CONSULTATION ON DRAFT TRADING RULES
1. Introduction
PLUS has on 1 September 2008 launched a market consultation in relation to proposed changes to its Trading Rules to reflect the expansion of its existing quote-driven services to provide hittable quotes in the more liquid securities and a dark pool in small and mid cap securities. This is in response to demand from PLUS market participants and will provide greater flexibility and choice of execution method.
The detailed draft Trading Rules are available for inspection
here.
PLUS market users and other interested parties are invited to comment on the detailed proposals, by 1 October 2008.
The existing rules have been amended to reflect:
1) changes in respect of the introduction of new trading models: namely:
- the change from non-hittable quotes to hittable quotes for liquid UK securities;
- the introduction of a dark pool for non liquid UK securities;
2) changes to arrangements in respect of clearing and settlement and default for on book trades on the hittable-quote board and in the dark pool. These trades will be settled through the CCP and therefore, to be eligible to trade on book, members must be able to settle through the CCP and the CCP.s rules in respect of clearing and settlement and default will apply; and
3) some re-formatting to provide a more logical grouping of certain rules and avoid unnecessary duplication.
It should be noted that the introduction of direct market access for submission of orders and trade reports is under consideration, but detailed rules in respect of this are not being consulted on at this stage.
2. Hittable quotes
Trades may be:
- on book (automatic execution of orders matching with hittable quotes); or
- off book (trades agreed bi-laterally by telephone or as a result of complementary dealing services (which include request-for-quote and other electronic dealing services) and trade reported to PLUS.
3. Non-hittable quotes
Trades are agreed by telephone on the basis of firm and transparent but non-hittable or liftable two-way quotes provided by registered market makers, or as a result of complementary dealing services (which include request-for-quote and other electronic dealing services) and trade reported to PLUS.
4. Dark pool
Automatic execution of matching orders within a central, anonymous non-displayed order book.
5. Stock coverage for the different trading models
The list for the securities traded on the different trading models will be confirmed by market notice at a later date but it is envisaged that the stock coverage will initially be as follows:
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Trading model
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Stock coverage
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Hittable quotes (on and off book)
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liquid UK securities
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Non-hittable quotes
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non liquid securities and
non UK liquid securities
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Dark book
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non liquid UK securities
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A security may be either on a hittable-quote board or on a non-hittable-quote board, it cannot be on both. Securities on non-hittable quote boards may also be in the dark pool.
6. On and off book trading and trade reporting
Securities on the hittable-quote board may be traded on book (automatic execution or orders matching with hittable quotes) or off book (telephone dealing or dealing through RSP). For on book trades (both on the hittable-quote board and in the dark pool) PLUS will generate trade reports and trade reports must not be submitted. Trade reports will be required to be submitted for off book trades as currently. This is summarised as follows:
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Board
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Trading model
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Trade reports
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Hittable quotes
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on and off book
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On book: trade reports generated by PLUS (trade types A or AM)
Off book: trade reports need to be submitted to PLUS (trade types O, N, L, I, T and trade sub types as applicable)
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Non-hittable quotes
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off book only
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Trade reports need to be submitted to PLUS (trade types O, N, L, I, T and trade sub types as applicable)
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Dark book (securities will also be on non-hittable quote board)
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on book only
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Trade reports generated by PLUS (trade type A)
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7. PLUS trading day
The proposed PLUS trading day can be viewed
here.
8. Summary changes to the rules
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Chapter
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Main changes
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Chapter 1 Market Principles
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Substantially unchanged. A new principle has been added (the Sixth Principle) but this is not a new rule being currently included in chapter 3 (rule 3.2) of the current rules.
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Chapter 2 Membership
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Additional rules added in respect of:
- Requirement for members to have controls to prevent submission or erroneous orders and trade reports to PLUS (rule 2.10 of draft rules);
- requirements to notify changes in CCP settlement arrangements (rules 2.24 (f)(ii) and (iii) of draft rules);
- voice-recording to cover changes to FSA rules scheduled for March 2009 (rule 2.23 of draft rules);
- expansion of the permitted activities of a broker to reflect the addition of on book execution services; and
- expansion of the restrictions that may be placed on a member in respect of the ability to deny access to on-book trading.
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Chapter 3 Trading models of the PLUS market
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Completely new chapter containing an overview of the different trading models
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Chapter 4 Trading rules for on book execution
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Completely new chapter covering on book execution i.e. trading executed electronically on the hittable-quote board and in the dark pool. This chapter covers:
- the trading day
- quote obligations on the hittable-quote board
- the mechanics of trading:
o order types
o market maker conduct
o submission of orders
o submission of stop losses on the hittable-quote board
o responsibility for an order
o order management
o acknowledgement of orders
o order matching rules
o trade types
o trade confirmation
o contra requests
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Chapter 5 Trading rules for off book execution
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Currently chapter 3. This chapter is substantially unchanged from the existing rules but has been amended to reflect the fact that the dealing obligations apply to off book trading for securities on the hittable-quote board as well as for securities on the non-hittable quote board
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Chapter 6 Trade reporting for off book execution
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Currently chapter 4. This is substantially unchanged but has been amended to reflect the fact that trade reporting is only applicable for off book trading on the hittable-quote board and trading on the non-hittable quote board
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Chapter 7 Market operations
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New chapter. This deals with regulatory actions by PLUS or rules that relate to more than one trading model and includes:
- the rules that are currently in the Market Operations section of the existing chapter 3:
o market hours
o business calendar
o suspension of trading
o suspensions/removal from trading/trading halts on PLUS
o dealing in a suspended security
o market condition
o systems failures
- the rules relating to conditional dealing, currently in chapter 3 (rules 3.41-3.42).
- the rules related to publication of trade data and deferred publication arrangements, which are currently covered in chapter 4 (rules 4.22-4.27), amended to apply to trading on the hittable-quote board and non-hittable quote board.
In addition the rules relating to systems issues have been expanded to include deletion of orders and to provide more formalised procedures for members to request closure of quotes and deletion of orders. Further detail in respect of this will be added to the PLUS website.
New rules have been added in respect of the powers of PLUS to delete orders and cancel trades (proposed rules 7.26 and 7.27)
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Chapter 8 Clearing and settlement
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Previously chapter 5. This has been revised to include clearing and settlement arrangements for securities settled through the CCP (on book trading of securities on the hittable-quote board and trading in the dark pool). The clearing and settlement arrangements for securities traded bilaterally are unchanged except that they will now apply to off-book trading for securities on the hittable-quote board and trading in securities on the non-hittable quote board
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Chapter 9 Default rules for off book trades
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Previously chapter 6. The introduction has been amended to include default arrangements for securities that are settled through the CCP
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9. Questions for consultation
9.1 Tick sizes and lot sizes
(a) PLUS is considering increasing the tick sizes for trading in the dark pool to reduce the number of algo orders which may otherwise have an impact on performance.
(b) PLUS is also considering introducing the concept of lot sizes to reduce the number of algo orders which may otherwise have an impact on performance.
Q.1 What views do participants have on this approach?
Q.2 What tick sizes do participants feel would be acceptable?
Q.3 What lot sizes do participants feel would be acceptable?
9.2 Quote refresh period
Q.4 A quote refresh period of 90 seconds is envisaged. Do participants consider this to be reasonable?
9.3 Period when hittable quotes are hittable
It is proposed that hittable quotes are hittable only during the MQP of the home market. Market makers may but are not required to display quotes outside of this period, in which case the quotes will be firm for the purposes of off book trading.
Q.5 Do participants agree with this approach for securities where the home market is the UK?
If not, when would participants propose that the quotes should be hittable?
Q.6 What about for European securities . do participants agree that hittable quotes should only be hittable during the MQP of the relevant home European market?
If not, when would participants propose that the quotes should be hittable?
9.4 Period for matching in the dark pool
It is proposed that matching in the dark pool occurs during the MQP of the home market. Outside of this period (from pre-open to the start of MQP and following the end of MQP until the end of the trade reporting period) no matching occurs but order management can take place such as the submission of new orders and the withdrawal or amendment of existing orders.
Q.7 Do participants agree with this approach where matching occurs in the dark pool during the MQP of the home market where the home market is the UK?
If not, when would participants propose that matching should occur.
Q.8 What about for European securities . do participants agree that hittable quotes should only be hittable during the MQP of the relevant home European market?
If not, when would participants propose that the quotes should be hittable?
9.5 Matching algorithm on opening
It is proposed that there will be a matching algorithm immediately following the start of the MQP for the home market of the security. This may differ from the matching rules that will apply during the reminder of the matching period, which will run until the end of the MQP.
Q.9 Do participants think that it is appropriate to have different matching rules for initial matching following the start of the MQP, compared with the matching rules proposed for the remainder of the matching period?
Q.10 If so, what views do participants have on the type of opening matching rules that believe would be appropriate?
9.6 Stop losses
It is currently proposed to include stop losses as an option for securities with hittable quotes, which will result in automatic generation of an immediate execution order once a trigger price is reached.
Q.11 How useful do participants believe that this functionality will be?
9.7 Back and choice rules and rules governing market makers dealing with each other for securities with non-hittable quotes
The proposed back and choice rules for securities with non-hittable quotes are unchanged from our existing rules. Although market makers will be able to execute electronically against each others. quotes for securities with hittable quotes, we will still need rules to cover market maker challenges where market makers deal with each other by telephone for securities with hittable quotes.
Q.12 Do participants feel that the existing rules are sufficient or would additional detail be desirable to clarify the obligations?
If so, what additional clarification would participants find useful?
Responses to consultation
Responses to the consultation should be directed to the Regulation Department of PLUS at:
PLUS Markets Group plc
Standon House
21 Mansell Street
London E1 8AA
E-Mail: regulation@plusmarketsgroup.com
Telephone: 020 7553 2035
If you wish your comments to remain confidential, please indicate this in your response.