OATS Report - October 21, 2002

October 21, 2002

OATS recently added a Special Handling Code, "TS", for a Trailing Stop Order. For the purposes of OATS reporting, a Trailing Stop Order is defined as follows: In the case of a sell order, a Trailing Stop Order allows the stop price to increase by a predetermined amount or formula (e.g., a specified dollar amount, a percentage of the market price, or some other predetermined criteria) as the market price of the security advances. In the case of a buy order, a Trailing Stop Order allows the stop price to decrease by a predetermined amount or formula (e.g., a specified dollar amount, a percentage of the market price, or some other predetermined criteria) as the market price of the security declines. Once the Trailing Stop price is triggered, the buy or sell order becomes either an executable market order or a limit order (i.e., a Trailing Stop Limit Order).

Below are two examples of how Trailing Stop Orders should be reported to OATS. The examples assume that (a) the firm will continuously re-calculate the Trailing Stop Price as appropriate; and (b) the order is retained by an order entry firm and will be routed to a market center for execution when the Trailing Stop Price is triggered:

1. A Trailing Stop Sell Order: A customer has purchased 1000 shares of a Nasdaq security, ABCD, at $20.00, and immediately enters a GTC Trailing Stop Sell Order at 90% of the prevailing market price (i.e. initially, $18.00). The firm reports to OATS a New Order Report for a sell of 1000 shares of ABCD, with a Special Handling Code of "TS", a Time In Force Code of "GTC", an initial Stop Price of $18.00 (i.e. Market Price of $20.00 X 90% = $18.00) and other appropriate information. As long as the market price of ABCD advances, the firm will continue to re-calculate the Trailing Stop Price at 90% of market value. OATS will not require the reporting of a Cancel/Replace Report each time the firm's system re-calculates the Trailing Stop Price. However, the firm's system will need to retain the highest calculated Trailing Stop Price. In our example, the price of ABCD advances to a high of $30.00 per share. Its highest calculated Trailing Stop Price would be $27.00 (i.e. Market Price of $30.00 X 90%). Should the market price for ABCD begin to decline and hit or go through the highest calculated trailing stop price (i.e. $27.00 in our example), this would trigger a market order to sell the 1000 shares of ABCD. The firm would generate an OATS Cancel/Replace Report with a timestamp at the time the market price hit or went through the highest calculated Trailing Stop Price. The Cancel/Replace Report would be for an order to sell 1000 shares of ABCD at market. Then the firm would transmit the market order to the appropriate market center for execution. The firm would need to generate an OATS Route Report providing the market center it was transmitted to, the number of shares and the security symbol, ABCD, etc.
2. A Trailing Stop Buy Order: A customer sold short 500 shares of a Nasdaq security, WXYZ, at $30.00 per share, and immediately enters a GTC Trailing Stop Buy Order at 110% of the prevailing market price (i.e. initially, $33.00). The firm reports to OATS a New Order Report for a buy of 500 shares of WXYZ, with a Special Handling Code "TS", a Time In Force Code of "GTC", an initial Stop Price of $33.00 (i.e. Market Price of $30.00 X 110% = $33.00) and other appropriate information. As long as the market price of WXYZ declines, the firm will continue to re-calculate the Trailing Stop Price at 110% of market value. OATS would not require the reporting of a Cancel/Replace Report each time the firm's system re-calculated the Trailing Stop Price. However, the firm's system will need to retain the lowest calculated Trailing Stop Price. In our example, the price of WXYZ declines to a low of $20.00 per share. It's lowest calculated trailing Stop Price would be $22.00 (i.e. Market Price of $20.00 X 110%). Should the market price for WXYZ begin to advance and hit or go through the lowest calculated Trailing Stop Price (i.e. $22.00 in our example), this would trigger a market order to buy the 500 shares of WXYZ. This would require the firm to generate an OATS Cancel/Replace Report with a timestamp at the time the market price hit or went through the lowest calculated Trailing Stop Price as well as other appropriate information. The Cancel/Replace Report would be for an order to buy 500 shares of WXYZ at market. Then the firm would transmit the market order to the appropriate market center for execution. The firm would need to generate an OATS Route Report providing the market center the market order was transmitted to, the number of shares and the security symbol, WXYZ, etc.