[Federal Register Volume 70, Number 106 (Friday, June 3, 2005)]
[Notices]
[Pages 32692-32694]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-2843]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51731; File No. SR-Phlx-2005-02]


Self-Regulatory Organizations; Philadelphia Stock Exchange, Inc.; 
Notice of Filing of a Proposed Rule Change and Amendment Nos. 1 and 2 
Thereto Relating to Volume Weighted Average Price Crosses

May 24, 2005.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\, and Rule 19b-4 \2\ thereunder, notice is hereby given 
that on January 25, 2005, the Philadelphia Stock Exchange, Inc. 
(``Phlx'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'' or ``SEC'') the proposed rule change as 
described in Items I, II, and III, below, which Items have been 
prepared by the Phlx. On May 4, 2005, the Phlx submitted Amendment No. 
1 to the proposed rule change,\3\ and on May 18, 2005, the Phlx 
submitted Amendment No. 2 to the proposed rule change.\4\ The 
Commission is publishing this notice to solicit comments on the 
proposed rule change, as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, the Phlx (1) eliminated the concept of 
linking a VWAP cross to a ``primary market'' and instead proposed to 
link a VWAP cross to correspond to any single market, and (2) 
requested relief from the provisions of SEC Rule 11Ac1-1 under the 
Act (the ``Quote Rule'') with respect to VWAP crosses.
    \4\ In Amendment No. 2, the Phlx (1) eliminated the proposed 
rule text addressing the treatment of VWAP crosses in the case of 
trading halts, (2) corrected a citing reference to Phlx auction 
market rules, and (3) clarified the description of the ``b'' 
modifier.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Phlx proposes to amend Phlx Rule 126, ``Crossing'' Orders, by 
adding new subsection (i) dealing with volume weighted average price 
(``VWAP'') crosses. The text of amended Phlx Rule 126 is set forth 
below. New language is italicized.

Rule 126.

``Crossing'' Orders

    When a member has an order to buy and an order to sell the same 
security, he must offer such security at a price which is higher than 
his bid by the minimum variation permitted in such security before 
making a transaction with himself.

Supplementary Material

    (a)-(h) No Change.
    (i) This section applies to the execution of certain transactions 
hereinafter referred to as VWAP crosses which are customer-to-customer 
crosses that are equal to any single market or consolidated market 
volume weighted average prices either for the entire trading day from 
9:30 a.m. to 4 p.m., or for any portion of the trading day. VWAP 
crosses are not subject to the Exchange's auction market rules and 
thus, may not be broken-up upon entry to the Exchange. VWAP crosses 
must be identified as VWAP on each order ticket, entered by symbol and 
price, identified as `agency' and, when applicable, identified as 
``short exempt''. The basis upon which the VWAP is to be calculated 
(including the time of day in which the trades to be included in the 
VWAP formula must occur, and whether such trades are limited to those 
occurring on a particular market or include all trades on the 
consolidated market) must be documented upon receipt of the order. VWAP 
crosses may be executed only during the Exchange's Post Primary Session 
and reported with the identifier ``b'', to the nearest decimal eligible 
for reporting by the Exchange.
* * * * *

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 Phlx included statements 
concerning the purpose of and basis for the proposed rule change, as 
amended, 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 Phlx 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
    The Exchange represents that the purpose of the proposed rule 
change is to permit certain customer-to-customer \5\ crosses to be 
executed at a VWAP \6\ during the Exchange's Post Primary Session.\7\ 
The new crossing transactions would be permitted to be executed at 
prices which are equal to any single market or consolidated market 
volume weighted average prices calculated for the entire trading day 
from 9:30 a.m. to 4 p.m., or for any portion of the trading

[[Page 32693]]

day, as may be agreed to by the two parties to the trade. These trades 
would therefore not be subject to Exchange Rules 118, 119, and 120,\8\ 
which collectively establish auction market rules of priority, parity 
and precedence of orders on the equity floor.
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    \5\ Pursuant to Phlx Rule 126(d) a ``customer'' order would 
include any order which a broker represents in an agency capacity, 
including any order of a market maker or other broker-dealer not 
affiliated with the broker, and it would not include any order of a 
broker-dealer affiliated with the executing broker, or any 
associated person of such broker-dealer.
    \6\ The Commission has observed that the VWAP for a security is 
generally determined by: (1) Calculating raw values for regular 
session trades reported by the Consolidated Tape during the regular 
trading day by multiplying each such price by the total number of 
shares traded at that price; (2) compiling an aggregate sum by 
adding each calculated raw value from step one above; and (3) 
dividing the aggregate sum by the total number of reported shares 
for that day in the security. See Securities Exchange Act Release 
No. 48709 (Oct. 28, 2003), 68 FR 62972, 62982 at n. 88 (Nov. 6, 
2003) (the Regulation SHO Proposing Release). Pursuant to the 
Exchange's proposed rule change, however, members would be able to 
elect to calculate a VWAP using only a single market's prices rather 
than all trades reported by the Consolidated Tape, and could elect 
to base that calculation on trades reported during a particular time 
slice during the day rather than including all trades reported 
during the regular trading day. Members would be required to 
document the particular trades they have agreed to be used in the 
calculation.
    \7\ According to Phlx Rule 101, the Post Primary Session 
(``PPS'') operates from 4 to 4:15 p.m.
    \8\ See Amendment No. 2, supra note 4 (deleting a reference to 
Phlx Rule 123).
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    For example, assume that a floor broker receives in the morning an 
order to sell 10,000 XYZ at the VWAP calculated based upon transactions 
reported in the consolidated market between noon and 2 p.m. later that 
day. The floor broker would immediately complete an order ticket with 
the details of the proposed trade, including the time the order was 
placed and an identification of the transaction as a ``VWAP'' trade. 
The floor broker would also prepare a document memorializing the basis 
upon which the VWAP is to be calculated (i.e., the VWAP of transactions 
reported in the consolidated market between noon and 2:00). Thereafter, 
the floor broker would perhaps contact other institutional clients and 
inform them of an indication of interest to sell XYZ security during 
the Post Primary Session at the specified VWAP. Once the floor broker 
located a buyer for the transaction, he would generate an order ticket 
for the buyer by entering the time the order was placed and identifying 
the trade as a ``VWAP'' trade to be executed at the stipulated VWAP. 
During the Post Primary Session, the two orders would be crossed and 
the trade would be executed at the stipulated VWAP and reported to 
clearing and the tape at that price. Pursuant to the proposed rule 
change, the trade would be reported to the tape with the identifier 
``b'' to the nearest decimal eligible for reporting by the Exchange. 
The ``b'' would distinguish VWAP trades from other transactions that 
may possibly be reported after the close.\9\
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    \9\ See Securities Exchange Act Release Nos. 41210 (Mar. 24, 
1999), 64 FR 15857 (Apr. 1, 1999) (approving Phlx's pilot program 
for the Volume Weighted Average Price Trading System and stating 
that trades thereunder will be reported to the Consolidated Tape 
System with the sale condition ``B'' to indicate volume weighted 
average pricing); and 41606 (July 8, 1999), 64 FR 38226 (July 15, 
1999) (stating that rules governing reporting of transactions in 
Nasdaq securities contain a provision whereby a firm may aggregate 
transactions at the same price that would be impractical to report 
individually, provided that no individual order of 10,000 shares or 
more may be aggregated, and that these reports have a ``.B'' 
modifier appended by the reporting firm and are disseminated to the 
Nasdaq tape and vendors). In the past, the Exchange reported trades 
in the Volume Weighted Average Price Trading System to the 
Consolidated Tape System with the sale condition ``B'' to indicate 
volume weighted average pricing (the ``B'' distinguished VWAP trades 
from other transactions that may have possibly been reported after 
the close such as after-hours, crossing session, or late sales 
transactions). The Exchange no longer uses the Volume Weighted 
Average Price Trading System, so there is no chance that VWAP 
Crosses identified with a ``b'' sale condition will be confused with 
Volume Weighted Average Price Trading System trades. See Amendment 
No. 2, supra note 4.
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    Under Commission Rule 10a-1 under the Act,\10\ absent an exemption, 
a short sale of a security registered on a national securities exchange 
and reported in the consolidated reporting system may not be effected 
at a price either (1) below the last reported price of a transaction 
reported in such system (``minus tick'') or (2) at the last reported 
price if such price is lower than the previously reported different 
price (``zero minus tick''). This is known as the ``tick test.'' 
Because VWAP crosses are executed at a price that is based on the VWAP 
of trades during a particular time of day and executed in the Post 
Primary Session, it is possible that some VWAP crosses may not comply 
with the tick test because the VWAP cross price of a security may 
represent a minus tick or zero-minus tick with respect to the last sale 
reported by the Consolidated Tape. Thus, the Exchange intends also to 
apply to the Commission for exemptive relief from the tick test 
provisions of SEC Rule 10a-1 for crosses with a short sale component 
executed pursuant to new Phlx Rule 126(i).\11\ The Exchange is also 
requesting relief from the provisions of Commission Rule 11Ac1-1 under 
the Act \12\ (the ``Quote Rule'') with respect to VWAP crosses.
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    \10\ 17 CFR 240.10a-1.
    \11\ See Draft letter from Carla Behnfeldt, Director, Legal 
Department New Product Development Group, Phlx, to Larry E. 
Bergmann, Senior Associate Director, Division of Market Regulation, 
Commission, dated February 3, 2005.
    \12\ 17 CFR 240.11Ac1-1.
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2. Statutory Basis
    The Exchange believes that the proposal is consistent with Section 
6(b) of the Act \13\ in general, and furthers the objectives of Section 
6(b)(5) of the Act \14\ in particular, in that it affords market 
participants a new means of executing transactions at a VWAP, thereby 
enhancing investors' choices.
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    \13\ 15 U.S.C. 78f(b).
    \14\ 15 U.S.C. 78f(b)(5).
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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 by the 
Exchange.

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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer 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 Exchange consents, the Commission shall:
    A. By order approve such proposed rule change, as amended; or
    B. Institute proceedings to determine whether the proposed rule 
change, as amended, should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, is consistent with the Act. Comments may be 
submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number SR-Phlx-2005-02 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609.
    All submissions should refer to File Number SR-Phlx-2005-02. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, 
all written statements with respect to the proposed rule change, as 
amended, 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

[[Page 32694]]

provisions of 5 U.S.C. 552, will be available for inspection and 
copying in the Commission's Public Reference Room. Copies of the filing 
also will be available for inspection and copying at the principal 
office of the Phlx. All comments received will be posted without 
change; the Commission does not edit personal identifying information 
from submissions. You should submit only information that you wish to 
make available publicly. All submissions should refer to File Number 
SR-Phlx-2005-02 and should be submitted on or before June 24, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-2843 Filed 6-2-05; 8:45 am]
BILLING CODE 8010-01-P