regulatory organizations; proposed rule changes: Philadelphia Stock Exchange, Inc.,

[Federal Register: July 30, 1999 (Volume 64, Number 146)]

[Notices]

[Page 41480-41482]

From the Federal Register Online via GPO Access [wais.access.gpo.gov]

[DOCID:fr30jy99-161]

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41646; File No. SR-Phlx-99-21]

Self-Regulatory Organizations; Notice of Filing and Immediate Effectiveness of Proposed Rule Change by the Philadelphia Stock Exchange, Inc. To Establish Fees for Transactions Executed Through the Volume Weighted Average Price (``VWAP'') Trading System (``VTS'')

July 23, 1999.

Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that on June 28, 1999, the Philadelphia Stock Exchange, Inc. (``Exchange'' or ``Phlx'') filedwith 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 Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change form interested persons.

\1\ 15 U.S.C. 78s(b)(1).

\2\ 17 CFR 240.19b-4.

1. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change

   The Commission recently approved the Exchange's proposal to operate the Volume Weighted Average Price (``VWAP''‹SUP›‹/SUP›) Trading System (``VTS''‹SUP›TM‹/SUP›) \3\ as a facility of the Exchange.\4\ The VTS will provide a daily pre-opening order matching session for the execution of large stock orders at the VWAP. The Exchange now proposes to establish a fee schedule for trades executed through the VTS.

   \3\ VWAP is a registered trademark of the Universal Trading Technologies Corporation (``UTTC''). The VTS‹SUP›TM‹/SUP› is the property of UTTC.

   \4\ See Securities Exchange Act Release No. 41210 (Mar. 24, 1999), 64 FR 15857 (Apr. 1, 1999) (``VTS Approval Order''). The approval is effective for a 1 year pilot period.

   The text of the proposed rule change is available at the Office of the Secretary, the Exchange, and at the Commission.

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

   In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements.

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

      1. Purpose

         On March 24, 1999, the Exchange received Commission approval to operate the VTS as a facility of the Exchange. The VTS will provide a daily pre-opening order matching session for the execution of large stock orders at the VWAP. Approximately 300 of the most highly capitalized and highly liquid equity securities that are listed on the New York Stock Exchange will be

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         eligible for matching during the pre-opening session. During the pre- opening session, the VTS will electronically match orders for execution at the VWAP according to the algorithm developed by the Universal Trading Technologies Corporation. The matched and executed orders will be assigned a final VWAP after the close of regular trading.

         As a facility of the Exchange, the VTS will operate using Exchange equipment and personnel, allow Exchange floor traders to participate, and rely upon the Stock Clearing Corporation of Philadelphia (``SCCP'') to process VTS trades.\5\ Matches performed during the pre-opening session will be regulated and reported as Exchange trades. Further details regarding the operation of the VTS appear in the VTS Approval Order and Exchange Rule 237, ``The Universal Trading System Morning Session,'' which governs the operation of VTS.

         \5\ The SCCP has fileda separate proposal with the Commission to establish fees for the trade recording and confirmation services that SCCP will provide for VTS trades. See File No. SR-SCCP-99-02.

         The Exchange now proposes to adopt fees for trades executed through the VTS. Although trades executed on behalf of VTS users will result in transaction fees, it is only Exchange member firms and clearing firms that will be billed and held responsible for paying the fees. Thus, the transaction fees resulting from a VTS user's trading activity will be billed to the Exchange member or clearing firm through which the VTS orders were routed. Although the transaction fees vary primarily according to the ultimate user that receives trade execution through the VTS (e.g, retail customer, specialist, Exchange member), they also depend on the type of trade (e.g., cross versus non-cross), and the annual volume of VTS trading activity. The proposed fee schedule is as follows:

         ‹bullet› Institutional user and retail customer user (non-cross trades):

         1 share to 10 million shares per year: $0.02 per share ›10 million to 20 million shares per year: $0.015 per share ›20 million shares per year: $0.01 per share

         ‹bullet› Institutional user and retail customer user (cross trades):

         Intra-firm: $0.005 per share \6\

         \6\ Intra-firm cross trades refer to cross trades where the identified contra-sides are from the same firm. Because the same firm is on both sides of an intra-firm cross trade, the $.005 per share fee applies to each side, thus totaling $.01 per share.

         Inter-firm: $0.01 per share

         ‹bullet› Non-member/non-institutional user: $0.015 per share.

         ‹bullet› Specialist or alternate specialist Committer: No charge.

         ‹bullet› Member off-floor liquidity provider: $0.01 per share.

         ‹bullet› Member user (not enrolled as Committer): $0.01 per share.

         Under the proposal, the fees for non-cross trades executed on behalf of a institutional user \7\ or retail customer user \8\ will be predicated upon the aggregate number of shares that such institutional user or retail customer user trades annually through VTS. In calculating the number of shares that each user trades through the VTS, the Exchange shall always treat January 1 as the start of the year. For the first 10 million shares traded per year, the fee will be $.02 per share. For more than 10 million shares up to 20 million shares per year, the fee will be $.015 per share. For greater than 20 million shares per year, the fee be $.01 per share.\9\ These volume discount thresholds will be prorated based upon a user's enrollment date.\10\ The Exchange believes that reducing fees for increased trading volume should help attract order flow to the VTS.

         \7\ An institutional user is an entity not registered as a broker-dealer or doing business as a hedge fund (i.e., private investment pool), but one that serves in a fiduciary capacity. 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. See Exchange Rule 237(c)(v).

         \8\ The level of fees will not affect the manner in which orders are matched pursuant to the UTTC matching algorithm. See Exchange Rule 237(e).

         \9\ The Exchange's billing system monitors users' VTS transaction volume on an aggregate and ongoing basis. Therefore, discounts are immediately applied toward any VTS transaction volume that exceeds the discount thresholds. Telephone conversation between Michael L. Loftus, Attorney, Division of Market Regulation, Commission, and Nandita Yagnik, Counsel, Exchange, on July 8, 1999.

         \10\ For example, if a new user enrolled on July 1, the volume discount thresholds would be reduced by 50% because 50% of the year would have expired. Thus, the user's trades would generate transaction fees of $.02 for the first five million shares matched, $.015 for matches greater than 5 million shares up to 10 million shares, and $.01 for matches over 10 million shares.

         With respect to cross orders \11\ for institutional users and retail customer users, the Exchange proposes to charge $.005 per side, per share, for intra-firm crosses and $.01 per share for inter-firm crosses.\12\ The trade volume of users' cross orders (inter-firm and intra-firm cross orders) will not be counted toward the volume aggregations applicable to non-cross orders.

         \11\ 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 the cross can be entered separately, with the contra-side identified. See Exchange Rule 237(d)(i)(C).

         \12\ Inter-firm cross orders refer to cross orders where the identified contra-sides are from different firms.

         Trades for non-member/non-institutional users \13\ will be assessed fees of $.015 per share. Trades for specialist and alternate specialist Committers \14\ will not be charged transaction fees for VTS trades. Trades for the other type of Committer--Exchange members who serve as off-floor liquidity providers--will be charged $.01 per share. Lastly, trades for member users who are not enrolled as Committers will be assessed fees of $.01 per share.

         \13\ The non-member/non-institutional user category includes non-member broker-dealers.

         \14\ ``Committers'' are Exchange members who agree to provide contra-side liquidity on a proprietary basis. Committers are required to provide a minimum volume guarantee of 2,500 shares for each side of the market. Committer status is restricted to Exchange members that are: (i) Phlx floor traders, Phlx specialists, or Phlx alternate specialists; or (ii) off-floor liquidity providers. Specialists and alternate specialists may act as Committers only in their specialty issues. See Exchange Rule 237(c)(i). A more thorough description and discussion of order types, classes of users, and conditions to access appear in Exchange Rule 237 and the VTS Approval Order.

         Although Exchange members will be billed for the VTS trades of their customer users, no other separate fee shall apply to members acting as brokers. This practice is similar to other fee arrangements currently employed by the Exchange, including the assessment of fees for equity option transactions.\15\

         \15\ See Securities Exchange Act Release No. 41317 (Apr. 21, 1999), 64 FR 23144 (Apr. 29, 1999).

      2. Statutory Basis

         The Exchange believes that the proposed rule change is consistent with Section 6(b)(4) of the Act \16\ in that it provides for the equitable allocation of reasonable fees and other charges among members using VTS. The Exchange further believes that the proposed fee schedule is reasonable and will help attract order flow to VTS.

         \16\ 15 U.S.C. 78f(b)(4).

   2. Self-Regulatory Organization's Statement on Burden in Competition

      The Exchange believes that the proposed rule change will not impose any inappropriate burden on competition.

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

      The Exchange did not solicit or receive written comments with respect to the proposed rule change.

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

   Because the foregoing proposed rule change establishes a due, fee, or charge imposed by the Exchange, it has become effective upon filing pursuant to Section 19(b)(3)(A) of the Act \17\ and Rule 19b-4(f)(2) thereunder.\18\ At any time within 60 days of the filing of the proposed rule change, the Commission may summarily abrogate such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act.\19\

   \17\ 15 U.S.C. 78s(b)(3)(A).

   \18\ 17 CFR 240.19b-4(f)(2).

   \19\ In reviewing this proposed rule change, the Commission has considered the proposal's impact on efficiency, competition and capital formation. 15 U.S.C. 78c(f)

4. Solicitation of Comments

   Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Persons making written submissions should file six copies thereof with the Secretary, Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549- 0609. Copies of the submissions, all subsequent amendments, all written statements with respect to the proposed rule change that are filedwith 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, 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-99-21 and should be submitted by August 20, 1999.

   For the Commission, by the Division of Market Regulation, pursuant to delegated authority.\20\

   \20\ 17 CFR 200.30-3(a)(12).

   Margaret H. McFarland, Deputy Secretary.

   [FR Doc. 99-19489Filed7-29-99; 8:45 am]

   BILLING CODE 8010-01-M