[Federal Register Volume 64, Number 59 (Monday, March 29, 1999)]
[Notices]
[Pages 14953-14959]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-7542]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-41199; International Series Release No. 1189; File No.
10-126]
Tradepoint Financial Networks plc; Order Granting Limited Volume
Exemption From Registration as an Exchange Under Section 5 of the
Securities Exchange Act
March 22, 1999.
I. Summary
Tradepoint Financial Networks plc (``Tradepoint'' or the
``Exchange'') operates as a securities exchange from facilities in
London under the marketing
[[Page 14954]]
name Tradepoint Stock Exchange. it is a Recognised Investment Exchange
under section 37(3) of the U.K. Financial Services Act 1986. The
Exchange does not have a physical trading floor; it is a screen-based
electronic market for the trading of securities (``Tradepoint
System''). All of the securities currently traded through the
Tradepoint System are listed on the London Stock Exchange (``LSE''),
which is the primary market for those securities.
By letter dated November 20, 1997, Tradepoint filed with the
Securities and Exchange Commission (``Commission''), pursuant to
Section 5 of the Securities Exchange Act of 1934 (``Exchange Act''), an
application for exemption from registration as a national securities
exchange under Section 6 of the Exchange Act if Tradepoint operates the
Tradepoint System in the United States. Tradepoint anticipates that the
Exchange will account for limited volume in trading of securities.\1\
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\1\ See Letter from Joseph S. Cohn, Davis Polk & Wardwell,
counsel for Tradepoint, to Jonathan G. Katz, Secretary, dated
November 20, 1997, available in the Commission's Public Reference
Room (File No. 10-126). On April 6, 1998, Tradepoint filed an
amendment to the filing. On June 30, 1998, Tradepoint filed a second
amendment to the filing. Both amendments are also available in the
Commission's Public Reference Room.
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The Commission published Tradepoint's application for comment on
July 2, 1998.\2\ In response, the Commission received eight comment
letters.\3\ Based on its conclusion that Tradepoint will effect a
limited volume of transactions and that it is practicable and not
necessary or appropriate in the public interest or for the protection
of investors for Tradepoint to register under Section 6 of the Exchange
Act, the Commission hereby grants Tradepoint's application for
exemption from registration as a national securities exchange.
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\2\ Exchange Act Release No. 40161 (July 2, 1998), 63 FR 37146
(July 9, 1998) (``Tradepoint Notice''). The file number originally
assigned to Tradepoint was 10-101. Tradepoint has been reassigned to
File No. 10-126.
\3\ Most commenters favored granting Tradepoint a low volume
exemption from exchange registration. The comment letters are
discussed in Section IV of this Order.
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II. Description of the Tradepoint System
The Exchange is an alternative market to the LSE. From its
facilities in London, the Exchange supplies automated trading services
to market-makers, broker-dealers and institutional investors
(collectively, ``Members'') on identical terms and conditions.
Potential Members must meet the eligibility requirements of the
Exchange.\4\ Status as a Member of the Exchange does not carry voting
rights or any other rights, other than the right to trade using the
Tradepoint System.\5\
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\4\ These requirements are set forth in Tradepoint Market Rule
3.4 (see Exhibit A(2)(b) of Tradepoint's application). Both U.S. and
non-U.S. applications must be authorized to conduct investment
business, have arranged for clearing arrangements with an Exchange
Clearing Member (a Member of the Exchange that is also a member of
the London Clearing House, as more fully described below), and meet
the standards of financial responsibility and operational capability
prescribed by the Exchange.
\5\ Tradepoint is listed on the Vancouver Stock Exchange and on
the Alternative Investment Market of the LSE. The Exchange is a
publicly held, for-profit company.
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The Tradepoint System provides to Exchange Members an electronic,
order-driven market that handles order entry and management,
information display, matching, execution, and immediate trade
publication and settlement message routing for certain securities
listed on the LSE.\6\ Members are able to access the current market
position in any security traded on the Exchange, monitor selected
market information provided by the Exchange on a real time basis; enter
or revise orders; send orders to the instant auction or periodic
auction books for execution;\7\ set up, access, and request trading and
market reports; and input settlement routing instructions. In addition
to these functions, the Exchange also supports order processing and
management of the order book, order book display and updating,
maintenance of individual trading status books, maintenance and
updating of individual stock watch lists, and market supervision,
surveillance and compliance. Most of these functions are controlled by
the Exchange, but allow for some customization by the Member.
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\6\ Tradepoint does not list securities; it offers trading only
in securities listed on other exchanges.
\7\ The Exchange operates two types of auctions: instant and
periodic. A security may be traded in either an instant auction or a
periodic auction, but not both. In the instant auction, orders are
matched electronically, in full or in part. Execution is automatic
and continuous. Thus, a Member's orders are executed as soon as a
contra-side order reaches the order book. The periodic auction is
used for smaller capitalization and infrequently traded securities.
It allows orders for these securities to accumulate over a period of
time at the end of which the central computer matches qualifying buy
and sell orders at a ``balance price.'' See Section II of the
Tradepoint Notice for a more complete description of the periodic
auction.
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The Exchange maintains an electronic order book for each traded
security, with Members entering bids or offers directly into the
Tradepoint System. Orders with the same bid or offer price are
prioritized according to the time they are entered into the Tradepoint
System. The minimum display size for any order is 1,000 shares. The
Exchange does not provide a facility for ``reserve'' orders. A Member
may have software that controls sending an order, however, so that if a
Member wishes to sell 10,000 shares in 1,000 share increments, the
Member's software will route the next increment to the Exchange after
the previous increment is executed. Newly routed orders are then placed
at the end of the queue for time priority. The Tradepoint System is
completely anonymous.\8\
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\8\ The Tradepoint Notice stated that the names of Members were
revealed upon clearance and settlement. This is not the case. The
names of Members are not revealed to each other at any point in the
trading process.
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Members of the Exchange are also able to enter ``cross trades.''
Cross trades are trades between two customers of the same firm at a
price between the bid and offer. To effect a cross trade, a Member will
simultaneously enter a bid and an offer for a security, which will
match after exposure to the electronic order book.\9\ Thus, if there is
no other superior price on the book, a cross trade will be entered into
the Tradepoint System by the firm essentially for reporting purposes.
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\9\ If there is a bid or an offer on the Exchange's book that
matches either side of the cross trade, however, that bid or offer
will have priority over the bid or offer that is part of the cross,
and will receive execution. As a result some portion of that side of
the trade will be left on the Exchange's book.
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In addition, the Exchange may create a ``specialist'' capability
for some of the stocks traded on the Exchange. The Exchange would enter
into an arrangement with a specific Member (``Committed Liquidity
Provider'' or ``CLP''), who would commit to providing liquidity with
respect to a particular security. The CLP would function in a manner
similar to that of a specialist on a U.S. exchange. The CLP's orders
would be subject to the same price and time priorities as other system
orders. As payment, the CLP would receive a percentage of the
Exchange's net transaction fees resulting from execution of the orders
entered by the CLP.
In order for a Member to access the Tradepoint System, he or she
must have a Personal Identification Number, which is assigned by the
Exchange.\10\ Access to the Tradepoint System in the United Kingdom is
currently available through an internal network of personal computers
via a stand alone PC, through a separate application on an existing
Reuters RT terminal, ICV-Topic 3 Trader workstation, through a Liberty
InterTrade Direct Screen, or through a
[[Page 14955]]
Bloomberg terminal. Access to the Tradepoint System in the United
States will be either through a Bloomberg terminal or through a direct
connection to the Exchange through an existing global private data
network operator. In the future, the Exchange's screens may be
accessible from other distributors of information services as well.
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\10\ All individuals who have access to the Tradepoint System
must have completed training from representatives of the Exchange in
the use of the Tradepoint System.
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All trades executed on the Exchange must be registered with the
London Clearing House (``LCH'') for clearances and settlement through
CREST \11\ (with the exception of cross trades, which are settled as
described below).\12\ All Members (including U.S. Members)\13\ must
either be a member of the LCH (``Clearing Member'') or have entered
into a direct or indirect clearing arrangement with a Clearing Member
(``Non-Clearing Member''). It is expected that U.S. Members will be
Non-Clearing Members. Cross trades are settled directly through CREST
by the Member that entered the trade (or by a sponsor of the Member
that is a member of CREST). The LCH is not involved in the clearance
and settlement of cross trades.
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\11\ The CREST system is operated by CRESTCo Limited, a
corporation incorporated in England under the Companies Act of 1985.
CRESTCo Limited was established by the Bank of England to provide
facilities for the settlement of U.K. equity transactions in
uncertificated form.
\12\ After a trade is registered with the LCH, the LCH becomes
the counterparty to both sides of that trade, guaranteeing
settlement.
\13\ A U.S. Members is Member who is accessing the Tradepoint
System from within the U.S.
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The settlement cycle in the U.K. is five business days, as opposed
to three in the United States. U.S. Members' trades will not settle on
the normal. U.S. cycle, but on the U.K. cycle.
III. Trading by U.S. Members
The Exchange will permit U.S. persons to become Members in
accordance with its normal business procedures.\14\ To comply with the
U.S. securities laws, however, the Exchange will offer two different
levels of service--one for all U.S. Members (``Public Market'') and one
limited to U.S. Members who are ``qualified institutional buyers''
(``QIBs'') as defined in Rule 144A under the Securities Act of 1933
\15\ (``Securities Act'') (as may be amended from time to time),
international agencies, and non-U.S. persons (within the meaning of
Regulation S).\16\ Bids and offers in U.K. securities registered under
the Exchange Act, either in American Depositary Receipt (``ADR'') form
or in ordinary share form, will be available in the Public Market; bids
and offers in those securities that are not registered under the
Exchange Act will be available only to QIBs, non-U.S. persons, and
international agencies (``QIB Market''). U.S. Members in the QIB Market
will be required to resell any securities purchased on the Exchange
through the Exchange or outside the United States. Such resales will be
limited to other QIBs, international agencies, and non-U.S.
persons.\17\
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\14\ The Exchange's rules for participation are set forth in
Tradepoint Market Rules 3.4.1 and 3.4.2. The standards are
objective, considering such factors as regulatory status and
capital. The Commission expects that Tradepoint will admit
applicants fairly based on these standards. A discriminatory denial
of access to Tradepoint would constitute grounds for withdrawal of
this Order. As a condition of the order, Tradepoint will be
providing the Commission with a list of U.S. applicants who have
been denied access to the Tradepoint System on a quarterly basis.
\15\ 17 CFR 230.144A.
\16\ A ``non-U.S. person'' within the meaning of Regulation S
may include a U.S. broker-dealer that is acting as agent for an
account held for the benefit of a non-U.S. person. This broker-
dealer, when acting in its capacity as agent for this type of
account, would have access to Tradepoint's QIB Market. The same
broker-dealer may have accounts held for the benefit of U.S. persons
as well. Such a broker-dealer would not be permitted to effect
trades in the QIB Market for these accounts (unless the owners of
those accounts are QIBs), or for its own proprietary account (unless
it is a QIB).
\17\ The Exchange generally will not provide access to U.S.
Members to securities for which there is a U.S. transfer agent or
that are eligible for deposit at a registered clearing agency. U.S.
Members may have access to such securities, however, if the annual
trading volume in the U.S. of such securities is less than ten
percent of the securities' annual worldwide trading volume.
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Other than these restrictions, U.S. Members will trade on the
Exchange under the same terms as non-U.S. Members. U.S. Members will
also trade on the Exchange during London business hours.\18\ In
addition, U.S. Members will be subject to the same fees as all other
Members.\19\
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\18\ The Exchange will be available to U.S. Members from 7:30
a.m. to 5:30 p.m. London time (2:30 a.m. to 12:30 p.m. Eastern
standard time).
\19\ See Exhibit N, Sections 4 and 6, of Tradepoint's Form 1
filing for the specific fees charged by the Exchange.
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IV. Comments
In response to the Tradepoint Notice, the Commission received eight
comment letters.\20\ In general, the commenters favored Tradepoint's
application, stating that it will provide investors in the U.S. with
greater opportunities to invest in foreign securities. A number of
commenters stated that the Tradepoint System would enable broker-
dealers in the U.S. to compete on equal footing with foreign broker-
dealers with respect to trades in U.K. securities.\21\ Commenters also
stated that Tradepoint would reduce the costs of trading for investors,
thereby increasing shareholder return.\22\ In addition, commenters
stated that making Tradepoint available to U.S. investors would
increase transparency.\23\ As further discussed below, only one
commenter, the NYSE, objected to Tradepoint's application.\24\
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\20\ See letters from: New York Stock Exchange, Inc. (``NYSE'')
dated August 10, 1998; Joan C. Conley, Corporate Secretary, National
Association of Securities Dealers, Inc. (``NASD'') dated August 10,
1998 (in reference to File No. S7-12-98); Professor Anthony
Neuberger, London Business School dated July 9, 1998; Robin
Fellgett, Deputy Director, HM Treasury (``Treasury'') dated July 10,
1998; John Packett, Director, Union Securities (International) Ltd.
(``Union) dated July 21, 1998; Kevin M. Foley, Bloomberg L.P.
(``Bloomberg'') dated August 10, 1998; Steve Klein, Director of
Global Equity Trading, American Century Investment Management
(``ACIM'') dated August 3, 1998; and Benn Steil dated July 17, 1998.
All of the letters are contained in Public File No. 10-126 in the
Commission's Public Reference Room. The staff has also prepared a
summary of comments which can be found in the file.
\21\ Bloomberg Letter at 1; Treasury Letter at 1; Steil Letter
at 1; Neuberger Letter at 1.
\22\ See Steil Letter 1 (commenting that the Tradepoint system
is a ``low-cost non-intermediated'' vehicle through which U.S.
investors can trade U.K. equities, and stating that the availability
of direct access electronic trading methods will enable fund
managers to reduce trading costs considerably, resulting in
increased return for fundholders); ACIM Letter at 1-2 (stating that
it has supported and encouraged the creation of low-cost trading
alternatives driven by evolving technological changes; that
Tradepoint will provide a welcome alternative to traditional trading
systems in the U.K.; and that Tradepoint's ability to succeed has
been hampered by the ``entrenched conservatism of local U.K. dealing
practices combined with regulatory impediments to the expansion of a
U.S. customer base''; also stating that it believes Tradepoint
offers investors the benefit of direct, anonymous electronic access
to a central limit order book in U.K. stocks with zero cost, apart
from clearing fees, to the initiator of a bid or offer). See also
Union Letter at 1 (stating that settlement guarantees by the London
Clearing House minimize counterparty risk; noting that trades on the
LSE currently carry no guarantees other than that of the broker;
citing the fact that orders may be posted on the Tradepoint system
anonymously; and stating that the Tradepoint system provides a lower
cost alternative for U.S. investors to trade in U.K. securities); HM
Letter at 1 (stating that it favors Tradepoint's application for
exemption from registration under Section 5, and stating that
Tradepoint's application is an example of the ``potential benefits
to investors and financial intermediaries from opening up the
provision of exchange services to international operators'');
Bloomberg Letter at 1 (stating that Tradepoint will provide U.S.
broker-dealers with lower cost U.K. equity trading on behalf of
their investor clients).
\23\ Neuberger Letter at 1 (supporting Tradepoint's application
because Tradepoint offers investors the opportunity to deal directly
with the rest of the market by putting orders in at will and
managing them over time; and stating that Tradepoint is a
transparent market because all investors have access to the same
information). See also Union Letter at 1 (stating that the
Tradepoint system is transparent because most major U.K.
institutions have access to Tradepoint's market display).
\24\ See infra Sections IV.C and IV.D. for a discussion of the
NYSE's comments.
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One commenter stated that, although he strongly supports
Tradepoint's application for exemption from registration, he believes
that the low volume basis for exemption provided by Section 5 of the
Exchange Act is
[[Page 14956]]
fundamentally flawed in that a less liquid exchange, for that reason
alone, does not provide investors better protection than a more liquid
exchange.\25\
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\25\ Steil Letter at 2. The Commission notes that the only
statutory basis for granting an exemption from registration as a
national securities exchange under Section 5 is low volume. The
Commission has adopted new rules permitting, among other things,
alternative trading systems to register as broker-dealers or as
exchanges. See Exchange Act Release No. 40760 (Dec. 8, 1998), 63 FR
70844 (December 22, 1998) (``Regulation ATS Adopting Release'').
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ACIM also questioned whether, in a broader sense, exemption under
Section 5 is the optimum way for the Commission to balance its
regulatory responsibilities with respect to investor protection against
the benefits of innovation, competition, and lower costs.\26\ ACIM
stated that in theory, the more attractive the benefits of trading on
Tradepoint, the more likely it is that an unanticipated number of
investors will trade on the exchange, thus jeopardizing its low volume
exception.\27\
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\26\ ACIM Letter at 2.
\27\ ACIM Letter at 2.
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Only the NASD directly addressed whether the volume levels the
Commission proposed as the threshold for the low volume exemption were
appropriate.\28\ While the NASD stated that it is in favor of a low
volume exemption for Tradepoint, it also noted that the Commission may
be creating incentives for U.S. exchanges to create subsidiaries abroad
to conduct activity in the U.S. through the low volume exemption.\29\
The NASD also stated that it believes granting Tradepoint's application
would pave the way for a U.S. market ``to create an OTC Bulletin Board
to publish quotations from NASD members, on a real-time basis, in
unregistered foreign securities in another jurisdiction.'' \30\
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\28\ The NASD stated that it believes ``the volume levels that
the Commission proposed as the thresholds for the exemption are
appropriate.'' NASD Letter at 9. The NASD Letter also expresses the
views of NASD's subsidiaries, NASD Regulation, Inc. and The Nasdaq
Stock Market, Inc.
\29\ NASD Letter at 9.
\30\ NASD Letter at 9.
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The Commission believes that an exchange operated offshore but
targeting U.S. persons, which is owned or controlled, directly or
indirectly, through a financial interest or otherwise, by a U.S.
national securities exchange or national securities association, would
be considered a U.S. market operated by an SRO. As such, it would be
subject to Commission oversight. The Commission notes that Tradepoint,
as a condition to this Order, has agreed that it is subject to the
Commission's jurisdiction.
V. Limited Volume Exemption
Section 5 of the Exchange Act requires that all exchanges subject
to the jurisdiction of the United States either register with the
Commission as a national securities exchange or obtain a Commission
exemption from that requirement.\31\ Section 5 authorizes the
Commission to grant an exemption from registration if the Commission
finds that, ``by reason of the limited volume of transactions affected
[the] exchange, it is not practicable and not necessary or appropriate
in the public interest for the protection of investors'' to require
such registration.\32\
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\31\ 15 U.S.C. 78e (1988).
\32\ Id.
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In the last sixty years, the Commission has granted one of the
exemption from registration as a national securities exchange on the
basis of low volume of the Arizona Stock Exchange (``AZX'').\33\ In its
order granting a limited volume exemption from registration as an
exchange to AZX,\34\ the Commission used the volume levels of the fully
regulated national securities exchanges at that time as the benchmark
for low volume for AZX.\35\ Consequently, AZX's exemption order was
conditioned upon its volume staying below that of the national
securities exchange with the lowest average daily trading volume.\36\
AZX's trading is also limited to securities registered under the
Exchange Act \37\ that were also traded on registered U.S. exchanges or
Nasdaq.
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\33\ See Exchange Act Release No. 28899 (Feb. 20, 1991), 56 FR
8377 (February 28, 1991) (``AZX Release''). AZX was originally named
Wunsch Auction Systems, Inc.
\34\ See AZX Release at note 33.
\35\ Id.
\36\ For calendar year 1990, this was the Cincinnati Stock
Exchange (``CSE''). In 1990 the CSE's average daily trading volume,
expressed in shares, was 1,238,241. In 1996, AZX's volume threshold
was increased to 5,965,346 shares, which was the average daily
trading volume of shares traded on the Philadelphia Stock Exchange
(``Phlx'') in 1995, the Phlx was the national securities exchange
with the lowest average daily trading volume.
\37\ As a condition to AZX's limited volume exemption, the
Commission required ``the effective registration of any security
traded on [AZX] under sections 12(b) or 12(g) of the Act, or the
provision of information with respect to the security pursuant to
section 15(d) of the Act, or an exemption from registration because
the security is a `government security' as defined in section
3(a)(42)(A), (B), or (C) of the Act.''
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VI. Tradepoint Exemption
The Commission agrees with the majority of commenters that
permitting the Exchange to operate in the U.S. on a low volume basis
would provide U.S. investors with greater opportunities to invest in
foreign securities. By providing direct access, the Exchange offers
U.S. investors a lower cost trading alternative. As one commenter
stated, Tradepoint offers investors an excellent low-cost non-
intermediated mechanism for trading U.K. stocks.\38\ Moreover, the
Commission believes that given Tradepoint's limited size, it would be
unnecessary to compel Tradepoint to satisfy all of the regulatory
requirements imposed upon registered national securities exchanges
under the Exchange Act. For example, if Tradepoint were to register as
a national securities exchange under the Exchange Act, it would be
required to become a self-regulatory organization, to file copies of
proposed rules with the Commission for approval or disapproval,\39\ to
allow only broker-dealers to become members, and to trade only
registered securities.\40\ Because Tradepoint is regulated in the U.K.
as an exchange, requiring Tradepoint to comply with the U.K. and U.S.
regulation of exchanges might, at times, be inconsistent. In light of
Tradepoint's anticipated limited volume of trading in the U.S., the
Commission believes it would be impracticable and unnecessary to
require Tradepoint to comply with all the requirements applicable to
national securities exchanges. At the same time, the Commission is
concerned with affording U.S. investors who use the Exchange with
sufficient protection. Consequently, the Commission is imposing
conditions in exempting Tradepoint from registration as a national
securities exchange.
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\38\ Steil letter at 1.
\39\ Section 19(b)(1) of the Exchange Act, 15 U.S.C. 78s(b)(1).
\40\ Tradepoint's Members currently are both broker-dealers and
institutions. Under Section 6 of the Exchange Act, registered
exchanges may have only broker-dealer members. See Regulations ATS
Adopting Release, supra note 25, at notes 363-374 and accompanying
text.
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A. Volume Level
Trading volume in the United States is generally measured in number
of shares. In the United Kingdom, the monetary value of trading is the
common measure of a securities transaction and of overall market
activity.\41\ In the U.K., share prices are roughly one-seventh of what
they are in the U.S. for a comparable security.\42\
[[Page 14957]]
This difference in share price is also reflected in the trading ADRs in
this country, where each ADR is generally a multiple of the ordinary
shares that are traded on the LSE.\43\
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\41\ According to the Exchange, commissions in the United
Kingdom are also based on a percentage of the share price, rather
than on the number of shares purchased.
\42\ In 1990, when AZX was granted an exemption, the average
daily volume of all regional stock exchanges was 24.5 million shares
and the average price of shares traded was $28.51. In 1997, the
average daily volume of all regional stock exchanges was 59.2
million shares and the average price of shares traded was $42.20. In
1997, the average daily volume on the LSE was 1.1 billion shares and
the average price of shares traded was $6.04.
\43\ For example, British Airways PLC (``BAB'') is traded on the
New York Stock Exchange (``NYE'') in ADR form. The ADR ratio for BAB
is 1:10; thus, each ADR is equivalent to ten ordinary shares. Glaxo
Wellcome PLC (``GLX'') is also traded on the NYSE in ADR form. The
ADR ratio for GLX is 1:2. SmithKline Beecham PLC (``SBH'') is also
traded on the NYSE in ADR form. the ADR ratio for SBH is 1:5. These
securities will all be available for trading through the Exchange in
their ordinary share form in the U.S.
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In order to adjust for these factors, the Commission is granting
the Exchange's application for exemption from exchange registration,
using dollar value as a benchmark for volume, rather than average daily
number of shares traded. This will permit the Exchange to operate in
the U.S. under a benchmark which more appropriately reflects the
difference in dollar value between U.S. and U.K. markets, and the
difference in the way trading is measured in the U.K.
In addition, the Commission believes that it is appropriate to
grant a low volume exemption only to an exchange that is a low volume
exchange in its home country. The Commission believes that a U.S.
limited volume exchange should not be owned, directly or indirectly, by
a foreign exchange that has a significant market share in its home
country. In 1997, LSE volume was 1.1 billion shares. The Exchange's
volume was 3.1 million shares, significantly less than one percent of
the LSE's average daily volume. The Commission is therefore
conditioning the Exchange's operation in the U.S. upon it remaining a
low volume exchange in the U.K.
Under the exemption, the Exchange will be exempt so long as:
(i) The average daily dollar value of trades (measured on a
quarterly basis) involving a U.S. Member does not exceed $40 million;
\44\ and
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\44\ The average price of shares traded on all regional changes
in 1997 was $42.20. Thus, $40 million is equivalent to significantly
less than 1.2 million shares a day, which was the original volume
limitation placed on AZX.
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(ii) Its worldwide average daily volume (measured on a quarterly
basis) does not exceed ten percent of the average daily volume of the
LSE.
The limitation on the Exchange's worldwide trading volume would
ensure that the Commission could reevaluate the appropriateness of the
low volume exemption should the Exchange achieve significant volume
relative to the LSE.
B. QIB Access to Unregistered Securities
As noted above, under the terms of the Older the Commission is
issuing today, Tradepoint will operate a QIB Market in the U.S.
consisting of U.K. securities not registered under the Exchange
Act.\45\ Only QIBs, non-U.S. persons, and international agencies will
have access to the screens displaying quotations in these securities,
and securities purchased in the QIB Market must be resold through the
Tradepoint QIB Market or otherwise outside the U.S. These conditions
are designed to ensure that a public market does not develop in the
U.S. in these unregistered securities. In its comment letter, the NYSE
stated that it believes that any securities traded in the QIB Market
should be limited to Rule 144A securities.\46\ The NYSE stated that it
believes that the Commission ``limited private trading systems to Rule
144A securities in order to prevent the establishment of a semi-public
market in unrestricted, but unregistered, foreign securities'' and that
absent an articulation by the Commission of a change in policy in this
area, the QIB Market should be limited to Rule 144A securities.\47\
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\45\ As of September 23, 1998, according to the Exchange, 75
securities whose issuers also have securities registered in the
United States traded on Tradepoint. This number may change in the
future, as issuers' registration status under the Exchange Act
changes. As a condition to this Order, the Exchange is required to
inform the Commission of any changes in the registration status of
the securities it trades. As described above, the registration
status of a given security under the Securities Act and under the
Exchange Act has an effect on how it will be traded through the
Tradepoint System in the U.S.
\46\ ``Rule 144A securities'' are securities that have been sold
by an issuer pursuant to a private offering exemption under the
Securities Act and are eligible for resale under Securities Act Rule
144A.
\47\ ?????
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Tradepoint is not a system designed to trade Rule 144A or other
types of ``restricted'' securities under the Securities Act. Rather, it
is a system designed to trade securities that are freely tradable under
the Securities Act but some of which are not registered under the
Exchange Act. The Commission is imposing a number of requirements on
that portion of the Tradepoint System through which foreign securities
that are not registered under the Exchange Act will trade in order to
assure against the establishment of a U.S. public market in those
securities.
The Commission's approval in allowing Tradepoint to operate a
closed QIB-only market in foreign securities that are not registered
under the Exchange Act is premised on Tradepoint's continuing to
qualify for the limited volume exemption from exchange registration as
described in this Order. Were that exemption not available, and were
Tradepoint therefore required to register as a national securities
exchange, Tradepoint would not be permitted to trade unregistered
foreign securities, whether in a QIB-only market or otherwise.
C. Dissemination of Quotation and Last Sale Information
In its comment letter, the NYSE also stated that it believes that
Tradepoint must be required to disseminate quotation and last sale
information for all registered Tradepoint securities that trade in the
U.S. public market.\48\ The NYSE noted that the 64 \49\ Tradepoint
securities that are traded in ADR form in the U.S. should be subject to
Rules 11Aa3-1 \50\ (``Last Sale Reporting Rule'') and 11Ac1-1 \51\
(``Firm Quote Rule'') under the Exchange Act. In the NYSE's view, if
the Commission required Tradepoint to register as a national securities
exchange, it would be subject to these rules with respect to the
registered securities. The NYSE stated that it did not believe that if
Tradepoint registered as a national securities exchange the fact that
ADRs publicly traded in the U.S. are not fungible with the securities
in the Tradepoint System and that Tradepoint securities are traded and
quoted in pence, while the ADRs are traded and quoted in dollars, would
be sufficient to exempt the Exchange from the Firm Quote and last Sale
Reporting Rules.\52\
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\48\ NYSE Letter at 2-3.
\49\ In its comment letter, the NYSE stated that 64 securities
traded on Tradepoint also trade in the U.S. in ADR form. Tradepoint
believes 75 securities are currently traded on Tradepoint whose
issuers also have securities registered in the U.S. Some of these
securities may be traded in ordinary share form in the U.S., which
may explain the discrepancy between the numbers provided by
Tradepoint and by the NYSE.
\50\ 17 CFR 240.11Aa3-1.
\51\ 17 CFR 204.11Ac1-1
\52\ NYSE Letter at 2.
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The Last Sale Reporting Rule requires registered national
securities exchanges and associations to report transaction prices and
volumes for listed equity and Nasdaq securities that trade in their
markets. Similarly, the Firm Quote Rule requires registered national
securities exchanges and associations to collect and disseminate
quotation information for listed equity and Nasdaq securities that
trade in their markets. By their terms, these rules do not apply to
Tradepoint, if exempted, because the Last Sale Reporting Rule and the
Firm Quote Rule apply only to registered national securities exchanges,
not to
[[Page 14958]]
exempt exchanges.\53\ In addition, requiring Tradepoint to report to
the Consolidated Tape is impracticable. Prices on Tradepoint are quoted
in decimals and in pence. Moreover, Tradepoint operates between the
hours of 2:30 a.m. and 12:30 p.m. Eastern standard time; during much of
this time, the Consolidated Tape is not operating.
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\53\ In the order granting AZX a limited volume exemption, the
Commission noted that there was no real-time transaction reporting
service, including the Consolidated Tape Association and Nasdaq,
available to systems that trade outside the NYSE's normal trading
hours. Exchange Act Release No. 28899 (February 20, 1991), 56 FR
8377 (February 28, 1991). In addition, the Commission notes that
Tradepoint will not be trading ``covered'' securities within the
meaning of the Firm Quote Rule.
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The Commission agrees, however, that it is important that
transaction information be available to investors and the public.
Tradepoint currently disseminates transaction volume and price
information via its internet website. Tradepoint has agreed to update
this information every twenty minutes. There is no charge to access the
site.\54\ In addition, Tradepoint's trading information will be
available via Bloomberg and Reuters to all subscribers of subscribers
of those vendors on a real-time basis.\55\
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\54\ Prior to filing its application for exemption from
registration with the Commission, Tradepoint updated this
information on an hourly basis. Because U.S. exchanges generally
provide this information without charge on a twenty minute delayed
basis, Tradepoint agreed to modify its dissemination practices to
more closely reflect those of U.S. exchanges. Tradepoint's website
address is http://www.tradepoint.co.uk>.
\55\ Like U.S. market centers, Tradepoint charges a fee for
real-time trade dissemination. Tradepoint has represented to the
Commission that it will make its trading information available in
real-time to any entity for a reasonable, non-discriminatory fee.
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D. Other Conditions
The Commission is also imposing other conditions on the Exchange
beyond the low volume requirements discussed above. In considering for
the first time a foreign exchange's operation in the United States, the
Commission has considered both the need to protect U.S. investors and
the interest of U.S. investors in gaining direct access to a foreign
market. The Commission believes that when a foreign market seeks to
operate in the United States--either as a registered exchange or
pursuant to a limited volume exemption under Section 5 of the Exchange
Act--that market must agree to comply with key provisions of the
federal securities laws. When Tradepoint initially applied for an
exemption last year, both its market rules and its member agreement
included English Choice of law and choice of forum (arbitration in
England) clauses. Under those provisions, a U.S. Member effectively
would have waived its rights and protections under the federal
securities laws. Such an outcome would have been inconsistent with
investor protection, the public interest, and Section 29(a) of the
Exchange Act, which provides: ``any condition, stipulation, or
provision binding any person to Waive compliance with any provision of
this title or of any rule or regulation thereunder, or of any rule of
an exchange required thereby shall be void.'' \56\
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\56\ 15 U.S.C. 78cc(a).
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Accordingly, as a condition to the Commission's approval of
Tradepoint's application, Tradepoint has agreed to amend its market
rules and member agreement to include provisions that expressly
preserve a U.S. Member's anti-fraud protections under the federal
securities laws. All Tradepoint Members must agree to honor these
provisions. In particular, Tradepoint's market rules and member
agreement must make clear that, notwithstanding any other provision or
rule, a court or tribunal with jurisdiction over any dispute arising
out of or in connection with a transaction made on the Exchange shall
apply the U.S. federal securities law statutes to any cause of action
based upon fraudulent acts or omissions that either (a) occurred in the
United States or (b) resulted in damages suffered in the United States.
For example, a U.S. Member entering an order or executing a trade on
Tradepoint would satisfy this requirement. It is the Commission's
intention and expectation that these provisions will apply to U.S.
Members and U.S. investors involved in or affected by a transaction
that takes place over the Exchange, as well as to any other Member or
person who is involved in or affected by such a transaction. THe ``U.S.
federal securities laws'' include the statutes the Commission
administers, the rules and regulations promulgated under such statutes,
and Commission and judicial decisions applying and interpreting those
statutes. Thus, what constitutes a ``fraudulent act or omission'' is
determined by looking to Commission and Judicial decisions.
Invoking these provisions will require an allegation that a
fraudulent act or omission has taken place, at least in part, in the
U.S., or that damages occurred (i.e., effects were felt) in the U.S.
Such a claim could involve Members, investors, or the Exchange itself.
For example, if a U.S. Member enters an order on Tradepoint on behalf
of a customer based on oral, written, or electronic information the
U.S. Member or customer alleges was misleading, either the U.S. Member
or investor could invoke the market rules to preserve fraud claims
under the federal securities laws.
Although the Exchange's market rules and member agreement require
members to arbitrate their disputes in England, the Commission believes
and expects that English arbitrators and courts will follow the above
requirements and interpret and apply the U.S. federal securities laws
as defined above. The Commission will monitor any litigation under this
condition and reserves the right to modify or withdraw Tradepoint's
exemption from exchange registration.
Other conditions will allow the Commission to monitor the Exchange
for compliance with all applicable sections of the Securities Act and
the Exchange Act (such as the anti-fraud and securities registration
provisions), and will ensure that the Commission has access to books,
records, and personnel of the Exchange should the need arise.\57\
Specifically, the Commission is requiring the Exchange to keep and
provide the following to the Commission upon request as a condition on
the operation of the Exchange in the U.S.
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\57\ The Commission is exempting the Exchange from Rules 6a-1,
6a-2, 6a-3 and 24b-1 under the Exchange Act. Rules 6a-1, 6a-2 and
6a-3 set froth the procedures regarding amendments and supplemental
material exchanges must file. Essentially the same information
required by these rules will be provided to the Commission by the
Exchange under the other conditions. To require the Exchange to
comply with these rules would be duplicative, and would not result
in the Commission receiving the material in as useful a form as
proposed under the conditions set forth here.
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(a) Daily summaries of trading and time-sequenced records of each
transaction involving a U.S. Member;
(b) Information disseminated to U.S. Members, such as quotation and
transaction information regarding securities traded through the
Tradepoint System, as well as market notices to Members and other
communications (such as to the trading hours);
(c) Daily pound and the equivalent dollar value of transactions,
and daily share volume of business transacted through the Tradepoint
System (separately for orders entered by non-U.S. and U.S. Members, and
in the aggregate);
(d) A list of securities for which U.S. orders are accepted; and
(e) Copies of Member applications and standards for admission to
the Exchange.
The Exchange will also be required to provide 30 days prior notice
to the
[[Page 14959]]
Commission of any material changes in the operation of the Tradepoint
System. The Exchange will also provide the Commission with direct
access to real-time quotes and trading information.
Furthermore, the Exchange will supply to the Commission on a
quarterly basis within 30 days of the end of each quarter:
(a) Total volume and average daily volume of transactions effected
through the system during the period and year-to-date aggregates of
these numbers, expressed in:
(i) Number of units of securities (for transactions in common
stock, number of ordinary shares; for transactions in securities other
than stock, other appropriate commonly used measure of value of such
securities);
(ii) Number of transactions; and
(iii) Monetary value (for transactions in common stock, pound value
and equivalent dollar value; for transactions in securities other than
stock, other appropriate commonly used measure of value of such
securities and equivalent dollar value); and
(b) Records regarding the identity of U.S. Members in the
Tradepoint System and the identity of those denied participation in the
Tradepoint System and the reason for such denial, as well as a
description of the reason for terminating a former U.S. Member's
ability to use the Tradepoint System.
The Exchange will be required to provide separate unit,
transaction, and monetary volume and average daily volume information
for the period covered by the report reflecting:
(a) Tradepoint System activity in securities involving a U.S.
Member and;
(b) Tradepoint System activity in securities not involving a U.S.
Member.
The primary market and hours for each type of security will also be
identified.
The Exchange will also adopt and implement procedures to conduct
surveillance of trading by Exchange employees and requirements to
ensure the non-disclosure of confidential information in the possession
of Exchange employees.\58\ In addition, in response to regulatory
trading halts on U.S. markets, the Exchange will be required to either
suspend trading on the Tradepoint System for U.S. Members or consult
with the Commission with respect to a possible suspension of trading.
As a condition to the exemption granted by this Order, Tradepoint must
cooperate with any investigation in connection with trading on the
Tradepoint System conducted by the Commission, including allowing
Commission staff access to the facilities, books and records and other
documents, as well as employees for interviews, and it will provide the
Commission with any requested information (including documents) in
connection with trading on the Tradepoint System. The Exchange will
also be required to maintain an agent for service of process in the
U.S. at all times that the Exchange is offering its services in the
U.S.
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\58\ The Commission notes that Tradepoint already has such
procedures in place.
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The Exchange will adopt any necessary rule changes to conform its
market rules and member agreement to the requirements, conditions, and
language of this Order. An express condition of the Commission's
approval is that the Exchange will have the capacity to enforce
compliance by its Members with the rules of the Exchange with respect
to the terms and conditions of this Order.
Finally, the Exchange will disclose to its U.S. Members, either by
broadcasting over the Tradepoint System, or through such other means as
it normally communicates with its Members, information regarding the
trading priorities of the Exchange and the response time of orders
entered into the Tradepoint System by U.S. Members as compared to the
response time of orders entered by European or other non-U.S. Members.
In addition, the Exchange will be required to disclose that the nature
and timeliness of pre-trade and post-trade information provided by the
Exchange differs from that provided by U.S. registered securities
exchanges. Such information will include: (1) Notification that trades
executed through the Exchange are not reported to the U.S. Consolidated
Tape; (2) a description of clearance and settlement procedures and
disclosure that the time for clearance and settlement under U.K. law is
the date of the transaction plus five business days, as compared to
three business days under U.S. law; and (3) disclosure of any
Tradepoint System limitations affecting capacity to disseminate timely
information or to handle Members' orders during peak or other
periods.\59\ The Exchange will also disclose to its U.S. Members risks
that may arise due to capacity problems of the Tradepoint System.
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\59\ U.S. broker-dealers trading on behalf of U.S. customers
should disclose to those customers any additional risks in executing
customer orders for U.K. securities on Tradepoint, including the
effects of Tradepoint's choice of law and forum clauses. Any U.S.
Member entering orders in the Tradepoint System for the accounts of
others may be required to register with the Commission as a broker-
dealer unless an exception or exemption applies.
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This Order is subject to amendment if the Exchange offers trading
in securities listed on any market (in the U.K. or otherwise) other
than the LSE. The Exchange will also be required to continue to operate
at all times in accordance with all applicable U.K. laws.
No provision contained in this Order or in any other agreement or
document, nor any actions taken pursuant to them, shall be construed to
affect or limit, or shall affect or limit, any right or responsibility
of the Commission to take any action under the federal securities laws.
The Commission's assessment of the impact of the trading of
unregistered securities (i.e., of both domestic and foreign issuers),
and of the appropriate regulatory posture to these developments, is
still ongoing. This issue, and the broader issues involving recent
trends and initiatives that give U.S. investors greater and more
instantaneous access to foreign securities markets, create tensions
between competing Commission goals. The Commission, for example, wishes
to foster developments that enable U.S. investors to execute securities
trades more efficiently, but also desires that foreign securities
traded in U.S. markets have full and fair disclosure. These tensions
and issues will continue to be addressed by the Commission in the
future, including issues raised by exempt exchanges such as Tradepoint,
as well as alternative trading systems.
In light of the limited volume of trading anticipated to be done on
the Exchange, and in the view of the regulatory protections over system
activity that are either currently in place or that will be imposed by
the Commission upon the Exchange in the form of conditions upon this
exemption, the Commission finds that it is not practicable and not
necessary or appropriate in the public interest or for the protection
of investors to require Tradepoint to register as a national securities
exchange.
VII. Conclusion
The Commission has reviewed Tradepoint's application for exemption
from registration as a national securities exchange.
It is therefore ordered, pursuant to Section 5 of the Exchange Act,
that Tradepoint's exemption from registration as a national securities
exchange be granted, subject to the conditions contained in this Order.
By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-7542 Filed 3-26-99; 8:45 am]
BILLING CODE 8010-01-M
