.
Fifth, any remaining non-member orders are matched with non-member
non-institution orders participating through a broker. The remaining
non-member orders filtering down through each step may include
unmatched orders and partially unmatched orders from all prior steps.
These remaining orders are matched with the new category of orders in
each step first, before that category is matched against itself. Thus,
after non-member non-institution orders participating through a broker
are matched against the unmatched orders of non-member orders, such
non-member non-institution orders are matched with each other. Non-
member non-institution orders include non-member broker-dealer orders
as well as non-member, non-broker-dealer, non-institution orders, such
as retail customer orders.
Sixth, any remaining non-member orders are matched with non-member
broker-dealers subscribing directly. Non-member broker-dealer orders
subscribing directly are then matched with each other. Instead of
dealer activity, if the non-member broker-dealer is acting as a broker,
then the order would be matched in steps 4 or 5, depending on who he or
she is representing as a broker.
Seventh, the matching process is ended respecting non-member
orders. Thus, any remaining non-member orders that are restricted to
matching with non-members only are removed; these are unmatched, except
as provided in step 23 below.
Eighth, any remaining non-member conditional facilitation orders
are matched with their conditional Guarantors (facilitating members).
These conditional orders were first subject to matching against other
non-member orders in the prior steps, and are now eligible for matching
against the identified Guarantor, who is a member.
Ninth, any remaining non-member orders are matched with member
orders participating through brokers. Any unmatched member orders
participating through brokers are then removed.
Tenth, any remaining non-member orders are matched with orders of
off-floor members. Any unmatched off-floor members' orders are then
removed.
Step 11 involves matching any remaining non-member orders with
order of Phlx Floor Traders. Any unmatched Phlx Floor Traders' orders
are then removed. This category includes one-sided orders (as opposed
to commitments) of Specialists and Alternate Specialists, who are
permitted to trade as a ``dealer'' in specialty issues.
Steps 12 through 14 introduce commitments into the matching
process. In step 12, any remaining non-member orders are matched with
commitments of Phlx Off-Floor Liquidity Providers. The remaining
commitments of Phlx Off-Floor Liquidity Providers are then removed. In
step 13, any remaining non-member orders are matched with commitments
of Specialists; unmatched Specialist commitments are then removed. In
step 14, any remaining non-member orders are matched with commitments
of Alternate Specialists; unmatched Alternate Specialist commitments
are then removed.
In step 15, any remaining non-member orders are matched with member
facilitation orders (those with conditional or last resort Guarantors).
The other type of facilitation order, an unconditional facilitation, is
already matched in step 1.
In step 16, non-member last resort facilitation orders are matched
with their identified last resort Guarantors.
Step 17 represents the end of non-member matching. Any remaining
non-member orders are unmatched, except as provided in step 23 below.
In step 18, Phlx member conditional facilitation orders are matched
with their identified conditional Guarantor. Again, the unconditional
facilitation orders have already been matched; the last resort
facilitation orders are matched later in the process.
Step 19 involves extensive Phlx member matching. All remaining
member orders are matched with each other, as long as they are not
restricted to matching against non-members only. This includes the
following types of Phlx member orders from steps 9-11 and 15 above:
Phlx member orders participating through brokers, Phlx off-floor member
orders, Phlx floor members' orders, and member last resort facilitation
orders.
Step 20 involves matching Phlx member orders with commitments that
have not been restricted to matching against non-member only. First,
any remaining Phlx member orders are matched with commitments of Off-
Floor Liquidity Providers, and then with commitments of Specialists and
Alternate Specialists. Unmatched commitments are then removed.
In Step 21, Phlx member last resort facilitation orders are matched
with their identified last resort Guarantor.
Step 22 signals the end of the whole matching ``round'' in a
security. Any remaining Phlx member orders and commitments are
unmatched, except as provided in step 23.
Step (23), the last step, involves performing matching rounds,
which amends the original proposal. Specifically, if any unmatched
orders remain, the largest unsatisfied constrained order is permanently
removed, the matches after step 1 are unmatched and the matching
process starts again; among unsatisfied orders of the same size, Phlx
member orders would be removed before non-member orders, and among two
Phlx members (or non-members), the latest in time is removed first.
Additional matching rounds occur, each removing another unsatisfied
constrained order, until no unsatisfied constrained orders remain.
Matching rounds are intended to maximize the number of executions.
VWAP
The VWAP that the Exchange shall assign to each eligible security,
which
[[Page 68343]]
shall be derived daily and publicly disseminated promptly following
calculation at 4:15 P.M. for each security where a UTS match occurred
that day, will be calculated on the basis of those transactions
reported during the regular trading session to the appropriate
reporting authority. Generally, consistent with Phlx Rule 111, all UTS
matches create a binding contract. However, in the case where a
transaction occurs in the Morning Session in a security which has not
opened for trading by 3:00 P.M. on the primary market, the respective
Morning Session transaction will be voided and a report to that effect
will be sent immediately to all matched Participants.
In general, the VWAP for each eligible security shall be calculated
by: (i) Utilizing all regular way trades that appear on the
Consolidated Tape (including sold sales and late sales \9\) effected
from the opening of the regular trading session and printed prior to
4:15 P.M. by the appropriate reporting authority,\10\ (ii) multiplying
each respective reported price by the total number of shares traded at
that price; (iii) adding together each of these calculated values,
compiling an aggregate sum; and (iv) dividing the aggregate sum by the
total number of reported shares used in item (i) in the security. The
resulting VWAP will be reported in the form of a fraction, rounded to
the nearest 1/256th.
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\9\ A late sale is a transaction which is a correct last sale
but is publicly disseminated later than is generally required.
Generally, transactions are required to be publicly disseminated
within 90 seconds after the execution. A sold sale designates a
transaction appearing on the Consolidated Tape out of its proper
sequence.
\10\ However, prints representing trades executed after regular
trading hours (9:30 A.M. to 4:00 P.M., such as the Phlx's Post
Primary Session (``PPS'') will not be utilized in the VWAP
calculation after 4:02 P.M.
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Reporting
All UTS transactions will first be reported to the reporting
authority at approximately 9:20 A.M. as a single volume print including
all matches in all securities. The morning print for all UTS matches
will occur by way of an administrative message over the Consolidated
Tape reflecting total volume in Exchange listed securities. For
example, that message would indicate that 3 million shares traded
through the UTS at the VWAP. The morning print is intended to notify
investors regarding pre-opening volume.
Participants, under normal circumstances, will also be notified of
their levels of participation by 9:20 A.M. UTS transactions will be
reported to the entering subscriber in the form of automated reports
reflecting the number of shares traded by the Participant (whether User
or Committer) through the UTS in each issue.
Promptly following calculation of the final VWAP at approximately
4:20 P.M., trades are assigned that day's VWAP for that security and
will, at that time, be reported trade-by-trade to the appropriate
reporting authority. The Exchange will continuously calculate the VWAP
throughout the trading day for each issue available for trading. The
final VWAP will be available through the System to UTS subscribers who
received Morning Session executions. Each Morning Session match, once a
VWAP is assigned, constitutes a completed transaction for the purpose
of reporting the trade to the appropriate reporting authority.
End-of-day prints will normally be reported promptly following
calculation of the final VWAP at 4:15 P.M. and, unlike the morning
print, the end-of-day prints will be printed on a trade-by-trade basis
representing all matches that morning. Each print will reflect a
matched trade and the corresponding VWAP. These trades will be reported
to the Consolidated Tape with the sale condition ``B'' indicating
average weighted pricing, which will distinguish VWAP trades from other
transactions that may possibly be reported after the close (such as
after-hours, crossing session, or late sales transactions). Thus, these
trades will not impact the determination of the last sale price in a
security. Because reporting is trade-by-trade, if no UTS trade occurred
that day, the final VWAP will not be reported to the Consolidated Tape
that day.
The UTS will not disseminate or disclose orders or commitments,
including UTS bid/ask sizes, prior to the Morning Session match, nor
UTS imbalances remaining after the Morning Session match, except to the
entering Participant. The purpose of this anonymity is to safeguard
against dissemination to any other participant or to the marketplace
the existence of executed or unexecuted orders, which, in turn, could,
if disseminated, influence the market after the opening of the regular
trading day.
Other Provisions
Pursuant to paragraph (h) of the Rule, disputes respecting Morning
Session participation, or eligibility of orders or participants, are to
be resolved by the Exchange, in accordance with Phlx Rule 124.
The Exchange's liability respecting the UTS is limited pursuant to
Phlx By-Law Article 12-11 and paragraph (i) of the Rule. Thus, the
Exchange is not liable for any damage arising from the use of the UTS.
Specifically, this provision states that pursuant to By-Law Article 12-
11, the Exchange shall not be liable for any damages, claims, losses or
expenses caused by any errors, omissions or delays resulting from any
act, condition or cause beyond the reasonable control of the Exchange,
including but not limited to, an act of God; fire; flood; extraordinary
weather conditions; war; insurrection; riot; strike; accident; action
of government; communications or power failure; equipment or software
malfunction arising from the use of the UTS, the calculation of the
VWAP or any and all other matters respecting the operation of the
System or Morning Session.
With respect to trading halts, the Rule is not intended to limit
the ability of the Exchange to otherwise halt or suspend trading in any
stock traded through the UTS. Further, as stated in paragraph (k) of
the Rule, a new provision respecting extraordinary market conditions,
the Floor Procedure Committee may determine, due to extraordinary
circumstances, to adjust or modify any of the times referenced by this
Rule respecting the order entry period, order matching period or any
aspect of the transaction reporting procedures. In addition to fast
market conditions, for purposes of this paragraph, extraordinary
circumstances also include systems malfunctions and other circumstances
that limit the Exchange's ability to receive, disseminate or report UTS
information in a timely and accurate manner.
Lastly, short sales are governed by paragraph (g) of the Rule,
which states that Morning Session orders and commitments must be
appropriately marked pursuant to Phlx Rule 455, but are exempt from the
``tick test'' short sale restrictions of Rule 455. Further, positions
resulting from Morning Session transactions are effective for the
purpose of determining long or short status, immediately upon
notification to the participant of a UTS execution, notwithstanding
that the VWAP has not yet been determined.
The specific text of the proposed rule change is available at the
places described in item IV below.
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 self-regulatory organization
included statements concerning the purpose of and basis for the
proposed rule change and discussed any comments it received
[[Page 68344]]
on the proposed rule change. The text of these statements may be
examined at the places specified in Item IV below. The self-regulatory
organization 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
During the past ten years, listed equities trading volume has
experience explosive growth, from 18 billion shares in 1982 to a
projected 140 billion shares in 1997, representing a sevenfold increase
in 15 years. A contributing factor to this volume surge is the
increasing presence of institutional trading. The Exchange expects that
over 11 million trades of 5,000 shares or more will be executed in the
markets during this year.
Although institutional trading of block orders often consists of
exchange member firms trading for their proprietary accounts, the vast
majority of such trading is for the benefit of non-member accounts. The
common thread among most of these non-member block orders is that the
investment focus is long-term, rather than short-term. When the
investment focus is long-term, intra-day price drops occurring when
positions are purchased or sold are problematic ``bumps'' in the road.
Many long-term investors prefer to avoid such drops, even though an
opportunity to buy at the low or sell at the high may be lost.
Smoothing over these bumps would be beneficial to long-term investors.
In this vein, long-term investors often link the ability to secure fair
prices to the ability to retain anonymity while ``working'' large
orders.
On the other hand, member firms typically use intra-day volatility
as an opportunity to trade in the short term. Such firms do so either
as facilitator for their customer orders, arbitrageur or as registered
floor traders. Many of these traders welcome the opportunities
presented by additional volume and volatility. Thus, diverting such
intra-day risks from long-term investors (who seek to avoid such risks)
to proprietary traders (who seek to assume such risks) is an important
benefit of the proposed Morning Session for the execution of large-
sized securities on a VWAP basis.
By placing intra-day price risks on those most willing, and most
suited, to accept such risks, the Morning Session will serve both
institutional investors and proprietary traders. The advantages of the
Morning Session will be available to all qualified market participants
for eligible sized orders. Institutions which will particularly benefit
from the session include corporate pension funds, state and municipal
pension funds, major money managers and mutual funds. In addition to
offering fair pricing, the session should also be cost effective, as it
will often replace the costs of working a VWAP or regular order over
the course of a day or longer, with the ease of a single execution and
single transaction charge.
In its role as a national securities exchange and trading venue for
equity securities, the Phlx seeks to provide liquidity and a
marketplace for all types of investors. In addition to its current
market structure and products, the Exchange endeavors to provide new
products and systems, thereby enhancing liquidity, while preserving
full investor protection. The UTS adds an important dimension to these
goals by way of the VTS, which offers institutional money managers,
broker-dealers and investors the ability to receive large executions
more efficiently, with less market impact. The VTS is intended to
provide liquidity, complete anonymity, and end-to-end data security in
an electronic environment. All VTS trades will be priced at the VWAP,
which the Phlx believes is regarded industry-wide as providing a useful
execution price measurement at a reasonable cost. Institutions have
been receiving VWAP executions since 1985. the VTS is intended to
standardize this pricing method so that investors can obtain ``at
market returns'' and implement investment strategies utilizing the new
standard VWAP.
The Phlx believes that the UTS is an innovative new automated
securities trading system that complements the existing auction market.
By providing an automated matching system with floor traders as well as
off-floor traders serving as facilitators for executions on a VWAP
basis, the UTS incorporates the principles of an auction market with
the automation benefits of an electronic execution system. Thus, the
Exchange believes that the UTS, as a new data processing and
communication technique, creates the opportunity for more efficient and
effective market operations, consistent with Section 11A(a)(1)(B) of
the Act,\11\ by providing increased execution alternatives to
investors. By combining pricing in terms of a VWAP with the ability to
access block-sized liquidity commitments, and by providing the ability
to anonymously effect such block-sized orders prior to the opening of
the regular session, the Exchange's Morning Session should particularly
accommodate institutional customer interests.
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\11\ 15 U.S.C. Sec. 78k-1(a)(1)(B)
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The Exchange proposes to adopt the Rule in order to establish and
govern the UTS. In general, the UTS will accept orders and commitments
of established minimum volumes (i.e., 5,000 shares for orders and 2,500
shares for commitments), executing orders against other orders and
commitments at the VWAP. The VWAP will be assigned to each matched
trade and reported to the appropriate reporting authority, including
trade-by-trade volume and the VWAP. Consistent with Rule 11Aa3-1 under
the Act,\12\ the Exchange will thereby provide for the collection and
dissemination of transaction reports containing, among other things,
the price of the security. The Exchange believes that the proposed
reporting structure provides transparency to Morning Session
executions, specifically identifying the total volume executed before
the opening, first as a single print and, once the VWAP is calculated,
trade-by-trade. The Exchange recognizes that within the meaning of Rule
11Ac1-1 under the Act,\13\ bids/offers will not be utilized in the UTS,
because all orders are executable only at the VWAP, rendering bids/
offers meaningless.\14\
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\12\17 CFR 240.11Aa3-1
\13\17 CFR 240.11Ac1-1
\14\ Accordingly, the Exchange has requested exemptive relief
from the requirements of Rule 11Ac1-1 under the Act. See Letter from
Gerald D. O'Connell, First Vice President, Phlx, to Larry E.
Bergmann, Assistant Director, Division of Market Regulation, SEC,
dated February 28, 1996. In this letter, the Exchange has also
requested interpretive relief regarding Rule 11A2-2(T) under the
Act, 17 CFR 240.11A2-2(T) and exemptive relief from Section 10(a) of
the Act, 15 U.S.C. Sec. 78j(a). A revised letter, which reflects the
changes made to the proposed rule change as a result of Amendment
No. 2, will be submitted separately.
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Because the System's matching process should be complete prior the
time of the opening of the Phlx market (and other equity markets) at
9:30 A.M., the Exchange believes that the issue of the integration of
UTS orders into the auction market is not raised by the proposal.
Specifically, the Exchange does not believe that the UTS raises market
integration issues, such as the role of the Intermarket Trading System
(``ITS'') or integrating booked orders, because UTS matching would
occur pre-opening, when the markets are not yet open for regular
trading. Therefore, the Exchange concludes that the operation of the
UTS is outside of the scope of the ITS Plan, which is based on access
across various markets to continuous two-sided quotations.\15\ As a
result, the
[[Page 68345]]
Exchange believes that UTS pre-opening matching does not implicate the
intermarket price protection obligations of the ITS Plan, as no UTS
price is calculated until the end of the trading day, nor does UTS
order flow impact or create bids/offers for purposes of other market
center quoting during the trading day.\16\
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\15\ See ITS Plan, Section 6.
\16\ The Exchange notes that, in comparison, the Optimark
System, which would operate as a periodic call market and was
recently approved by the Commission, does give rise to ITS Plan
issues. See Securities Exchange Act Release No. 39086 (September 17,
1997), 62 FR 50036 (September 24, 1997) (File No. SR-PCX-97-18)
(order granting approval to PCX Application of the OptiMark System).
---------------------------------------------------------------------------
Further, the assignment of a final VWAP to Morning Session
executions would occur after the close of trading. It is possible that
an order on the Phlx specialist's limit order book may remain
unexecuted at the end of a trading day at a price equal or better than
the VWAP in that security, meaning UTS orders would be executed at that
price. However, the Exchange does not believe that this presents a
market fragmentation concern, because the booked order was never
eligible for the VWAP or a UTS execution, as it was not entered as a
UTS order; it may not have been eligible for a UTS execution due to
size or account status. Further, that booked order was entered for
execution at a specified limit price or better, not at the VWAP, which
could have resulted in a different price. For these reasons, no
expectation will be created for such orders to look to the UTS or VWAP
execution price; orders entered for execution on the Phlx will continue
to be governed by existing rules. Requiring that such regular Phlx non-
UTS orders be protected in light of only better VWAP prices after the
close is unfair\17\ and illogical, as these orders would then be
executable after the close; not subject to the risk of a different
VWAP; and in effect, guaranteed a price based on prints in a system for
which the order was not eligible and in which it was never entered. In
fact, this would disadvantage unexecuted UTS orders.
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\17\ In fact, if Phlx orders were guaranteed an execution
related to the UTS VWAP, various market manipulation concerns could
arise; for instance, buy orders in a surging stock could unfairly
benefit from a VWAP that the buyer knows will be lower than the last
sale in that security.
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Further, the Exchange believes that UTS orders do not raise price
priority issues, because all orders have been entered for execution at
the VWAP. The UTS will execute orders based on the priority principles
enumerated in the Rule, which, according to the Exchange, is consistent
with Section 11 of the Act \18\ and the rules thereunder, in that
specialist activity will be consistent with Section 11(a)(1)(A) of the
Act, members will generally yield priority to non-members pursuant to
Section 11(a)(1)(G) of the Act, and Committers will fulfill the
obligations of Section 11(b) of the Act. Phlx Off-Floor Liquidity
Providers receive priority over Floor Traders in order to encourage
commitments. Because Phlx Floor Traders' priority is last-in-line, no
issue of Specialist trading ahead of customers in raised by the UTS. As
amended, the Rule affords priority to orders by account type (meaning,
except crosses, non-member before member, type of non-member account,
constraints, and direct subscription versus broker access); then by
order size (largest first); and for orders of the same size and account
type, on a chronological basis by time of entry.
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\18\ 15 U.S.C. Sec. 78k.
---------------------------------------------------------------------------
The UTS will operate as a facility of the Exchange within the
meaning of Section 3(a)(2) of the Act,\19\ in that the UTS utilizes
Phlx equipment and personnel, floor trader participation, and SCCP to
process UTS trades. Thus, Morning Session trades will be appropriately
regulated and reported as Exchange trades. The Phlx notes that this is
similar to the regulatory treatment afforded to after-hours trading
sessions on the Exchange as well as other exchanges.\20\
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\19\ 15 U.S.C. Sec. 78c(a)(2).
\20\ See, e.g., Securities Exchange Act Release No. 29237 (May
24, 1991) (File Nos. SR-NYSE-90-52 and SR-NYSE-90-53 establishing an
off-hours trading facility).
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As previously stated, the VWAP will be calculated on the basis of
those transactions reported by the appropriate reporting authority for
the respective security from the beginning of the regular trading
session until 4:15 P.M. In the case where a transaction occurs in the
Morning Session in a security which has not opened for trading that day
for any reason in the primary market by 3:00 P.M., the respective
Morning Session transaction will be voided and a report to that effect
will be immediately sent. The Exchange believes that establishing a
specific time frame by which a security must trade gives further
assurance that the VWAP will consist of a representative sample of
trades from which to derive a calculation. Additionally, this provision
will also serve the important function of prompt notice that the
Morning Session transaction will be voided if the primary market has
not yet opened in a particular issue. Although written or electronic
confirmation will follow, Participants should be aware that this rare
exception to the creation of a binding contract through the UTS may
occur by observing that an issue failed to open on its primary market.
The 3:00 P.M. cut-off provides an objective limitation on the VWAP
calculation, which notifies the User that a representative VWAP cannot
be calculated for that day. The Exchange has determined that the 3:00
P.M. provision is preferable to calculating a VWAP based on the
previous day's pricing, because an important purpose of the VWAP is to
incorporate and average that day's price movement.
With respect to trading halts, if a security opens for trading but
is the subject of a halt and does not resume trading for the remainder
of the day, the Morning Session transaction is based on the prints that
occurred before the halt. The Exchange realizes that a security may
only be open for a short time before it is halted; however, the
Exchange believes that for the purposes of the UTS VWAP calculation,
trading that occurs prior to a halt forms a reasonable basis for
calculating a VWAP for that day, even if the security does not reopen
that day. A significant amount of price discovery is involved in an
opening print, such that it provides an appropriate VWAP measure, which
is preferable to voiding that day's UTS trades. For these reasons, the
Exchange has determined that even a few minutes of trading provides
adequate pricing information, which is preferable to voiding UTS trades
and consistent with the creation of a binding contract.
Nevertheless, the Exchange maintains that the Morning Session
execution is an executed Exchange contract, with only the one unusual
circumstances enumerated above. The Exchange notes that although
utilizing the VWAP as a pricing mechanism is new to exchange trading,
block trades as well as certain Nasdaq trades are currently reported as
average weighted pricing trades.\21\
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\21\ Such trades are currently reported using the indicator
``W.''
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With respect to access to the System, as stated above, Participants
may be either Users, who may enter orders, or Committers, who must be
Exchange members. Because Users may be non-members of the Exchange,
qualified non-member access to the UTS is proposed. The Exchange
believes that the UTS provides adequate controls regarding limited non-
member access to the System. For computer processing purposes, one
control mechanism requires SCCP account information for UTS trades,
just as for all Phlx equity trades. For disciplinary jurisdiction and
compliance purposes, the second
[[Page 68346]]
control mechanism over non-member access to the UTS is the requirement
of a three-way agreement. As described above, in the three-way
agreement, the Phlx member must agree to be jointly and severally
liable for actions of the non-member through the UTS; and the non-
member must agree to adhere to all applicable by-laws and rules of the
Exchange. This is intended to provide a jurisdictional basis for
disciplinary action against such non-member, to the same degree as if
the order were placed directly. The required agreement with the non-
member provides that the Exchange has the right to terminate access to
the UTS, without prior notice for any reasons, or no reason whatsoever.
Because both a three-way and give-up agreement are required,
termination of either agreement necessarily results in the Exchange's
ability to terminate access to the UTS. In sum, the Exchange believes
that these requirements ensure adequate controls over non-member
access, including Exchange supervision of and jurisdiction over non-
member Users. The Exchange notes that similar non-member access has
been afforded to other exchange system.\20\ Utilizing SCCP facilities
and requiring Exchange agreements with non-members is intended to
facilitate coordination with persons engaged in clearing and settling
these transactions, consistent with Section 6(b)(5) of the Act.\23\
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\22\ See Securities Exchange Act Release No. 35030 (November 30,
1994) (File No. SR-CHX-93-19) (order approving Chicago Match and, at
n.70 therein, reference to the New York Stock Exchange's SuperDOT).
\23\ 15 U.S.C. Sec. 78f(b)(5).
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Section 10(a) of the Act governs short sales in securities, while
Rule 3b-3 under the Act \24\ defines the term ``short sale'' as ``any
sale of a security which the seller does not own or any sale which is
consummated by the delivery of a security borrowed by, or for the
account of, the seller.'' Further, Rule 3b-3 provides that if a person
has ``purchased, or has entered into an unconditional contract, finding
on both parties thereto, to purchase'' a security, then that person
shall be deemed to own that security.\25\ Separately, the Exchange has
requested exemptive relief from the ``tick test'' of Section 10(a) of
the Act.\26\ Thus, pursuant to paragraph (g) of the Rule, Morning
Session orders and commitments should not be subject to the tick test/
short sale restrictions of Phlx Rule 455. Nevertheless, UTS orders must
be marketed in accordance with that rule. Further, because a long
position creates an irrevocable contract, a purchase during the Morning
Session may be followed by sales during the regular trading session in
that security, without such sales deemed to be short sales.
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\24\ CFR 240.30b-3.
\25\ The Exchange understands that proposed amendments to these
provisions provide that if the ownership of a security is claimed by
virture of having entered into a contract to purchase it, the
contract must involve a fixed, currently ascertainable amount of the
security at a fixed, currently ascertainable price. Separately, the
Exchange requested that an exemption for the Morning Session be
incorporated into these proposed amendments. See letter from Gerald
D. O'Connell, First Vice President, Phlx, to Larry E. Bergmann,
Assistant Director, Division of Market Regulation, SEC, dated
November 9, 1995.
\26\ See supra note 14.
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Lastly, the Exchange proposes to amend Phlx Rule 101 to adopt
Commentary .03 reflecting the Morning Session and providing reference
to the Rule. The Exchange also proposes minor changes to Rule 101 for
clarity and correction. Specifically, ``A.M.'' and ``P.M.'' would
appear in capital letters consistently throughout the rule, and there
would be a heading for each commentary. The Exchange believes that
these changes to Rule 101 should both correct and clarify its
provisions.
For the reason stated above, the Phlx believes that the proposal to
operate a Morning Session utilizing the UTS is consistent with the Act,
and particularly with Sections 6, 11 and 11A thereof. Specifically, the
proposal is consistent with Section 6(b)(5) of the Act, in that it is
designed to promote just and equitable principles of trade, prevent
fraudulent and manipulative acts and practices, to foster cooperation
and coordination with persons engaged in regulating, clearing,
settling, processing information with respect to, and facilitating
transactions in securities, to remove impediments to and perfect the
mechanism of a free and open market and a national market system, as
well as to protect investors and the public interest, by providing an
automated order entry and execution system for securities traded during
the Morning Session, based on a comprehensive rule and extensive
matching algorithm.
The Exchange anticipates that significant institutional volume
could be attracted to the Phlx, which should, in turn, add liquidity to
both the Morning Session as well as to the Phlx's regular trading
session. The Exchange believes that the UTS provides an important new
pricing mechanism for exchange trades the VWAP. Further, the Exchange
believes that the Morning Session should provide a unique opportunity
to electronically submit block-sized orders for automatic matching
before the regular opening at 9:30 A.M. Thus, the UTS should perfect
the mechanism of a free and open market and a national market system.
The proposal at hand employs specific procedures and safeguards
designed to protect investors and the public interest, prevent
fraudulent and manipulative acts and practices, and promote just and
equitable principles of trade. These procedures include specific
execution priority parameters, order entry specifications and Exchange
surveillance procedures (separately submitted) designed to monitor UTS
transactions. The Exchange also believes that because the Morning
Session is limited to a once-per-day session and adequately provides
for transparency, despite the requested limited exemptive relief, the
proposal is consistent with the Act.
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.
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 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 self-regulatory organization consents, the Commission will:
(A) By order approve the 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. 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 amendment, 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
[[Page 68347]]
public in accordance with the provisions of 5 U.S.C. Sec. 552, will be
available for inspection and copying at the Commission's Public
Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549.
Copies of such filing will also be available for inspection and copying
at the principal office of the Exchange. All submissions should refer
to File No. SR-Phlx-96-14 and should be submitted by January 21, 1998.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\27\
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\27\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-33992 Filed 12-30-97; 8:45 am]
BILLING CODE 8010-01-M
