[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