[Federal Register Volume 61, Number 177 (Wednesday, September 11, 1996)]
[Notices]
[Pages 47993-47999]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-23122]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37640; File No. SR-Phlx-96-14]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Philadelphia Stock Exchange, Inc. Relating to the
Universal Trading System's Morning Session
September 4, 1996.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on April
29, 1996, the Philadelphia Stock Exchange, Inc. (``Phlx'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the self-regulatory
organization. On July 26, 1996, the Exchange submitted to the
Commission Amendment No. 1 to the proposed rule change.\1\ The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ See letter from Gerald D. O'Connell, Senior Vice President,
Market Regulation and Trading, Operations, Phlx, to Jennifer Choi,
Division of Market Regulation, SEC, dated July 26, 1996. The
Exchange clarifies that it does not propose to trade Nasdaq
securities through the Universal Trading System (``UTS'') without a
computer-to-computer interface to the National Association of
Securities Dealers for reporting purposes.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Phlx, pursuant to Rule 19b-4 of the Act, proposes to implement
a daily pre-opening order matching session
[[Page 47994]]
(``Morning Session'' or ``session'') for the execution of large-sized
stock orders on a volume weighted average price (``VWAP'') basis on its
equity floor. The VWAP shall be derived from transactions executed
during the trading day and reported to the appropriate reporting
authority. The Morning Session has been designed to provide
institutional investors with the means to execute large-sized stock
orders in Exchange securities anonymously and at fair market prices
approximately 15 minutes prior to the opening of the ``regular trading
session'' (i.e., 9:30 A.M.-4:00 P.M. (ET)). The price of Morning
Session transactions will be determined at approximately 4:15 P.M.
(ET). At that time, the Exchange shall assign the applicable VWAP and
report each such trade to the appropriate reporting authority, the
Consolidated Tape or other, as VWAP trades.
The receipt and matching of orders for the Morning Session will be
handled electronically through the Exchange's Universal Trading System
(``UTS'' or ``System''). The UTS is a system that was devised for
facilitating the operational aspects of the Morning Session.
Each of the approximately 2,500 equity securities currently
available for trading on the Exchange, both listed and traded pursuant
to Unlisted Trading Privileges (``UTP'') (including over-the-counter
securities) will be eligible for the Morning Session.
The present proposal consists of changes to existing Exchange rules
to accommodate the Morning Session and the adoption of a new rule
applicable solely to the Morning Session, Rule 237--UTS Morning
Session. In addition, Rule 101 is proposed to be amended to add the
Morning Session as an exception to regular trading hours.\2\
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\2\ The Exchange also proposes several minor amendments to Rule
101, including placing A.M. and P.M. in capital letters, adding a
heading to each commentary, and deleting reference to two specific
index options.
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Proposed Rule 237 is organized as follows: an introductory
paragraph, followed by paragraphs: (a) explaining reporting; (b)
defining the UTS; (c) governing who the participants are; (d)
explaining order entry; (e) specifying order priority; (f) defining the
VWAP; (g) governing short sales in the UTS; (h) concerning disputes;
(i) containing provisions relating to limitation of liability; and (j)
pertaining to trading halts.
UTS trades will be subject to transaction fees as established in
the Exchange's fee schedule.
The Universal Trading System
The UTS will operate as a separate Exchange system made available
to Phlx member organizations and their non-member customers for the
purpose of participating in the Morning Session. UTS will link off-
floor and on-floor computer terminals to an Exchange communications
base unit. UTS access is accomplished through dial-up into the UTS
system, utilizing software provided to users and a log-on procedure
dependent upon whether the user is accessing UTS through a personal
computer or main-frame system.
The UTS base unit will: (i) accept orders and commitments, (ii)
match buyers with sellers, (iii) give execution reports to matched
participants (iv) calculate the VWAP for each traded security, (v)
report trades to the central processor for tape reporting, and (vi)
create the necessary audit trail, recording order entry and execution
of Morning Session orders.
The UTS was developed by Universal Trading Technologies Corporation
(``UTTC''), who will assist the Exchange in its operation of the System
in accordance with its agreement with the Exchange.
Participation and Clearing Requirements
Participation in the Morning Session may occur by way of a
commitment from a Committer or an order from a User (collectively,
``Participants'').
Phlx Floor Traders and Off-Floor Liquidity Providers (collectively,
``Committers'') will each day commit on a proprietary basis to provide
contra-side liquidity in eligible securities for the execution of
Morning Session orders placed by non-committer members and their
customers (collectively, ``Users''). UTS commitments may only be made
by Exchange members. Committers may be either Phlx Floor Traders or
Off-Floor Liquidity Providers, who must register with the Exchange in a
prescribed manner prior to acting in the capacity of a Committer. Phlx
Floor members qualify as Floor Traders if they are either the
Specialist or Alternate Specialist in the security on the Phlx. Off-
Floor Liquidity Providers must be members and may only engage as
Committers for their proprietary accounts. Committers will be able to
choose which, if any, issues they wish to make commitments, but for
each chosen issue must provide a minimum volume guarantee of 2,500
shares on each side of the market.
Commitments may be entered and modified in the UTS during the Order
Entry Time Period and also during any other periods which the Exchange
may make available for that purpose. Committers may make such contra-
side liquidity commitments through the UTS as day-commitments or good-
till-cancelled (``GTC'') commitments.
UTS orders may only be placed by approved Users. Users may be
either members or non-members; however, individual orders placed
directly by non-members will require a Stock Clearing Corporation of
Philadelphia (``SCCP'') member's give-up to ensure that a Phlx clearing
member, who must also be a Phlx member, has assumed responsibility for
the order. Specifically, the Exchange member must agree to be jointly
and severally liable for actions of the non-member through the UTS and
the non-member must agree to adhere to all applicable by-laws and rules
of the Exchange. Give-up agreements with non-members must be approved
in advance by the Exchange, including a delineation of the credit
limits for the respective customer.\3\ The ``three way agreement''
between the Exchange, the member and the non-Member User is in addition
to the give-up agreement.\4\
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\3\ A draft of a sample three way agreement was submitted to the
Commission by letter dated February 7, 1996. Since that time, the
Exchange has added a provision relating to the Exchange's ability to
terminate a User's access to the System. The draft, including this
new provision, will be re-submitted to the Commission.
\4\ Telephone conversation between Jennifer S. Choi, Division of
Market Regulation, SEC, and Edith Hallahan, Special Counsel,
Regulatory Services, Phlx, on August 15, 1996.
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UTS Order Entry
Users will enter orders directly and anonymously into the UTS from
computer terminals, which may include various types of computer
hardware and handheld devices. Only those orders and commitments placed
through UTS will be eligible for execution during the Morning Session
and orders entered into the UTS are only eligible for execution through
UTS.\5\ UTS orders will only be accepted during the UTS order entry
time period, 5:00 a.m. to 9:15:00 a.m. (ET), and will only be eligible
for a UTS execution on the day the order has been placed. UTS orders
and commitments may be cancelled (order condition CXL) until 9:15 a.m.
(ET). Confirmation of order placement and cancellation is
electronically confirmed throughout the UTS.
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\5\ Commitments also are only eligible for execution through UTS
and do not migrate to any other trading session. Telephone
conversation between Jennifer S. Choi, Division of Market
Regulation, SEC, and Edith Hallahan, Special Counsel, Regulatory
Services, Phlx, on May 22, 1996.
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[[Page 47995]]
Morning Session trading interest may be entered into UTS in the
form of either: (i) An order to trade as a User; or (ii) as a
commitment to provide contra-side liquidity to User orders. The minimum
order size for individual User orders shall be 5,000 shares, while
Committers will be permitted to commit in sizes of 2,500 or greater.
In placing orders and commitments on the System, Participants will
be required to provide order/commitment description and account
identification information necessary for UTS to establish the priority
and eligibility of orders on the System. Specifically UTS orders and
commitments are to be placed with the following designations:
(i) buy/sell;
(ii) volume;
(iii) stock symbol;
(iv) Participant status: C (Committer) or U (User);
(v) Committer account ``commit'' status: T (Floor Trader) or L (Off-
Floor Liquidity Provider); and GTC or Day;
(vi) User account ``order'' status: F (member firm), C (public customer
or Registered Investment Adviser); order type (basic, cross,
facilitation, etc.);
(vii) Exchange clearing member organization number;
(viii) give-up of Phlx floor broker (required for each User order);
(ix) User identification number; and
(x) restrictions, if any, on matching against member accounts.
Order Types
Eligible order types for the Morning Session include the following:
basic, all-or-none, minimum size, facilitation, facilitation-only,
facilitation-if-necessary, facilitation-minimum and cross.
In addition to the size-related order types--including basic orders
(i.e., fill-order-to-extent-possible), all-or-none orders and minimum
size orders--the UTS also permits Users to place orders with ``cross''
and ``facilitation'' instructions. A cross order is a two-sided order,
with both sides comprised of non-member interest, placed by one User
with instructions to match the identified buy-side with the identified
sell-side. Facilitation orders, on the other hand, are two-sided orders
where one side is comprised of non-member interest and the other side
of member interest, with the instruction to cross the non-member
interest with the facilitating member interest; a facilitation order
may also consist of both sides comprised of member interest with the
instruction to cross the members' orders.
Participants may place simple-facilitation orders or may attach
contingency instructions on facilitation orders, whereby certain
conditions must be met for execution, as indicated below:
--Simple-facilitation: match the facilitator as contra-side to the
accompanying order to the full extent permissible for the facilitator
under the Morning Session's priority rule for facilitation-cross
orders, but to also, nonetheless, allow any other order(s) with
priority over the facilitator to be matched as the contra-side to the
accompanying order.
--Facilitation-only: only execute the cross if the facilitator can be
completely matched with the accompanying order; otherwise both sides of
the facilitation-only order are cancelled.
--Facilitation-minimum: only execute if the facilitator can be matched
on a specified minimum number of shares with the accompanying order.
--Facilitation-if-necessary: only match the facilitator to the
accompanying order if no other orders or commitments can be matched
with the order.
Execution and Priority of Orders
Orders for the Morning Session will be matched at approximately
9:16 A.M. (ET). Trades executed through the UTS are printed and cleared
as Phlx transactions, executed on the Exchange and cleared through
SCCP. In matching VWAP orders for execution during the Morning Session,
the following execution priority will apply:
(1) Match non-member User orders (public customers and Registered
Investment Advisers acting on behalf of non-member accounts) with other
non-member User orders;
(2) Match non-member User orders (not matchable with other non-
member User orders) with Member User orders;
(3) Match non-member User orders (not matchable with each other or
with member User orders) with commitments;
(4) Match member User orders (not matchable with non-member User
orders) with other member User orders; and
(5) Match member User orders (not able to be matched with other
User orders) with commitments.
The System will not, however, match commitments with other commitments.
User orders are afforded priority as follows: first by account
type, in accordance with the five steps described above; then by order
size (largest first, etc.); and then, for orders of the same size and
account type, on a chronological basis by time-of-entry. Similarly,
commitments are prioritized, as follows: first, on the basis of sub-
account types, with Off-Floor Liquidity Providers receiving priority
over Floor Traders; then, on the basis of commitment size (largest
first, etc.); and finally, on a rotational basis among those of the
same size and sub-account type.\6\
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\6\ For commitments of the same subaccount type and size, the
System will choose commitments to be matched on a random basis.
Telephone conversation between Jennifer S. Choi, Division of Market
Regulation, SEC, and Edith Hallahan, Special Counsel, Regulatory
Services, Phlx, on May 22, 1996.
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Notwithstanding the above, cross orders for the accounts of non-
members have absolute priority to trade with each other regardless of
size or time priority considerations respecting other orders in the
security. The non-member side to a facilitation order will have
absolute priority to participate regardless of size or time priority of
other orders (other than customer-to-customer cross orders), but the
member firm side to a facilitated cross, though it will have priority
to trade with its customer over other member firm interest, will not
have priority over non-member orders.
Participants are allowed to place instructions stipulating that
their orders and commitments only be matched with non-member account
orders. Orders and commitments must, however, be available for matching
against all non-member orders.
VWAP
The VWAP that the Exchange shall assign to each eligible security,
which shall be derived daily and publicly disseminated promptly
following calculation at 4:15 P.M. (ET) for each of the Exchange's
2,500 eligible equity issues, will be calculated on the basis of those
transactions reported during the regular trading session to the
appropriate reporting authority, Consolidated Tape or other reporting
authority. Generally, consistent with Rule 111, all UTS matches create
a binding contract. However, in the case where a transaction occurs in
the Morning Session in a security that has not opened for trading by
3:00 P.M. (ET) on the primary market, the respective Morning Session
transaction will be voided and a report to that effect will be sent
immediately to all matched Participants.
In general, the VWAP for each eligible security shall be calculated
by: (i) utilizing all regular way trades (including sold sales and late
sales \7\)
[[Page 47996]]
effected from the opening of the regular trading session and printed
prior to 4:15:00 P.M. (ET) by the appropriate reporting authority,\8\
(ii) multiplying each respective reported price by the total number of
shares traded at that price; (iii) adding together each of these
calculated values, compiling an aggregate sum, and (iv) dividing the
aggregate sum by the total number of reported shares for that day in
the security. The resulting VWAP will be reported in the form of a
fraction, rounded to the nearest \1/256\th.
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\7\ A late sale is an option transaction that is a correct last
sale but is publicly disseminated later than is generally required.
Generally, each option transaction is required to be publicly
disseminated within 90 seconds after the execution. A sold sale
designates a transaction appearing on the tape out of its proper
sequence.
\8\ However, prints representing trades executed after regular
trading hours (9:30 A.M. to 4:00 P.M. (ET)), such as the Phlx's Post
Primary Session (``PPS'') as well as the Pacific Stock Exchange,
Inc. (``PSE''), will not be utilized in the VWAP calculation after
4:02 P.M. (ET).
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Reporting
Although the UTS will become available for all Exchange securities,
different reporting schemes will be employed for exchange-listed
securities and for Nasdaq National Market securities. All UTS
transactions will first be reported to the respective reporting
authorities at approximately 9:20 A.M. (ET) as a single volume print
including all matches in all securities. The morning print for listed
securities will occur by way of an administrative message over the
Consolidated Tape reflecting total volume in exchange-listed
securities. The morning print for Nasdaq securities will occur in
similar fashion by way of a direct linkage to the National Association
of Securities Dealers, Inc. (``NASD''). The morning prints are intended
to notify investors regarding pre-opening volume.
Paritcipants, under normal circumstances, will also be notified of
their levels of participation by 9:20 A.M. (ET). UTS transactions will
be reported to the User and the Committer in the form of automated
reports reflecting the number of shares traded by the Participant
through the UTS in each issue.
Promptly following calculation of the final VWAP, at approximately
4:20 P.M. (ET), trades are assigned that day's VWAP for that security
and will, at that time, be reported to the appropriate reporting
authority. The Exchange will continuously calculate the VWAP throughout
the trading day, on a minute-by-minute basis, for each issue available
for trading. The intra-day VWAP as well as the final VWAP will be
available to all UTS Participants through the UTS. Each Morning Session
match, once a VWAP is assigned, constitutes a completed transaction for
the purpose of reporting the trade to the appropriate reporting
authority.
End-of-day prints will normally be reported promptly following
calculation of the final VWAP at 4:15 P.M. (ET) and, unlike the morning
prints, the end-of-day prints will be printed on a trade-by-trade basis
for each individual interested which was matched that morning. Each
print will reflect a matched trade and the corresponding VWAP. These
trades will be reported to the Consolidated Tape with the sale
condition ``B'' indicating average weighted pricing, which will
distinguish VWAP trades from other transactions that may possibly be
reported after the close (such as after-hours, crossing session or late
sales transactions). With respect to Nasdaq National Market securities,
the ``W'' indicator will likewise be utilized to indicate average
weighted pricing. Reporting to the NASD will occur automatically via
computer interface once such interface is completed. The Exchange
states that it does not propose to trade Nasdaq securities through the
UTS without a computer-to-computer interface to the NASD for reporting
purposes.\9\
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\9\ The Exchange notes that Nasdaq issues traded on the Exchange
during regular trading hours would currently be reported directly to
the NASD utilizing Nasdaq terminals.
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The UTS will not disseminate orders or commitments, including UTS
bid/ask sizes, prior to the Morning Session match or UTS imbalances
remaining after the Morning Session match. The purpose of this
anonymity is to safeguard against dissemination to any other
participant the existence of executed or unexecuted block orders,
which, in turn, could, if disseminated, influence the market after the
opening of the regular trading day.
Other Provisions
Pursuant to proposed paragraph (h), disputes respecting UTS Morning
Session participation, or eligibility of orders or participants, are to
be resolved by the Exchange. The Exchange's liability respecting the
UTS is limited pursuant to By-Law Article 12-11. Thus, the Exchange is
not liable for any damage arising from the use of the UTS. With respect
to trading halts, Rule 237 is not intended to limit the ability of the
Exchange to otherwise halt or suspend trading in any stock traded
through the UTS. The Exchange may determine, due to extraordinary
circumstances to adjust or modify any of the times referenced by this
rule respecting the order entry period, order matching period or any
aspect of the transaction reporting procedures. Lastly, short sales are
governed by proposed paragraph (g), which states that UTS Morning
Session orders and commitments are not subject to the short sale
restrictions of Rule 455.\10\ Further, positions resulting from UTS
Morning Session transactions are effective for the purpose of
determining long or short status, immediately upon notification tot he
participant of a UTS execution, notwithstanding that the VWAP has not
yet been determined.
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\10\ For short sales, orders will be marked pursuant to Rule
455. See proposed Phlx Rule 237(g).
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The specific text of the proposed rule change is available at the
Exchange and the Commission.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of and basis for the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of these statements may be examined at
the places specified in Item IV below. The self-regulatory organization
has prepared summaries set forth in Sections A, B, and C below, of the
most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
During the past ten years, listed equities trading volume has
experienced explosive growth, from 31.9 billion shares in 1985 to 98
billion shares in 1995. At the same time, Nasdaq volume grew at an even
greater pace, from 20.6 billion shares in 1985 to 102 billion shares in
1995. Together, for 1995, the listed exchange markets and Nasdaq
(collectively, ``the markets'') traded in excess of 200 billion shares.
A contributing factor to this volume surge is the increasing presence
of institutional trading. The Exchange expects that over ten million
trades of 5,000 shares or more will be executed in the markets during
this year.
Although institutional trading of block orders often consists of
member firms trading for their proprietary accounts, the vast majority
of such trading is for the benefit of non-member accounts. The common
thread among most of these non-member block orders is that the
investment focus is long-term, rather than short-term. When the
investment focus is long-term, intra-day
[[Page 47997]]
price drops occurring when positions are purchased or sold are
problematic ``bumps'' in the road. Many long-term investors prefer to
avoid such drops, even though an opportunity to buy at the low or sell
at the high may be lost. Smoothing over these bumps would be beneficial
to long-term investors. In this vein, long-term investors often link
the ability to secure fair prices to the ability to retain anonymity
while ``working'' large orders.
On the other hand, member firms typically use intra-day volatility
as an opportunity to trade in the short term. Such firms do so either
as facilitators for their customer orders, arbitrageur or as registered
floor traders. Many of these traders welcome the opportunities
presented by additional volume and volatility. Thus, diverting such
intra-day risks from long-term investors (who seek to avoid such risks)
to proprietary traders (who seek to assume such risks) is the primary
goal of the Phlx's proposal to adopt a Morning Session for the
execution of large-sized securities on a VWAP basis.
By placing intra-day price risks on those most willing, and most
suited, to accept such risks, the Morning Session will serve both
institutional investors and proprietary traders. The advantages of the
Morning Session will be available to all qualified market participants
for eligible sized orders. Institutions, which will particularly
benefit from the session, however, include corporate pension funds,
state and municipal pension funds, major money managers and mutual
funds. In addition to offering fair pricing, the session will also be
cost effective, as it will often replace the costs of ``working'' an
order over the course of a day or longer, with the ease of a single
execution and single transaction charge.
The Phlx believes that the UTS is an innovative new automated
system, which complements the existing auction market. By integrating
order entry functions for customer orders into an automated matching
system with floor traders as well as off-floor traders serving as
facilitators, and then executing such orders on a VWAP basis in a
manner designed to facilitate customer interests first, the UTS
incorporates the principles of an auction market with the automation
benefits of an electronic execution system. Thus, the Exchange believes
that the UTS, as a new data processing and communication technique,
creates the opportunity for more efficient and effective market
operations, consistent with Section 11A(a)(1)(B) of the Act, by
providing increased execution alternatives to investors. By combining
pricing in terms of a VWAP with the ability to access block-sized
liquidity commitments, and by providing the ability to anonymously
effect such block-sized orders prior to the opening of the regular
session, the Exchange's Morning Session should particularly accommodate
institutional customer interests.
The Exchange proposes to adopt Rule 237 to establish and govern the
UTS. In general, the UTS will accept orders and commitments of
established minimum volumes (i.e., 5,000 shares for orders and 2,500
shares for commitments), executing orders against other orders and
commitments at the VWAP. The VWAP will be assigned to each matched
trade and reported to the appropriate reporting authority, Consolidated
Tape or directly to the NASD, including trade-by-trade volume and the
VWAP. Consistent with Rule 11Aa3-1 under the Act, the Exchange will
thereby provide for the collection and dissemination of transaction
reports containing, among other things, the price of the security.
Because the System's matching process should be completed prior to the
time of the opening of the Phlx market at 9:30 A.M. (ET), the issue of
the integration of UTS orders into the auction market is not raised by
the proposal.
The Exchange recognizes that Section 11Ac1-1 under the Act bids/
offers will not be utilized in the UTS within the meaning of the rule
because all orders are executable only at the VWAP, rendering bids/
offers meaningless.\11\ Further, UTS orders do not raise price priority
issues because all orders have been entered for execution at the VWAP.
The UTS will executive orders bases on the priority principles
enumerated in Rule 237, which is consistent with Section 11(a) of the
Act, in that members yield priority to non-members. Off-Floor Liquidity
Providers receive priority over Floor Traders to encourage commitments.
Because Floor Traders' priority is last-in-line, no issue of
Specialists trading ahead of customers is raised by the UTS.
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\11\ The Exchange has requested exemptive relief from the
requirements of this Rule. See letter from Gerald D. O'Connell,
First Vice President, Phlx, to Larry E. Bergmann, Assistant
Director, Division of Market Regulation, SEC, dated February 28,
1996. In this letter, the Exchange has also requested interpretive
relief regarding Rule 11A2-2(T) under the Act.
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The Exchange believes that the proposed reporting scheme provides
transparency to Morning Session executions, specifically identifying
the total volume executed before the opening, first as a single print
and, once the VWAP is calculated, trade-by-trade. With respect to
Nasdaq National Market securities, the Exchange believes that reporting
UTS transactions to the NASD by computer interface is consistent with
the Joint Industry Plan \12\ (``Plan'') adopted pursuant to Section
12(f) of the Act, which governs the collection, consolidation and
dissemination of quotation and transaction information for Nasdaq
National Market securities listed or traded pursuant to UTP on an
exchange. The Exchange does not believe that the Plan precludes VWAP
trading, but rather that the Plan focuses on assuring adequate
reporting of covered securities. The Exchange's proposal to report
directly to the NASD is thus consistent with the Plan.
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\12\ This Plan was recently amended and extended by the
Commission. See Securities Act Release No. 36481 (Nov. 13, 1995)
(File No. S7-24-89).
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The UTS will operate as a facility of the Exchange within the
meaning of Section 3(a)(2) of the Act, in that the UTS utilizes Phlx
equipment and personnel, floor trader participation, and SCCP to clear
UTS trades. Thus, Morning Session trades will be appropriately
regulated and reported as Exchange trades. The Phlx notes that this is
similar to the regulatory treatment afforded to after-hours trading
sessions on the Exchange as well as other exchanges.\13\
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\13\ See e.g., Securities Exchange Act Release No. 29237 (May
24, 1991) (File No. SR-NYSE-90-52 and SR-NYSE-90-53 establishing an
off-hours trading facility).
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As previously stated, the VWAP will be calculated on the basis of
those transactions reported by the appropriate reporting authority for
the respective security from the beginning of the regular trading
session to 4:15 P.M. (ET). In the case where a transaction occurs in
the Morning Session in a security that has not opened for trading that
day for any reason in the primary market by 3:00 P.M. (ET), the
respective Morning Session transaction will be voided and a report to
that effect will be immediately sent. The Exchange believes that
establishing a specific time frame by which a security must trade
givers further assurance that the VWAP will consist of a representative
sample of trades from which to derive a calculation. Additionally, this
provision will also serve the important function of prompt notice that
the Morning Session transaction will be voided if the primary market
has not yet opened in a particular issue. Although written confirmation
will follow, Users will be aware that this rare exception to the
creation of a binding contract through the UTS may occur by observing
that an issue failed to open on its primary market. The 3:00 P.M. (ET)
cut-off provides an objective limitation on the
[[Page 47998]]
VWAP calculation, which notifies the User that a representative VWAP
cannot be calculated for that day. The Exchange has determined that the
3:00 P.M. (ET) provision is preferable to calculating a VWAP based on
the previous day's pricing, because an important purpose of the VWAP is
to incorporate and average that day's price movement.
With respect to trading halts, if a security opens for trading but
is the subject of a halt and does not resume trading for the remainder
of the day, the Morning Session transaction is based on the prints that
occurred before the halt. The Exchange realizes that a security may
only be open for a short time before it is halted; however, the
Exchange believes that for the purposes of the UTS VWAP calculation,
trading that occurs prior to a halt forms a reasonable basis for
calculating a VWAP for that day, even if the security does not reopen
that day. A significant amount of price discovery is involved in an
opening print, such that it provides an appropriate VWAP measure, which
is preferable to voiding that day's UTS trades.
Nevertheless, the Exchange maintains that the Morning Session
execution is an executed Exchange contract, with only one unusual
circumstance enumerated above. The Exchange notes that although
utilizing the VWAP as a pricing mechanism is new to exchange trading,
block trades as well as certain Nasdaq trades are currently reported as
average weighted pricing trades.
With respect to access to the System, as stated above, Participants
may be either Users, who may enter orders, or Committers, who must be
Exchange members. Because Users may be non-members of the Exchange,
limited non-member access to the UTS is proposed. The Exchange believes
that the UTS provides adequate controls regarding limited non-member
access to the System. Specifically, orders placed directly by non-
members will require a give-up agreement between the non-member and a
SCCP member, which must be approved in advance by the Exchange,
including a delineation of the credit limits for the respective
customer. Thus, the clearing member will agree to clear trades for the
non-member User up to specified dollar amount.
In addition, a separate ``three way agreement'' concerning
disciplinary jurisdiction is also required. The purpose of this
arrangement is to ensure that a Phlx clearing member, who must also be
a Phlx member, has assumed responsibility for the order. The Exchange
member must agree to be jointly and severally liable for all actions of
the non-member through the UTS and the non-member must acknowledge its
responsibility to all applicable by-laws and rules of the Exchange to
the same degree as if the order were placed directly with the give-up
firm, providing a jurisdictional basis for disciplinary action against
such non-member. The required agreement with the non-member User
provides that the Exchange has the right to terminate the User's access
to the UTS, without prior notice for any reasons, or no reason
whatsoever. In addition, termination of the agreement or clearing
arrangement necessarily results in the Exchange's ability to terminate
access to the UTS. The Exchange believes that these requirements ensure
adequate controls over non-member access, including Exchange
supervision of and jurisdiction over non-member Users. The Exchange
notice that similar non-member access has been afforded to other
exchange systems.\14\ Utilizing SCCP facilities and requiring Exchange-
approved agreements with non-members are intended to facilitate
coordination with persons engaged in clearing and settling these
transactions, consistent with Section 6(b)(5).
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\14\ See Securities Exchange Act Release No. 35030 (Nov. 30,
1994) (File No. SR-CHX-93-19) (Order approving Chicago Match and, at
note 70, reference to the New York Stock Exchange's SuperDOT).
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The Exchange notes that Section 10(a) of the Act governs short
sales in securities, while Rule 3b-3 defines the term ``short sale'' as
``any sale of a security which the seller does not own or any sale
which is consummated by the delivery of a security borrowed by, or for
the account of, the seller.'' Further, Rule 3b-3 provides that if a
person has ``purchased, or has entered into an unconditional contract,
binding on both parties thereto, to purchase'' a security, then that
person shall be deemed to own that security.\15\ Separately, the
Exchange has requested exemptive relief from the ``tick test'' of
Section 10(a) of the Act.\16\ Thus, pursuant to Rule 237(g), UTS
Morning Session orders and commitments are not subject to the short
sale restrictions of Rule 455. Specifically, because a long position
creates an irrevocable contract, a purchase during the UTS Morning
Session may be followed by sales during the regular trading session in
that security, without such sales deemed short sales.
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\15\ The Exchange also understands that amendments to these
provisions propose that if the ownership of a security is claimed by
virtue of having entered into a contract to purchase it, the
contract must involve a fixed, currently ascertainable amount of the
security at a fixed, currently ascertainable price. Separately, the
Exchange requested that an exemption for the Morning Session be
incorporated into these amendments. See letter from Gerald D.
O'Connell, First Vice President, Phlx, to Larry E. Bergmann,
Assistant Director, Division of Market Regulation, SEC, dated
November 9, 1995.
\16\ Id.
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Lastly, the Exchange proposes to amend Rule 101 to adopt Commentary
.03 reflecting the UTS Morning Session and providing reference to Rule
237. The Exchange also proposes minor changes to Rule 101 for clarity
and correction. Specifically, A.M. and P.M. would appear in capital
letters consistently throughout the rule, and there would be a heading
for each commentary. In addition, reference to two specific index
options, the Value Line Index Options and National Over-the-Counter
Index Options, would be replaced with the language ``broad-based
(market) index options,'' which shall freely trade until 4:15 P.M. (ET)
each business day. Thus, each Exchange market index option would not
have to be listed in this rule; Rule 1101A currently provides such a
list of market index options, all of which trade until 4:15 P.M. (ET).
The Exchange believes that these changes to Rule 101 should both
correct and clarify its provisions.
2. Statutory Basis
For the reasons stated above, the Phlx believes that the proposal
to operate a Morning Session utilizing the UTS is consistent with the
Act, and particularly with Sections 6, 11 and 11A. Specifically, the
proposal is consistent with Section 6(b)(5), in that it is designed to
promote just and equitable principles of trade, prevent fraudulent and
manipulative acts and practices, to foster cooperation and coordination
with persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system, as well as to
protect investors and the public interest, by providing an automated
order entry and execution system for securities traded during the
Morning Session.
The Exchange anticipates that significant institutional volume
could be attracted to the Phlx, which should, in turn, add liquidity to
both the Morning Session as well as to the Phlx's regular trading
session. The Exchange believes that the UTS provides an important new
pricing mechanism for exchange trades--the VWAP. Further, the Exchange
believes that the Morning Session should provide a unique opportunity
to electronically submit block-sized orders for automatic matching
before the regular opening at
[[Page 47999]]
9:30 A.M. (ET). Thus, the UTS should perfect the mechanism of a free
and open market and a national market system. The proposal at hand
employs specific procedures and safeguards designed to protect
investors and the public interest, prevent fraudulent and manipulative
acts and practices and promote just and equitable principles of trade.
These procedures include specific execution priority parameters, order
entry specifications and Exchange surveillance procedures (separately
submitted) designed to monitor UTS transactions. The Exchange also
believes that because the UTS Morning Session is limited to a once-per-
day session and adequately provides for transparency, despite the
requested limited exemptive relief, the proposal is consistent with the
Act.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any inappropriate burden on competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the publication of this notice in the Federal
Register or within such other period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve the proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for inspection and copying at the
Commission's Public Reference Section, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Copies of such filing will also be available
for inspection and copying at the principal office of the Exchange. All
submissions should refer to File No. SR-Phlx-96-14 and should be
submitted by October 2, 1996.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-23122 Filed 9-10-96; 8:45 am]
BILLING CODE 8010-01-M
