[Federal Register Volume 70, Number 134 (Thursday, July 14, 2005)]
[Notices]
[Pages 40772-40773]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-13842]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51996; File No. SR-Phlx-2005-02]


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

July 8, 2005.
    On January 25, 2005, the Philadelphia Stock Exchange, Inc. 
(``Phlx'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission''), pursuant to Section 19(b)(1) of the 
Security Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to permit certain customer-to-
customer crosses to be executed at a volume weighted average price 
(``VWAP'') during the Exchange's Post Primary Session.\3\ On May 4, 
2005, the Phlx submitted Amendment No. 1 to the proposed rule 
change,\4\ and on May 18, 2005, the Phlx submitted Amendment No. 2 to 
the proposed rule change.\5\ The proposed rule change, as amended, was 
published for comment in the Federal Register on June 3, 2005.\6\ The 
Commission received no comments on the proposal. The order approves the 
proposed rule change, as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ According to Phlx Rule 101, the Post Primary Session 
(``PPS'') operated from 4 to 4:15 p.m.
    \4\ 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 Rule 11Ac1-1 under the Act 
(the ``Quote Rule'') with respect to VWAP crosses.
    \5\ 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.
    \6\ See Securities Exchange Act Release No. 51731 (May 24, 
2005), 70 FR 32692 (June 3, 2005) (``Notice'').
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    The Phlx proposed to amend Phlx Rule 126, ``Crossing'' Orders, by 
adding new subsection (i) to permit certain customer-to-customer \7\ 
crosses to be executed at a VWAP \8\ during the

[[Page 40773]]

Exchange's PPS.\9\ 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 am. to 4 p.m., or for any portion of the 
trading day, as may be agreed to by the two parties to the trade.\10\ 
Pursuant to the proposed rule change, the VWAP 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.
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    \7\ Pursuant to Phlx Rule 126(b) a ``customer'' order would 
include any order which a broker represents in an agency capacity, 
including any order of a market marker 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.
    \8\ 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 (October 28, 2003), 68 FR 62972, 62982, at n. 88 (November 
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 trade day. Members would be required to document 
the particular trades they have agreed to be used in the 
calculation.
    \9\ According to Phlx Rule 101, the PPS operates from 4 to 4:15 
p.m.
    \10\ These trades would therefore not be subject to the Phlx 
Rules 118, 119, and 120, which collectively establish auction market 
rules of priority, parity and precedence of order on the equity 
floor.
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    The Commission finds that the proposed rule change, as amended, is 
consistent with the requirements of Section 6 of the Act \11\ and the 
rules and regulations thereunder applicable to a national securities 
exchange.\12\ In particular, the Commission finds that the proposed 
rule change, as amended, is consistent with Section 6(b)(5) of the 
Act,\13\ which requires, among other things, that the rules of an 
exchange be designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to 
perfect the mechanism of a free and open market and a national market 
system, and, in general, to protect investors and the public interest. 
The Commission believes that the proposed rule change, as amended, will 
present market participants on Phlx with a new means of executing 
transactions at a VWAP, thereby enhancing investors' choices. 
Specifically, the proposed rule change would permit certain customer-
to-customer crosses to be executed at a VWAP during the Exchange's PPS.
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    \11\ 15 U.S.C. 78f.
    \12\ In approving this proposed rule change, as amended, the 
Commission notes that it has considered the proposed rule's impact 
on efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
    \13\ 15 U.S.C. 78f(b)(5).
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    The Phlx also has requested an exemption from Rule 11Ac1-1 of the 
Act (``Quote Rule'') with respect to these VWAP crosses.\14\ The Quote 
Rule requires a national securities exchange to collect bids, offers, 
quotation sizes, and aggregate quotation sizes from ``responsible 
brokers or dealers'' for each reported security listed or admitted to 
unlisted trading privileges and to make them available to quotation 
vendors throughout the trading day with respect to reported securities 
traded on such exchange floor.\15\ In addition, responsible brokers and 
dealers must promptly communicate their best bids, offers, and 
quotation sizes for any subject security to the exchange and be firm 
for their published bids and offers in any amount up to their published 
quotation sizes.\16\ A bid or offer is defined in the Quote Rule as 
``the bid price and the offer price communicated by an exchange member 
or OTC market maker to any broker or dealer, or to any customer, at 
which it is willing to buy or sell one or more round lots of a covered 
security, as either principal or agent, but shall not include 
indications of interest.'' \17\ To constitute a bid or offer, the 
underlying trading interest must have been communicated to at least one 
other potential counterparty. Bids and offers are intended to attract 
other parties to deal with the person publishing the bid or offer at 
the quoted price.
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    \14\ 17 CFR 240.11Ac1-1. See also 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.
    In addition, the Phlx has requested an exemption from the tick 
test provisions of Rule 10a-1 of the Act (``Short Sale Rule'') for 
crosses with a short sale component executed pursuant to proposed 
Phlx Rule 126(i). 17 CFR 240.10a-1. See also Notice, supra note 6, 
at 32693. The Commission is currently reviewing the Phlx's request 
for exemption from the Short Sale Rule.
    \15\ Subsection (a)(21)(i) of the Quote Rule defines the term 
``responsible broker or dealer'' to mean: ``[w]hen used with respect 
to bids or offers communicated on an exchange, any member of such 
exchange who communicates to another member on such exchange, at the 
location (or locations) designated by such exchange for trading in a 
covered security, a bid or offer for such covered security, as 
either principal or agent. * * *'' 17 CFR 240.11Ac1-1(a)(21)(i).
    \16\ See 17 CFR 240.11Ac1-1(c).
    \17\ 17 CFR 240.11Ac1-1(a)(4).
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    On the other hand, the Phlx is requesting relief from the Quote 
Rule because, with respect to the proposed Phlx Rule 126(i) VWAP 
crosses, the Phlx represents that bids and offers will not be made 
continuously and trades entered pursuant to Phlx Rule 126(i) would be 
entered for execution at a VWAP rather than at a specified bid or 
offer. In addition, the price of a VWAP cross would not be determined 
until such time as the VWAP is calculated. Furthermore, on account of 
the absence of a specified bid or offer, the Phlx represents that a 
VWAP cross is not a mechanism by which Phlx members would broadcast 
prices to other members and trade with one another at those prices. 
Thus, the Phlx represents that VWAP crosses do not implicate the 
reporting of bids and offers for the national market system concerns 
that Section 11A addresses.
    Therefore, under proposed Phlx Rule 126(i), it would not be 
possible for the Phlx to collect firm bids and offers at specific 
prices with respect to VWAP crosses and transmit each information on a 
continuous basis to quotation vendors. Only after the VWAP cross is 
effected after the close of trading is the Phlx able to transmit 
pricing information to vendors. Accordingly, the Commission believes it 
is appropriate to grant the Phlx's request for exemption from the 
requirement of the Quote Rule for VWAP crosses executed pursuant to 
proposed Phlx Rule 126(i).
    For the foregoing reasons, the Commission finds that the proposed 
rule change, as amended, is consistent with the Act and the rules and 
regulations thereunder applicable to a national securities exchange, 
and, in particular, with Section 6(b)(5) of the Act.\18\
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    \18\ 15 U.S.C. 78f(b)(5).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\19\ that the proposed rule change (SR-Phlx-2005-02), as amended, 
be, and it hereby is, approved.
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    \19\ 15 U.S.C. 78s(b)(2).

    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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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 05-13842 Filed 7-13-05; 8:45 am]
BILLING CODE 8010-01-M