[Federal Register Volume 64, Number 146 (Friday, July 30, 1999)]
[Notices]
[Pages 41480-41482]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-19489]


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SECURITIES AND EXCHANGE COMMISSION

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


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

July 23, 1999.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on June 28, 1999, the Philadelphia Stock Exchange, Inc. (``Exchange'' 
or ``Phlx'') 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 Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change form interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change
    The Commission recently approved the Exchange's proposal to operate 
the Volume Weighted Average Price (``VWAP'') Trading System 
(``VTS''TM) \3\ as a facility of the Exchange.\4\ The VTS 
will provide a daily pre-opening order matching session for the 
execution of large stock orders at the VWAP. The Exchange now proposes 
to establish a fee schedule for trades executed through the VTS.
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    \3\ VWAP is a registered trademark of the Universal Trading 
Technologies Corporation (``UTTC''). The VTSTM is the 
property of UTTC.
    \4\ See Securities Exchange Act Release No. 41210 (Mar. 24, 
1999), 64 FR 15857 (Apr. 1, 1999) (``VTS Approval Order''). The 
approval is effective for a 1 year pilot period.
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    The text of the proposed rule change is available at the Office of 
the Secretary, the Exchange, and at 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 Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

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

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

[[Page 41481]]

eligible for matching during the pre-opening session. During the pre-
opening session, the VTS will electronically match orders for execution 
at the VWAP according to the algorithm developed by the Universal 
Trading Technologies Corporation. The matched and executed orders will 
be assigned a final VWAP after the close of regular trading.
    As a facility of the Exchange, the VTS will operate using Exchange 
equipment and personnel, allow Exchange floor traders to participate, 
and rely upon the Stock Clearing Corporation of Philadelphia (``SCCP'') 
to process VTS trades.\5\ Matches performed during the pre-opening 
session will be regulated and reported as Exchange trades. Further 
details regarding the operation of the VTS appear in the VTS Approval 
Order and Exchange Rule 237, ``The Universal Trading System Morning 
Session,'' which governs the operation of VTS.
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    \5\ The SCCP has filed a separate proposal with the Commission 
to establish fees for the trade recording and confirmation services 
that SCCP will provide for VTS trades. See File No. SR-SCCP-99-02.
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    The Exchange now proposes to adopt fees for trades executed through 
the VTS. Although trades executed on behalf of VTS users will result in 
transaction fees, it is only Exchange member firms and clearing firms 
that will be billed and held responsible for paying the fees. Thus, the 
transaction fees resulting from a VTS user's trading activity will be 
billed to the Exchange member or clearing firm through which the VTS 
orders were routed. Although the transaction fees vary primarily 
according to the ultimate user that receives trade execution through 
the VTS (e.g, retail customer, specialist, Exchange member), they also 
depend on the type of trade (e.g., cross versus non-cross), and the 
annual volume of VTS trading activity. The proposed fee schedule is as 
follows:
     Institutional user and retail customer user (non-cross 
trades):

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

     Institutional user and retail customer user (cross 
trades):

Intra-firm: $0.005 per share \6\
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    \6\ Intra-firm cross trades refer to cross trades where the 
identified contra-sides are from the same firm. Because the same 
firm is on both sides of an intra-firm cross trade, the $.005 per 
share fee applies to each side, thus totaling $.01 per share.
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Inter-firm: $0.01 per share

     Non-member/non-institutional user: $0.015 per share.
     Specialist or alternate specialist Committer: No charge.
     Member off-floor liquidity provider: $0.01 per share.
     Member user (not enrolled as Committer): $0.01 per share.
    Under the proposal, the fees for non-cross trades executed on 
behalf of a institutional user \7\ or retail customer user \8\ will be 
predicated upon the aggregate number of shares that such institutional 
user or retail customer user trades annually through VTS. In 
calculating the number of shares that each user trades through the VTS, 
the Exchange shall always treat January 1 as the start of the year. For 
the first 10 million shares traded per year, the fee will be $.02 per 
share. For more than 10 million shares up to 20 million shares per 
year, the fee will be $.015 per share. For greater than 20 million 
shares per year, the fee be $.01 per share.\9\ These volume discount 
thresholds will be prorated based upon a user's enrollment date.\10\ 
The Exchange believes that reducing fees for increased trading volume 
should help attract order flow to the VTS.
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    \7\ An institutional user is an entity not registered as a 
broker-dealer or doing business as a hedge fund (i.e., private 
investment pool), but one that serves in a fiduciary capacity. Such 
entities include, but are not limited to: qualified pension plans, 
investment companies registered under the Investment company Act of 
1940, bank trust departments, corporations that purchase securities 
for corporate purposes, and insurance companies. See Exchange Rule 
237(c)(v).
    \8\ The level of fees will not affect the manner in which orders 
are matched pursuant to the UTTC matching algorithm. See Exchange 
Rule 237(e).
    \9\ The Exchange's billing system monitors users' VTS 
transaction volume on an aggregate and ongoing basis. Therefore, 
discounts are immediately applied toward any VTS transaction volume 
that exceeds the discount thresholds. Telephone conversation between 
Michael L. Loftus, Attorney, Division of Market Regulation, 
Commission, and Nandita Yagnik, Counsel, Exchange, on July 8, 1999.
    \10\ For example, if a new user enrolled on July 1, the volume 
discount thresholds would be reduced by 50% because 50% of the year 
would have expired. Thus, the user's trades would generate 
transaction fees of $.02 for the first five million shares matched, 
$.015 for matches greater than 5 million shares up to 10 million 
shares, and $.01 for matches over 10 million shares.
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    With respect to cross orders \11\ for institutional users and 
retail customer users, the Exchange proposes to charge $.005 per side, 
per share, for intra-firm crosses and $.01 per share for inter-firm 
crosses.\12\ The trade volume of users' cross orders (inter-firm and 
intra-firm cross orders) will not be counted toward the volume 
aggregations applicable to non-cross orders.
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    \11\ A cross order is a two-sided order with both sides 
comprised of non-member interest, with instructions to match the 
identified buy-side with the identified sell-side. The two sides 
making up the cross can be entered separately, with the contra-side 
identified. See Exchange Rule 237(d)(i)(C).
    \12\ Inter-firm cross orders refer to cross orders where the 
identified contra-sides are from different firms.
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    Trades for non-member/non-institutional users \13\ will be assessed 
fees of $.015 per share. Trades for specialist and alternate specialist 
Committers \14\ will not be charged transaction fees for VTS trades. 
Trades for the other type of Committer--Exchange members who serve as 
off-floor liquidity providers--will be charged $.01 per share. Lastly, 
trades for member users who are not enrolled as Committers will be 
assessed fees of $.01 per share.
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    \13\ The non-member/non-institutional user category includes 
non-member broker-dealers.
    \14\ ``Committers'' are Exchange members who agree to provide 
contra-side liquidity on a proprietary basis. Committers are 
required to provide a minimum volume guarantee of 2,500 shares for 
each side of the market. Committer status is restricted to Exchange 
members that are: (i) Phlx floor traders, Phlx specialists, or Phlx 
alternate specialists; or (ii) off-floor liquidity providers. 
Specialists and alternate specialists may act as Committers only in 
their specialty issues. See Exchange Rule 237(c)(i). A more thorough 
description and discussion of order types, classes of users, and 
conditions to access appear in Exchange Rule 237 and the VTS 
Approval Order.
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    Although Exchange members will be billed for the VTS trades of 
their customer users, no other separate fee shall apply to members 
acting as brokers. This practice is similar to other fee arrangements 
currently employed by the Exchange, including the assessment of fees 
for equity option transactions.\15\
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    \15\ See Securities Exchange Act Release No. 41317 (Apr. 21, 
1999), 64 FR 23144 (Apr. 29, 1999).
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b)(4) of the Act \16\ in that it provides for the 
equitable allocation of reasonable fees and other charges among members 
using VTS. The Exchange further believes that the proposed fee schedule 
is reasonable and will help attract order flow to VTS.
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    \16\ 15 U.S.C. 78f(b)(4).
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B. Self-Regulatory Organization's Statement on Burden in Competition

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

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

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

[[Page 41482]]

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

    Because the foregoing proposed rule change establishes a due, fee, 
or charge imposed by the Exchange, it has become effective upon filing 
pursuant to Section 19(b)(3)(A) of the Act \17\ and Rule 19b-4(f)(2) 
thereunder.\18\ At any time within 60 days of the filing of the 
proposed rule change, the Commission may summarily abrogate such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.\19\
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    \17\ 15 U.S.C. 78s(b)(3)(A).
    \18\ 17 CFR 240.19b-4(f)(2).
    \19\ In reviewing this proposed rule change, the Commission has 
considered the proposal's impact on efficiency, competition and 
capital formation. 15 U.S.C. 78c(f)
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549-
0609. Copies of the submissions, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any persons, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for inspection and copying in the 
Commission's Public Reference Section, 450 Fifth Street, N.W., 
Washington, D.C. 20549. Copies of such filing will also be available 
for inspection and copying at the principal office of the Exchange. All 
submissions should refer to File No. SR-Phlx-99-21 and should be 
submitted by August 20, 1999.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-19489 Filed 7-29-99; 8:45 am]
BILLING CODE 8010-01-M