After Hours Trading System

Negociação após o fechamento das negociações Ruptura do comércio após o fechamento das horas O surgimento das redes de comunicações eletrônicas (ECNs) deu início a uma nova era na negociação de ações. Uma ECN é uma interface que não só permite aos investidores individuais interagir eletronicamente, mas também permite que os grandes investidores institucionais interagir anonimamente, escondendo assim suas ações. As negociações fora do horário comercial foram usadas principalmente por investidores institucionais até a década de 1990, quando as ECNs ficaram mais disponíveis. A negociação após o horário comercial agora está acessível à maioria dos investidores por meio do uso de contas de corretagem e também é conhecida como negociação de horas prolongadas e o mercado de pós-horas. O fechamento do mercado pós-horas é a última transação eo preço final de um título que é negociado no mercado pós-horário. O que são Horas de Negociação Pós-Horas As horas de negociação de amanhã depois de horas decorrem de aproximadamente 8:00 da manhã a 9:15 da tarde A sessão de tarde após horas se estende das 16:15 às 20:00 Certas negociações pré-mercado ocorrem Tão cedo quanto 6:00 durante dias de troca regulares e podem durar até que o mercado abre na manhã. As vantagens da negociação After-Hours Para os comerciantes, existem várias vantagens para a negociação após o horário regular do mercado. Um é conveniência. Os investidores podem preferir negociar em horários de pico, e as negociações pós-horário oferecem essa flexibilidade adicional. Muitos eventos de notícias significativos, como lançamentos de lucros e indicadores econômicos, são lançados fora das horas de negociação padrão. As sessões de negociação depois de horas são oportunidades para negociar imediatamente em novas informações, em vez de esperar o tradicional dia de negociação para tomar uma posição. Além disso, embora a volatilidade seja um risco associado com a negociação após o horário, você pode encontrar alguns preços atraentes durante este tempo. Encontrando as ações mais voláteis com volume após o horário Os ganhos da companhia ou os comunicados de imprensa após o sino chamam a atenção grande e criam o volume ea volatilidade enquanto os comerciantes reagem às notícias. Muitos desses lançamentos de ganhos ocorrem após o fechamento do mercado, proporcionando uma oportunidade para atuar sobre as notícias como ocorre, em vez de esperar pelo próximo dia de negociação. O calendário, portanto, fornece uma lista de ações para assistir após horas para uma oportunidade. Observe as ações durante o dia, e estreitar a lista para uma menor seleção mais gerenciável de ações para o comércio. Faça isso filtrando aqueles com um volume diário médio inferior a 1 milhão de ações. Se as ações não tiverem volume significativo durante a sessão de negociação regular9: 30 da manhã às 4:00 da tarde ESTthen é improvável que tenha volume significativo após o sino de fechamento, mesmo com um grande comunicado de imprensa. Riscos de Negociação de Horas Extendidas O desenvolvimento de negociação pós-horário oferece aos investidores a possibilidade de ganhos significativos, mas você também deve estar ciente de alguns de seus riscos e perigos inerentes: Menos liquidez. Há muito mais compradores e vendedores durante as horas normais. Durante a negociação após o horário comercial, pode haver menos volume de negociação para o seu estoque, e pode ser mais difícil converter ações em dinheiro. Espalha-se largamente. Um menor volume de negociação pode resultar em um spread mais amplo entre os preços de oferta e de venda. Portanto, pode ser difícil para um indivíduo para ter sua ordem executada a um preço favorável. Competição difícil para os investidores individuais: Embora os investidores individuais tenham agora a oportunidade de negociar num mercado pós-horário, a realidade é que devem competir contra os grandes investidores institucionais que têm acesso a mais recursos do que o investidor individual médio. Volatilidade. O mercado de negociação fora do horário de negociação é finamente negociado em comparação com o comércio de horas regulares. Portanto, é mais provável que você experimente fortes flutuações de preços no pós-negociação de horas de negociação durante as horas normais. O que é o Indicador Nas horas após as horas do Nasdaq 100 O indicador Nas horas após as horas do Nasdaq 100 é um indicador do sentimento pós-mercado e da atividade de negociação, calculado medindo os níveis de preços após horas dos estoques dentro do Nasdaq 100 e usando a mesma metodologia Usado para criar o Nasdaq 100 durante sessões comerciais regulares. Como algumas ações não podem ser negociadas na sessão pós-horário, seus preços permanecerão no fechamento diário ao calcular o indicador após as horas do Nasdaq 100. Como a negociação no final do dia é diferente da negociação no mercado pós-horário Embora a negociação após o horário comercial e a negociação no final do dia pareçam sinônimos, são dois termos distintos. Late-day trading é a compra e venda ilegal de fundos mútuos após o horário regular do mercado. Esta prática é diferente da negociação pós-hora de ações por causa de uma razão fundamental: no mercado pós-horas de ações, os preços dos títulos flutuam de acordo com as forças normais do mercado, como a demanda. fornecem. E novas informações. No entanto, nos últimos dias de negociação de fundos mútuos, o preço do fundo mútuo (NAV) permanece constante após um certo tempo do dia, porque ninguém mais é autorizado a comprá-lo e vendê-lo até o dia seguinte. Este preço constante às vezes é referido como uma cotação obsoleta porque, no final do dia, o preço não está mais vivo e não vai mudar. Assim, se alguma informação relevante que afeta o fundo torna-se pública após o preço dos fundos é definido, uma oportunidade é criada para os comerciantes para capitalizar sobre o preço de cotação obsoleto: os comerciantes exploram esta oportunidade vai comprar o fundo ao preço fechado sabendo que a informação material será Afectar o NAV, que terá sofrido alterações na abertura do mercado. Esta prática é injusta porque é feita num momento em que outros investidores não estão a participar na compra e venda do fundo, por isso os comerciantes de fim de dia estão negociando exclusivamente a preços que estão momentaneamente suspensos e não refletindo as mudanças nos fundos reais worthif outros Os investidores foram autorizados a negociar o fundo, o preço seria afetado pelas forças do mercado em tempo real, e ninguém teria uma vantagem. Investor Publications After-Horas Trading: Entender os riscos A Bolsa de Valores de Nova York eo Nasdaq Stock Marketthe Os centros de mercado de maior volume nos EUA hoje têm sido tradicionalmente abertos para negócios das 9:30 às 16:00 horário do Leste. Embora a negociação fora desse windowor após horas de negociação tenha ocorrido por algum tempo, ele costumava ser limitado principalmente aos investidores de alto patrimônio líquido e investidores institucionais. Mas isso mudou no final do século passado. Algumas pequenas bolsas agora oferecem horários estendidos. E, com o surgimento das Redes de Comunicações Eletrônicas. Ou ECNs, todos os dias os investidores individuais podem ter acesso aos mercados pós-horários. Antes de decidir negociar depois de horas, você precisa educar-se sobre as diferenças entre as horas de negociação regular e prolongada, especialmente os riscos. Você deve consultar seu corretor e ler quaisquer documentos de divulgação sobre esta opção. Verifique seu Web site dos corretores para a informação disponível na troca after-hours. Tal como acontece com a negociação durante o horário regular, os serviços oferecidos pelos corretores durante horas prolongadas variam. Você deve, portanto, comprar ao redor para encontrar a empresa que melhor se adapte às suas necessidades de negociação. Enquanto after-hours trading apresenta oportunidades de investimento, há também os seguintes riscos para aqueles que querem participar: incapacidade de ver ou agir em cima de cotações. Algumas empresas só permitem que os investidores para ver as cotações de um sistema de negociação da empresa usa para depois de horas de negociação. Verifique com o seu corretor para ver se o seu sistema de empresas permitirá que você acessar outras cotações em outros ECNs. Mas lembre-se que apenas porque você pode obter cotações em outra ECN não significa que você será capaz de comércio com base nessas cotações. Você precisa perguntar à sua empresa se ele roteará sua ordem para execução para a outra ECN. Se você está limitado às cotações dentro de um sistema, você pode não ser capaz de concluir um comércio, mesmo com um investidor disposto, em um sistema comercial diferente. Falta de Liquidez. Liquidez refere-se à sua capacidade de converter ações em dinheiro. Essa capacidade depende da existência de compradores e vendedores e como é fácil concluir um comércio. Durante as horas de negociação regulares, os compradores e vendedores da maioria das ações podem negociar prontamente um com o outro. Durante after-hours, pode haver menos volume de negociação para algumas ações, tornando mais difícil executar alguns de seus comércios. Algumas ações não podem ser comercializadas durante longas horas. Maiores Cálculos Spreads. Menos atividade de negociação também poderia significar maiores spreads entre a oferta e pedir preços. Como resultado, você pode achar mais difícil obter sua ordem executada ou obter um preço tão favorável como você poderia ter durante o horário regular do mercado. Volatilidade dos preços . Para ações com atividade de negociação limitada, você pode encontrar flutuações de preços maiores do que você teria visto durante o horário comercial normal. Histórias de notícias anunciadas após as horas podem ter maiores impactos sobre os preços das ações. Preços incertos. Os preços de algumas ações negociadas durante a sessão pós-horário podem não refletir os preços dessas ações durante as horas normais, no final da sessão de negociação regular ou na abertura da negociação regular no dia útil seguinte. Bias para Ordens Limitadas. Muitos sistemas de negociação eletrônica atualmente aceitam apenas ordens de limite, nas quais você deve inserir um preço no qual deseja que sua ordem seja executada. Uma ordem de limite garante que você não vai pagar mais do que o preço que você entrou ou vender por menos. Se o mercado se afasta de seu preço, sua ordem não será executada. Verifique com seu corretor para ver se as ordens não executadas durante a sessão de negociação após o horário serão canceladas ou se serão automaticamente inseridas quando as horas de negociação regulares começarem. Da mesma forma, descobrir se uma ordem que você colocou durante as horas regulares vai levar para a negociação depois de horas. Concorrência com Comerciantes Profissionais. Muitos dos comerciantes após horas são profissionais com grandes instituições, como fundos mútuos, que podem ter acesso a mais informações do que os investidores individuais. Atrasos de Computador. Tal como acontece com a negociação on-line, você pode encontrar durante atrasos depois de horas ou falhas na obtenção de sua ordem executada, incluindo ordens para cancelar ou alterar seus negócios. Para algumas transações pós-horas, sua ordem será encaminhada de sua corretora para um sistema de negociação eletrônico. Se houver um problema de computador na sua empresa, isso pode impedir ou atrasar o seu pedido de chegar ao sistema. Se você encontrar atrasos significativos, você deve chamar seu corretor para determinar a extensão do problema eo que você pode para obter sua ordem executada. Para obter dicas sobre como investir com sabedoria, visite a seção de Informações sobre o Investidor do nosso site. Você pode aprender mais sobre o impacto de ECNs e depois de horas de negociação nos mercados de valores mobiliários, lendo um estudo especial que a equipe da SEC preparou em junho de 2000.After Horas Forex Scalping Estratégia Eu uso a estratégia after-hour forex scalping para explorar a Eurodollar par de moedas durante o forex depois de horas. Em particular, entre as 7:00 PM EST e 0: 00 AM EST. A estratégia funciona contra-tendência e comércios curto no topo da gama e longo na parte inferior da gama. Preferência de par de moeda para o comércio: Euro Tempo de negociação: Entre as 7:00 PM EST e 0: 00 AM EST (5 horas) Preferred Timeframe8217s: 5 Min ou 15 Min EURUSD After Horas Trading Exemplo A estratégia forex after hours me ganhou 28 pips in 5 horas de negociação do eurodólar. (Veja screenshot) Como a estratégia funciona: Marcar fora da faixa alta-baixa entre 4PM EST e 7PM EST. Importante O intervalo deve ser pelo menos 30 pips, caso contrário, não negociação. Troque o intervalo entre as 7:00 PM EST e 0: 00 AM EST. We8217d gostaria de ir curto no topo do 4PM EST e 7PM EST intervalo de negociação. We8217d gostam de muito tempo na parte inferior das 4PM EST e 7PM EST gama de negociação. Parar de operar em 0: 00 AM EST. Ir muito tempo depois que o eurodollar toca a gama baixa. Olhe para o couro cabeludo 20 pips. Coloque stop loss 12 pips abaixo da baixa da faixa de negociação. Ir curto imediatamente após o eurodollar toca a gama alta. Olhe para o couro cabeludo 20 pips. Coloque stop loss 12 pips acima da alta da faixa de negociação. Faça o download do Forex Analyzer PRO para hoje em dia Estudo Especial: Redes de Comunicação Eletrônica e Negociação Pós-Horário B - Dinâmica de Negociação do Mercado Pós-Horário C-OEA Estudo de Negociação Pós-Horário em 15 Estoques Nasdaq D-Relatórios dos Grupos de Trabalho Pós-Horas E-NASD Notificação aos Membros 00-07 150 Divulgação a Clientes Envolvidos em Horário Extendido Resumo Executivo A revolução da tecnologia da informação forneceu aos investidores novas opções de execução. Destacam-se o recente crescimento de sistemas de negociação alternativos conhecidos como Redes de Comunicações Eletrônicas (quotECNsquot) e as maiores oportunidades de negociação no mercado pós-horário. De acordo com um pedido do Congresso, o pessoal da Comissão preparou um relatório que analisa as operações correntes de ECNs e as negociações fora do horário comercial, o seu impacto nos mercados de valores mobiliários e as iniciativas regulamentares recentes que foram tomadas para abordar estes desenvolvimentos. O Relatório discute os tipos de participantes no mercado que aderem aos serviços ECN, bem como os benefícios que as ECNs fornecem aos assinantes e ao mercado como um todo. O relatório aborda também as iniciativas da Comissão, tais como as Regras de Gestão de Ordens e o Regulamento ATS, que serviram para integrar mais plenamente as actividades de ECN no sistema de mercado nacional e descrevem alguns desenvolvimentos recentes envolvendo ECNs. A segunda parte do Relatório analisa a dinâmica de negociação atual no mercado pós-horário. Em particular, o Relatório conclui que o volume de negócios pós-horário permanece relativamente pequeno, com a maior parte desta atividade concentrada durante o período imediatamente seguinte ao encerramento das 4:00 pm da sessão regular. O relatório também destaca as limitações de liquidez e volatilidade de preços que os investidores continuam a enfrentar neste mercado e descreve iniciativas recentes para melhorar a transparência e estender proteção essencial dos investidores e medidas de integridade do mercado para este ambiente. O relatório conclui com uma discussão das questões que teriam de ser abordadas se os principais mercados decidissem oferecer as suas próprias sessões fora do horário de expediente. De um modo geral, o Relatório indica que tanto os mercados estabelecidos como as REC têm procurado fornecer mecanismos inovadores ao longo dos últimos anos para satisfazer as exigências dos investidores de uma maior flexibilidade no momento de suas operações e em seus locais de negociação. A Comissão continua fortemente empenhada em trabalhar com as organizações de auto-regulação e o sector dos valores mobiliários para assegurar que a estrutura regulamentar, nomeadamente nas áreas da protecção dos investidores e da integridade do mercado, acompanhe este ambiente em rápida mutação. Parte I. Introdução e Visão Geral A tecnologia mudou para sempre a maneira como fazemos nossa vida diária. A revolução tecnológica atingiu quase todos os aspectos da nossa sociedade. Os mercados de valores mobiliários estão na vanguarda deste fenómeno. Os avanços tecnológicos têm desempenhado um papel fundamental no recente crescimento de sistemas de negociação alternativos conhecidos como Redes de Comunicações Eletrônicas (quotECNsquot) e as maiores oportunidades para investidores de varejo para negociar títulos no mercado de pós-horas. Em muitos aspectos, esses dois desenvolvimentos estão inter-relacionados. Enquanto ECNs atualmente realizar a grande maioria de suas negociações durante as sessões de negociação regular de 9:30 da manhã a 4:00 pm, 1 em média cerca de 3 do volume de ações em ações cotadas e 30 do volume em ações da Nasdaq, Horas de mercado tem desempenhado um papel em seu desenvolvimento. Uma das maiores ECNs, Instinet Corp. inicialmente estabeleceu seu nicho de mercado na década de 1970, fornecendo serviços pós-horas para comerciantes institucionais e profissionais. ECNs têm procurado um papel crescente no after-hours trading por investidores de varejo. No relatório da Comissão da Conferência sobre a H. R. 3194, o Congresso encarregou a Comissão de elaborar um relatório sobre o crescimento recente das REC e a evolução do mercado pós-horário. 2 Este Relatório, elaborado pela Divisão de Regulação de Mercado ("Divisão"), analisa as operações correntes de ECNs e de negociação fora do horário comercial, seu impacto no mercado de valores mobiliários global e as iniciativas regulatórias recentes que foram tomadas para tratar desses desenvolvimentos. As análises das Divisões sobre a atividade de ECN ea negociação no mercado pós-horário basearam-se em dados compilados pelo Escritório de Análise Econômica da Comissão (quoOEAquot). Especificamente, na Parte II do Relatório, a Divisão discute como as ECNs atuam atualmente e seu impacto no mercado de títulos global. Discutimos os tipos de participantes no mercado que aderem aos serviços da ECN, incluindo investidores de varejo e institucionais, criadores de mercado e outros corretores. Descrevemos alguns dos benefícios que ECNs oferecem aos assinantes, incluindo o anonimato na negociação, bem como os benefícios que as ECNs fornecem ao mercado como um todo. A Divisão discute então as iniciativas da Comissão, tais como as Regras de Gestão de Ordens e o Regulamento ATS, que serviram para integrar mais plenamente as actividades de ECN no sistema de mercado nacional e descrevemos alguns desenvolvimentos recentes envolvendo ECNs. Na Parte III do Relatório, a Divisão analisa o mercado pós-horário, incluindo a capacidade expandida dos investidores de varejo para o comércio após os principais mercados fechados para o dia. Discutimos a evolução da estrutura do mercado pós-horário, incluindo os papéis atualmente desempenhados por mercados estabelecidos, como a Bolsa de Valores de Nova York e a Bolsa de Valores de Chicago, bem como a Nasdaq Stock Market. A Divisão também analisa a atual dinâmica de negociação do mercado pós-horário, incluindo a concentração da atividade comercial imediatamente após o fechamento das 4:00 pm, a aparente preponderância da atividade institucional durante esse período e as restrições de liquidez e volatilidade de preços enfrentadas Por investidores neste mercado. As conclusões das Divisões nesta área são consistentes com a análise dos OEAs das estatísticas de qualidade de mercado durante o comércio fora das horas de expediente, fornecido como Anexo C ao Relatório. A Divisão também discute os recentes esforços das organizações de auto-regulação de valores mobiliários (quotSROsquot) para desenvolver propostas para melhorar a proteção do investidor e para resolver as preocupações operacionais decorrentes da generalização do comércio pós-hora. Além disso, o relatório descreve iniciativas recentes para melhorar a transparência do mercado de pós-horário e para estender os programas essenciais de protecção dos investidores e integridade do mercado a este ambiente. O relatório conclui com uma discussão de questões que teriam de ser abordadas se os principais mercados decidissem oferecer as suas próprias sessões fora do horário, incluindo a necessidade de novos tipos de ordens de compra e venda para ter mais em conta as várias sessões de negociação ea Benefícios de preservar 4:00 pm preços de fechamento de ações. Parte II. Redes de Comunicações Electrónicas I. Introdução aos ECNs A. Introdução Os sistemas alternativos de negociação, conhecidos como ECNs, tornaram-se parte integrante dos modernos mercados de valores mobiliários, proporcionando aos investidores uma maior flexibilidade e reduzindo os custos de transacção, bem como a concorrência nas bolsas de valores estabelecidas e Nasdaq Mercado de ações. Hoje, as ECNs representam aproximadamente 30 do volume total de ações e 40 do volume em dólares negociados em títulos da Nasdaq. 3 ECNs representam cerca de 3 do volume total de acções e do dólar em valores mobiliários cotados. Em contraste, em 1993, as ECNs representavam apenas 13 do volume de ações em títulos da Nasdaq e apenas 1,4% do volume de ações listadas. 5 A grande maioria da actividade da ECN envolve actualmente a negociação de valores da Nasdaq durante as horas de negociação regulares. Em 1999, uma média de 93% do volume de ações da ECN foi relatada em títulos da Nasdaq. 6 Aproximadamente 96% do volume de ações da ECN no Nasdaq National Market System (quotNMSquot) foram efetuados durante o pregão regular das 9h30 às 16h00. 7 O nível geral de atividade da ECN nas ações listadas permaneceu relativamente pequeno em 1999 e Cerca de 26 deste volume de acções foram efectuadas no mercado pós-horário. 8 B. ECNs 150 Quem são eles e que serviços eles fornecem Em termos mais simples, ECNs reunir compradores e vendedores para a execução eletrônica de negócios. A Comissão definiu uma ECN como qualquer sistema electrónico que divulgue amplamente a ordens de terceiros celebradas por um fabricante de mercado de câmbio ou por um mercado de balcão (quotOTC), permitindo que tais ordens sejam executadas no todo ou em parte. 9 A definição exclui especificamente os sistemas internos 10 de encaminhamento de ordens de corretagem e sistemas de cruzamento 150, isto é, sistemas que cruzam várias ordens a um preço único definido pela ECN e que não permitem que as ordens sejam cruzadas ou executadas directamente por participantes fora de Os horários especificados. Atualmente, existem nove ECNs operando em nossos mercados de valores mobiliários: Instinet, Island, Bloomberg Tradebook, Archipelago, REDIBook, Strike, 11 Attain, NexTrade, Market XT e GFI Securities. 12 ECNs têm uma grande variedade de assinantes, incluindo investidores de varejo, investidores institucionais, criadores de mercado e outros corretores. ECNs fornecem muitos serviços de mercado a estes subscritores. Por exemplo, os assinantes da ECN podem inserir ordens de limite na ECN, geralmente através de um terminal de computador personalizado ou de uma conexão dial-up direta. A ECN publicará essas ordens no sistema para que outros assinantes possam visualizar. A ECN então irá combinar as ordens contrárias à execução. Na maioria dos casos, o comprador e o vendedor permanecem anônimos um com o outro, com os relatórios de execução de negociação listando a ECN como a parte contrária. Além disso, os assinantes podem usar esses recursos como negociação ou tamanho de reserva, 13 e podem ter acesso ao livro ECN inteiro (em oposição ao quottop do livro), que contém dados importantes de mercado em tempo real sobre a profundidade do interesse de negociação. 14 II. Iniciativas Regulatórias A. ECNs e o Sistema do Mercado Nacional Em 1975, o Congresso dirigiu a Comissão para facilitar o desenvolvimento de um sistema nacional de mercado de valores mobiliários (quot1975 Amendments). 15 Naquela época, o Congresso estava preocupado com a fragmentação da negociação e as execuções de clientes pobres resultantes da negociação de valores mobiliários em mercados separados e desconectados. As Emendas de 1975, conforme refletidas na Seção 11A da Securities Exchange Act de 1934, foram concebidas para estabelecer um quadro no qual os mercados concorrentes estariam ligados entre si de forma a produzir os melhores preços e execuções eficientes. Este quadro incluiu três componentes mínimos. Em primeiro lugar, as bolsas de valores e os concessionários publicariam os preços a que estavam dispostos a negociar e os preços a que as acções eram negociadas. 16 Em segundo lugar, as ligações entre mercados ajudariam os clientes a obterem os melhores preços disponíveis para as suas encomendas em qualquer mercado e incentivariam os melhores preços de mercado a surgir. E, em terceiro lugar, os corretores permaneceriam obrigados a buscar a melhor execução das ordens de seus clientes. A Comissão foi encarregada de facilitar estes objectivos, permitindo ao mesmo tempo a máxima flexibilidade na concepção do sistema do mercado nacional. Um conceito essencial de um sistema de mercado nacional era o de disponibilizar a todos os investidores informações sobre preços, volume e cotações de valores mobiliários em todos os mercados, de modo que os compradores e vendedores de títulos, onde quer que estejam localizados, pudessem tomar decisões de investimento informadas e não pagar mais do que O preço mais baixo ao qual alguém está disposto a vender, ou não vender por menos do que o preço mais alto que um comprador está disposto a oferecer. Quando as ECNs se desenvolveram, no entanto, elas não foram integradas no sistema de mercado nacional, mas serviram principalmente como Privados para investidores institucionais e corretores. Ao longo do tempo, como esses assinantes lançaram preços em ECNs que eram melhores do que os preços que estavam postando em Nasdaq, a cotação pública tornou-se menos confiável eo mercado tornou-se fragmentado. Isto conduziu a spreads artificialmente largos nos mercados públicos. Como resultado, muitos investidores, particularmente investidores de varejo, estavam recebendo execuções a preços inferiores aos exibidos pelos criadores de mercado e outros assinantes em ECNs. Isto essencialmente criou um mercado de dois níveis 150 o mercado público tradicional eo novo mercado ECN com melhores preços e acesso limitado. B. Regras de Manuseamento de Ordens Em 1996, a Comissão adoptou as Regras de Tratamento de Ordens 18 para abordar o mercado de duas camadas que tinha desenvolvido. Conforme descrito acima, antes da adoção das Regras de Manuseio de Ordens, os criadores de mercado poderiam publicar cotações em ECNs privadas que eram melhores do que as cotações que publicavam nos mercados públicos. O uso das ECNs de fato permitiu que os criadores de mercado mantivessem cotas artificialmente amplas no mercado público. De acordo com as Regras de Manuseamento de Ordens, os criadores de mercado e especialistas foram obrigados a reflectir nas suas cotações o preço de quaisquer encomendas que colocassem numa ECN se o preço fosse melhor do que a sua própria cotação pública. Isso pode ser feito de duas maneiras. Os fabricantes de mercado poderiam refletir essas ordens em suas cotações, comunicando-as como parte de suas cotações para sua troca ou associação nacional de valores mobiliários (ou seja, a NASD) 19 ou a ECN poderia fornecer o preço diretamente a uma bolsa ou associação, ECN na cotação pública disponibilizada aos fornecedores de dados de mercado (quotECN Display Alternativequot). Assim, a ECN Display Alternative permitiu a ECN agir voluntariamente como intermediário na comunicação ao sistema de cotação pública do melhor preço e tamanho das encomendas para cada garantia que tinha sido introduzida na ECN por um especialista ou criador de mercado. De acordo com essa alternativa, um especialista em câmbio ou um OTC market maker seria considerado conforme à Emenda ECN se a ECN utilizada: (1) fornecido a uma SRO para inclusão no sistema de cotação pública os preços e tamanhos dessas ordens em O preço de compra mais alto eo preço de venda mais baixo para a segurança e (2) tornou possível para qualquer corretor ou negociante para acessar essas ordens tão facilmente como se tivessem sido publicadas na cotação do mercado maker. Atualmente, todas as ECNs optaram por usar essa alternativa em nome de seus criadores de mercado assinantes. 21 As Regras de Manuseamento de Ordens tiveram um impacto imediato nos mercados de valores mobiliários. Os spreads entre lances e ofertas reduziram drasticamente, o que resultou em significativas reduções de custos para os investidores. 22 Além disso, a ECN Display Amendment ajudou a integrar as REC no sistema do mercado nacional. Pela primeira vez, as ordens de market maker e de especialistas entraram em ECNs foram acessíveis ao público. As Regras de Manuseamento de Ordem, no entanto, não abordavam como as ECNs deveriam ser regulamentadas nos mercados. Enquanto os criadores de mercado e especialistas foram obrigados a cumprir a alteração ECN, a participação da ECN na ECN Display Alternative foi voluntária. As Regras de Manuseamento de Pedidos não se aplicam diretamente às REC. Além disso, as Regras de Manuseio de Ordens não exigiam que todos os participantes do mercado informassem o fluxo de cotação público das ordens que eles colocavam nas ECNs. Assim, em muitos casos, as ordens institucionais e as ordens de não mercado não foram divulgadas ao público. Isto continuou a prejudicar a transparência dos preços. Estas preocupações, juntamente com o aumento do número de novos mercados electrónicos que proporcionam plataformas de negociação, levaram a Comissão a considerar a forma de incorporar estas novas plataformas de negociação no sistema do mercado nacional. C. Regulamentação ATS Em Dezembro de 1998, a Comissão adoptou o Regulamento ATS para estabelecer um quadro regulamentar para os sistemas de comércio alternativo e integrá-los mais plenamente no sistema do mercado nacional. 24 Na adopção da versão do Regulamento ATS, a Comissão observou que, embora os sistemas alternativos de negociação sejam mercados, historicamente foram regulamentados como corretores tradicionais, o que resultou em certas lacunas regulamentares. Para os sistemas de negociação alternativos com volumes significativos, a abordagem regulatória existente nessa época não proporcionava aos investidores o acesso aos melhores preços, não forneceu uma pista de auditoria completa ou supervisionou adequadamente a negociação em sistemas de negociação alternativos e criou o potencial de perturbação do mercado Devido a falhas do sistema. A Comissão procurou suprir estas lacunas regulamentares através da adopção do Regulamento ATS. Nos termos do Regulamento ATS, os sistemas de negociação alternativos poderiam optar por ser um participante no mercado e registar-se como corretora, ou ser um mercado separado e registar-se como uma bolsa. Essa abordagem permitiu que um sistema de negociação escolhesse o papel que desejava desempenhar como um negócio. Os sistemas de negociação alternativos com um volume de transacção significativo 150 e, por conseguinte, um impacto potencialmente significativo no mercado 150 eram obrigados a cumprir os seguintes requisitos adicionais. Os sistemas de negociação alternativos registrados como corretoras eram obrigados a vincular-se a uma bolsa registrada ou a NASD e exibir publicamente suas ordens de preços mais baixos (incluindo ordens institucionais) para os títulos cotados na bolsa e Nasdaq em que tinham 5 ou mais do volume de negociação . Os sistemas de negociação alternativos também tiveram que permitir que os membros das bolsas registradas ea NASD executassem contra as ordens publicamente exibidas. Somente as ordens que os participantes em um sistema de negociação alternativo optou por exibir para mais de um outro participante teve que ser exibido publicamente. Consequentemente, a parcela de ordens ocultas à vista através de características de tamanho de reserva em sistemas de negociação alternativos não precisava ser exibida publicamente. Um sistema de negociação alternativo com 20 ou mais volumes de negociação também precisava garantir que seus sistemas automatizados atendessem a certos padrões de capacidade, integridade e segurança. Isso visava evitar que o sistema interrompesse 150 e resultasse em ruptura no mercado de 150 experimentado por alguns sistemas de negociação alternativos durante períodos de alto volume de negociação. Um sistema de negociação alternativo com 20 ou mais do volume de negociação também teve de abster-se de negar injustamente o acesso dos investidores a seu sistema. Este requisito apenas proibia a discriminação injusta entre as pessoas que procuram acesso. Os sistemas eram livres para estabelecer critérios justos e objetivos, tais como credibilidade, para diferenciar entre potenciais participantes. Os sistemas menores que optaram por se registrar como intermediários experimentaram poucas mudanças em seus requisitos regulatórios. Como corretores registados, estes sistemas de negociação alternativos continuaram a ser cobertos pela supervisão de uma das organizações de auto-regulação. Desde que um sistema de comércio alternativo tivesse um volume limitado, apenas teve de apresentar um aviso à Comissão descrevendo a forma como opera, manter uma pista de auditoria e apresentar relatórios trimestrais. Em suma, após a adopção do Regulamento ATS, as REC poderiam registar-se como câmbios, nos termos da Secção 6 do Exchange Act 25, cumprir e assumir as numerosas funções de auto-regulação abrangidas pelo registo de câmbio ou permanecer registada como corretora De acordo com a Seção 15 do Exchange Act 26, e cumprir os requisitos do Regulamento ATS. As ECNs grandes estavam sujeitas a requisitos adicionais projetados para atender às suas atividades de mercado (ao contrário de suas atividades de corretor). To date, two ECNs have formally filed applications to register as exchanges. 27 Other ECNs are currently regulated as broker-dealers and are subject to Regulation ATS. In short, Regulation ATS recognized the evolving role that alternative trading systems play in our securities markets. It gave these systems the choice of registering with the Commission either as an exchange or as a broker-dealer. The option they chose 150 registering as a market participant . or as a market 150 affected their rights and responsibilities. Regulation ATS provided alternative trading systems with a regulatory structure which incorporated them into the national market system, while preserving their flexibility. In connection with the New York Stock Exchanges proposal to eliminate its rule limiting its members from dealing in its listed stocks, the Commission requested comment on the impact of fragmentation, particularly that arising from internalization of customer order flow. The Commission sought comment on whether this fragmentation undermined quote competition and the price discovery process in the market. The Commission also sought comment on alternative approaches of addressing fragmentation concerns. 28 D. Recent Developments 1. Linkages Currently, the nine ECNs are linked to Nasdaq through SelectNet. 29 This link allows each ECN to display its best orders for Nasdaq securities in the Nasdaq system, and allows the public to access those orders. ECNs, however, are not linked to the exchanges. To more fully integrate ECNs into the listed markets, the Commission recently approved an NASD rule proposal to permit ECNs to register as ITSCAES market makers. 30 Nasdaq market makers that trade listed stocks are currently linked to the exchanges through Nasdaqs CAES systems interface with the Intermarket Trading System (quotITSquot) (these market makers are known as ITSCAES market makers). 31 ITS is an electronic order routing system that facilitates intermarket trading of exchange-listed securities by allowing a broker-dealer in one market center to send an order to another market center trading the same security at a better price. Through the ITSCAES link, orders routed to an exchange floor may be routed to the OTC market for execution. Conversely, an OTC market maker may route orders to the exchanges for execution through the ITSCAES link. 32 Linking alternative trading systems and ECNs to ITS by permitting them to register as ITSCAES market makers will include ECN quotes in listed stocks in the consolidated quotation system for listed stocks, potentially improving the published prices and providing investors with better execution of their orders. Furthermore, alternative trading system and ECN participation in ITSCAES should make the third market more dynamic and competitive. The NASD is currently working on the technical and programming modifications to their systems needed to support this linkage. Under Regulation ATS, ECNs are required to provide access to non-subscribers to the quotes they place in the public quote stream. The access they provide must be consistent with the access provided to subscribers. While Regulation ATS does not prohibit ECNs from charging access fees, in the Regulation ATS release, the Commission stated that ECNs could not set fees that are inconsistent with equivalent access, such that the fees have the effect of creating barriers to access for non-subscribers. The Commission further stated that a SRO could regulate fees of its ECN members to ensure that any fees are charged in a manner consistent with the SROs market (such as requiring the fee to be incorporated in the displayed quote). To prevent fees from being used to bar access to non-subscribers, ECNs are currently permitted to charge non-subscribers the fee they charge a quotsubstantial proportionquot of their quotactivequot broker-dealer subscribers, under the terms of their no action letters. 33 Broker-dealers have a duty of best execution in handling customer orders that generally obligates broker-dealers to seek the best prices for those orders. At times, an ECN may display the best price for a security. If a broker-dealer routes an order to an ECN, however, the ECN may charge a fee that may add significantly to the cost of executing the order. By contrast, market makers may not charge fees for access to their quotes. The Division is currently analyzing ECN fees and their impact on best execution, as well as the market as a whole. Part III. After-Hours Trading I. Overview Trading in U. S. stocks outside of regular market hours is not a new phenomenon. For years, institutional investors and market professionals have sent their after-hours orders to broker-dealers for execution on ECNs or non-U. S. markets. 34 These market participants traditionally have been willing to accept the risks of trading outside of regular market hours, including the potential price volatility and lack of liquidity, because they operate sophisticated worldwide trading strategies that require them to make 24-hour adjustments to their portfolios and risk containment hedges. 35 Moreover, many of these institutions avoid market risks by negotiating the execution prices of their after-hours trades beforehand. 36 The after-hours market, however, is increasingly driven by many of the same technological advances and investor demands that are transforming the securities market as a whole. Starting in mid-1999, growing numbers of broker-dealers began providing their retail customers with the ability to have their orders directed to ECNs after the major markets close for the day. The Commission supports investor choice in trading hours provided that essential protections for investors and the markets are not compromised. Given the reach of todays technology and the global nature of the current securities markets, it was perhaps inevitable that some investors would seek expanded opportunities to effect their securities transactions outside of traditional market hours. Over the past few years, the Commission has been supportive of initiatives by the securities markets and ECNs that promise to give investors the benefits of expanded competition among trading venues and increased flexibility in the timing of their trades. This part of the Divisions Report discusses the structure and trading dynamics of the current after-hours market, as well as recent regulatory initiatives taken by the SROs and the Commission to develop a framework for further developments in this market. A. Structure of the After-Hours Market It is important to keep in mind that there are several different trading venues in the current after-hours market in U. S. stocks. While media reports can give the impression that all after-hours volume is handled electronically by ECNs such as Instinet and Island, the actual post-4:00 p. m. trading environment is more complex. Most of the nations stock exchanges have for years offered investors at least some opportunities to have their orders executed after the 4:00 p. m. regular session close. For example, both the New York Stock Exchange and American Stock Exchange provide crossing sessions in which matching buy and sell orders can be executed at 5:00 p. m. at the exchanges 4:00 p. m. closing prices. 37 In addition, four regional exchanges currently have post-primary trading sessions: the Boston Stock Exchange (quotBSEquot) and the Philadelphia Stock Exchange (quotPhlxquot) have post-primary sessions that operate from 4:00 p. m. to 4:15 p. m. the Chicago Stock Exchange (quotCHXquot) and the Pacific Exchange (quotPCXquot) operate their post-primary sessions until 4:30 p. m. As discussed below, since October 29, 1999, the CHX has also operated an quotE-Sessionquot to handle limit orders from 4:30 p. m. to 6:30 p. m. 38 The after-hours volume in NYSE-listed securities handled by the stock exchanges is substantial. For example, on the sample date of January 18, 2000, 39 consolidated tape data indicate that the exchanges accounted for over 92 of the share volume in NYSE-listed securities between 4:00 p. m. and 6:30 p. m. Some of this exchange volume included regular session closing transactions on the NYSE that were reported to the tape shortly after 4:00 p. m. Nevertheless, even if the entire volume reported by the NYSE between 4:00 p. m. and 4:15 p. m. was excluded from the Jan. 18 sample, the remaining exchanges still accounted for 69 of the after-hours volume in these securities. 40 While this situation may change as ECNs expand their activities in NYSE-listed securities, the role of the stock exchanges in after-hours trading should not be overlooked. Moreover, it is important to recognize that a variety of market participants, not just ECNs, have been active for years in the after-hours market for Nasdaq securities. Key Nasdaq trading and price reporting systems, such as SelectNet, Automated Confirmation Transaction Service, Nasdaq Trade Dissemination Service, and the Nasdaq Trade Dissemination Service, have operated until 5:15 p. m. since 1992. 41 These services are used by market makers and other broker-dealers, as well as by ECNs, to trade after the 4:00 p. m. close of the regular trading session. As discussed below, while ECNs are active in after-hours trading, other entities account for over half of the total after-hours share volume in Nasdaq securities. B. The Trading Dynamics of the After-Hours Market Historically, after-hours trading was concentrated in the period immediately following the 4:00 p. m. regular session close and there were limited numbers of issues with significant market liquidity after this initial post-close trading activity. 42 This continues to be the case today. A phrase that is often heard is that after-hours trading remains a quotmarket of stocksquot rather than a true quotstock market. quot While further enhancements to market transparency and advances in linkages among after-hours trading venues may improve the liquidity of this market in the years to come, full-fledged 24-hour a day trading in U. S. stocks remains in the future. 1. Volume Distribution The current level of trading after hours is extremely low in comparison with that of the regular sessions in exchange-listed and Nasdaq securities. On the sample date of Jan. 18, only 3 of the share volume in NYSE-listed securities was effected after 4:00 p. m. Similarly, share volume from post-4:00 p. m. trades in Nasdaq securities on Jan. 18 accounted for only 3 of the daily total. Moreover, the vast majority of after-hours share volume in both NYSE-listed and Nasdaq securities was effected shortly after the regular session close. The share volume distribution in NYSE-listed securities throughout the regular session and after-hours period on Jan. 18 is illustrated in the graph provided at B-1 . 43 The graphs presentation of consolidated tape share volume in 15-minute increments shows the usual heavy volume surges at the regular session opening and close with a small volume run-off immediately after 4:00 p. m. and a small volume rise at 5:00 p. m. as NYSE crossing session volume is reported. The graph at B-2 shows that the sharp decline in volume levels in listed stocks after 4:00 p. m. is evident even if all NYSE volume is excluded. 44 The concentration of after-hours trading in NYSE-listed securities during the periods immediately following the 4:00 p. m. close is shown in the graphs provided at B-5 and B-6 . In fact, less than 1 of the total NYSE-listed share volume after the close was effected from 5:30 p. m. to 6:30 p. m. The graphs at B-7 and B-8 indicate that this pattern holds even if the regular session runoff and crossing session volumes on the NYSE are excluded. Again, less than 1 of the total after-hours share volume on the regional exchanges and third market combined was executed from 5:30 p. m. to 6:30 p. m. 45 The intra-day volume distributions in Nasdaq securities appear to be similar to those in NYSE-listed securities. The graph at B-11 shows an inverted bell curve pattern for Nasdaq volume during the regular session on Jan. 18, with a sharp drop-off in volume after the close. The graph at B-12 shows that 73 of the total after-hours volume in Nasdaq securities occurred in the 4:00 p. m. to 4:15 p. m. period. 46 The graph at B-13 illustrates the rapid decline in volume levels from 4:15 p. m. to 6:30 p. m. While this drop-off in Nasdaq volume is less abrupt than that indicated in NYSE-listed securities on the same trade date, Nasdaq volume between 5:30 p. m. and 6:30 p. m. still accounted for only 3 of the total after-hours volume in these securities. 2. Volume after 6:30 p. m. The Divisions analyses of after-hours trading are largely based on consolidated tape information that is disseminated on a daily basis until 6:30 p. m. The Office of Economic Analysis analyzed Nasdaq share volume on selected trade dates in January and February 47 to determine if significant share volume was effected after tape dissemination ceased at 6:30 p. m. 48 OEA found that an average of only 5.4 of after-hours volume was effected from 6:30 p. m. to 11:59 p. m. on these dates, with an additional 1.9 of total after-hours volume effected from 12:00 a. m. to 8:00 a. m. on the next day. In short, based on this sampling, there is little evidence that significant after-hours activity routinely occurs after tape dissemination ceases at 6:30 p. m. 3. Average Share Size The Divisions intra-day analysis of average share size for transactions on Nasdaq appears to indicate that much of the after-hours activity immediately after the 4:00 p. m. close remains institutional in nature, with retail activity becoming more prominent thereafter. For example, the graph at B-14 indicates that the average share size for trades on Nasdaq from 9:30 a. m. to 4:00 p. m. on Jan. 18 was 714 shares. From 4:00 p. m. to 4:15 p. m. however, the average share size spiked to over 2,000 shares and continued at over a 1,000 shares for four additional 15-minute intervals. This increase in average share size typically would indicate that institutional investors were active during this period. From 5:45 p. m. to 6:30 p. m. however, smaller sized retail activity was indicated with average share volume dropping to 358 shares. The graph at B-15 shows that this intra-day pattern held for the four trade dates from Jan. 18 to 22, 2000. From 9:30 a. m. to 4:00 p. m. the average share size was 735 shares, while the average share size surged to 2,242 shares from 4:00 p. m. to 5:00 p. m. and dropped back to only 496 shares during the interval from 5:00 p. m. to 6:30 p. m. 4. Breakdown of ECN Activity As discussed above, it would be a mistake to assume that all after-hours trading is conducted by ECNs. Data supplied to the Division by Nasdaq 49 indicate a more complex picture of after-hours trading, with the level of ECN trading fluctuating on particular days and time periods. The Division focused on trading by the ten most active firms in the after-hours market in Nasdaq securities for each trade date from Jan. 18 to 21. The graph at A-5 shows that the proportion of ECN activity ranged from a low of 20 on Jan. 18 to a high of 66 on Jan. 21. For the four trade dates, ECNs effected an average of 41 of total Nasdaq share volume from 4:00 p. m. to 6:30 p. m. The graphs at A-6 show that, while the total after-hours share volumes by the ECNs were generally largest from 4:00 p. m. to 4:30 p. m. ECN activity as percentages of total volume were often greatest as overall volume declined during the period from 5:15 p. m. to 6:30 p. m. The graphs at A-7 support these findings. Specifically, while the average amount of share volume effected by ECNs from Jan. 18 to 21 declined from over 2 million shares from 4:00 p. m. to 4:30 p. m. to slightly less than 1.5 million shares from 5:15 p. m. to 6:30 p. m. the percentages of total ECN volume during these intervals grew from 36 to 63, respectively. The relative increase in ECN activity after 5:15 p. m. appears to be consistent with the Divisions finding that the average share size of Nasdaq trades declined during this post-5:15 p. m. period. As discussed above, smaller average transaction share size is usually associated with increased activity by retail investors who tend to route their after-hours trades through ECNs. 5. Liquidity Constraints and Price Volatility Most stocks that trade in the after-hours market trade only during the period immediately after the 4:00 p. m. regular session close. For example, on sample date Jan. 18, a total of 2,077 Nasdaq issues traded from 4:00 p. m. to 6:30 p. m. representing 43 of the Nasdaq issues that traded that day. As indicated in the graph at B-16 . however, the number of Nasdaq stocks traded after-hours on Jan. 18 declined sharply after the initial 4:00 p. m. to 4:15 p. m. interval while 1,994 issues traded during this initial period, only 469 issues traded from 4:15 p. m. to 4:30 p. m. After 5:15 p. m. only about 100 issues traded. Most of the after-hours trading volume still appears to be concentrated in a small number of stocks, particularly those that have been the subject of major corporate news announcements issued after the 4:00 p. m. regular session close. 50 As a result, sharp price swings in these issues in the after-hours market are not unusual. For example, the issuers for the two most active stocks in the after-hours market on Jan. 18, Microsoft Corp. and Corel Corp. both issued post-close earnings reports on that day. During the regular session on Jan. 18, Microsoft shares closed at 115 516. Following the post-4:00 p. m. release of the companys earnings report, 2.9 million shares of Microsoft were traded by 6:30 p. m. leaving shares at 112 190, down 2 916 (2.2) from the 4:00 p. m. close. This after-hours volume represented 7.2 of the daily volume on Jan. 18. Microsoft shares reopened at 9:30 a. m. on Jan. 19 at 110 189 and ended the regular session at 107 with volume of 48.8 million shares. 51 The second most active issue in the after-hours market on Jan. 18, Corel, ended the regular session at 20. Following the companys post-4:00 p. m. earnings report, 1.39 million shares traded by 6:30 p. m. leaving shares at 23 2332, up 3 2332 (18.6) from the regular session close. After-hours volume in this less liquid stock represented 32 of the total daily volume on Jan. 18. Share prices reopened the next morning at 21 78, with prices generally declining thereafter to close at 20 916 on volume of 8.5 million shares. 52 Not surprisingly, the largest percentage price swings in the after-hours market are often experienced by extremely illiquid quotpenny stocksquot in which small absolute price swings translate into large percentage changes. For example, the largest percentage price gain in the Jan. 18 after-hours market was in shares of Western Water Co. which traded from a price of 1 132 at 4:00 p. m. to rise to 1 1532 at 6:30 p. m. representing a gain of 42. 53 The largest percentage price decline was in shares of Covol Technologies, which ended at 6:30 p. m. at a price of 1 116 for a decline of 19 from the regular session close. 54 The Divisions analysis of after-hours trading on the sample date of January 18 highlights the liquidity constraints and price volatility faced by investors in this market. These findings are consistent with OEAs analysis of market quality statistics during after-hours trading, provided as Attachment C to the Report. OEA analyzed quotations spreads, trading costs, and price volatility for regular session and after-hours trading in the 15 largest capitalization stocks in the Nasdaq 100 index for February 7-11, 2000. This analysis indicated that market quality in these securities deteriorated significantly after the regular session close. For example, the average (median) quote spread in these stocks more than tripled (from 8 cents per share from 9:30 to 4:00 p. m. to 26 cents per share from 4:00 p. m. to 6:30 p. m.). Effective spreads, a measure of trading costs, increased from 13 cents per share to 36 cents per share in after-hours trading. Trade price volatility, a measure of the average price change between trades, was 5 cents during regular hours and increased to 15 cents in after-hours trading. 55 In sum, the analyses performed by both the Division and OEA indicate that investors need to carefully consider the heightened trading costs and potential risks of the current after-hours market before directing their orders to this venue. II. Regulatory Initiatives A. Increased Access by Retail Investors to the After-Hours Market Beginning in mid-1999, increasing numbers of broker-dealers began offering their retail customers the opportunity to direct their orders to ECNs so that the orders would be eligible for execution after the regular session close. As discussed above, these developments promised retail investors some of the same flexibility in after-hours trading that institutions and professional traders have had for years. While the Commission was generally supportive of these developments, it was clear that more needed to be done to adequately disclose to retail investors the potential risks of trading in the often illiquid and volatile after-hours market and to consider the ramifications of widespread after-hours trading for key investor protection and market integrity regulations. The Commissions concerns were heightened in early 1999 when the major markets appeared to have been rushing into their own after-hours trading sessions without first adequately considering critical investor protection and operational issues. 56 B. After-Hours Trading Summit and SRO Working Groups On June 30, 1999, Chairman Levitt, NYSE Chairman Richard Grasso, and NASD Chairman Frank Zarb jointly hosted an after-hours summit that laid the groundwork for a more thorough consideration of the issues raised by widespread after-hours trading. The more than 40 participants in the Summit included consumer protection advocates and representatives from all facets of the securities industry, including large and small brokerage firms, on-line investment firms, ECNs, clearing firms and organizations, as well as representatives from the other SROs. At the Summit, the NYSE and NASD announced that they were forming several Working Groups that would canvass a wide range of viewpoints on after-hours trading from both inside and outside the securities industry. 57 These Working Groups were directed to produce recommendations concerning issues related to investor protection and potential changes to trading conventions, as well as operational issues related to clearance and settlement. 58 The Working Groups issued their final reports to the NASD and the NYSE in early October 1999. The NASD and NYSE posted the reports on their web sites to provide the public with an opportunity to review and comment on the Working Groups recommendations. 59 1. Investor Protection and Education Investor protection issues are of paramount importance in any market, and especially in the current after-hours trading environment. The Working Group on Investor Protection and Education was formed to examine common standards that could be developed to maximize protections and minimize confusion for investors. The recommendations of the Working Group included the following: Full disclosure of the nature and risks of extended hours trading for investors should be required, and a best practices document should be adopted industry-wide. Investors should be required to give specific instructions to their broker-dealers to quotopt inquot to having orders eligible for execution in the after-hours market. Given the current nature of the market, investors should use limit orders. The industry should coordinate an education campaign on after-hours trading to reach investors through printed materials, web sites, and public service announcements. In addition to issuing these recommendations, the Working Group outlined best practices and disclosure guidelines for broker-dealers to ensure that customers, prior to participating in after-hours trading, are knowledgeable about the nature of the market and how each firm operates in that market, and are fully aware of the risks and opportunities associated with after-hours trading. 60 2. Clearance amp Settlement and Operations Issues The Working Group on Clearance amp Settlement and Operations Issues examined not only the clearance and settlement process, but also issues surrounding back-office operations and risk management procedures at broker-dealers. In addition, the Working Group considered the implications for margin calculations and various critical Commission and SRO rules relating to back-office operations, including the Commissions net capital rule. The Working Groups recommendations included the following: After-hours stock trades should be processed as quotsame dayquot trades, with settlement by the third day after the trade date (quotT3quot). Orders should be specific to a session, and should not carry over from the traditional trading period to the after-hours session, or the reverse, unless specifically designated. There should be new types of orders available to investors, including: (i) orders designated for the after-hours session (ii) orders entered during the day session and designated to extend to the after-hours session (iii) good-till-cancelled orders designated to remain active through the day and after-hours session and (iv) good-till-cancelled orders entered in the after-hours session and designated to carry over to the next day. The traditional trading session should stop at 4:00 p. m. and the after-hours session should begin one hour later. A break between the day and evening sessions would: (i) allow time for the 4:00 p. m. closing price to be captured (ii) provide a window for corporate announcements (iii) give specialists and market makers time to adjust their order books (iv) give member firms and processors time to close and re-open their systems and (v) reinforce the message that the after-hours trading session is a fundamentally different type of market. Closing prices for reporting, valuations, etc. should be based on the 4:00 p. m. close of the traditional trading day. Issuers should be encouraged to make corporate announcements during the period between the day and after-hours sessions. 3. Trading Conventions Prior to widespread after-hours trading by the major markets, there should be some consensus on trading conventions that could affect the U. S. capital markets and the national market system. This Working Group examined issues involving the dissemination of market data, trading halts for news and other corporate developments, intermarket trading rules, lending issues, and mutual fund valuations. The Working Group tried to reconcile and distinguish between the different after-hours trading environments that existed at the time of its report and those that might exist in the future. As a result, some of the Working Groups recommendations apply if the primary exchanges extend their trading hours. Other recommendations apply even if the primary exchanges do not move to full scale after-hours trading, but retail trading continues to occur after-hours. The Working Groups recommendations included the following: The consolidated tape for last-sale and quotation information should be used for after-hours trading. Regulations that govern the usage of these systems and best execution during traditional trading hours should be continued in the after-hours trading session. If the primary markets decide to offer their own after-hours sessions, they must determine if they need to extend their regular session trading rules to assure liquidity and the maintenance of an orderly market by their members. When primary markets are not open, certain responsibilities should rest with broker-dealers and ECNs who participate. Bids and offers should be displayed with the percentage change from the 4:00 p. m. closing price. Only limit orders should be accepted. Brokers who accept orders should disclose clearly the hours during which they will attempt to execute and protect orders, as well as any other limitations on their ability to do so. Even if the primary exchanges are closed, the SROs should have the ability to halt trading in single stocks under certain circumstances. When the primary markets are not open, principles of best execution should continue to apply to broker-dealers and ECNs accepting orders in the after-hours market. Broker-dealers and ECNs who choose to accept after-hours orders should be held to the investor protection and market integrity rules of the SROs and the Commission. 61 Because the primary market closing price has become the standard of valuation for many financial instruments and settlements, a quotclosing pricequot mechanism should be preserved by the primary exchanges and set at 4:00 p. m. This should be followed by a break of at least 60 minutes before reopening for an after-hours trading session. The Working Group believed that the break between the regular and after-hours sessions would provide an opportunity for the orderly public dissemination of corporate news, thereby reducing the need for SROs to impose possibly disruptive ad hoc trading halts in specific securities. The Working Group noted that the Commission should examine its rules to assure flexible pricing conventions for primary and secondary securities offerings, so that pricing can occur either in the post-4:00 p. m. break or prior to the days market opening. Specifically, the Commission should consider permitting verbal confirmation (and booking) of purchases subject only to: (i) final pricing ( e. g. . within a prescribed price range) and (ii) the SECs declaration of effectiveness of the registration statement. This would allow issuers and underwriters the flexibility to price at 4:00 p. m. following the after-hours session, or before the 9:30 a. m. regular session opening. C. SRO Initiatives 1. NASD Model for Investor Disclosure As discussed above, the report of the Working Group on Investor Protection and Education provided firms with best practices and disclosure guidelines regarding retail customer participation in the often illiquid and volatile after-hours market. On January 28, 2000, the Commission announced that it had approved proposed NASD Regulation Notice to Members No. 00-07 that reminded member firms that they have an obligation to their retail customers under existing NASD rules to disclose the material risks of after-hours trading before permitting customers to engage in this activity. 62 These rules include NASD Rule 2110 (just and equitable principles of trade), and NASD Rule 2210 (the advertising rule, which requires that all communications with the public be based on principles of fair dealing and good faith). While the Notice did not require a standard disclosure, NASD Regulation staff provided model after-hours trading risk disclosures as guidance to member firms. The Notice recognized that members were free to modify the model disclosures, or draft disclosures of their own, provided they address, at a minimum, all of the material factors outlined in the Notice. 2. Transparency Enhancements As discussed above, the Working Groups recognized the critical need for more transparency in the after-hours market. Specifically, the Working Groups recommended that the consolidated last-sale and quotation information that is available for the regular trading sessions should be extended to cover the after-hours market. The Commission approved several SRO programs in October 1999 that were designed to further these goals. uma. Nasdaq Extended Hours Pilot On October 13, 1999, the Commission approved on a temporary or quotpilotquot basis a Nasdaq program to extend the operation of key trade and price reporting systems until 6:30 p. m. 63 These systems include SelectNet, Automated Confirmation Transaction Service, Nasdaq Trade Dissemination Service, and the Nasdaq Trade Dissemination Service. It is important to recognize that the pilot does not expand the Nasdaq regular trading session beyond 4:00 p. m. it simply extends the post-close operation of some key systems from 5:15 p. m. to 6:30 p. m. 64 Under the pilot, the posting of quotations and trading of securities by NASD members during the period of time following Nasdaqs normal market close and before 6:30 p. m. is voluntary. If a Nasdaq market maker chooses to post quotations and trades during the 4:00 p. m. to 6:30 p. m. period, however, it is obligated to post firm two-sided quotations when opening and making its market. NASD member firms that choose not to open their market and instead send customer or proprietary orders to other market participants for display andor execution (or that choose to hold those orders until the next days regular trading session) are not obligated to post firm two-sided quotes. Regardless of an NASD members quotation activity, all transactions in Nasdaq National Market, SmallCap, Convertible Debt and OTC transactions in exchange-listed securities executed between the hours of 8:00 a. m. and 6:30 p. m. must be reported to ACT within 90 seconds. As discussed below, this greater market transparency for after-hours trading provides broker-dealers with essential price information needed to meet their best execution duties for customer orders in the after-hours environment and also supports the extension of key investor protection regulations to this market. B. Chicago Stock Exchange E-Session Pilot On October 13, 1999, the Commission also approved the Chicago Stock Exchanges pilot program for an quotE-Sessionquot that operates from the end of its existing post-primary session at 4:30 p. m. to 6:30 p. m. 65 While trading during the E-Session is conducted in many respects as it is during the CHXs primary trading session, the CHX added new features to more fully automate the transmission of orders and to provide additional protections to investors who trade after-hours. To participate in the E-Session, investors are limited to the use of unconditional limit orders, and each limit order must be affirmatively designated for trading in the E-Session, to prevent a situation where an investor unknowingly participates in after-hours trading. Any orders that remain unexecuted at the close of the E-Session are automatically canceled, and are not carried over to any other trading session. 66 Specialists continue to make two-sided, continuous markets in their assigned stocks. 67 One of the major benefits of the CHX E-Session Pilot is that the consolidated tape for exchange-listed stocks now continues to operate until 6:30 p. m. 68 Together with the Nasdaq Extended-Hours Pilot and the NASDs 90-second trade reporting requirements for OTC transactions in listed stocks, the running of the consolidated tape significantly enhances the ability of investors to have access to essential price information for the critical 4:00 p. m. to 6:30 p. m. segment of the after-hours market. D. Investor Protection and Market Integrity Rules When the SRO extended-hours pilots were initiated in October 1999, both the SROs and the Commission determined that essential investor protection and market integrity rules should apply to the after-hours market. 1. Manning Rule The proposal for the Nasdaq Extended-Hours Pilot included modifications to NASD Rule 4617 (Normal Business Hours) to make clear to Nasdaq market makers who voluntarily open their markets after the traditional close that, except as modified by the proposal, they are generally obligated to conduct their business during the extended session in conformity with all NASD Rules. 69 In addition, Nasdaq amended NASD IM-2110-2 (also known as the quotManning Rulequot) to extend its applicability until 6:30 p. m. 70 The Manning Rule prohibits an NASD member firm that is holding a customer limit order from trading for that members market making proprietary account at a price that would satisfy the customers limit order without executing that customer limit order. 71 2. Firm Quote Rule In general, Exchange Act Rule 11Ac1-1(b)(1)(ii) requires an association to disseminate the best bid, offer, and quotation sizes for subject securities whenever quotlast sale information with respect to reported securities is reported by a member acting in the capacity of an OTC market maker pursuant to an effective transaction reporting plan. quot NASD members, including OTC market makers, who choose to trade from 4:00 p. m. to 6:30 p. m. are required to report last sale information pursuant to the NASDs rules, and the NASD disseminates quotes during this time. These procedures, in turn, trigger Exchange Act Rule 11Ac1-1(c)(2) (the quotFirm Quote Rulequot), which generally obligates OTC market makers to execute any order to buy or sell a subject security, other than an odd-lot order, presented to it by another broker or dealer, or any other person belonging to a category of persons with whom such responsible broker or dealer customarily deals, at a price at least as favorable to such buyer or seller as the responsible brokers or dealers published bid or published offer. Thus, if an OTC market maker chooses to quote in the extended-hours period, it is required to honor its quotes up to the published size. 3. ECN Display Alternative Similarly, the reporting of last sale information to the NASD triggers the ECN Display Alternative. 72 Accordingly, an order entered by a market maker into an ECN that widely disseminates the order is deemed to be a bid or offer to be communicated to the market makers association for at least the minimum quotation size required by the Associations rules if the priced order is for the account of the market maker, or the actual size of the order up to the minimum quotation size required if the priced order is for the account of a customer. The ECN Display Alternative deems the market maker to be in compliance with this requirement if the ECN displays the market makers order in Nasdaq. Thus, if an ECN is receiving OTC market maker orders before 6:30 p. m. the ECN must transmit those orders through SelectNet for display in the Nasdaq montage, or the OTC market maker must post the quote separately in its own quote line in the montage in order to be in compliance with the ECN Display Alternative. 4. Limit Order Display Rule In addition, Exchange Act Rule 11Ac1-4 (the quotLimit Order Display Rulequot) is not limited to regular trading hours, but also applies to market makers that choose to participate in after-hours trading sessions. Simply put, the Limit Order Display Rule requires an OTC market maker to publish immediately a bid or offer that reflects the price and full size of each customer limit order that improves the bid or offer of the OTC market maker, and that reflects the full size of the customer limit order that is priced equal to the bid or offer of the OTC market maker or the national best bid or offer, and represents more than a de minimis change in the size of the OTC market makers bid or offer. 73 5. Regulation ATS Regulation ATS also applies to market participants who choose to operate from 4:00 p. m. to 6:30 p. m. Any alternative trading system that has five percent of more of the average daily trading volume in a security must display its best orders in that security in the public quotation stream during regular trading hours. Under Regulation ATS, in calculating their volume, alternative trading systems must include all trades executed during the twenty-four hours that constitute a day. Thus, any alternative trading system that meets the five percent threshold must display its orders in the public quotation stream whenever the public quote systems make display possible. E. Current Issues 1. Potential Enhancements to Nasdaq Extended-Hours Pilot Nasdaq officials have informed the Commission staff that they are considering whether it might be appropriate to apply some additional trading rules to the Extended-Hours Pilot. As noted above, NASD Rule 3350 (quotNASD Short Sale Rulequot) is currently applicable only to the Nasdaq regular session. Nasdaq officials are seeking to determine if the after-hours market has developed to the point that the application of the NASD Short Sale Rule to trading from 4:00 p. m. to 6:30 p. m. would be beneficial to mitigate the high levels of price volatility that are often experienced after the regular session close. 74 Similarly, Nasdaq officials are considering whether the application of NASD rules prohibiting quotlockedquot and quotcrossedquot markets for quotations from 4:00 p. m. to 6:30 p. m. would improve the trading environment during this period. 75 Eventually, Nasdaq will determine whether to propose a full-fledged after-hours trading session in which market-maker participation would be mandatory and all normal trading rules would apply. 2. After-Hours Sessions for the Major Markets If Nasdaq decides to pursue a full-fledged after-hours trading session or the NYSE decides to develop a new type of post-4:00 p. m. trading session in lieu of its current limited crossing sessions, they would need to file rule change proposals with the Commission for notice and comment. This would give the public and other interested parties an opportunity to comment on the structure and trading rules applicable to the new sessions before the Commission determines whether to approve the proposals. While the recommendations from the Working Groups are not binding in terms of after-hours session proposals, the Commission would need to consider a number of key issues that were addressed by the Working Groups if the major markets propose full-fledged after-hours sessions. uma. Development of New Order Types If the major markets decide to implement after-hours trading sessions, there will be a need to develop standardized order types to avoid investor confusion and to ensure that these orders receive best executions. For example, as discussed above, the Working Groups recommended consideration of at least the following order types to take into account the new trading sessions: Orders designated for the after-hours session. Orders entered during the day session and designated to extend to the after-hours session. Good-till-cancelled orders designated to remain active through the day and after-hours session. Good-till-cancelled orders entered in the after-hours session and designated to carry over to the next day. The Division believes that, before widespread after-hours trading begins, the SROs should consider whether these or other order designations would serve to minimize confusion concerning when particular buy or sell orders would be eligible for execution. B. Preservation of 4:00 p. m. Closing Prices The Working Groups noted that investors and the securities industry have come to rely on 4:00 p. m. closing prices in equity securities for a variety of valuation purposes. Regular session closing stock prices are also used by many other parties in todays financial industry, including investment companies and advisors, banks, lawyers, accountants, and other professionals, to value positions and liabilities in a variety of contexts. Moreover, closing prices play a role in a number of the Commissions regulations in areas such as secondary offerings. The Division believes that proposals by the major markets for after-hours trading sessions should make provisions to preserve distinct regular session closing prices for equity securities. III. Conclusion Despite recent advances in trading venues and enhanced market transparency, the after-hours market in stocks remains an often illiquid and volatile market that requires retail investors to exercise caution when attempting to capture short-term profits by trading after the major markets close. Even in relatively liquid stocks, steep after-hours price swings can surprise investors that base their trading decisions on the regular sessions closing prices. In less liquid stocks, investors need to be even more cautious to avoid receiving surprisingly unfavorable prices after the regular session close. Nevertheless, the Commission recognizes that, in todays electronic world, investors will continue to seek greater flexibility in the timing of their trades and trading venues. Thanks to the information technology revolution, todays investors enjoy unprecedented access to the nations markets. Investors have at their fingertips the ability to direct their own investment decisions. With a click of the mouse, investors can review the performance of their portfolios on a near real-time basis. They can retrieve vast amounts of market information to make informed investment decisions 150 and when they have made a decision, they can again click the mouse and place their orders. While the after-hours market is still in its infancy, investor demands could someday make after-hours trading a mature, robust trading session. Both the established markets and ECNs have sought to provide innovative mechanisms to meet investor demands for after-hours trading. The Commission remains committed to working with the SROs and the securities industry to ensure that the regulatory structure, particularly in the areas of investor protection and market integrity, keeps pace with this rapidly changing environment. 1 All times are Eastern. 2 See Division B of the Conference Committee Report on H. R. 3194 (H. Rept. 106-479), Public Law 106-113, at Cong. Record Vol. 145, No. 163, Part II, pg. H12308, Nov. 17, 1999. 3 The graphs provided at A-1 show that, while total share volume by ECNs in Nasdaq securities rose from about 18 billion shares in the first quarter of 1999 to around 26 billion shares in the fourth quarter, the percentage of total share volume attributed to ECNs remained at approximately 30 throughout the period. These graphs are based on data compiled by OEA from routine quarterly reports submitted by ECNs to the Commission as well as data supplied by Nasdaq web sites. It should be noted, however, that there apparently are some significant differences in methodologies employed among ECNs in compiling their trading statistics. As a result, aggregate trading statistics for ECNs are, at best, approximations. 4 The graphs provided at A-2 indicate that, while total share volume by ECNs in NYSE-listed securities rose from about 1.56 billion shares in the first quarter of 1999 to around 1.77 billion shares in the fourth quarter, the percentage of total share volume attributed to ECNs remained at approximately 3 throughout the period. 5 See Division, Market 2000, An Examination of Current Equity Market Developments (January 1994)(quotMarket 2000 Reportquot), at II-13. The graph in the upper portion of A-3 shows the growth in ECN share volumes in Nasdaq securities since 1993. The graph in the lower portion of A-3 shows a similar proportionate increase in ECN activity in NYSE-listed securities since 1993. 6 The graph in the upper portion of A-4 illustrates the preponderance of ECN activity in Nasdaq securities. 7 The relatively limited role of ECNs in after-hours trading in Nasdaq securities is shown in the graph in the middle portion of A-4 . 8 The larger percentage of after-hours trading in listed securities by ECNs is shown in the graph in the lower portion of A-4 . 9 Exchange Act Rule 11Ac1-1, 17 CFR 240.11Ac1-1. 10 These order-routing systems may be operated by, or on behalf of, an OTC market maker or exchange market maker that executes customer orders primarily against the account of such market maker as principal, other than riskless principal. 11 The Strike ECN recently consolidated with BRUT. Strike operates on the technology platform previously used by BRUT. See letter from Belinda Blaine, Division Associate Director, to J. Craig Long, Foley amp Lardner, dated January 14, 2000. 12 Market XT is an ECN only for the after-hours market. 13 The negotiation feature permits subscribers to conduct anonymous negotiations over price and size. Reserve size orders are orders that show only a part of the available size, permitting subscribers to enter large orders that can be displayed and executed in part. 14 See Regulation of Exchanges and Alternative Trading Systems, Exchange Act Release No. 40760 (December 8, 1998), 63 FR 70844 (December 22, 1998). 16 Congress considered the public availability of quotation information to be critical to fair and competitive markets because published quotations provide investors, broker-dealers, and other market participants with essential information about the condition of the market. This information assists investors in making investment decisions and in finding the best market for a security, while also making it possible for investors to evaluate the quality of their executions. 17 See Order Handling Rules at 88 quoting SEC, Statement of the Securities and Exchange Commission on the Future Structure of the Securities Markets (February 2, 1972), 37 FR 5286 (February 4, 1972). 18 Exchange Act Release No. 37619A (September 6, 1996), 61 FR 48290 (September 12, 1996) (quotOrder Handling Rulesquot). In addition to specifically addressing the markets created by ECNs, the Commission required market makers and specialists to display customer limit orders that were priced better than a specialists or OTC market makers quote or that added to the size associated with such quote. 19 Exchange Act Rule 11Ac1-1(c)(5)(i), 17 CFR 11Ac1-1(c)(5)(i). 20 Exchange Act Rule 11Ac1-1(c)(5)(ii), 17 CFR 11Ac1-1(c)(5)(ii). 21 Letters dated January 17, 1997 from Richard R. Lindsey, then-Director, Division, SEC, to Charles R. Hood, Senior V. P. and General Counsel, Instinet Corporation Joshua Levine and Jeffrey Citron, Smith Wall Associates TONTO System, now known as Archipelago Gerald D. Putnam, President, Terra Nova Trading, LLC Bloomberg Tradebook Roger D. Blanc, Wilkie Farr amp Gallagher (counsel to Bloomberg) letter dated October 6, 1997 from Richard R. Lindsey, then-Director, Division, SEC, to Matthew G. Maloney, Dickstein, Shapiro, Morin amp Oshinsky LLP (counsel to Spear, Leeds amp Kellogg) letter dated February 4, 1998 from Robert L. D. Colby, Deputy Director, Division, SEC, to Linda Lerner, General Counsel, All-Tech Investment Group, Inc. letter dated April 21, 1998 from Richard R. Lindsey, then-Director, Division, SEC, to Mark Dorsey, Fried, Frank, Harris, Shriver amp Jacobsen (counsel to Brass Utility, LLC) letter dated November 13, 1998 from Robert L. D. Colby, Deputy Director, Division, SEC, to Lloyd H. Feller, Morgan, Lewis, Bockius LLP (counsel to Strike Technologies LLC) letter dated November 13, 1998 from Robert L. D. Colby, Deputy Director, Division, SEC, to John Schaible, PIM Global Equities, Inc. letter dated January 4, 2000 from Robert L. D. Colby, Deputy Director, Division, SEC, to Sam Scott Miller, Orrick, Herrington amp Sutcliffe LLP (counsel to Market XT) and letter dated April 24, 2000 from Belinda Blaine, Associate Director, Division, SEC, to Robert Crossan, Chief Financial Officer, GFI Securities. 22 This reduction can also be attributed to the display of customer limit orders by market makers and ECNs. According to the NASD, quoted spreads declined by up to 41 percent following the implementation of the Order Handling Rules. See Market Quality Monitoring Overview of 1997 Market Changes, NASD Economic Research, March 17, 1998. See also Effects of Market Reform on Trading Costs and Depths of Nasdaq Stocks . Michael Barclay, et al., Journal of Finance, Vol. VIV, No. 1 (February, 1999) (this study found that the quoted and effective spreads for Nasdaq stocks declined approximately 30 percent). 23 As of October 1997, there were four ECNs linked to Nasdaq through the Nasdaq SelectNet service. Today, as described above, there are ten ECNs in operation. 24 See Regulation of Exchanges and Alternative Trading Systems, Exchange Act Release No. 40760 (December 8, 1998), 63 FR 70844 (December 22, 1998). As discussed above, ECNs are a type of alternative trading system. 27 See Applications for and Amendments to Application for Registration as a National Securities Exchange (quotForm 1quot) for Island, dated June 28, 1999 and NexTrade, dated March 24, 2000. In addition, Archipelago initially filed a Form 1, dated August 11, 1999. Archipelago is currently considering whether to become a facility of the Pacific Exchange, rather than an independent SRO. 28 See Exchange Act Release No. 42450 (February 23, 2000), 65 FR 10577 (February 28, 2000). 29 is a screen-based system on Nasdaq workstations, offered to NASD members to facilitate negotiation of securities transactions. Broker-dealers may enter orders directed to either one broker-dealer or to all market makers, and negotiate the terms of the orders through counteroffers entered into the system. 30 See Exchange Act Release No. 42536 (March 16, 2000), 65 FR 4857 (February 1, 2000). 31 CAES (Computer Assisted Execution System) is a NASD system that enables members to direct agency orders of up to 1,000 shares in both Nasdaq securities and exchange-listed securities to market makers for automatic execution. 32 The Commission recently expanded the securities that can be traded through the ITSCAES link to include so-called Rule 390 securities. Rule 390 securities refer to securities that were subject to the New York Stock Exchanges off-board trading restrictions. The Commission recently approved the rescission of NYSE Rule 390. See Exchange Act Release No. 42758 (May 5, 2000), 65 FR 30175 (May 10, 2000). 33 All of the ECNs charge a fee to market participants that execute through SelectNet against an order displayed in the ECN. 34 For example, one ECN, Instinet, has been offering after-hours services since 1975. See also Market 2000 Report, at II-13 amp II-14. 35 Many institutions and professional traders also adjust their portfolios and hedges by trading stock index futures, many of which trade at night on automated systems operated by futures exchanges. In addition, portfolio hedges are often adjusted through after-hours exchanges of stock index futures with baskets of underlying stocks (so-called quotExchanges for Physicalsquot or quotEFPsquot). Most of these basket trades are effected after-hours on foreign markets such as London and Tokyo. 36 For example, an institution might arrange with its broker-dealer to have an after-hours trade executed at a volume-weighted average price for the stock during the regular trading session. 37 Several regional exchanges also offer investors the opportunity to have orders entered after 4:00 p. m. that are eligible for execution at the primary markets 4:00 p. m. closing prices. In addition, the NYSE offers a separate crossing session for program trades that can be effected after the 4:00 p. m. close at negotiated prices. 38 The CHX E-Session (as well as the exchanges primary and post-primary sessions) also offers opportunities to trade Nasdaq stocks. 39 The Division selected Jan. 18, 2000, as a sample date because it fell within a recent period when many large corporations traditionally issue post-close announcements regarding quarterly earnings reports. After-hours trading traditionally has been most active during these so-called quotreporting periods. quot In some cases, the Report compares after-hours trading on Jan. 18 with activity on the remaining trade dates that week. 40 If all NYSE volume was excluded, the regional exchanges still accounted for over 48 of share volume in NYSE-listed securities between 4:00 p. m. and 6:30 p. m. on Jan. 18. 41 Descriptions of these Nasdaq systems are provided in Part II of this Report. As discussed below, the Nasdaq pilot program that was approved by the Commission in October 1999 extended the operation of these services and mandated 90-second trade reporting for Nasdaq and exchange-listed securities until 6:30 p. m. in order to provide enhanced transparency to investors in the after-hours market. 42 On September 25, 1996, Chairman Levitt forwarded to Congressman John D. Dingell, Ranking Member of the House Committee on Commerce, a Division report that analyzed after-hours trading in selected stocks in July 1996 (quot1996 Studyquot). The Divisions 1996 Study found, among other things, that after-hours trading was concentrated in the periods immediately following the post-close corporate news announcements and during the period immediately before the next days regular session opening. 43 The Division used consolidated tape data compiled by the Commissions Office of Economic Analysis to produce the graphs of NYSE-listed share volume provided in Attachment B . 44 The graphs at B-3 and B-4 show that this pattern holds even for volume on the CHX and the so-called quotThird Market, quot respectively, which are among the more active participants in after-hours trading. Activity by ECNs in NYSE-listed securities is included in the Third Market reports on the consolidated tape. 45 Again, the graphs at B-9 and B-10 show that this pattern holds even for volume on the CHX and the Third Market, respectively (these markets continue to report trades to the consolidated tape until 6:30 p. m.). None of the CHX volume and only 1.3 of the Third Market after-hours volume were executed from 5:30 p. m. to 6:30 p. m. on Jan. 18. 46 Nasdaq data indicate that 94 of the share volume from 4:00 p. m. to 4:15 p. m. resulted from after-hours transactions rather than runoff from the regular trading session. 47 OEAs analyses focused on Nasdaq trading on January 28 and 31, and February 7 and 8, 2000. 48 While trades effected after 6:30 p. m. are not reported to the consolidated tape, trade reports are still submitted to the NASD for surveillance purposes. These non-public trade reports were used in OEAs review. Because this information is non-public, only aggregate statistics are provided in this Report. 49 firm-specific data supplied to the Division is based on non-public surveillance reports. The Divisions Report, therefore, presents only aggregate data for after-hours activity by ECNs and non-ECNs. In addition, it is important to note that differences among ECNs concerning trade-reporting procedures make it difficult to properly aggregate these volume reports for statistical purposes. Specifically, some ECNs report all of their trades to the tape, even if the seller in the transaction is another broker-dealer (normally, the selling broker-dealer reports a trade for tape dissemination). Other ECNs follow the convention of having the selling broker-dealer report under these circumstances. This situation makes it difficult to compare volume among ECNs and between ECNs and other broker-dealers with precision. The volume statistics in this Report, therefore, are approximations. 50 The current concentration of after-hours activity in a small number of quotstoryquot stocks is consistent with the findings of the Divisions 1996 Study. 51 Intra-day price movements in Microsoft shares during the regular trading sessions on Jan. 18 and 19 are shown in the Bloomberg graph provided at B-17 . 52 Intra-day price movements in Corel shares during the regular trading sessions on Jan. 18 and 19 are shown in the Bloomberg graph provided at B-18 . 53 price movements in Western Water shares on Jan. 18 and 19 are shown in the Bloomberg graph provided at B-19 . 54 Intra-day price movements in Covol Technology shares on Jan. 18 and 19 are shown in the Bloomberg graph provided at B-20 . 55 OEAs findings are also consistent with those of a recent study of trading in 250 Nasdaq stocks in the first half of 1999. Barclay and Hendershott, Price Discovery and Trading Costs After Hours . Working Paper, University of Rochester Simon School of Business, Jan. 24, 2000. 56 For example, the Commission staff learned in discussions with market officials that the NYSE and Nasdaq were contemplating different quottrade datequot standards for after-hours trading that could needlessly complicate essential clearance and settlement functions. One market was contemplating treating after-hours transactions as quotnext-dayquot trades while the other market would have reported after-hours transactions on the next day but with quotas-ofquot designations with the previous day as the trade date. This would have resulted in after-hours trades in the two markets being on differing settlement schedules that would have significant ramifications for the major clearing agencies. Moreover, it was also evident that the major markets had not yet adequately considered the burdens of widespread after-hours trading on member firm systems, particularly in view of the then-ongoing efforts of the securities industry to prepare for the year 2000 transition. 57 Immediately following the Summit, the NYSE and NASD used their web sites to provide the public with an opportunity to comment on the proposed agendas of the Working Groups and to submit comments on the issues that would be covered. 58 In addition to the three Working Groups which are discussed below, a Working Group on Options Markets was formed to conduct a comprehensive review of issues that would impact the options markets as after-hours trading evolves, including coordination with the stock markets, dissemination of market data, clearance, settlement and back office issues, the effects on exercise and settlement procedures, and how best to inform investors of the implications of after-hours trading in options, including modifications to the Options Disclosure Document which is currently provided to options investors. When the initial deadlines were set for issuance of the Working Groups final reports, it was determined that the Working Group on Options Markets should issue its final report several weeks after the other Working Groups, to allow sufficient time for the Working Group on Options Markets to analyze the contents of the other reports and make recommendations accordingly. At the time the other Working Groups issued their final reports, the Working Group on Options Markets (which was composed of representatives of the registered options exchanges, as well as a representative of the International Securities Exchange), was focusing on plans to link the options markets. Because that issue was of primary importance, and remains so to date, the Working Group on Options Markets has not issued a final report. 59 The Working Groups final reports are available at nasd and nyse . Copies of these reports are provided in Attachment D to this Report. 60 A copy of the Working Groups quotBest Practices Relating to Extended Hours Tradingquot document is included in Attachment D . 61 The application of these rules in the after-hours market is discussed below. 62 The NASD, through its wholly owned subsidiary, filed this Notice to Members with the Commission as a proposed rule change on January 11, 2000, NASD Regulation, Inc. See Exchange Act Release No. 42363 (January 28, 2000), 65 FR 5715 (February 4, 2000)(SR-NASD-00-01). A copy of the Notice to Members is provided in Attachment E to this Report. 63 See Exchange Act Release No. 42003 (October 13, 1999), 64 FR 56554 (October 20, 1999)(SR-NASD-99-57. The Nasdaq Extended-Hours Pilot was initially approved to operate until March 1, 2000. The Commission subsequently approved an extension of the pilot until October 1, 2000. See Exchange Act Release No. 42481 (March 1, 2000)(SR-NASD-00-07). 64 As discussed above, many of these systems had operated daily until 5:15 p. m. since 1992. 65 See Exchange Act Release No. 42004 (October 13, 1999), 64 FR 56548 (October 20, 1999)(SR-CHX-99-16). The CHX E-Session Pilot was initially approved to operate until March 1, 2000. The Commission approved an extension of the pilot until October 1, 2000. See Exchange Act Release No. 42463 (February 28, 2000)(SR-CHX-00-02). 66 The CHX requires members to provide certain disclosures to non-members before accepting orders for execution in the E-Session. Specifically, before a member can accept an order from a non-member, the member must first disclose that: (1 ) orders for E-Session eligible securities are eligible only for a single E-Session--if not executed during that E-Session, the orders will be automatically canceled (2) the only orders that are eligible for execution during the E-Session are unconditional limit orders (3) there may be greater fluctuations in securities prices because there will likely be less liquidity during the E-Session once traditional trading hours have ended and (4) because distinct systems and facilities offer trading in securities after the close of the traditional trading period, at any particular time, quotations and transaction prices for a security may vary among those systems and facilities. CHX requires these disclosures to help ensure that participants in the after-hours market understand the potential risks of trading outside traditional trading hours. 67 As discussed above, the CHX trades both exchange-listed and Nasdaq stocks during the day and during its 4:00 p. m. to 4:30 p. m. post-primary session. The most active of these stocks are also eligible for trading in the 4:30 p. m. to 6:30 p. m. E-Session. 68 Technically, the consolidated tape runs until 6:35 p. m. to ensure that it captures any run-off from the 4:30 p. m. to 6:30 p. m. E-Session. The CHX reimburses the Securities Industry Automation Corp. (which administers the tape) for extending tape operations until 6:35 p. m. 69 The NASDs short sale rule is currently not applicable beyond traditional market hours. See NASD Notice to Members 94-68. As discussed below, however, Nasdaq is currently considering whether the application of the NASD short sale rule would be beneficial. 70 The Manning Rule previously applied only during traditional Nasdaq market hours. 71 If a customer does not formally assent (quotopt-inquot) to processing of their limit order(s) during the extended hours period commencing after the normal close of the Nasdaq market, limit order protection will not apply to that customers order(s). 72 Exchange Act Rule 11Ac1-1(c)(5), discussed in Part II, above. 73 There are certain exceptions to the Limit Order Display Rule. Those exceptions would continue to apply during an after-hours trading session. See Exchange Act Rule 11Ac1-4(c). 74 The NASD Short Sale Rule determines price changes or quotticksquot based on the securitys bid side of the Nasdaq Best Bid and Offer (quotNBBOquot), which reflects the highest published bid quotation (quotBest Bidquot). The NBBO began to be disseminated by Nasdaq from 4:00 p. m. to 6:30 p. m. starting on February 7, 2000. Nasdaq delayed initiating the NBBO until February 7 in order to give mutual fund complexes and vendor systems used by funds sufficient time to adjust and test systems that use a securitys regular session closing NBBO for end-of-day valuations for net asset valuation purposes. 75 A quotlockedquot market exists if a securitys Best Bid equals the Best Offer. A quotcrossedquot market exists if the Best Bid is higher than the Best Offer. Modified: 03172006