Section I - Introduction
On January 28, 2000, the Securities and Exchange Commission ("Commission") ordered the American Stock Exchange LLC ("AMEX"), the Boston Stock Exchange, Inc. ("BSE"), the Chicago Board Options Exchange, Inc. ("CBOE"), the Chicago Stock Exchange, Inc. ("CHX"), the Cincinnati Stock Exchange, Inc. ("CSE"), the National Association of Securities Dealers, Inc. ("NASD"), the New York Stock Exchange ("NYSE"), the Pacific Exchange, Inc. ("PCX"), and the Philadelphia Stock Exchange, Inc. ("PHLX") (collectively the "Participants" and individually a "Participant") to act jointly in discussing, developing, and submitting to the Commission a plan to implement decimal pricing in the equities and options markets beginning no later than July 3, 2000 ("Decimals Implementation Plan"), and in implementing the Decimals Implementation Plan.
Subsequently, the Commission ordered that all dates be suspended in the original order and they solicited industry comments on how to proceed with the implementation of decimal pricing. On June 8, 2000 the Commission ordered the Participants (The International Securities Exchange LLC ("ISE") was included in this order, and shall Hereafter be referred to as a Participant) to act jointly in planning, discussing, developing, and submitting to the Commission a plan that will begin phasing in the implementation of decimal pricing in equities securities and options on or before September 5, 2000.
As mandated by the Commission order, this plan has been discussed with interested market participants, including the Securities Industry Association ("SIA") and its members, the Depository Trust and Clearing Corporation ("DTCC") and its two operating subsidiaries, the National Securities Clearing Corporation and the Depository Trust Company, the Options Clearing Corporation ("OCC"), the Securities Industry Automation Corporation ("SIAC"), the Intermarket Trading System Operating Committee ("ITSOC"), the Options Price Reporting Authority ("OPRA"), the Consolidated Tape Association ("CTA"), and the Consolidated Quote Operating Committee ("CQOC") (collectively the "Interested Parties"). The Participants submit to the Commission this plan for a phased-in implementation of Decimal Pricing.
Section II - Background
In mid-1997, in recognition of the potential benefits to the investing public of pricing securities in decimals, the Commission urged the Participants to begin pricing in decimals. The Securities Industry Association and the equities and options markets formed a Decimalization Steering Committee in July 1998 to develop a decimalization implementation plan and coordinate a smooth transition. In mid-1998, the General Accounting Office ("GAO") recommended, and the Commission agreed, that the Year 2000 effort was too important to the industry to risk implementation of decimal pricing before the Year 2000 effort was completed.
Section III - Implementation Strategy
The Participants recommend a phased-in implementation, consisting of four phases, for the conversion to decimal pricing that reduces the risk to the investing public, issuers, Participants, clearing and depository organizations, and member firms. This implementation period (the "Phase-In Period") will begin on August 28, 2000 and will end with full implementation of decimal pricing for all equities and options on or before April 9, 2001.
The Participants believe a phased-in implementation is the most effective way to ensure that markets continue to operate in an efficient, orderly, and fair manner during the conversion process while mitigating the risk of fallback, and allows the Participants to determine the impact of decimal pricing on trading rules and inter-market systems capacity during historically high-volume times (e.g., Option expirations, triple witching).
In order to mitigate the risk to the investing public of trading and quoting message rates that could possibly overwhelm industry capacity thereby producing stale information (see SRI's April 14, 1999 Executive Summary presentation and subsequent Mitigating Options Message Traffic Final Report issued on December 14, 1999), the Participants recommend that during the Phase-in Period, a Minimum Price Variation ("MPV") for quoting should be applied and should be continued through the last day that this plan is in effect.
The recommended MPV schedule for quoting is as follows: For equity issues .01 MPV For option issues quoted under $3 a contract. .05 MPV For option issues quoted at $3 a contract and greater. .10 MPV
The Participants agree to abide by the schedule above while the plan is in effect. The Participants may work separately, and/or jointly with each other, and may commission a third party or third parties to perform a detailed statistical analysis of quoting and trading activity beginning with Phase I ("Limited Exchange-Listed Issues") and extending through the Phase-In Period. For Phase I ("Limited Exchange-Listed Issues"), Phase IIA ("Additional Exchange-Listed Issues") and Phase III ("Limited Nasdaq Issues"), the Participants will agree on the equity issues (and options on those equities). The result of the study or studies will form the basis for the Participants study or studies on systems capacity, liquidity, and trading behavior due to the Commission no more than 60 days after full implementation (on or before April 9, 2001) of decimal pricing.
Importantly, at the end of the Phase-In Period, the MPV's described above will remain in effect through the last day that this plan is in effect. This plan will remain in effect until the Commission approves rules for each Participant which designate the minimum increment by which equities and options are quoted or until any other date identified by the Commission. The Participants' implementation project schedule and milestones can be found in Appendix A.
Section IV - Testing and Readiness Reporting
The Participants have discussed their readiness at each of the Exchange Committee meetings during the plan preparation. After the plan is submitted to the Commission the Participants, in conjunction with the Interested Parties, will discuss readiness prior to the checkpoints listed in this plan. The schedule for the Participants meetings during plan preparation was as follows:
June 27, 2000
July 5, 2000
July 18, 2000
In addition to the Exchange Committee meetings, the Participants report on their status and on firm testing status at the biweekly SIA Decimal Testing and Implementation Subcommittee meetings and the monthly SIA Decimal Steering Committee meetings. The schedule for these meetings prior to Phase I implementation is as follows:
August 8, 2000
August 15, 2000
The equity issues (and options on those equities) that will quote in decimals for Phase I (Limited Exchange-Listed Issues) have been identified and widely disseminated. The equity issues (and options on those equities) that will quote in decimals for Phase II (Additional Exchange-Listed Issues) and Phase III (Limited Nasdaq Issues) will be identified by the end of July, 2000 and by the beginning of January, 2001, respectively. These time frames meet the approximate two months notice that the member firms have identified to the SIA that they need in order to inform their customers. The Participants and the SIA will ensure dissemination to their respective membership base through the use of web sites, membership bulletins, and the SIA decimal committees.
Section V - Implementation Phases
A. Phase I - Limited Exchange-Listed Issues
The Participants recommend that the phase-in process consist of an initial phase, to begin on Monday, August 28, 2000 and continue through the last day that this plan is in effect, during which a minimum of 10 to 15 exchange-listed equity issues (and options on those equities) will quote in decimals (per the recommended quote MPV schedule documented earlier) and where the Participants, with the cooperation of the Interested Parties, will evaluate the industry's transition to decimals. Due to the concerns of the industry and the Participants regarding the impacts of decimal pricing on message traffic and trading patterns, an evaluation of decimal pricing by the Participants will commence beginning with this phase.
B. Phase IIA - Additional Exchange-Listed Issues
The Participants recommend that the first phase be followed by a partial conversion (per the recommended quote MPV schedule documented earlier) of approximately 50 to 100 exchange-listed equity issues (and options on those equities) beginning on Monday, September 25, 2000 and continuing through the last day that this plan is in effect. The Participants and the Interested Parties will continue to evaluate the transition to decimal pricing and its impacts on the industry, especially as they relate to capacity, liquidity and trading patterns.
C. Phase IIB - Full Conversion of Exchange-Listed Issues and/or All Options Checkpoint.
At Checkpoint III (Determine Readiness for Full Implementation of Exchange-Listed Issues and/or All Options), the Participants will evaluate the results of the first two phases of decimal quoting. If, after consultation with the Interested Parties and the Commission, the Participants believe that the Participants and Interested Parties are technically prepared for full implementation and this would not cause adverse impacts to the investing public, the Participants may elect to fully convert all exchange-listed issues and/or all option issues (both exchange-listed and Nasdaq-listed) to decimal quoting (per the recommended quote MPV schedule documented earlier). The Participants may also elect to implement a penny pilot in selected option issues. Any decision to fully convert exchange-listed issues and/or all options or to implement a penny pilot on options will be made during the period between November, 2000 and April, 2001, and a notice would be widely disseminated by the Participants and the SIA to the Industry and the investing public at least 30 calendar days before implementation.
D. Phase III - Limited Nasdaq Issues
As with exchange-listed issues, the Participants recommend an initial phase of limited Nasdaq issues to begin on or before March 12, 2001 and continue through the last day that this plan is in effect. Approximately 10 to 15 Nasdaq equity issues (and options on those equities if not already quoting in decimals) will quote in decimals (per the recommended quote MPV schedule documented earlier). The Participants, with the cooperation of the Interested Parties, will evaluate the industry's transition to decimals in Nasdaq issues. Joint and/or independent studies will continue through this phase.
E. Phase IV - All Markets, Full Implementation
At Checkpoint V (Determine Readiness for All Markets, Full Implementation), the Participants will evaluate the results of all previous phases. If, after consultation with the Interested Parties and the Commission, the Participants believe that the Participants and the Interested Parties are technically prepared for full implementation and this would not cause adverse impacts to the investing public, the Participants recommend that full implementation of decimal quoting for equities and options (per the recommended quote MPV schedule documented earlier) begin on or before April 9, 2001 and continue through the last day that this plan is in effect. The Participants, with the cooperation of the Interested Parties, will evaluate the industry's transition to full decimal pricing in all issues and joint and/or independent studies will continue evaluating the impacts of decimal pricing.
F. Checkpoints
The Participants have identified five checkpoints where the Participants will formally evaluate the results of the phase-in implementation program and determine the industry's ability to function without disruption to the investing public in a decimal pricing environment. Throughout the period during which this plan is effective, however, the Participants will monitor the impact of decimal-based pricing on the industry and will confer with the Commission on those impacts.
1. Checkpoint I - Pre-implementation Evaluation
The first checkpoint will take place on August 15, 2000 where the Participants will poll the Interested Parties, review industry mandated testing results and confer with the Commission on the industry's preparedness to proceed with Phase I (Limited Exchange -Listed Issues) on August 28, 2000. While the Participants have defined fallback scenarios for themselves during this phase (see Section VI - Fallback/Recovery) and have determined that no single firm failure will cause a fallback to fractional pricing, the Participants will be prepared to confer with the Commission if it appears that multiple failures are placing the investing public at risk or at a disadvantage. The Participants have identified the equity issues (and options on those issues) to be quoted in decimals in the first phase.
2. Checkpoint II - Determine Readiness for Additional Exchange-Listed Issues
The second checkpoint will take place on September 19, 2000 where the Participants, after polling the Interested Parties, will confer with the Commission on the industry's preparedness to proceed with Phase II (Additional Exchange-Listed Issues) of the Phase -In Period on September 25, 2000. While the Participants have defined fallback scenarios for themselves during this phase (see Section VI - Fallback/Recovery) and have determined that no single firm failure will cause a fallback to fractional pricing, the Participants will be prepared to confer with the Commission if it appears that multiple failures are placing the investing public at risk or at a disadvantage. By the end of July 2000, the Participants will identify the additional equity issues (and options on those equities) to be quoted in decimals in the second phase.
3. Checkpoint III - Determine Readiness for Full Implementation of Exchange -Listed Issues and/or all Options.
The third checkpoint will occur on November 1, 2000. The Participants will evaluate the results of the first two phases of decimal quoting. If, after consultation with the Interested Parties and the Commission, the Participants believe that the Participants and the Interested Parties are technically prepared for full implementation and this would not cause adverse impacts to the investing public, the Participants may elect to fully convert all exchange-listed issues and/or all option issues (both exchange-listed and Nasdaq -listed) to decimal quoting (per the recommended quote MPV schedule documented earlier). The Participants may also elect to implement a penny pilot in selected option issues. Any decision to fully convert exchange-listed issues and/or all options or to implement a penny pilot on options will be made during the period between December, 2000 and April, 2001, and a notice would be widely disseminated by the Participants and the SIA to the industry and the investing public at least 30 calendar days before implementation.
4. Checkpoint IV - Limited Nasdaq Issues
The fourth checkpoint will occur on March 5, 2001 where the Participants will poll the Interested Parties, review industry testing results and confer with the Commission on the industry's preparedness to proceed with Phase III (Limited Nasdaq Issues) of the Phase -In Period on or before March 12, 2001. In the beginning of January, 2001 the Nasdaq will identify the Nasdaq equity issues (and options on those issues if not already quoting in decimals) to be quoted in decimals.
5. Checkpoint V - Determine Readiness for All Markets, Full Implementation
The fifth checkpoint will occur on April 2, 2001, where the Participants will evaluate the results of the first three phases of decimal quoting. If, after consultation with the Interested Parties and the Commission, the Participants believe that the Participants and Interested Parties are technically prepared for full implementation and this would not cause adverse impacts to the investing public, the Participants will proceed with full implementation of all exchange-listed issues (if not already quoting in decimals), Nasdaq issues and all options on the issues (if not already quoting in decimals) on or before April 9, 2001.
G. Post Phase-in Process
The post phase-in process will begin at the end of the Phase-In Period (on or before April 9, 2001) and will last no more than two months. The Participants will review the Phase-In Period and the impact of decimal pricing on systems capacity, liquidity, and trading behavior. The Participants will submit joint and/or individual studies, that document the impacts of decimal pricing and may contain a recommendation on whether there should be a uniform minimum increment for equities or options or both. Absent Commission action on the study and recommendations, each Participant will submit proposed rule changes to establish its choice of minimum increments by which equities or options are quoted on its market no later than thirty calendar days after the filing of the study.
Section VI - Fallback/Recovery
The Participants, after consultation with the Interested Parties have agreed that Phase I (Limited Exchange-Listed Issues) and Phase III (Limited Nasdaq Issues) of the Phase-In Period require specific procedures for Participant fallback. Throughout the period during which this plan is effective however, the Participants will monitor the impact of decimal -based quoting and will confer with the Commission on those impacts.
For options quoting during Phase I (Limited Exchange-Listed Issues) and Phase III (Limited Nasdaq Issues) there will be no intra-day fallback to fractional pricing and issues must quote on every exchange in the same format, either decimal or fraction. For equity quoting during Phase I (Limited Exchange-Listed Issues) and Phase III (Limited Nasdaq Issues), there may be an intra-day fallback to fractional pricing, as a last resort after all other efforts have been exhausted to remediate the problem. Specific details of the fallback plan will be published prior to the August 28, 2000 start date. For equity issues, in the event that a regional exchange Participant experiences a problem on day one of Phase I (Limited Exchange-Listed Issues) or Phase III (Limited Nasdaq Issues) that would require a fallback to fractional quoting, the Participant must attempt to fix the problem and may halt trading if the primary exchange for affected issues continues to quote in decimals. A problem at one of the Participants on day one of Phase I (Limited Exchange-Listed Issues) or Phase III (Limited Nasdaq Issues) will not necessitate a trading halt or fallback to fractional quoting by the other Participants. However, if any of the primary exchanges revert back to fractional quoting on day two, all other equity Participants quoting the issues on the affected primary exchange will also revert back to fractional quoting for those issues. Any issues falling back to fractions must continue to quote in fractions until the Monday following the correction of the problem.
For option issues, a problem at one of the Participants during Phase I (Limited Exchange -Listed Issues) or Phase III (Limited Nasdaq Issues) will not necessitate a trading halt by the other Participants. If an Options Exchange on the following day must fallback to fractional quoting and multiple-listed issues are involved in the fallback, all Options Exchanges will fallback. If the underlying equity reverts back to quoting in fractions, options on that equity may continue to quote in decimals. If a Participant chooses to revert the options back to fractional quoting until such time as the underlying equity issues are ready to convert to decimal quoting, the conversion must occur overnight and for multiple-listed issues, all Option Exchanges quoting the issues must agree to fallback as well. Any option issues falling back to fractions must continue to quote in fractions until the Monday following the correction of the problem.
Any programmatic problems encountered by the Participants after day one of Phase I (Limited Exchange-Listed Issues) or Phase III (Limited Nasdaq Issues) and any capacity issues will be treated like any other production problem by each Participant and will be subject to their normal operating procedures. As noted above, however, the Participants will monitor the impact of decimal-based quoting on the industry throughout the time that this plan is effective and will confer with the Commission on the impacts. Procedures to deal with problems at a clearing or settlement utility (i.e., NSCC, OCC DTC) are modeled after the Participants' Year 2000 contingency plans. If a clearing or settlement entity cannot process the first day's trading activity, the Participants trading the issues cleared or settled by the entity will open for decimal pricing on the following business day. If the clearing or settlement entity still cannot process trading activity, the Participants may halt trading in the issues until the entity can successfully process the first day's trades.
Each Participant will submit their own procedures on how to deal with open orders on issues quoting in decimal format that will revert back to fractional pricing.
Section VII - Summary
The Participants with the cooperation of the Interested Parties have agreed upon an approach to implement a phased-in implementation program for decimal quoting that provides the maximum safety for the industry and the investing public while satisfying the Commission order on decimal pricing implementation.
The implementation of a limited number of equities (and options on those equities) quoting at pre-described MPV's in the first phase (Phase I - Limited Exchange-Listed Issues) and the third phase (Phase III - Limited Nasdaq Issues) tests the operational readiness of the industry and at the same time minimizes the ill-effects to the investing public of a fallback to fractional quoting.
Following Phase I (Limited Exchange-Listed Issues) is an additional limited phase of decimal quoting of equities and options at pre-described MPV's. The goals of the second phase (Phase II -Additional Exchange-Listed Issues) are to evaluate projected capacity estimates, impacts to liquidity, and new trading patterns in advance of full implementation of decimal pricing.
