January 28, 2000
Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609
Re: Release No. 34-42209; File No. S7-29-99; Unlisted Trading Privileges
Dear Mr. Katz:
The Boston Stock Exchange, Inc. (the "Exchange" or the "BSE") appreciates this opportunity to comment on the proposed rule (the "Rule") by the Securities and Exchange Commission (the "Commission" or the "SEC") relating to unlisted trading privileges ("UTP") in initial public offerings ("IPOs"). The Exchange agrees with and commends the Commission on its efforts to provide relief from the anti-competitive environment surrounding the current UTP rules pertaining to IPOs.
Section 12(f) of the Act, which governs when a national securities exchange may extend UTP to a security, originally required an exchange to apply to the Commission for approval before extending UTP in that security. This process delayed the Exchange's ability to compete during the publication process in the Federal Register and subsequent comment period prior to receipt of approval to trade a security via UTP. During this time period the primary and OTC markets had a significant advantage over the Exchange in that they exclusively traded the security not only when brought to market but also during the notice period. Trading during this time is typically the most active for a security. There was further disadvantage after the Exchange received approval, due to the fact that order flow in the particular security had already been routed to the primary exchange and OTC markets, further inhibiting attempts to reroute this order flow to the BSE.
UTP Act of 1994
The UTP Act of 1994 provided some relief to exchanges seeking to trade a security via UTP ("UTP exchanges") in that the filing, notice and approval process was eliminated from Section 12(f) of the Act. However, the amended rule restricted UTP exchanges from trading an IPO for two days after trading commenced on the primary exchange and OTC market. During this two day period the same anti-competitive disadvantages that were present prior to the passage of the UTP Act of 1994 remained for UTP exchanges, but for a shorter duration.
The Commission, in an effort to remove anti-competitive measures, proposed in 1995 to eliminate the waiting period to trade a security via UTP and to permit trading in an IPO immediately after the first trade on the primary exchange was reported to the Consolidated Tape. The SEC, after reviewing responses to the proposed rule, adopted a one day delay for an IPO to be traded via UTP. The Commission acknowledged the anti-competitive factors addressed by supporters of the original SEC proposal, which included the Exchange, however it was concerned about the potential for increased volatility of an IPO subject to a decentralized market. The SEC indicated its intention to continue to monitor and revisit, if necessary. Although the restriction period was shortened, the disadvantages faced by the UTP exchanges, including the inability to trade during what is typically the most active market for a security and the routing of business away from the UTP exchanges, continues to date.
II. Definition Of An IPO For UTP Purposes
For purposes of Rule 12f-2, the Commission has interpreted the definition of IPO in a dual manner - the traditional IPO and a "technical" IPO. A traditional IPO has been defined as one involving a security the offering of which is subject to registration under the 1933 Act and whose issuer, immediately prior to filing the registration statement with respect to the offering, was not a reporting company. The technical IPO is most often seen in reorganizations (e.g. mergers or spin-offs), which are not traditional first time offerings and in fact, usually comprise some form of new entity in name but with existing shareholders or, alternatively, a combined entity where shareholders of a reporting company are exchanged with a non-reporting company to form the newly traded reporting company.
This latter definition has increased the number of instances where a UTP exchange is at a competitive disadvantage with the primary exchange and the OTC market. This additional administrative burden has also caused investors orders to be treated unfairly. UTP exchanges have been required to research, sometimes on short notice from the primary exchange, whether a reorganization transaction involved a technical IPO. This required identification of the issuer, review of the pertinent registration statement and, at times, contact with the Commission to determine IPO status when sources such as EDGAR did not provide the controlling documents necessary to review. Those transactions determined to be technical IPOs would, in certain circumstances, put investors at a disadvantage since limit orders on a UTP exchange would be cancelled due to ineligibility to trade for a day, and subsequently sent to the primary exchange where all priority would be forfeited. Although the SEC has recently provided certain regional exchanges with a no-action letter providing relief from the technical IPO restriction, which the Exchange commends, it is important to understand the historical effect this Rule has had on both the UTP exchanges and investors. We ask that the Commission consider formalizing such relief through amendment to Rule 12f-2, Section 12(f)(1)(G)(i).
III. Recent Developments
The Commission indicated its willingness to both monitor and reconsider the issue when new data became available. In 1998 certain exchanges submitted a study ("Regional Study") examining the effects of immediate multiple trading of IPO securities. The Regional Study was undertaken to address the issues raised by those opposing the multiple trading of IPOs on day one - specifically the potential for price volatility and negative effect on bid-ask spread of the IPO.
The Regional Study compared two sets of data. Both sets included five days of data for IPO securities subject to the one day trading delay and a similar group of IPO securities with no trading delay. The first set compared multiple listed securities and primary only listed securities. Analysis revealed that price volatility was approximately 30% higher when an IPO was traded on only the primary exchange versus multiple exchanges. Bid-ask spreads in both situations were found not to be statistically different. The second set compared IPOs subject to the technical IPO one day restriction and those that were not subject to any delay. Again, the Regional Study found that there was no statistically significant difference in either price volatility or bid-ask spreads.
The Exchange believes that the elimination of the one day trading restriction is long overdue. As indicated above, the current restrictions on UTP exchanges trading a security subject to an IPO is unfair and anti-competitive and provides the primary exchange and OTC markets with undue advantage.
The Regional Study has provided empirical evidence that refutes the arguments previously made in favor of the restriction. In addition, all exchange specialists, whether on the primary or UTP exchange, must provide a fair and orderly market. The Intermarket Trading System Plan governs trading activity amongst the exchanges as well, in order to ensure that all such activity is conducted in an orderly and efficient manner. Finally, the investing public, in certain circumstances, has been negatively affected by the current restriction. With the advent of ECNs, ATSs and the significant increase in competition, we agree with the Commission that justification no longer exists for the one day trading restriction.
Thank you for the opportunity to respond. If you have any questions or wish to discuss this response please do not hesitate to contact me.
/s/Anthony K. Stankiewicz