[Federal Register Volume 64, Number 59 (Monday, March 29, 1999)]
[Notices]
[Pages 14953-14959]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-7542]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41199; International Series Release No. 1189; File No. 
10-126]


Tradepoint Financial Networks plc; Order Granting Limited Volume 
Exemption From Registration as an Exchange Under Section 5 of the 
Securities Exchange Act

March 22, 1999.

I. Summary

    Tradepoint Financial Networks plc (``Tradepoint'' or the 
``Exchange'') operates as a securities exchange from facilities in 
London under the marketing

[[Page 14954]]

name Tradepoint Stock Exchange. it is a Recognised Investment Exchange 
under section 37(3) of the U.K. Financial Services Act 1986. The 
Exchange does not have a physical trading floor; it is a screen-based 
electronic market for the trading of securities (``Tradepoint 
System''). All of the securities currently traded through the 
Tradepoint System are listed on the London Stock Exchange (``LSE''), 
which is the primary market for those securities.
    By letter dated November 20, 1997, Tradepoint filed with the 
Securities and Exchange Commission (``Commission''), pursuant to 
Section 5 of the Securities Exchange Act of 1934 (``Exchange Act''), an 
application for exemption from registration as a national securities 
exchange under Section 6 of the Exchange Act if Tradepoint operates the 
Tradepoint System in the United States. Tradepoint anticipates that the 
Exchange will account for limited volume in trading of securities.\1\
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    \1\ See Letter from Joseph S. Cohn, Davis Polk & Wardwell, 
counsel for Tradepoint, to Jonathan G. Katz, Secretary, dated 
November 20, 1997, available in the Commission's Public Reference 
Room (File No. 10-126). On April 6, 1998, Tradepoint filed an 
amendment to the filing. On June 30, 1998, Tradepoint filed a second 
amendment to the filing. Both amendments are also available in the 
Commission's Public Reference Room.
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    The Commission published Tradepoint's application for comment on 
July 2, 1998.\2\ In response, the Commission received eight comment 
letters.\3\ Based on its conclusion that Tradepoint will effect a 
limited volume of transactions and that it is practicable and not 
necessary or appropriate in the public interest or for the protection 
of investors for Tradepoint to register under Section 6 of the Exchange 
Act, the Commission hereby grants Tradepoint's application for 
exemption from registration as a national securities exchange.
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    \2\ Exchange Act Release No. 40161 (July 2, 1998), 63 FR 37146 
(July 9, 1998) (``Tradepoint Notice''). The file number originally 
assigned to Tradepoint was 10-101. Tradepoint has been reassigned to 
File No. 10-126.
    \3\ Most commenters favored granting Tradepoint a low volume 
exemption from exchange registration. The comment letters are 
discussed in Section IV of this Order.
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II. Description of the Tradepoint System

    The Exchange is an alternative market to the LSE. From its 
facilities in London, the Exchange supplies automated trading services 
to market-makers, broker-dealers and institutional investors 
(collectively, ``Members'') on identical terms and conditions. 
Potential Members must meet the eligibility requirements of the 
Exchange.\4\ Status as a Member of the Exchange does not carry voting 
rights or any other rights, other than the right to trade using the 
Tradepoint System.\5\
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    \4\ These requirements are set forth in Tradepoint Market Rule 
3.4 (see Exhibit A(2)(b) of Tradepoint's application). Both U.S. and 
non-U.S. applications must be authorized to conduct investment 
business, have arranged for clearing arrangements with an Exchange 
Clearing Member (a Member of the Exchange that is also a member of 
the London Clearing House, as more fully described below), and meet 
the standards of financial responsibility and operational capability 
prescribed by the Exchange.
    \5\ Tradepoint is listed on the Vancouver Stock Exchange and on 
the Alternative Investment Market of the LSE. The Exchange is a 
publicly held, for-profit company.
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    The Tradepoint System provides to Exchange Members an electronic, 
order-driven market that handles order entry and management, 
information display, matching, execution, and immediate trade 
publication and settlement message routing for certain securities 
listed on the LSE.\6\ Members are able to access the current market 
position in any security traded on the Exchange, monitor selected 
market information provided by the Exchange on a real time basis; enter 
or revise orders; send orders to the instant auction or periodic 
auction books for execution;\7\ set up, access, and request trading and 
market reports; and input settlement routing instructions. In addition 
to these functions, the Exchange also supports order processing and 
management of the order book, order book display and updating, 
maintenance of individual trading status books, maintenance and 
updating of individual stock watch lists, and market supervision, 
surveillance and compliance. Most of these functions are controlled by 
the Exchange, but allow for some customization by the Member.
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    \6\ Tradepoint does not list securities; it offers trading only 
in securities listed on other exchanges.
    \7\ The Exchange operates two types of auctions: instant and 
periodic. A security may be traded in either an instant auction or a 
periodic auction, but not both. In the instant auction, orders are 
matched electronically, in full or in part. Execution is automatic 
and continuous. Thus, a Member's orders are executed as soon as a 
contra-side order reaches the order book. The periodic auction is 
used for smaller capitalization and infrequently traded securities. 
It allows orders for these securities to accumulate over a period of 
time at the end of which the central computer matches qualifying buy 
and sell orders at a ``balance price.'' See Section II of the 
Tradepoint Notice for a more complete description of the periodic 
auction.
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    The Exchange maintains an electronic order book for each traded 
security, with Members entering bids or offers directly into the 
Tradepoint System. Orders with the same bid or offer price are 
prioritized according to the time they are entered into the Tradepoint 
System. The minimum display size for any order is 1,000 shares. The 
Exchange does not provide a facility for ``reserve'' orders. A Member 
may have software that controls sending an order, however, so that if a 
Member wishes to sell 10,000 shares in 1,000 share increments, the 
Member's software will route the next increment to the Exchange after 
the previous increment is executed. Newly routed orders are then placed 
at the end of the queue for time priority. The Tradepoint System is 
completely anonymous.\8\
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    \8\ The Tradepoint Notice stated that the names of Members were 
revealed upon clearance and settlement. This is not the case. The 
names of Members are not revealed to each other at any point in the 
trading process.
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    Members of the Exchange are also able to enter ``cross trades.'' 
Cross trades are trades between two customers of the same firm at a 
price between the bid and offer. To effect a cross trade, a Member will 
simultaneously enter a bid and an offer for a security, which will 
match after exposure to the electronic order book.\9\ Thus, if there is 
no other superior price on the book, a cross trade will be entered into 
the Tradepoint System by the firm essentially for reporting purposes.
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    \9\ If there is a bid or an offer on the Exchange's book that 
matches either side of the cross trade, however, that bid or offer 
will have priority over the bid or offer that is part of the cross, 
and will receive execution. As a result some portion of that side of 
the trade will be left on the Exchange's book.
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    In addition, the Exchange may create a ``specialist'' capability 
for some of the stocks traded on the Exchange. The Exchange would enter 
into an arrangement with a specific Member (``Committed Liquidity 
Provider'' or ``CLP''), who would commit to providing liquidity with 
respect to a particular security. The CLP would function in a manner 
similar to that of a specialist on a U.S. exchange. The CLP's orders 
would be subject to the same price and time priorities as other system 
orders. As payment, the CLP would receive a percentage of the 
Exchange's net transaction fees resulting from execution of the orders 
entered by the CLP.
    In order for a Member to access the Tradepoint System, he or she 
must have a Personal Identification Number, which is assigned by the 
Exchange.\10\ Access to the Tradepoint System in the United Kingdom is 
currently available through an internal network of personal computers 
via a stand alone PC, through a separate application on an existing 
Reuters RT terminal, ICV-Topic 3 Trader workstation, through a Liberty 
InterTrade Direct Screen, or through a

[[Page 14955]]

Bloomberg terminal. Access to the Tradepoint System in the United 
States will be either through a Bloomberg terminal or through a direct 
connection to the Exchange through an existing global private data 
network operator. In the future, the Exchange's screens may be 
accessible from other distributors of information services as well.
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    \10\ All individuals who have access to the Tradepoint System 
must have completed training from representatives of the Exchange in 
the use of the Tradepoint System.
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    All trades executed on the Exchange must be registered with the 
London Clearing House (``LCH'') for clearances and settlement through 
CREST \11\ (with the exception of cross trades, which are settled as 
described below).\12\ All Members (including U.S. Members)\13\ must 
either be a member of the LCH (``Clearing Member'') or have entered 
into a direct or indirect clearing arrangement with a Clearing Member 
(``Non-Clearing Member''). It is expected that U.S. Members will be 
Non-Clearing Members. Cross trades are settled directly through CREST 
by the Member that entered the trade (or by a sponsor of the Member 
that is a member of CREST). The LCH is not involved in the clearance 
and settlement of cross trades.
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    \11\ The CREST system is operated by CRESTCo Limited, a 
corporation incorporated in England under the Companies Act of 1985. 
CRESTCo Limited was established by the Bank of England to provide 
facilities for the settlement of U.K. equity transactions in 
uncertificated form.
    \12\ After a trade is registered with the LCH, the LCH becomes 
the counterparty to both sides of that trade, guaranteeing 
settlement.
    \13\ A U.S. Members is Member who is accessing the Tradepoint 
System from within the U.S.
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    The settlement cycle in the U.K. is five business days, as opposed 
to three in the United States. U.S. Members' trades will not settle on 
the normal. U.S. cycle, but on the U.K. cycle.

III. Trading by U.S. Members

    The Exchange will permit U.S. persons to become Members in 
accordance with its normal business procedures.\14\ To comply with the 
U.S. securities laws, however, the Exchange will offer two different 
levels of service--one for all U.S. Members (``Public Market'') and one 
limited to U.S. Members who are ``qualified institutional buyers'' 
(``QIBs'') as defined in Rule 144A under the Securities Act of 1933 
\15\ (``Securities Act'') (as may be amended from time to time), 
international agencies, and non-U.S. persons (within the meaning of 
Regulation S).\16\ Bids and offers in U.K. securities registered under 
the Exchange Act, either in American Depositary Receipt (``ADR'') form 
or in ordinary share form, will be available in the Public Market; bids 
and offers in those securities that are not registered under the 
Exchange Act will be available only to QIBs, non-U.S. persons, and 
international agencies (``QIB Market''). U.S. Members in the QIB Market 
will be required to resell any securities purchased on the Exchange 
through the Exchange or outside the United States. Such resales will be 
limited to other QIBs, international agencies, and non-U.S. 
persons.\17\
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    \14\ The Exchange's rules for participation are set forth in 
Tradepoint Market Rules 3.4.1 and 3.4.2. The standards are 
objective, considering such factors as regulatory status and 
capital. The Commission expects that Tradepoint will admit 
applicants fairly based on these standards. A discriminatory denial 
of access to Tradepoint would constitute grounds for withdrawal of 
this Order. As a condition of the order, Tradepoint will be 
providing the Commission with a list of U.S. applicants who have 
been denied access to the Tradepoint System on a quarterly basis.
    \15\ 17 CFR 230.144A.
    \16\ A ``non-U.S. person'' within the meaning of Regulation S 
may include a U.S. broker-dealer that is acting as agent for an 
account held for the benefit of a non-U.S. person. This broker-
dealer, when acting in its capacity as agent for this type of 
account, would have access to Tradepoint's QIB Market. The same 
broker-dealer may have accounts held for the benefit of U.S. persons 
as well. Such a broker-dealer would not be permitted to effect 
trades in the QIB Market for these accounts (unless the owners of 
those accounts are QIBs), or for its own proprietary account (unless 
it is a QIB).
    \17\ The Exchange generally will not provide access to U.S. 
Members to securities for which there is a U.S. transfer agent or 
that are eligible for deposit at a registered clearing agency. U.S. 
Members may have access to such securities, however, if the annual 
trading volume in the U.S. of such securities is less than ten 
percent of the securities' annual worldwide trading volume.
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    Other than these restrictions, U.S. Members will trade on the 
Exchange under the same terms as non-U.S. Members. U.S. Members will 
also trade on the Exchange during London business hours.\18\ In 
addition, U.S. Members will be subject to the same fees as all other 
Members.\19\
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    \18\ The Exchange will be available to U.S. Members from 7:30 
a.m. to 5:30 p.m. London time (2:30 a.m. to 12:30 p.m. Eastern 
standard time).
    \19\ See Exhibit N, Sections 4 and 6, of Tradepoint's Form 1 
filing for the specific fees charged by the Exchange.
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IV. Comments

    In response to the Tradepoint Notice, the Commission received eight 
comment letters.\20\ In general, the commenters favored Tradepoint's 
application, stating that it will provide investors in the U.S. with 
greater opportunities to invest in foreign securities. A number of 
commenters stated that the Tradepoint System would enable broker-
dealers in the U.S. to compete on equal footing with foreign broker-
dealers with respect to trades in U.K. securities.\21\ Commenters also 
stated that Tradepoint would reduce the costs of trading for investors, 
thereby increasing shareholder return.\22\ In addition, commenters 
stated that making Tradepoint available to U.S. investors would 
increase transparency.\23\ As further discussed below, only one 
commenter, the NYSE, objected to Tradepoint's application.\24\
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    \20\ See letters from: New York Stock Exchange, Inc. (``NYSE'') 
dated August 10, 1998; Joan C. Conley, Corporate Secretary, National 
Association of Securities Dealers, Inc. (``NASD'') dated August 10, 
1998 (in reference to File No. S7-12-98); Professor Anthony 
Neuberger, London Business School dated July 9, 1998; Robin 
Fellgett, Deputy Director, HM Treasury (``Treasury'') dated July 10, 
1998; John Packett, Director, Union Securities (International) Ltd. 
(``Union) dated July 21, 1998; Kevin M. Foley, Bloomberg L.P. 
(``Bloomberg'') dated August 10, 1998; Steve Klein, Director of 
Global Equity Trading, American Century Investment Management 
(``ACIM'') dated August 3, 1998; and Benn Steil dated July 17, 1998. 
All of the letters are contained in Public File No. 10-126 in the 
Commission's Public Reference Room. The staff has also prepared a 
summary of comments which can be found in the file.
    \21\ Bloomberg Letter at 1; Treasury Letter at 1; Steil Letter 
at 1; Neuberger Letter at 1.
    \22\ See Steil Letter 1 (commenting that the Tradepoint system 
is a ``low-cost non-intermediated'' vehicle through which U.S. 
investors can trade U.K. equities, and stating that the availability 
of direct access electronic trading methods will enable fund 
managers to reduce trading costs considerably, resulting in 
increased return for fundholders); ACIM Letter at 1-2 (stating that 
it has supported and encouraged the creation of low-cost trading 
alternatives driven by evolving technological changes; that 
Tradepoint will provide a welcome alternative to traditional trading 
systems in the U.K.; and that Tradepoint's ability to succeed has 
been hampered by the ``entrenched conservatism of local U.K. dealing 
practices combined with regulatory impediments to the expansion of a 
U.S. customer base''; also stating that it believes Tradepoint 
offers investors the benefit of direct, anonymous electronic access 
to a central limit order book in U.K. stocks with zero cost, apart 
from clearing fees, to the initiator of a bid or offer). See also 
Union Letter at 1 (stating that settlement guarantees by the London 
Clearing House minimize counterparty risk; noting that trades on the 
LSE currently carry no guarantees other than that of the broker; 
citing the fact that orders may be posted on the Tradepoint system 
anonymously; and stating that the Tradepoint system provides a lower 
cost alternative for U.S. investors to trade in U.K. securities); HM 
Letter at 1 (stating that it favors Tradepoint's application for 
exemption from registration under Section 5, and stating that 
Tradepoint's application is an example of the ``potential benefits 
to investors and financial intermediaries from opening up the 
provision of exchange services to international operators''); 
Bloomberg Letter at 1 (stating that Tradepoint will provide U.S. 
broker-dealers with lower cost U.K. equity trading on behalf of 
their investor clients).
    \23\ Neuberger Letter at 1 (supporting Tradepoint's application 
because Tradepoint offers investors the opportunity to deal directly 
with the rest of the market by putting orders in at will and 
managing them over time; and stating that Tradepoint is a 
transparent market because all investors have access to the same 
information). See also Union Letter at 1 (stating that the 
Tradepoint system is transparent because most major U.K. 
institutions have access to Tradepoint's market display).
    \24\ See infra Sections IV.C and IV.D. for a discussion of the 
NYSE's comments.
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    One commenter stated that, although he strongly supports 
Tradepoint's application for exemption from registration, he believes 
that the low volume basis for exemption provided by Section 5 of the 
Exchange Act is

[[Page 14956]]

fundamentally flawed in that a less liquid exchange, for that reason 
alone, does not provide investors better protection than a more liquid 
exchange.\25\
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    \25\ Steil Letter at 2. The Commission notes that the only 
statutory basis for granting an exemption from registration as a 
national securities exchange under Section 5 is low volume. The 
Commission has adopted new rules permitting, among other things, 
alternative trading systems to register as broker-dealers or as 
exchanges. See Exchange Act Release No. 40760 (Dec. 8, 1998), 63 FR 
70844 (December 22, 1998) (``Regulation ATS Adopting Release'').
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    ACIM also questioned whether, in a broader sense, exemption under 
Section 5 is the optimum way for the Commission to balance its 
regulatory responsibilities with respect to investor protection against 
the benefits of innovation, competition, and lower costs.\26\ ACIM 
stated that in theory, the more attractive the benefits of trading on 
Tradepoint, the more likely it is that an unanticipated number of 
investors will trade on the exchange, thus jeopardizing its low volume 
exception.\27\
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    \26\ ACIM Letter at 2.
    \27\ ACIM Letter at 2.
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    Only the NASD directly addressed whether the volume levels the 
Commission proposed as the threshold for the low volume exemption were 
appropriate.\28\ While the NASD stated that it is in favor of a low 
volume exemption for Tradepoint, it also noted that the Commission may 
be creating incentives for U.S. exchanges to create subsidiaries abroad 
to conduct activity in the U.S. through the low volume exemption.\29\ 
The NASD also stated that it believes granting Tradepoint's application 
would pave the way for a U.S. market ``to create an OTC Bulletin Board 
to publish quotations from NASD members, on a real-time basis, in 
unregistered foreign securities in another jurisdiction.'' \30\
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    \28\ The NASD stated that it believes ``the volume levels that 
the Commission proposed as the thresholds for the exemption are 
appropriate.'' NASD Letter at 9. The NASD Letter also expresses the 
views of NASD's subsidiaries, NASD Regulation, Inc. and The Nasdaq 
Stock Market, Inc.
    \29\ NASD Letter at 9.
    \30\ NASD Letter at 9.
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    The Commission believes that an exchange operated offshore but 
targeting U.S. persons, which is owned or controlled, directly or 
indirectly, through a financial interest or otherwise, by a U.S. 
national securities exchange or national securities association, would 
be considered a U.S. market operated by an SRO. As such, it would be 
subject to Commission oversight. The Commission notes that Tradepoint, 
as a condition to this Order, has agreed that it is subject to the 
Commission's jurisdiction.

V. Limited Volume Exemption

    Section 5 of the Exchange Act requires that all exchanges subject 
to the jurisdiction of the United States either register with the 
Commission as a national securities exchange or obtain a Commission 
exemption from that requirement.\31\ Section 5 authorizes the 
Commission to grant an exemption from registration if the Commission 
finds that, ``by reason of the limited volume of transactions affected 
[the] exchange, it is not practicable and not necessary or appropriate 
in the public interest for the protection of investors'' to require 
such registration.\32\
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    \31\ 15 U.S.C. 78e (1988).
    \32\ Id.
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    In the last sixty years, the Commission has granted one of the 
exemption from registration as a national securities exchange on the 
basis of low volume of the Arizona Stock Exchange (``AZX'').\33\ In its 
order granting a limited volume exemption from registration as an 
exchange to AZX,\34\ the Commission used the volume levels of the fully 
regulated national securities exchanges at that time as the benchmark 
for low volume for AZX.\35\ Consequently, AZX's exemption order was 
conditioned upon its volume staying below that of the national 
securities exchange with the lowest average daily trading volume.\36\ 
AZX's trading is also limited to securities registered under the 
Exchange Act \37\ that were also traded on registered U.S. exchanges or 
Nasdaq.
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    \33\ See Exchange Act Release No. 28899 (Feb. 20, 1991), 56 FR 
8377 (February 28, 1991) (``AZX Release''). AZX was originally named 
Wunsch Auction Systems, Inc.
    \34\ See AZX Release at note 33.
    \35\ Id.
    \36\ For calendar year 1990, this was the Cincinnati Stock 
Exchange (``CSE''). In 1990 the CSE's average daily trading volume, 
expressed in shares, was 1,238,241. In 1996, AZX's volume threshold 
was increased to 5,965,346 shares, which was the average daily 
trading volume of shares traded on the Philadelphia Stock Exchange 
(``Phlx'') in 1995, the Phlx was the national securities exchange 
with the lowest average daily trading volume.
    \37\ As a condition to AZX's limited volume exemption, the 
Commission required ``the effective registration of any security 
traded on [AZX] under sections 12(b) or 12(g) of the Act, or the 
provision of information with respect to the security pursuant to 
section 15(d) of the Act, or an exemption from registration because 
the security is a `government security' as defined in section 
3(a)(42)(A), (B), or (C) of the Act.''
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VI. Tradepoint Exemption

    The Commission agrees with the majority of commenters that 
permitting the Exchange to operate in the U.S. on a low volume basis 
would provide U.S. investors with greater opportunities to invest in 
foreign securities. By providing direct access, the Exchange offers 
U.S. investors a lower cost trading alternative. As one commenter 
stated, Tradepoint offers investors an excellent low-cost non-
intermediated mechanism for trading U.K. stocks.\38\ Moreover, the 
Commission believes that given Tradepoint's limited size, it would be 
unnecessary to compel Tradepoint to satisfy all of the regulatory 
requirements imposed upon registered national securities exchanges 
under the Exchange Act. For example, if Tradepoint were to register as 
a national securities exchange under the Exchange Act, it would be 
required to become a self-regulatory organization, to file copies of 
proposed rules with the Commission for approval or disapproval,\39\ to 
allow only broker-dealers to become members, and to trade only 
registered securities.\40\ Because Tradepoint is regulated in the U.K. 
as an exchange, requiring Tradepoint to comply with the U.K. and U.S. 
regulation of exchanges might, at times, be inconsistent. In light of 
Tradepoint's anticipated limited volume of trading in the U.S., the 
Commission believes it would be impracticable and unnecessary to 
require Tradepoint to comply with all the requirements applicable to 
national securities exchanges. At the same time, the Commission is 
concerned with affording U.S. investors who use the Exchange with 
sufficient protection. Consequently, the Commission is imposing 
conditions in exempting Tradepoint from registration as a national 
securities exchange.
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    \38\ Steil letter at 1.
    \39\ Section 19(b)(1) of the Exchange Act, 15 U.S.C. 78s(b)(1).
    \40\ Tradepoint's Members currently are both broker-dealers and 
institutions. Under Section 6 of the Exchange Act, registered 
exchanges may have only broker-dealer members. See Regulations ATS 
Adopting Release, supra note 25, at notes 363-374 and accompanying 
text.
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A. Volume Level

    Trading volume in the United States is generally measured in number 
of shares. In the United Kingdom, the monetary value of trading is the 
common measure of a securities transaction and of overall market 
activity.\41\ In the U.K., share prices are roughly one-seventh of what 
they are in the U.S. for a comparable security.\42\

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This difference in share price is also reflected in the trading ADRs in 
this country, where each ADR is generally a multiple of the ordinary 
shares that are traded on the LSE.\43\
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    \41\ According to the Exchange, commissions in the United 
Kingdom are also based on a percentage of the share price, rather 
than on the number of shares purchased.
    \42\ In 1990, when AZX was granted an exemption, the average 
daily volume of all regional stock exchanges was 24.5 million shares 
and the average price of shares traded was $28.51. In 1997, the 
average daily volume of all regional stock exchanges was 59.2 
million shares and the average price of shares traded was $42.20. In 
1997, the average daily volume on the LSE was 1.1 billion shares and 
the average price of shares traded was $6.04.
    \43\ For example, British Airways PLC (``BAB'') is traded on the 
New York Stock Exchange (``NYE'') in ADR form. The ADR ratio for BAB 
is 1:10; thus, each ADR is equivalent to ten ordinary shares. Glaxo 
Wellcome PLC (``GLX'') is also traded on the NYSE in ADR form. The 
ADR ratio for GLX is 1:2. SmithKline Beecham PLC (``SBH'') is also 
traded on the NYSE in ADR form. the ADR ratio for SBH is 1:5. These 
securities will all be available for trading through the Exchange in 
their ordinary share form in the U.S.
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    In order to adjust for these factors, the Commission is granting 
the Exchange's application for exemption from exchange registration, 
using dollar value as a benchmark for volume, rather than average daily 
number of shares traded. This will permit the Exchange to operate in 
the U.S. under a benchmark which more appropriately reflects the 
difference in dollar value between U.S. and U.K. markets, and the 
difference in the way trading is measured in the U.K.
    In addition, the Commission believes that it is appropriate to 
grant a low volume exemption only to an exchange that is a low volume 
exchange in its home country. The Commission believes that a U.S. 
limited volume exchange should not be owned, directly or indirectly, by 
a foreign exchange that has a significant market share in its home 
country. In 1997, LSE volume was 1.1 billion shares. The Exchange's 
volume was 3.1 million shares, significantly less than one percent of 
the LSE's average daily volume. The Commission is therefore 
conditioning the Exchange's operation in the U.S. upon it remaining a 
low volume exchange in the U.K.
    Under the exemption, the Exchange will be exempt so long as:
    (i) The average daily dollar value of trades (measured on a 
quarterly basis) involving a U.S. Member does not exceed $40 million; 
\44\ and
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    \44\ The average price of shares traded on all regional changes 
in 1997 was $42.20. Thus, $40 million is equivalent to significantly 
less than 1.2 million shares a day, which was the original volume 
limitation placed on AZX.
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    (ii) Its worldwide average daily volume (measured on a quarterly 
basis) does not exceed ten percent of the average daily volume of the 
LSE.
    The limitation on the Exchange's worldwide trading volume would 
ensure that the Commission could reevaluate the appropriateness of the 
low volume exemption should the Exchange achieve significant volume 
relative to the LSE.

B. QIB Access to Unregistered Securities

    As noted above, under the terms of the Older the Commission is 
issuing today, Tradepoint will operate a QIB Market in the U.S. 
consisting of U.K. securities not registered under the Exchange 
Act.\45\ Only QIBs, non-U.S. persons, and international agencies will 
have access to the screens displaying quotations in these securities, 
and securities purchased in the QIB Market must be resold through the 
Tradepoint QIB Market or otherwise outside the U.S. These conditions 
are designed to ensure that a public market does not develop in the 
U.S. in these unregistered securities. In its comment letter, the NYSE 
stated that it believes that any securities traded in the QIB Market 
should be limited to Rule 144A securities.\46\ The NYSE stated that it 
believes that the Commission ``limited private trading systems to Rule 
144A securities in order to prevent the establishment of a semi-public 
market in unrestricted, but unregistered, foreign securities'' and that 
absent an articulation by the Commission of a change in policy in this 
area, the QIB Market should be limited to Rule 144A securities.\47\
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    \45\ As of September 23, 1998, according to the Exchange, 75 
securities whose issuers also have securities registered in the 
United States traded on Tradepoint. This number may change in the 
future, as issuers' registration status under the Exchange Act 
changes. As a condition to this Order, the Exchange is required to 
inform the Commission of any changes in the registration status of 
the securities it trades. As described above, the registration 
status of a given security under the Securities Act and under the 
Exchange Act has an effect on how it will be traded through the 
Tradepoint System in the U.S.
    \46\ ``Rule 144A securities'' are securities that have been sold 
by an issuer pursuant to a private offering exemption under the 
Securities Act and are eligible for resale under Securities Act Rule 
144A.
    \47\ ?????
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    Tradepoint is not a system designed to trade Rule 144A or other 
types of ``restricted'' securities under the Securities Act. Rather, it 
is a system designed to trade securities that are freely tradable under 
the Securities Act but some of which are not registered under the 
Exchange Act. The Commission is imposing a number of requirements on 
that portion of the Tradepoint System through which foreign securities 
that are not registered under the Exchange Act will trade in order to 
assure against the establishment of a U.S. public market in those 
securities.
    The Commission's approval in allowing Tradepoint to operate a 
closed QIB-only market in foreign securities that are not registered 
under the Exchange Act is premised on Tradepoint's continuing to 
qualify for the limited volume exemption from exchange registration as 
described in this Order. Were that exemption not available, and were 
Tradepoint therefore required to register as a national securities 
exchange, Tradepoint would not be permitted to trade unregistered 
foreign securities, whether in a QIB-only market or otherwise.

C. Dissemination of Quotation and Last Sale Information

    In its comment letter, the NYSE also stated that it believes that 
Tradepoint must be required to disseminate quotation and last sale 
information for all registered Tradepoint securities that trade in the 
U.S. public market.\48\ The NYSE noted that the 64 \49\ Tradepoint 
securities that are traded in ADR form in the U.S. should be subject to 
Rules 11Aa3-1 \50\ (``Last Sale Reporting Rule'') and 11Ac1-1 \51\ 
(``Firm Quote Rule'') under the Exchange Act. In the NYSE's view, if 
the Commission required Tradepoint to register as a national securities 
exchange, it would be subject to these rules with respect to the 
registered securities. The NYSE stated that it did not believe that if 
Tradepoint registered as a national securities exchange the fact that 
ADRs publicly traded in the U.S. are not fungible with the securities 
in the Tradepoint System and that Tradepoint securities are traded and 
quoted in pence, while the ADRs are traded and quoted in dollars, would 
be sufficient to exempt the Exchange from the Firm Quote and last Sale 
Reporting Rules.\52\
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    \48\ NYSE Letter at 2-3.
    \49\ In its comment letter, the NYSE stated that 64 securities 
traded on Tradepoint also trade in the U.S. in ADR form. Tradepoint 
believes 75 securities are currently traded on Tradepoint whose 
issuers also have securities registered in the U.S. Some of these 
securities may be traded in ordinary share form in the U.S., which 
may explain the discrepancy between the numbers provided by 
Tradepoint and by the NYSE.
    \50\ 17 CFR 240.11Aa3-1.
    \51\ 17 CFR 204.11Ac1-1
    \52\ NYSE Letter at 2.
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    The Last Sale Reporting Rule requires registered national 
securities exchanges and associations to report transaction prices and 
volumes for listed equity and Nasdaq securities that trade in their 
markets. Similarly, the Firm Quote Rule requires registered national 
securities exchanges and associations to collect and disseminate 
quotation information for listed equity and Nasdaq securities that 
trade in their markets. By their terms, these rules do not apply to 
Tradepoint, if exempted, because the Last Sale Reporting Rule and the 
Firm Quote Rule apply only to registered national securities exchanges, 
not to

[[Page 14958]]

exempt exchanges.\53\ In addition, requiring Tradepoint to report to 
the Consolidated Tape is impracticable. Prices on Tradepoint are quoted 
in decimals and in pence. Moreover, Tradepoint operates between the 
hours of 2:30 a.m. and 12:30 p.m. Eastern standard time; during much of 
this time, the Consolidated Tape is not operating.
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    \53\ In the order granting AZX a limited volume exemption, the 
Commission noted that there was no real-time transaction reporting 
service, including the Consolidated Tape Association and Nasdaq, 
available to systems that trade outside the NYSE's normal trading 
hours. Exchange Act Release No. 28899 (February 20, 1991), 56 FR 
8377 (February 28, 1991). In addition, the Commission notes that 
Tradepoint will not be trading ``covered'' securities within the 
meaning of the Firm Quote Rule.
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    The Commission agrees, however, that it is important that 
transaction information be available to investors and the public. 
Tradepoint currently disseminates transaction volume and price 
information via its internet website. Tradepoint has agreed to update 
this information every twenty minutes. There is no charge to access the 
site.\54\ In addition, Tradepoint's trading information will be 
available via Bloomberg and Reuters to all subscribers of subscribers 
of those vendors on a real-time basis.\55\
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    \54\ Prior to filing its application for exemption from 
registration with the Commission, Tradepoint updated this 
information on an hourly basis. Because U.S. exchanges generally 
provide this information without charge on a twenty minute delayed 
basis, Tradepoint agreed to modify its dissemination practices to 
more closely reflect those of U.S. exchanges. Tradepoint's website 
address is <http://www.tradepoint.co.uk>.
    \55\ Like U.S. market centers, Tradepoint charges a fee for 
real-time trade dissemination. Tradepoint has represented to the 
Commission that it will make its trading information available in 
real-time to any entity for a reasonable, non-discriminatory fee.
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D. Other Conditions

    The Commission is also imposing other conditions on the Exchange 
beyond the low volume requirements discussed above. In considering for 
the first time a foreign exchange's operation in the United States, the 
Commission has considered both the need to protect U.S. investors and 
the interest of U.S. investors in gaining direct access to a foreign 
market. The Commission believes that when a foreign market seeks to 
operate in the United States--either as a registered exchange or 
pursuant to a limited volume exemption under Section 5 of the Exchange 
Act--that market must agree to comply with key provisions of the 
federal securities laws. When Tradepoint initially applied for an 
exemption last year, both its market rules and its member agreement 
included English Choice of law and choice of forum (arbitration in 
England) clauses. Under those provisions, a U.S. Member effectively 
would have waived its rights and protections under the federal 
securities laws. Such an outcome would have been inconsistent with 
investor protection, the public interest, and Section 29(a) of the 
Exchange Act, which provides: ``any condition, stipulation, or 
provision binding any person to Waive compliance with any provision of 
this title or of any rule or regulation thereunder, or of any rule of 
an exchange required thereby shall be void.'' \56\
---------------------------------------------------------------------------

    \56\ 15 U.S.C. 78cc(a).
---------------------------------------------------------------------------

    Accordingly, as a condition to the Commission's approval of 
Tradepoint's application, Tradepoint has agreed to amend its market 
rules and member agreement to include provisions that expressly 
preserve a U.S. Member's anti-fraud protections under the federal 
securities laws. All Tradepoint Members must agree to honor these 
provisions. In particular, Tradepoint's market rules and member 
agreement must make clear that, notwithstanding any other provision or 
rule, a court or tribunal with jurisdiction over any dispute arising 
out of or in connection with a transaction made on the Exchange shall 
apply the U.S. federal securities law statutes to any cause of action 
based upon fraudulent acts or omissions that either (a) occurred in the 
United States or (b) resulted in damages suffered in the United States. 
For example, a U.S. Member entering an order or executing a trade on 
Tradepoint would satisfy this requirement. It is the Commission's 
intention and expectation that these provisions will apply to U.S. 
Members and U.S. investors involved in or affected by a transaction 
that takes place over the Exchange, as well as to any other Member or 
person who is involved in or affected by such a transaction. THe ``U.S. 
federal securities laws'' include the statutes the Commission 
administers, the rules and regulations promulgated under such statutes, 
and Commission and judicial decisions applying and interpreting those 
statutes. Thus, what constitutes a ``fraudulent act or omission'' is 
determined by looking to Commission and Judicial decisions.
    Invoking these provisions will require an allegation that a 
fraudulent act or omission has taken place, at least in part, in the 
U.S., or that damages occurred (i.e., effects were felt) in the U.S. 
Such a claim could involve Members, investors, or the Exchange itself. 
For example, if a U.S. Member enters an order on Tradepoint on behalf 
of a customer based on oral, written, or electronic information the 
U.S. Member or customer alleges was misleading, either the U.S. Member 
or investor could invoke the market rules to preserve fraud claims 
under the federal securities laws.
    Although the Exchange's market rules and member agreement require 
members to arbitrate their disputes in England, the Commission believes 
and expects that English arbitrators and courts will follow the above 
requirements and interpret and apply the U.S. federal securities laws 
as defined above. The Commission will monitor any litigation under this 
condition and reserves the right to modify or withdraw Tradepoint's 
exemption from exchange registration.
    Other conditions will allow the Commission to monitor the Exchange 
for compliance with all applicable sections of the Securities Act and 
the Exchange Act (such as the anti-fraud and securities registration 
provisions), and will ensure that the Commission has access to books, 
records, and personnel of the Exchange should the need arise.\57\ 
Specifically, the Commission is requiring the Exchange to keep and 
provide the following to the Commission upon request as a condition on 
the operation of the Exchange in the U.S.
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    \57\ The Commission is exempting the Exchange from Rules 6a-1, 
6a-2, 6a-3 and 24b-1 under the Exchange Act. Rules 6a-1, 6a-2 and 
6a-3 set froth the procedures regarding amendments and supplemental 
material exchanges must file. Essentially the same information 
required by these rules will be provided to the Commission by the 
Exchange under the other conditions. To require the Exchange to 
comply with these rules would be duplicative, and would not result 
in the Commission receiving the material in as useful a form as 
proposed under the conditions set forth here.
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    (a) Daily summaries of trading and time-sequenced records of each 
transaction involving a U.S. Member;
    (b) Information disseminated to U.S. Members, such as quotation and 
transaction information regarding securities traded through the 
Tradepoint System, as well as market notices to Members and other 
communications (such as to the trading hours);
    (c) Daily pound and the equivalent dollar value of transactions, 
and daily share volume of business transacted through the Tradepoint 
System (separately for orders entered by non-U.S. and U.S. Members, and 
in the aggregate);
    (d) A list of securities for which U.S. orders are accepted; and
    (e) Copies of Member applications and standards for admission to 
the Exchange.
    The Exchange will also be required to provide 30 days prior notice 
to the

[[Page 14959]]

Commission of any material changes in the operation of the Tradepoint 
System. The Exchange will also provide the Commission with direct 
access to real-time quotes and trading information.
    Furthermore, the Exchange will supply to the Commission on a 
quarterly basis within 30 days of the end of each quarter:
    (a) Total volume and average daily volume of transactions effected 
through the system during the period and year-to-date aggregates of 
these numbers, expressed in:
    (i) Number of units of securities (for transactions in common 
stock, number of ordinary shares; for transactions in securities other 
than stock, other appropriate commonly used measure of value of such 
securities);
    (ii) Number of transactions; and
    (iii) Monetary value (for transactions in common stock, pound value 
and equivalent dollar value; for transactions in securities other than 
stock, other appropriate commonly used measure of value of such 
securities and equivalent dollar value); and
    (b) Records regarding the identity of U.S. Members in the 
Tradepoint System and the identity of those denied participation in the 
Tradepoint System and the reason for such denial, as well as a 
description of the reason for terminating a former U.S. Member's 
ability to use the Tradepoint System.
    The Exchange will be required to provide separate unit, 
transaction, and monetary volume and average daily volume information 
for the period covered by the report reflecting:
    (a) Tradepoint System activity in securities involving a U.S. 
Member and;
    (b) Tradepoint System activity in securities not involving a U.S. 
Member.
    The primary market and hours for each type of security will also be 
identified.
    The Exchange will also adopt and implement procedures to conduct 
surveillance of trading by Exchange employees and requirements to 
ensure the non-disclosure of confidential information in the possession 
of Exchange employees.\58\ In addition, in response to regulatory 
trading halts on U.S. markets, the Exchange will be required to either 
suspend trading on the Tradepoint System for U.S. Members or consult 
with the Commission with respect to a possible suspension of trading. 
As a condition to the exemption granted by this Order, Tradepoint must 
cooperate with any investigation in connection with trading on the 
Tradepoint System conducted by the Commission, including allowing 
Commission staff access to the facilities, books and records and other 
documents, as well as employees for interviews, and it will provide the 
Commission with any requested information (including documents) in 
connection with trading on the Tradepoint System. The Exchange will 
also be required to maintain an agent for service of process in the 
U.S. at all times that the Exchange is offering its services in the 
U.S.
---------------------------------------------------------------------------

    \58\ The Commission notes that Tradepoint already has such 
procedures in place.
---------------------------------------------------------------------------

    The Exchange will adopt any necessary rule changes to conform its 
market rules and member agreement to the requirements, conditions, and 
language of this Order. An express condition of the Commission's 
approval is that the Exchange will have the capacity to enforce 
compliance by its Members with the rules of the Exchange with respect 
to the terms and conditions of this Order.
    Finally, the Exchange will disclose to its U.S. Members, either by 
broadcasting over the Tradepoint System, or through such other means as 
it normally communicates with its Members, information regarding the 
trading priorities of the Exchange and the response time of orders 
entered into the Tradepoint System by U.S. Members as compared to the 
response time of orders entered by European or other non-U.S. Members. 
In addition, the Exchange will be required to disclose that the nature 
and timeliness of pre-trade and post-trade information provided by the 
Exchange differs from that provided by U.S. registered securities 
exchanges. Such information will include: (1) Notification that trades 
executed through the Exchange are not reported to the U.S. Consolidated 
Tape; (2) a description of clearance and settlement procedures and 
disclosure that the time for clearance and settlement under U.K. law is 
the date of the transaction plus five business days, as compared to 
three business days under U.S. law; and (3) disclosure of any 
Tradepoint System limitations affecting capacity to disseminate timely 
information or to handle Members' orders during peak or other 
periods.\59\ The Exchange will also disclose to its U.S. Members risks 
that may arise due to capacity problems of the Tradepoint System.
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    \59\ U.S. broker-dealers trading on behalf of U.S. customers 
should disclose to those customers any additional risks in executing 
customer orders for U.K. securities on Tradepoint, including the 
effects of Tradepoint's choice of law and forum clauses. Any U.S. 
Member entering orders in the Tradepoint System for the accounts of 
others may be required to register with the Commission as a broker-
dealer unless an exception or exemption applies.
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    This Order is subject to amendment if the Exchange offers trading 
in securities listed on any market (in the U.K. or otherwise) other 
than the LSE. The Exchange will also be required to continue to operate 
at all times in accordance with all applicable U.K. laws.
    No provision contained in this Order or in any other agreement or 
document, nor any actions taken pursuant to them, shall be construed to 
affect or limit, or shall affect or limit, any right or responsibility 
of the Commission to take any action under the federal securities laws. 
The Commission's assessment of the impact of the trading of 
unregistered securities (i.e., of both domestic and foreign issuers), 
and of the appropriate regulatory posture to these developments, is 
still ongoing. This issue, and the broader issues involving recent 
trends and initiatives that give U.S. investors greater and more 
instantaneous access to foreign securities markets, create tensions 
between competing Commission goals. The Commission, for example, wishes 
to foster developments that enable U.S. investors to execute securities 
trades more efficiently, but also desires that foreign securities 
traded in U.S. markets have full and fair disclosure. These tensions 
and issues will continue to be addressed by the Commission in the 
future, including issues raised by exempt exchanges such as Tradepoint, 
as well as alternative trading systems.
    In light of the limited volume of trading anticipated to be done on 
the Exchange, and in the view of the regulatory protections over system 
activity that are either currently in place or that will be imposed by 
the Commission upon the Exchange in the form of conditions upon this 
exemption, the Commission finds that it is not practicable and not 
necessary or appropriate in the public interest or for the protection 
of investors to require Tradepoint to register as a national securities 
exchange.

VII. Conclusion

    The Commission has reviewed Tradepoint's application for exemption 
from registration as a national securities exchange.
    It is therefore ordered, pursuant to Section 5 of the Exchange Act, 
that Tradepoint's exemption from registration as a national securities 
exchange be granted, subject to the conditions contained in this Order.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-7542 Filed 3-26-99; 8:45 am]
BILLING CODE 8010-01-M