1 Three of the four Working Groups issued their final reports (Investor Protection and Education, Clearance
and Settlement and Operations Issues, and Trading Conventions). These reports are available for public comment on the
NASD and NYSE web sites. The Working Group on Options Trading has not yet submitted its final report.
2 The Working Group stated however that when/if volume significantly expands in the after-hours market it may no longer
be satisfactory to investors for the 4:00 p.m. close to be used as a significant daily valuation point.
[11329]
October 21, 1999
TO: EQUITY MARKETS ADVISORY COMMITTEE No. 34-99
SEC RULES COMMITTEE No. 83-99
RE: NYSE/NASD AFTER-HOURS TRADING WORKING GROUPS
______________________________________________________________________________
The NYSE and NASD Working Groups on after-hours trading recently issued their final reports
containing recommendations on issues that may arise when the primary securities exchanges extend their
trading hours.1 The Working Group recommendations do not address issues that may arise during after-
hours trading by ECNs or regional securities exchanges. The Working Group reports are attached and
summarized below.
Working Group on Trading Conventions
The Working Group on Trading Conventions recognized that the primary exchanges’ current
4:00 p.m. Eastern time closing price has become the standard of valuation for many financial
instruments and settlements, including net asset values, indices adds and deletes, and index calculations.
The Working Group noted that the effect of any quick and dramatic change in the time, market
mechanism for deriving, and availability of the 4:00 p.m. closing price would significantly impact the
securities industry and investors.2
The Working Group also discussed the need for a break after the 4:00 p.m. close. Several
reasons for a break were considered by the Working Group, including, among other things, providing
time for systems to capture and recapture prices and to account for the fact that the 4:00 p.m. closing
prices are often not available until some time after 4:00 p.m. The Working Group therefore
recommended that a "closing price" mechanism should be established by the primary exchanges and set
at 4:00 p.m. Eastern time. This should be followed by a break of at least one hour before re-opening for
an after-hours session. Although the Working Group was responsible for making recommendations
only to the primary exchanges, a majority of the Working Group suggested that the SEC also may want
to consider the applicability of a post-4:00 p.m. break to ECNs, regional exchanges, and broker/dealers.
The Working Group recommended several best practices for the securities industry, including
that bids and offers should be displayed with the percentage change from the 4:00 p.m. closing price,
that only limit orders should be accepted in an after-hours session, and that brokers who accept orders
2should clearly disclose the hours during which they will attempt to execute orders. Even if the primary
exchanges are not open, the Working Group recommended that principles of best execution should
apply to broker-dealers and ECNs accepting orders in the after-hours market, and that broker-dealers
and ECNs who choose to accept after-hours orders should be held to the SEC and NASD trading rules.
Working Group on Clearance and Settlement and Operations Issues
The Working Group on Clearance and Settlement and Operations Issues also recommended
that the daytime trading session on the primary exchanges should stop at 4:00 p.m. Eastern time, and
that the after-hours session should begin one hour later. The Working Group stated that a break
between the day and evening sessions is desirable, among other things, to allow time for the 4:00 p.m.
closing price to be captured, to give specialists and market makers time to adjust their order books, and
to give firms and processors time to close and re-open their systems. The Working Group also stated
that ending the session at 8:00 p.m. Eastern time will present no major processing problems for firms or
the clearance and settlement areas of the securities business.
The Working Group recommended that after-hours trading on the primary markets should
begin one calendar quarter after decimalization begins. If decimalization is significantly delayed beyond
the currently anticipated July 1, 2000 start date, however, the Working Group stated that this
recommendation should be revisited.
Report of the Working Group on Investor Protection and Education
The Working Group on Investor Protection and Education recommended that complete and
full disclosure of the nature and risks of extended-hours trading to investors be required, and that best
practices be adopted industry wide. Specifically, the Working Group recommended that investors be
required to “opt-in” to extended-hours trading and that only limit orders be used by investors.
In addition, information and materials should be prepared for investors and should include
several disclosure items. In particular, firms should provide customers with an explanation of how the
extended-hours market operates in general; clearly describe what specific stocks, or groups of stocks, and
other securities will be available for trading; make clear that the prices of securities traded during after-
hours sessions may not reflect the prices of the securities on their primary market, either at the end of
the regular trading session, or the opening of the primary market on the next morning; and disclose that
trading volume
3may be lighter than during regular trading sessions, resulting in less liquidity for certain securities, and
that as a result, customers may receive partial executions, or no executions at all.
Ari Burstein
Assistant Counsel
Attachment