[Federal Register Volume 64, Number 62 (Thursday, April 1, 1999)]
[Notices]
[Pages 15857-15866]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-8061]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-41210; File No. SR-Phlx-96-14]
Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.;
Order Approving Proposed Rule Change and Notice of Filing and Order
Granting Accelerated Approval to Amendment Nos. 3 and 4 to Proposed
Rule Change Relating to the Establishment of a Daily Pre-Opening
Session for the Matching of Orders at the Volume Weighted Average Price
March 24, 1999.
I. Introduction
On April 29, 1996, the Philadelphia Stock Exchange, Inc.
(``Exchange'' or ``Phlx'') submitted to the Securities and Exchange
Commission (``Commission''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act'')\1\ and Rule 19b-4
thereunder,\2\ a proposed rule change that would establish a daily pre-
opening order matching session (``Session'') for the execution of
large-sized stock orders at the volume weighted average price
(``VWAPTM'').\3\ The Session would be conducted through the
VWAP Trading System (``VTSTM''), which would be operated as
a facility of the Exchange. The VTS is a system module of the Universal
Trading System (``UTSTM'') \4\ that was developed by
Universal
[[Page 15858]]
Trading Technologies Corporation (``UTTC'').\5\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ VWAPTM is a registered trademark of the Dover
Group, Inc.
\4\ The VTSTM and UTSTM trademarks are the
property of Universal Trading Technologies Corporation.
\5\ UTTC is a subsidiary of the Ashton Technology Group. UTTC
has developed three electronic trading system modules as part of its
UTS architecture: (i) the VWAP Trading System
(``VTSTM''); (ii) the Electronic Auction System
(``eASTM''); and (iii) the Electronic Public Limit Order
Book (``ePLOBTM''). This proposed rule change relates
only to the VTS.
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On July 26, 1996, the Exchange submitted Amendment No. 1 to the
proposed rule change.\6\ The proposed rule change, including Amendment
No. 1, was published for comment in the Federal Register on September
11, 1996.\7\ No comments were received on the proposal or Amendment No.
1. The Exchange submitted Amendment No. 2 to the proposed rule change
on October 29, 1997.\8\ The proposed rule change, as modified by
Amendment No. 2, was published for comment in the Federal Register on
December 31, 1997.\9\ No comments were received on Amendment No. 2. On
December 14, 1998, the Exchange submitted Amendment No. 3 to the
proposed rule change.\10\ Finally, on February 12, 1999, the Exchange
submitted Amendment No. 4.\11\ This order approves the proposed rule
change, as amended, and Amendment Nos. 3 and 4 on an accelerated basis.
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\6\ Amendment No. 1 discussed then proposed reporting procedures
and mechanisms relating to Nasdaq Stock Market issues that would be
matched during the Session. See Letter from Gerald D. O'Connell,
Senior Vice President, Market Regulation and Trading Operations,
Exchange, to Jennifer Choi, Attorney, Division of Market Regulation
(``Division''), Commission, dated July 26, 1996. Amendment No. 1 is
of no import because the proposed rule change has been revised such
that Nasdaq Stock Market issues are no longer eligible for matching
during the Session.
\7\ Securities Exchange Act Release No. 37640 (Sept. 4, 1996),
61 FR 47993 (Sept. 11, 1996).
\8\ In Amendment No. 2, the Exchange: (1) clarified the
responsibilities and functions of the Exchange and the VTS; (2)
excluded over-the-counter securities (i.e., Nasdaq Stock Market
issues) from matching during the Session; (3) proposed that a VTS
terminal be located on the Exchange's equity trading floor; (4)
prohibited Exchange floor members from VTS matching in non-specialty
issues; (5) revised and detailed matching priority provisions; (6)
updated order types and order entry procedures; (7) clarified
participation and subscriber access; (8) defined the ``extraordinary
circumstances'' under which the Exchange may modify the order entry
time period; and (9) specified the liability of the Exchange with
respect to the operation of the VTS. See Letter and attachment from
Philip H. Becker, Senior Vice President and General Counsel,
Exchange, to Belinda Blaine, Associate Director, Division,
Commission, dated October 28, 1997.
\9\ Securities Exchange Act Release No. 39481 (Dec. 22, 1997),
62 FR 68339 (Dec. 31, 1997).
\10\ In Amendment No. 3, the Exchange represented that UTTC
agreed to operate the VTS through UTTC's wholly-owned broker-dealer
subsidiary, REB Securities (``REB''), and that REB would be
responsible for conducting compliance activities relating to the
VTS. In addition, the Exchange: (1) agreed to operate the VTS as a
facility of the Exchange for a one year pilot period; (2) agreed to
limit the securities eligible for matching through the VTS to 300 of
the most highly-liquid and highly-capitalized issues listed on the
New York Stock Exchange; (3) proposed to delete the required
dissemination of a single volume print at 9:20 A.M.; (4) clarified
the proposed definition of ``institution''; (5) committed to prepare
a report regarding the number of tape corrections and how they
affect the VWAP values calculated by the Exchange; and (6) modified
from 4:02 P.M. to 4:01:30 P.M. the cut-off time that is designed to
capture trade reporting run-off and any sales that occur at the
close of regular trading. See Letter and attachment from Edith
Hallahan, First Vice President and Deputy General Counsel, Exchange,
to Michael Walinskas, Deputy Associate Director, Division,
Commission, dated December 11, 1998.
\11\ In Amendment No. 4, the Exchange agreed to report pre-
opening VWAP volumes for each eligible security in which matches had
been effected during the Session. The Exchange also separately
submitted confidential surveillance procedures. See Letter from
Adrienne Y. Hart, Vice President, Market Surveillance, Exchange, to
Michael Walinskas, Deputy Associate Director, Division, Commission,
and John A. McCarthy, Assistant Director, Office of Compliance
Inspections and Examinations (``OCIE'', Commission, dated February
8, 1999; and letter from Kenneth J. Meaden, Senior Vice President,
Exchange, to John McCarthy, OCIE, Commission, dated February 1,
1999.
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Under separate cover, the Exchange has requested from the
Commission exemptive and interpretive relief regarding Rules 10a-1,
10b-18, 11a2-2(T), 11Aa3-2, and 11Ac1-1 under the Act.\12\ The
Commission has issued a letter separate from this order that grants the
Exchange exemptive relief from Rule 10a-1 and provides interpretive
relief regarding Rule 11a2-2(T).\13\ In Section III of this order, the
Commission addresses the Exchange's interpretive requests regarding
Rules 11Aa3-2 and 11Ac1-1. With respect to the Exchange's request
concerning Rule 10b-18, the Commission will respond to the Exchange at
a later date.
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\12\ See Letter from Edith Hallahan, Associate General Counsel,
Exchange, to Larry E. Bergmann, Associate Director, Division,
Commission, dated June 5, 1998.
\13\ See Letter from Larry E. Bergmann, Associate Director,
Division, Commission, to Edith Hallahan, Associate General Counsel,
Exchange, dated March 24, 1999 (``Exemptive Relief Letter'').
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II. Description of the Proposal
The Exchange seeks to adopt proposed Exchange Rule 237, ``The
Universal Trading System Morning Session,'' to govern the operation of
the VTS or ``System'' \14\ for a one year pilot period. During the
Session, the System will electronically accept large-sized stock orders
and match the orders for execution according to an algorithm developed
by UTTC. The matched and executed orders will be assigned a final VWAP
after the close of regular trading. UTTC developed the System pursuant
to an agreement with the Exchange. The System will operate as a
facility of the Exchange under Section 3(a)(2) of the Act.\15\
Specifically, the System will utilize Exchange equipment and
personnel,\16\ floor trader participation, and the Stock Clearing
Corporation of Philadelphia (``SCCP'') to process System trades.
Matches performed during the Session will be regulated and reported as
Exchange trades. In addition, matches performed by the System will be
subject to transaction and access fees as established in the Exchange's
fees schedule.\17\
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\14\ For ease of reference, the term ``System'' shall be used in
place of VTS and UTS.
\15\ 15 U.S.C. 78c(a)(2).
\16\ UTTC technical personnel will assist the Exchange in
operating the System.
\17\ Apart from adopting proposed Exchange Rule 237, the
Exchange also seeks to make a conforming change to Exchange Rule
101, ``Hours of Business'' to include the Session as an exception to
regular trading hours.
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A. Stocks Eligible for Matching During the Session
Approximately 300 of the most highly-capitalized and highly-liquid
securities that trade on the New Stock Exchange (``NYSE'') will be
eligible for matching during the Session. To select these stocks, the
Exchange will use Standard and Poor's market data to identify the top
400 NYSE-listed issues in terms of market capitalization. Each stock
selected must have a market price below $200 per share. Next, the
Exchange will rank the 400 stocks according to their average dollar
volumes over the previous 20 days of trading. The Exchange will
designate the top 300 stocks as eligible for matching during the
Session. The Exchange will repeat this screening process every six
months to ensure that the stocks eligible for matching by the System
are highly-capitalized and highly-liquid.
B. System Participants
Access to the System will be limited to ``Committers'' and
``Users'' (collectively ``Participants''). Committers will be permitted
to enter ``Commitments'' while Users will be allowed to enter
``Orders.'' Although Exchange members may participate as either
Committers or Users, they may not participate as both Committer and or
Users, they may not participate as both Committer and User in the same
security for the same account during the same Session.
1. Committer
``Committer'' status will be restricted to Exchange members that
are: (i) Phlx Floor Traders (i.e, Phlx Specialist or Phlx Alternate
Specialist in the eligible stock that is the subject of the
[[Page 15859]]
Commitment); or (ii) Phlx Off-Floor Liquidity Providers (members that
commit to provide contra-side liquidity). Committers agree to provide
on a proprietary basis contra-side liquidity by specifying their
Committments; however, Off-Floor Liquidity Providers can only engage as
Committers for their proprietary accounts.
Exchange members must register with the Exchange prior to acting as
a Committer. Committers will be permitted to designate the eligible
issues for which they wish to make Commitments. For each eligible issue
selected, Committers will be required to provide a minimum volume
guarantee of 2,500 shares for each side of the market.\18\ All
Commitments must be entered in 500 share increments.
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\18\ Although the minimum Commitment size on each side of the
market is 2,500 shares, a Committer need to make identical
Commitments on both sides of the market. For example, a Committer
could agree to buy 2,500 shares and sell 5,000 shares at VWAP.
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Commitments must be entered directly by System subscribers or
through the System's trading floor terminal at the Exchange.\19\
Commitments may be entered and modified during the ``Order Entry Time
Period'' (5:00 A.M. to 9:15 A.M.).\20\ and during any other periods the
Exchange may specify.\21\ Commitments may be entered as ``day-
Commitments'' or ``good-till-canceled (``GTC'') Commitments.'' GTC
Commitments remain in effect for each Session until canceled and must
be established (and canceled) through the enrollment process.\22\
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\19\ To facilitate Floor Trader participation, the Exchange
proposes to install a System terminal on the equity trading floor
for the entry and reporting of Orders and Commitments.
\20\ Unless otherwise indicated, all times referenced throughout
this order are Eastern Standard Times.
\21\ For example, the Exchange may allow the entry and
modification of Commitments during certain times the previous day,
effective for the next day's Session. Because matching occurs only
during the Session, the additional period would simply provide extra
time for the entry of Commitments.
\22\ The enrollment process is the formal mechanism by which
Participants enter into a contractual arrangement to use the System.
System 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. Prior to activation,
all Users and Committers must provide proof of the review and
approval of their enrollment parameters by their compliance officer.
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Commitments may be restricted to execution against non-members
only. At no time will Commitments may be matched with other
Commitments. Commitments are executable only through the System.
2. User
``User'' status would be available to Exchange members and non-
members. However, Exchange floor members could participate as Users
only in their specialty issues. Under the proposal, Orders may only be
placed by and for enrolled Users. Users may enter Orders for customer
or proprietary (dealer or principal) accounts.
Orders will be eligible for matching by the System only on the day
the Order is entered. The minimum size for individual Orders is 5,000
shares. Like Commitments, all Orders must be entered in 500 share
increments.
Users may enter Orders directly into System terminals as
subscribers or through subscribing brokers; subscribing brokers may be
members or non-members. The Exchange has noted, however, that
participation through subscribing brokers may affect matching priority.
All non-member Orders entered through a broker must be entered
through an Exchange member or through a non-member broker with the
appropriate ``give-up agreement'' \23\ and ``three-way agreement'' \24\
in place. Non-member Orders also may be entered directly by subscribing
non-members who have in place with an Exchange member give-up and
three-way agreements.\25\
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\23\ A clearing agreement or ``give-up agreement'' is intended
to ensure that a SCCP member, who must also be an Exchange 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 define the credit limits for the
customer.
\24\ The Exchange, the Exchange/SCCP member, and the non-member
User are the parties to a ``three-way agreement.'' Under the
agreement, the Exchange member must agree to be jointly and
severally liable for actions of the non-member User through the
System. In return, the non-member User must agree to adhere to all
applicable by-laws and rules of the Exchange. The Exchange clarified
that neither it nor the SCCP approves credit limits established by
an Exchange/SCCP member for its non-member customer as part of a
three-way agreement. See Letter from Philip H. Becker, Senior Vice
President and Chief Regulatory Officer, Exchange, to Ivette Lopez,
Assistant Director, Division, Commission, dated December 10, 1996.
The letter also clarified that an Exchange ``clearing member'' is an
Exchange member that also is a member of the SCCP.
\25\ The Exchange submitted to the Commission a letter stating
that the Exchange did not intend for the sample three-way agreement,
which was previously provided to the Commission, to be considered
part of the Exchange's proposed rule change. See Letter from Edith
Hallahan, First Vice President and Deputy General Counsel, Exchange,
to Michael Walinskas, Deputy Associate Director, Division,
Commission, dated March 24, 1999. The letter also represented that
the Exchange will withdraw from any final three-way agreement
language stating that the Exchange has the right to terminate a
User's access to the System ``without prior notice for any reasons
or no reason whatsoever.'' The Commission notes that such language
raises important issues concerning appropriate access to the System.
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As with all Exchange trades, System matches will require both a
Phlx and SCCP member to be involved. Therefore, all Committers and
Users must specify both an executing and clearing account during the
enrollment process. The Exchange and the SCCP will perform trade
reconciliation and confirmation functions. System trades will then be
forwarded to the National Securities Clearing Corporation (``NSCC'')
for clearance and settlement.\26\
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\26\ The Exchange recently restructured the clearance and
settlement business offered through its wholly owned subsidiary,
SCCP. The SCCP no longer maintains its continuous net settlement
system for conducting settlements between the SCCP and its members.
As a result, the SCCP ceased providing the cash settlement services
attendant to the settlement process of the Philadelphia Depository
Trust Company. However, the SCCP continues to offer limited clearing
and settlement services to Exchange members. See Securities Exchange
Act Release No. 39444 (Dec. 11, 1997), 62 FR 66703 (Dec. 19, 1997).
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C. Entry of Orders and Commitments
Only Orders and Commitments that are entered through the System
will be eligible for matching and execution by the System during the
Session. Under no circumstances will Orders or Commitments migrate to
the Exchange's regular equity trading session. Because all Orders and
Commitments remain anonymous, the identity of Users and Committers will
not be revealed to other Participants.
Orders and Commitments will only be accepted into the System from
5:00 A.M. to 9:15:00 A.M. (``Order Entry Time Period''). The Order
Entry Time Period ends approximately 15 minutes prior to the opening of
the Exchange's regular trading session (9:30 A.M.-4:00 P.M.). However,
as previously mentioned, the Exchange may establish a different period
for the entry of Orders and Commitments into System's equity trading
floor terminal.\27\ Orders and Commitments may be canceled \28\ or
modified before the end of the Order Entry Time Period. Confirmation of
the placement and cancellation of an Order
[[Page 15860]]
or Commitment will occur electronically through the System.
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\27\ If the Exchange establishes any alternative time period for
the entry of Orders and Commitments, the alternative time period
should not allow Orders and Commitments placed through the System's
equity trading floor terminal to be entered at a time after which
all other methods of access to the System have been closed. For
example, it would not be permissible to establish a general cut-off
time for Order and Commitment entry of 9:15 A.M. but allow Orders
and Commitments to be entered through the System's equity trading
floor trading terminal until 9:16 A.M.
\28\ Orders and Commitments may be canceled through the System
until 9:15:00 A.M. by using the appropriate designator (``CXL'').
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When entering Orders or Commitments, Participants will be required
to provide a description of the Order or Commitment, as well as account
identification information needed to determine priority and
eligibility. Participants must provide the following information when
entering an Order or Commitment:
Buy/Sell designation;
Volume (number of shares). As previously stated, the
minimum size for Commitments is 2,500 shares and the minimum size for
Orders is 5,000 shares. All Commitments and Orders must be entered in
500 share increments;\29\
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\29\ The Exchange's Floor Procedures Committee may determine
whether to establish: (i) alternative minimum sizes for Commitments
and Orders; or (ii) alternative minimum increment sizes. Any
adjustments to Order, Commitment, or increment sizes are required to
be based on market and participant need, and are subject to prior
written notice.
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Stock symbol;
Participant status: Committer or User;
Committer account status: Off-Floor Liquidity Provider,
Specialist, or Alternate Specialist;
User account status: Member or non-member, and Order type
(basic, cross, facilitation, also including any constraints or
restrictions);
Clearing account number;
Trade account information (Exchange executing account
number); and
Subscriber identification number.
D. Types of Orders
Users may enter three types of Orders: (i) basic; (ii) cross; and
(iii) facilitation. A User may designate its basic and facilitation
Orders as either unconstrained (meaning executable to the extent
possible) or constrained.
1. Constraints
Two constraints are available to Users in connection with basic and
facilitation Orders: all-or-none (``AON'') and minimum-or-none
(``MON''). The AON constraint means that the User wants to execute all
shares of the Order or none at all. The MON constraint means that the
User wants to execute at least a specified number of shares of the
Order or none at all.
2. Basic Order
A basic Order is a standard, one-sided Order to buy or sell. A
basic Order may be restricted, meaning it is executable against non-
members only.
3. Cross Order
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 making up a cross can be
entered separately, with the contra-side identified. If the sizes do
not match, the remainder is left unexecuted.
4. Facilitation Order
A facilitation Order is a two-sided Order, with an identified Phlx
member on the contra-side to act as a facilitator for that Order, and
is known as a ``Guarantor.'' The contra-side may be entered together
with, or separate from, the facilitation Order; if the sizes do not
match, the remainder is left unexecuted. Facilitation Orders can be
submitted on behalf of Phlx members or non-members. Unlike basic
orders, facilitation Orders may not be restricted.
Three types of facilitation orders are available to Users: (i)
Unconditional facilitation: execute against an identified Guarantor or
not at all. This Order is a type of cross involving a Phlx member
Guarantor; (ii) conditional facilitation: execute against an identified
Guarantor after attempting to be executed against non-members to the
extent possible; and (iii) last resort facilitation: execute against an
identified Guarantor only after attempting to execute against all other
Orders and Commitments to the extent possible.
E. Execution Priority Rules
Orders and Commitments will be matched for execution by the System
at approximately 9:16 a.m. Trades matched and executed through the
System are printed and cleared as Exchange transactions, executed on
the Exchange and processed through SCCP.
1. Orders
Generally, Orders are afforded priority by: (i) Account type
(account types are based on status as a Phlx member or non-member, type
of non-member account, constraints, and direct subscription versus
broker access); (ii) Order size (largest first); and (iii)
chronological basis measured by time-of-entry (for Orders of the same
account type and size).
2. Commitments
Commitments are prioritized based on: (i) Sub-account types (Phlx
Off-Floor Liquidity Providers first, then Specialists, and Alternate
Specialists); and (ii) Commitment size (largest first). For Commitments
of the same size, priority rotates among Committers with the fewest
aggregate shares (in all eligible securities) matched through the
System at that time.
3. Liquidity Rotation Parameter
Although priority is generally based on size, the ``Liquidity
Rotation Parameter'' (``LRP'') provides that Order and Commitment
participation will rotate in 25,000 share increments, as opposed to
filling the largest Order or Commitment first. The LRP is intended to
ensure fair allocation. The LRP operates within each matching step
(after Step 1) to match Orders/Commitments in 25,000 share increments,
moving to the next Order/Commitment after 25,000 shares have been
matched, and then, after all other Orders/Commitments have received
their first 25,000 share match, returning to the unfilled portion of
the first Order/Commitment. Under the proposal, the Exchange's Floor
Procedure Committee may establish a different LRP size based on
operational experience, practicality, and demonstrated market need.
F. The Matching Algorithm
Execution priority is determined in accordance with the matching
algorithm that consists of 23 matching steps. In step 1, two-sided
Orders are matched in the following order:
Non-member/Non-member cross Orders.
Non-member/Member unconditional facilitation Orders.
Member/Member unconditional facilitation Orders.
Any unmatched ``residue'' due to the excess size entered
by one side remain unexecuted. It is important to remember that Step 1
matches unconditional facilitation Orders.
In step 2, non-member unconstrained Orders (basic and facilitation)
are matched with non-member unconstrained Orders. As with all matching
steps, priority is determined based on size and time of entry.
In step 3, remaining non-member unconstrained Orders are matched
with non-member constrained (AON and MON) Orders. Any non-member
constrained Orders not matched with the unconstrained Orders left over
from step 1 are then matched with other non-member constrained Orders.
In step 4, remaining non-member Orders are matched with non-member
institutions' \30\ Orders participating
[[Page 15861]]
through a broker. Such non-member institutions' Orders are then matched
with each other. (Non-member institutions entering Orders directly
would have participated in steps 2 and 3). It should be noted that
constraints are not relevant to determining priority in step 4 among
institutions participating through a broker.
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\30\ The proposal defines an institution as ``an entity not
registered as a broker-dealer or doing business as a hedge fund that
serves in a fiduciary capacity.'' The Exchange believes such
entities include, but are not limited to: qualified pension plans,
investment companies registered under the Investment Company Act of
1940, bank trust departments, corporations that purchase securities
for corporate purposes, and insurance companies.
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In step 5, remaining non-member Orders are matched with non-member
non-institution Orders participating through a broker. After non-member
non-institution Orders participating through a broker are matched
against the unmatched Orders of non-members, 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
customers).
In step 6, remaining non-member Orders are matched with Orders of
non-member broker-dealers that subscribe directly. Orders of non-member
broker-dealers that subscribe directly are then matched with each
other. Thus, step 6 matches non-member Orders (both constrained and
unconstrained) for non-member broker-dealers. (As opposed to dealer
activity, if a non-member broker-dealer is acting as a broker, the
Order would already be matched in steps 4 and 5).
By step 7, the matching process is ended with respect to non-member
Orders. Any remaining non-member Orders that are restricted to matching
with other non-members only are removed. The removed unmatched Orders
may be matched later according to step 23.
In step 8, remaining non-member conditional facilitation Orders are
matched with their conditional Guarantors (facilitating members). These
conditional Orders--which were first subject to matching against other
non-member Orders in prior steps--are now eligible for matching against
the identified Guarantor (a Phlx member).
In step 9, remaining non-member Orders are matched with member
Orders participating through brokers. Any unmatched member Orders
participating through brokers are removed.
In step 10, remaining non-member Orders are matched with Orders of
off-floor members. Any unmatched off-floor members' Orders are removed.
In step 11, remaining non-member Orders are matched with Orders of
Exchange floor members. Any unmatched Exchange floor members' Orders
are removed. This includes one-sided Orders (as opposed to Commitments)
of Specialists and Alternate Specialists.
In step 12, remaining non-member Orders are matched with
Commitments of Exchange Off-Floor Liquidity Providers. Any unmatched
Commitments of Exchange Off-Floor Liquidity Providers are removed.
In step 13, remaining non-member Orders are matched with
Commitments of Specialists. Any unmatched Specialist Commitments are
removed.
In step 14, remaining non-member Orders are matched with
Commitments of Alternate Specialists. Any unmatched Alternate
Specialist Commitments are removed.
In step 15, remaining non-member Orders are matched with member
facilitation Orders (those with conditional or last resort Guarantors).
Note that unconditional facilitation Orders previously were matched in
step 1.
In step 16, non-member last resort facilitation Orders are matched
with their identified last resort Guarantors.
In step 17, non-member matching ends. Any remaining non-member
Orders are unmatched, except as provided in step 23.
In step 18, Exchange member conditional facilitation Orders are
matched with their identified conditional Guarantors.
In step 19, all remaining Exchange member Orders are matched with
each other, provided they are not restricted to matching against non-
members only. This includes the following Phlx member Orders: Phlx
member Orders participating through brokers, Phlx off-floor member
Orders, Phlx floor member Orders, and Phlx member last resort
facilitation Orders.
In step 20, remaining Exchange member Orders are matched with
Commitments that have not been restricted to matching against non-
members only. First, remaining Exchange member Orders are matched with
Commitments of Off-Floor Liquidity Providers, and then with Commitments
of Specialists and Alternate Specialists. Unmatched Commitments are
removed.
In step 21, Exchange member last resort facilitation Orders are
matched with their identified last resort Guarantors.
In step 22, the whole matching ``round'' in an eligible security
ends. Any remaining Exchange member Orders and Commitments are
unmatched, except as provided in step 23.
In step 23, 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, Exchange member Orders would be removed before
non-member Orders. Among two Exchange members, or among two non-
members, the last in time would be removed first. Additional matching
rounds would occur, each removing another unsatisfied constrained
Order, until no unsatisfied constrained Orders remained. Matching
rounds are intended to maximize the number of executions.
G. Calculation of VWAP
The exchange shall calculate a final VWAP value for each eligible
security by: (i) using all regular way trades (including sold sales and
late sales)\31\ reported by the appropriate reporting authority from
the opening of the regular trading session and printed prior to 4:15:00
P.M.,\32\ (ii) multiplying each respective reported price by the total
number of shares traded at that price; (iii) adding together each of
these calculated values to compile an aggregate sum; and (iv) dividing
the aggregate sum by the total number of reported shares that appear in
the prints included in step (i) of the VWAP calculation process. The
resulting VWAP value will be reported in the form of a fraction and
will be rounded to the nearest 1/256th.\33\ Any proposed changes that
impact the manner in which the official VWAP is calculated are required
to be submitted to the Commission for review under Section 19(b) of the
Act.\34\
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\31\ A ``late sale'' is a transaction which is a correct last
sale but is publicly disseminated later than is required. Generally,
transactions are required to be publicly disseminated within 90
seconds of execution. A ``sold sale'' refers to a transaction
appearing on the CTS out of its proper sequence.
\32\ It should be noted that prints representing trades executed
after regular trading hours (9:30 A.M. to 4:00 P.M.), such as prints
reflecting trades executed during the Exchange's Post Primary
Session, will only be included in the VWAP calculation until 4:01:30
P.M.
\33\ The System software also allows Participants to convert
VWAP prices into decimal form.
\34\ 15 U.S.C. 78s(b).
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The exchange shall calculate and assign a final VWAP value to each
security subject to a match during the Session.\35\ The final VWAP
value that the Exchange calculates and assigns to each eligible
security shall be reported and publicly disseminated at 4:20 P.M.
promptly following calculation. The
[[Page 15862]]
final VWAP value will be available through the System to all
Participants that had a commitment or Order matched during the Session.
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\35\ In addition, the Exchange will continuously calculate a
non-final VWAP value throughout the trading day for each eligible
issue.
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The final VWAP value calculated and reported by the Exchange shall
be the official VWAP value. Unless the Exchange directs otherwise,
every VWAP value as initially reported by the reporting authority is
conclusively presumed to be accurate and deemed to be final, even if
the VWAP value is revised or subsequently determined to have been
inaccurate.
Generally, all System matches create a binding contract. However,
in the case where a match occurs during the Session in an eligible
security that has not opened for primary market trading by 3:00 P.M.,
the match will be voided and a report to that effect will immediately
be sent through the System to the Participants to the voided match. If
an eligible security opens for trading but is the subject of a trading
halt and does not resume trading for the remainder of the day, the
final VWAP value for any match in that eligible security on that day
will be based on the prints that occurred before the trading halt.
H. Reporting of System Transactions and VWAP
All System matches will first be reported to the reporting
authority (i.e., Consolidated Tape System or ``CTS'') at 9:20 A.M. as
separate volume prints for each eligible security in which matching
occurred. The morning print for all System matches will occur by way of
an administrative message over the CTS reflecting the VWAP volume in
each of the eligible securities. The morning print is intended to
provide market participants with VWAP volumes before regular trading
commences.
Under normal circumstances, Users and Committers will be notified
of their matches by 9:20 A.M. System matches will be reported to the
entering subscriber in the form of automated reports reflecting the
number of shares matched for each Participant by the System in each
issue.
Once the Exchange calculates and assigns a final VWAP value, each
Session match constitutes a completed transaction for the purpose of
reporting the trade to the appropriate reporting authority. End-of-day
prints will normally be reported at 4:20 P.M. following calculation of
the final VWAP at 4:15 P.M. The end-of-day prints will be printed on a
trade-by-trade basis representing all matches made that morning. Each
print will reflect a matched trade and the corresponding VWAP. These
trades will be reported to the CTS with the sale condition ``B'' to
indicate volume weighted average pricing (the ``B'' 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). The Exchange has represented that VWAP trades matched
and executed through the System will not impact the determination of
the last sale price in an eligible security listed on the NYSE.
The System will not disseminate or disclose Orders or Commitments,
including System bid/ask sizes, prior to the Session match, nor System
imbalances remaining after the Session match, except to entering
Participants.
Because reporting is performed on a trade-by-trade basis, if no
System match occurs in an eligible security, a final VWAP for that
particular security will not be reported to the CTS for that day.
I. Access to the System
Access to the System for subscribers (both direct subscribers and
subscribers acting as brokers) will be available by dial-up into the
System utilizing software and log-on procedures that vary depending on
whether the subscriber is accessing the System through a personal
computer or a main-frame system. System access may include various
types of computer hardware, software, and handheld devices.
J. Resolutions of Disputes
Disputes regarding Session participation or the eligibility of
Orders, Commitments, or Participants will be resolved by the Exchange
in accordance with Exchange Rule 124.
K. Liability of the Exchange
The Exchange shall not be liable for any damages, claims, losses or
expenses sustained by a member or member organization 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; stride; accident; action of
government; communications or power failure; equipment or software
malfunction arising from the use of the System, the calculation of the
VWAP or any and all other matters respecting the operation of the
System or Session.
L. Trading Halts in Eligible Securities
The proposed rule change does not limit the ability of the Exchange
to otherwise halt or suspend trading in any eligible stock matched
through the System.
M. Extraordinary Circumstances
In the case of ``extraordinary circumstances,'' the Exchange's
Floor Procedure Committee may determine to adjust or modify any of the
times relating to Order Entry Time Period, the matching period, or any
aspect of the transaction reporting procedures. The proposal defines
``extraordinary circumstances'' to include fast market conditions,
systems malfunctions, and other circumstances that limit the Exchange's
ability to receive, disseminate, or report System information in a
timely and accurate manner.
N. Short Sales
Orders and Commitments must be appropriately marked pursuant to
Exchange Rule 455 to indicate whether they are short sales. In
addition, Orders and Commitments will be exempt from the short sale
``tick test'' restrictions of Exchange Rule 455. Positions resulting
from Session matches will be effective for the purpose of determining
long or short status for the remainder of the trading day, immediately
upon notification of the Participant to a System match, notwithstanding
that the VWAP has not yet been determined.
III. Discussion
For the reasons discussed below, the Commission finds that the
proposed rule change is consistent with the requirements of the Act and
the rules and regulations thereunder applicable to a national
securities exchange, and with the requirements of Sections 6(b) and 11A
under the Act.\36\ In particular, the Commission believes the proposed
rule change is consistent with the Section 6(b)(5) requirements that
the rules of an exchange be designed to promote just and equitable
principles of trade, remove impediments to and perfect the mechanism of
a free and open market and a national market system, and, in general,
protect investors and the public interest.\37\
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\36\ 15 U.S.C. 78f(b) and 78k-1.
\37\ In approving this proposed rule change, the Commission has
considered the proposal's impact on efficiency, competition, and
capital formation. 15 U.S.C. 78c(f).
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The Commission believes the Exchange's proposed System will serve
as an innovative complement to the Exchange's existing auction market.
The Commission historically has encouraged innovation and the creation
of new electronic trading systems so that investors are provided access
to a variety of execution alternatives. At the
[[Page 15863]]
same time, the Commission believes it is important to ensure that a
trading system which operates as a facility of a national securities
exchange complies with the Act's standards regarding investor
protection and fair and orderly markets. The Commission believes that
the Exchange's proposal achieves this objective.
Some aspects of the proposal raise complicated regulatory issues.
For example, the matching of Orders and Commitments during the Session
includes some characteristics of a unitary call market and, therefore,
represents a departure from the traditional auction market trading
conducted on the Exchange floor. In addition, the System allows non-
Exchange members to enter Orders. Other aspects of the proposal raise
concerns regarding surveillance, reporting, transparency, control and
access, and priority principles of an auction market. After careful
review, and for the reasons discussed in more detail below, the
Commission believes the proposal adequately addresses the areas of
concern and is consistent with the maintenance of free and open markets
and investor protection in accordance with Section 6(b)(5) of the
Act.\38\
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\38\ 15 U.S.C. 78f(b)(5).
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The Commission believes that the System is properly regulated as a
facility of the Exchange.\39\ The System will use Exchange equipment
and personnel, involve the participation of Exchange floor traders, and
rely on the SCCP to clear System trades. Furthermore, matches performed
during the Session will be regulated and reported as Exchange trades.
The Commission believes that because the System will be using the
Exchange's premises, property, and services for effecting and reporting
System matches, it will be using the facilities of an exchange as
defined in Section 3(a)(2) of the Act.\40\
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\39\ Section 3(a)(2) of the Act states that ``[t]he term
`facility' when used with respect to an exchange includes its
premises, tangible or intangible property whether on the premises or
not, any right to the use of such premises or property or any
service thereof for the purpose of effecting or reporting a
transaction on an exchange (including, among other things, any
system of communication to or from the exchange, by ticker or
otherwise, maintained by or with the consent of the exchange), and
any right of the exchange to the use of any property or service.''
15U.S.C. 78c(a)(2).
\40\ Regulating the System as a facility of the Exchange is
consistent with the Commission's approach towards similar electronic
matching systems. For example, the Chicago Stock Exchange (``CHX'')
operated the Chicago Match as a facility of the CHX. See Securities
Exchange Act Release No. 35030 (Nov. 30, 1994), 59 FR 63141 (Dec. 7,
1994). The Chicago Match, which integrated an electronic order match
system with a facility for brokering trades, no longer operates as a
facility of the CHX.
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The Commission notes that the Exchange's use of UTTC personnel and
equipment in operating the System does not alter the Commission's
determination that the System is properly regulated as a facility of
the Exchange. The Exchange retains regulatory control over the System
and is fully responsible for ensuring that the System complies with the
federal securities laws and all applicable rules and regulations.
Although UTTC personnel shall assist the Exchange in operating the
System, these assistants will be acting as agents of the Exchange.
Therefore, the Exchange will maintain control of the System and will
exercise authority over the non-Exchange employees that help operate
the System.
The Commission believes that operation of the System as a facility
of the Exchange raises important issues regarding surveillance of the
System,\41\ UTTC personnel, and Exchange personnel. The Commission
believes the Exchange has adequately addressed these surveillance
issues. In particular, the Exchange's surveillance group will be
equipped with technology to create detailed audit trails that will
track Orders and Commitments from entry to the confirmation of
matching. The Exchange also will use technology to track Orders and
Commitments through the matching algorithm; this will identify the
exact point at which Orders and Commitments are matched, or
alternatively, not matched. In addition, a corrections alert mechanism
will provide notice of all corrections that occur in the CTS after the
VWAP calculation period. Finally, Exchange surveillance personnel will
use an electronic surveillance system to identify aberrant trading
behavior in any eligible stock matched through the System.
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\41\ The System will link off-floor and on-floor computer
terminals to the System's communications base unit. This 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 matched security (separate Exchange
systems will calculate the official VWAP; (v) report VWAP matches to
the entering Participants (separate Exchange systems will report
VWAP matches to the appropriate reporting authorities); and (vi)
create an audit trail by recording Order and Commitment entry and
execution.
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The Commission also believes that operation of the System as a
facility of the Exchange raises unique concerns regarding access to,
and control of, the System.\42\ For several reasons, the Commission
believes that the Exchange the UTTC have adequately addressed these
access and control concerns. First, the Commission notes that the
Exchange will retain regulatory control over the System and that the
Exchange will remain fully responsible for ensuring that the System
complies with the federal securities laws and all applicable rules and
regulations. Although the Exchange will use UTTC personnel and
equipment to assist in operating the System, such UTTC assistance will
be provided on an agency basis. More specifically, this assistance will
be provided by REB securities, a wholly owner broker-dealer subsidiary
of UTTC. REB will be assigned certain responsibilities for ensuring
compliance with the monitoring and reporting of System access and
control parameters. The Exchange represented that REB has developed a
special compliance program to address these issues. Second, REB will
not conduct any other securities business outside of its oversight of
System access and control. This limitation on business activity will
help focus REB's scrutiny on important compliance issues. This
limitation on business activity will help focus REB's scrutiny on
important compliance issues. The Exchange will require REB to conduct
annual independent audits regarding the System compliance program.
Finally, because REB is a broker-dealer registered under the Act, the
Commission will have the authority to inspect and examine REB. For
these reasons, the Commission believes the Exchange and UTTC have
adequately addressed issues relating to control and access.
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\42\ The VTS is the first electronic system offering VWAP that
will operate as a facility of a national securities exchange.
Although the Commission previously reviewed electronic systems that
offered volume weighted average pricing features, they were operated
as proprietary trading systems. See Letter from Alden S. Adkins,
Chief, Office of Automation and International Markets, Division,
Commission, to Charles R. Hood, Vice President and General Counsel,
Instinet Corporation (Dec. 6, 1991) (providing no-action relief to
Instinet's Market March crossing service) and letter from Alden S.
Adkins, Chief, Office of Automation and International Markets,
Division, commission, to Lloyd H. Feller, Morgan, Lewis & Bockius
(Oct. 28, 1991) (providing no-action relief to POSIT regarding its
volume weighted average pricing mechanism).
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The Commission believes that in providing non-Exchange members
limited access to the System, the Exchange's proposal does not
contravene the Act. The Act contemplates that transactions on a
national securities exchange will be conducted by ``members.'' \43\ In
[[Page 15864]]
addition, Section 6(c)(1) of the Act states that a national securities
exchange shall deny membership to any natural person who is not, or is
not associated with, a registered broker or dealer.\44\ The Commission
believes the Exchange has established adequate controls over non-member
access to the System. Specifically, a non-member may enter Orders
through the System only after entering into a ``give-up'' agreement
with an Exchange clearing member (i.e., such Exchange member also is a
SCCP member). The give-up agreement requires the Exchange clearing
member to assume legal responsibility for the Orders of the non-member.
The Exchange clearing member must submit the give-up agreement to the
Exchange in advance of any activity by the non-member and must also
specify the credit limits for the non-member.
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\43\ Section 3(a)(3)(A) of the Act describes a member in terms
of effecting transactions on a national securities exchange. The
pertinent text defines a member as ``any natural person permitted to
effect transactions on the floor of the exchange without the
services of another person acting as broker.'' 15 U.S.C.
78c(a)(3)(A).
\44\ 15 U.S.C. 78f(c)(1).
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Moreover, prior to obtaining permission to enter Orders through the
System, each non-member must enter into a ``three-way agreement'' with
the Exchange and an Exchange clearing member. The three-way agreement
requires the non-member to agree to adhere to the applicable rules of
the Exchange. Because the access of non-member Users is limited by the
requirement that such Users be parties to valid give-up and three-way
agreements,\45\ and because the behavior of non-member Users is
governed by the affirmative obligations contained in the mandated give-
up and three-way agreements, the Commission believes the participation
of non-members in the System does not violate the Act.
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\45\ If a non-member User's give-up or three-way agreement was
terminated, the non-member User would not be permitted to access the
System.
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The Commission also believes that the Exchange's proposal is
consistent with Section 11A of the Act.\46\ Specifically, the
Commission believes that the System will further the purposes of
Section 11A and the development of a national market system by
promoting economically efficient execution of securities transactions,
fair competition among markets, best execution of customer orders, and
an opportunity for orders to be executed without the participation of a
dealer. The System provides a new and potentially efficient way to
match and execute trading interests. It is principally designed to meet
the demands of institutional traders and other market professionals
that desire VWAP-based transactions. Use of the System may result in
enhanced liquidity for investors and increase the ability of investor
orders to interact directly with other investor orders.
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\46\ 15 U.S.C. 78k-1.
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The Commission believes the System may provide benefits to market
participants, especially those who trade in large blocks. Specifically,
Participants will enjoy complete end-to-end anonymity in their Orders
and Commitments; as a result, their proprietary trading strategies will
not be revealed to other market participants. Furthermore, because
Participants receive notice of Order and Commitment matches before the
NYSE opens for trading, those Participants not receiving matches will
have the opportunity to enter orders during regular trading hours.
The Commission believes the proposal is consistent with Rule 11Aa3-
1 of the Act.\47\ Promptly after the System matches Orders and
Commitments, each Participant will be notified of the issues and number
of shares matched for that Participant. The Exchange also will report
to the CTS at 9:20 A.M. the VWAP transaction volume in each eligible
issue. For example, if during the Session matches were effected in all
300 eligible securities, the Exchange would report to the CTS the
matched volume for each of the 300 securities (i.e., 300 separate
volume prints). Although the Final VWAP value for each eligible
security will not be calculated until after the closing of trading, the
Commission believes it is important that market participants have
access to matched VWAP volume before regular trading begins.\48\ Once
of the final VWAP value has been calculated, each transaction will
immediately be reported on a trade-by-trade basis, including the size
and final VWAP value, over the Tape B network of the CTS \49\ and to
the Participants. Thus, the Exchange will provide for the collection
and dissemination of transaction reports containing, among other
things, the price of the security. The display of Orders and
Commitments prior to matching would be impractical; in particular, it
would counter the benefits of anonymity afforded by the System.\50\ The
Commission believes that the System's reporting mechanisms will provide
investors with adequate transaction price information in accordance
with Rule 11Aa3-1 under the Act.
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\47\ Rule 11Aa3-1, ``Dissemination of Transaction Reports and
Last Sale Data with Respect to Transactions in Reported
Securities,'' governs the dissemination of transaction reports that
contain price and volume information with respect to purchase or
sale transactions involving one or more round lots of a security.
See 17 CFR 240.11Aa3-1.
\48\ The Exchange has informed the Commission that the operator
of the CTS, the Consolidated Tape Authority (``CTA''), will not
permit trade messages to be delivered over the CTS prior to the
start of regular trading on the U.S. equities markets (i.e., before
9:30 A.M.). Therefore, the pre-opening VWAP volumes reported over
the CTS must take the form of administrative messages. The
Commission urges the Exchange to work with the primary information
vendors to ensure that the vendors disseminate the VWAP volumes as
administrative message before the opening of trading.
\49\ As presently configured, the CTS consists of two tape
systems: Tape A and Tape B. The Tape A network displays only NYSE
symbol information while Tape B displays information for issue
listed on all other exchanges. Although each of the securities
eligible for matching during the Session are listed on the NYSE, the
VWAP matches will be reported on the Tape B network due to
programming difficulties and project priorities.
\50\ Cf. The OptiMark System. See Securities Exchange Act
Release No. 39086 (Sept. 17, 1997), 62 FR 50036 (Sept. 24, 1997).
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In response to the Exchange's request for interpretive relief, the
Commission confirms that the Exchange will not violate Rule 11Aa3-2
under the Act \51\ if the Exchange disseminates last sale data for
System matches at 4:20 P.M. Rule 11Aa3-2(d) requires self-regulatory
organizations to comply with the terms of any effective national market
system plan of which it is a sponsor or participant. The Commission
believes that the Exchange will continue to comply with the terms of
the CTS national market system plan if the Exchange disseminates
reports containing price and volume information for System matches at
4:20 P.M. The Commission notes that a national market system plan is
designed to ensure timely dissemination of last sale data. The
Commission believes that the Exchange has reporting procedures in place
to ensure the timely dissemination of preliminary and last sale data
for System matches. In particular, as soon as the matching process has
been completed at the end of the Session, the Exchange will report to
the CTS the matched VWAP volumes for each eligible security.
Furthermore, immediately after the final VWAP values have been
determined and assigned, the Exchange will report to the CTS each
transaction on a trade-by-trade basis, including the final VWAP value.
In each instance, the Exchange has committed to make timely
dissemination of important market information. Because the Exchange has
arranged for the timely dissemination of preliminary and last sale
data, the Commission believes the Exchange will remain in compliance
with the CTS national market system plan and will not violate Rule
11Aa3-2.
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\51\ 17 CFR 240.11Aa3-2.
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The Commission believes that the System does not violate Rule
11Ac1-1
[[Page 15865]]
under the Act (``Quote Rule'').\52\ The Quote Rule requires a national
securities exchange to collect bids, offers, quotation sizes, and
aggregate quotation sizes from ``responsible brokers or dealers,'' \53\
for each reported security listed or admitted to unlisted trading
privileges and to make them available to quotation vendors.\54\ A bid
or offer is defined in the Quote Rule as the ``bid price and offer
price communicated by an exchange member or OTC market maker to any
broker or dealer, or to any customer.'' \55\ To constitute a bid or
offer, therefore, the underlying trading interest must have been
communicated to at least one other potential counterparty. Bids and
offers are intended to attract other parties to deal with the person
publishing the bid or offer at the quoted price. In contrast, the
essence of the System is its anonymity. Only the System is aware of the
expressed trading interest until the matching and trade execution
occur. Therefore, the System is not a mechanism by which Participants
broadcast prices to other Participants and trade with one another at
those prices. Accordingly, the Commission believes that the System does
not violate the Quote Rule.
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\52\ 17 CFR 240.11Ac1-1.
\53\ Rule 11Ac1-1 defines the term ``responsible broker or
dealer,'' when used with respect to bids or offers communicated on
an exchange, to mean ``any member of such exchange who communicates
to another member on such exchange, to the location (or locations)
designated by such exchange for trading in a covered [period]
security, a bid or offer for such covered [reported] security, as
either principal or agent.'' The Rule provides, however, that if
``two or more members of an exchange have communicated on such
exchange bids or offers for a covered [reported] security at the
same price, each such member shall be considered, a `responsible
broker or dealer' for that bid or offer, subject to the rules of
priority and precedence then in effect on that exchange.''
Furthermore, if a member of the exchange represents as agent the
transmitted bid or offer of another exchange member, only the member
representing the bid or offer as agent shall be considered the
``responsible broker or dealer'' for that bid or offer. 17 CFR
240.11Ac1-1(a)(21)(i).
\54\ See 17 CFR 240.11Ac1-1(b).
\55\ See 17 CFR 240.11Ac1-1(a)(4).
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The Commission also believes that the matching algorithm and
Liquidity Rotation Parameter are appropriate ways to ensure that Orders
and Commitments are matched in accordance with the priority principles
of an auction market. The Commission believes that the priority
principles of the matching algorithm will not give rise to practices
that are inconsistent with Section 11(a) of the Act.\56\ Specifically,
the matching algorithm is designed to provide public order preference
and public order protection such that Exchange members must yield
priority to non-members. Moreover, the Exchange has represented that
Exchange Specialists will not be permitted to trade ahead of customers
because Exchange Floor Traders will be last in terms of priority (e.g.,
Off-Floor Liquidity Providers receive priority over Floor Traders). In
addition, the Liquidity Rotation Parameter, or ``anti-bully'' rule is
designed to ensure that order flow is fairly allocated. The LRP will
include more Participants in the matching process because the largest
Orders and Commitments will be filled in the course of several
rotations rather than a single match.
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\56\ 15 U.S.C. 78k(a).
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The Commission believes the market characteristics of the eligible
stocks will make it difficult to influence their intra-day prices and
thus their final VWAP values. Specifically, the 300 stocks eligible for
System matching during the one year pilot are among the most highly-
capitalized and highly-liquid stocks listed on the NYSE. The
significant daily transaction activity in each eligible stock should
help to make it difficult and economically impractical to influence
their prices. As a caveat, the Commission observes that manipulation
concerns would be heightened in the VWAP transaction volume in an
eligible security came to represent a substantial portion of the
overall transaction volume in such security. The Commission expects the
Exchange to closely monitor the VWAP trading volumes for each eligible
security in relation to their overall trading volumes. The Commission
believes that legitimate manipulation concerns would arise if the VWAP
transaction volume in an eligible security exceeded 20% of the
security's daily transaction volume.
Finally, the Commission believes it is appropriate that Orders and
Commitments will be exempt from the short sale ``tick test''
restrictions of Exchange Rule 455. Separate from this approval order,
the Commission has granted the Exchange exemptive relief from Rule 10a-
1 under the Act.\57\ Under the terms of the Rule 10a-1 exemptive
relief, Participants may enter Commitments and Orders to sell short
eligible securities provided that certain conditions are satisfied.
Therefore, the Commission believes it is appropriate for the Exchange
to likewise exempt Participants from the short sale restrictions that
appear in Exchange Rule 455.
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\57\ See Exemptive Relief Letter supra note 13.
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For the reasons discussed above, the Commission believes it is
appropriate to approve the Exchange's proposal for a one year pilot
period. As part of the pilot process, the Commission expects the
Exchange to collect information pertaining to the operation and
effectiveness of the System. The Commission requests that the Exchange
use its ongoing research and surveillance to prepare a comprehensive
report that: (i) addresses the overall reliability of the System and
identifies any System outages or other technical problems, (ii)
provides a summary of the Exchange's surveillance efforts regarding the
System and identifies any Exchange investigations or enforcement
actions involving the System; (iii) discusses the strategies employed
by Users and Committers and evaluates whether the System is useful to
market participants; (iv) provides feedback from Exchange members and
non-members regarding their experiences with the System; and (v)
measures the System's impact and effect on trading in the primary
market of the eligible securities. In addition, because the Exchange
has independently committed to prepare a report regarding the number of
tape corrections and how they affect the final VWAP values calculated
by the Exchange, that analysis should be included in the report. The
Exchange is requested to submit its report on the System no later than
two months before the end of the pilot period.
The Commission finds good cause for approving proposed Amendment
Nos. 3 and 4 prior to the thirtieth day after the date of publication
of notice of filing thereof in the Federal Register. The Commission
notes that Amendment No. 3 revised the proposed rule change in several
ways. First, the Exchange agreed to operate the System as a facility of
the Exchange for a one year pilot period. The Commission believes it is
appropriate for the Exchange to operate the System on a pilot basis for
one year. The pilot period will provide the Exchange with the time
necessary to evaluate the effectiveness of the System and to identify
and remedy any problems or difficulties that may develop in its
operation. Based on the results of the pilot period, the Exchange may
propose an extension of the pilot period or seek permanent approval of
the System. Second, the Exchange agreed to limit the securities
eligible for matching through the System to 300 of the most highly-
liquid and highly-capitalized issues listed on the NYSE. The Commission
believes it is reasonable for the Exchange to limit the universe of
eligible securities to highly-liquid and highly-capitalized securities.
The Commission believes that the prices of large, actively traded
securities are difficult to impact, and that as a result, the System's
VWAP values should be
[[Page 15866]]
less susceptible to manipulation. Third, the Exchange clarified the
definition of an ``institution,'' committed to prepare a report
regarding the number of tape corrections and how they affect the VWAP
values calculated by the Exchange, and modified from 4:02 P.M. to
4:01:30 P.M. the cut-off time designed to capture trade reporting run-
off and sales that occur at the close of regular trading. Because each
of these revisions strengthens the proposal, the Commission believes
they are appropriate modifications.
In Amendment No. 4, the Exchange agreed to report pre-opening VWAP
volumes for each eligible security in which matches have been effected
during the Session. The Commission believes it is appropriate for the
Exchange to report VWAP volumes for eligible securities individually
before the start of regular trading. Despite the absence of a final
price, the Commission believes that pre-opening volume prints will
improve transparency and provide valuable information to market
participants. The Commission continues to believe that a single,
aggregate VWAP volume print encompassing all eligible securities, as
previously proposed by the Exchange, provides little benefit to market
participants. Amendment No. 4 also provided improved surveillance
procedures. Although the surveillance measures cannot be discussed in
specific terms because of their confidential nature, the Commission
believes the measures will strengthen the oversight of the System and
improve the proposal.
Based on the above, the Commission believes good cause exists,
consistent with Sections 6(b) and 19(b) of the Act,\58\ to accelerate
approval of Amendment Nos. 3 and 4 to the proposed rule change.
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\58\ 15 U.S.C. 78f(b) and 78s(b).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning Amendment Nos. 3 and 4 to the proposal, including
whether the proposed rule change as amended is consistent with the Act.
Persons making written submissions should file six copies thereof with
the Secretary, Securities and Exchange Commission, 450 Fifth Street,
NW., Washington, DC 20549-0609. Copies of the submissions, 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 persons, other than those that may be withheld from
the public in accordance with the provisions of 5 U.S.C. 552, will be
available for inspection and copying in the Commission's Public
Reference Section, 450 Fifth Street, NW., Washington, DC 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 April 22, 1999.
V. Conclusion
The Commission believes the Exchange's proposal satisfies the
standards of the Act that apply to national securities exchanges. The
Commission recognizes that investors desire to trade large blocks of
securities anonymously and free of the price movements that often
accompany such transactions. By operating a facility that allows
investors to anonymously effect block-sized trades at the day's volume
weighted average price, the Exchange will be able to better accommodate
the needs of investors.
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\59\ that the proposed rule change (SR-Phlx-96-14), as amended, is
approved for a pilot period ending March 24, 2000.
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\59\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\60\
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\60\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-8061 Filed 3-31-99; 8:45 am]
BILLING CODE 8010-01-M
