2.3 Philippine Stock Exchange (PSE) Structure and Trading

2.3 Philippine Stock Exchange (PSE) Structure and Trading

The Philippine Stock Exchange (PSE) is the sole licensed national securities exchange operating in the Philippines. It provides the central auction market and electronic infrastructure for capital raising and secondary trading of equity securities, exchange-traded funds, and real estate investment trusts.

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Corporate History and Self-Regulatory Mandate

Consolidation and Demutualization

Prior to 1992, the Philippine equities market was fragmented across two rival exchanges: the Manila Stock Exchange (MSE) (established in 1927) and the Makati Stock Exchange (MkSE) (founded in 1963). In December 1992, the two entities consolidated into the unified Philippine Stock Exchange.

Pursuant to Section 33 of the Securities Regulation Code (SRC / Republic Act No. 8799), the PSE underwent demutualization in 2001, transitioning from a non-stock, broker-owned membership association into a publicly held, for-profit stock corporation. In December 2003, the PSE listed its own shares on its exchange under the stock symbol PSE.

Self-Regulatory Organization (SRO) Status and CMIC

The PSE is recognized by the SEC as a Self-Regulatory Organization (SRO). In this capacity, the exchange possesses delegated regulatory authority to enforce listing rules, monitor trading participants (licensed brokerage firms), and maintain market orderliness.

To eliminate inherent conflicts of interest between commercial exchange operations and member regulation, the PSE spun off its regulatory and market surveillance divisions into a separate, independent corporate subsidiary: the Capital Markets Integrity Corporation (CMIC). CMIC is tasked with:

• Conducting routine and spot audits of broker-dealers' financial condition, books, and records.
• Enforcing the SEC's Risk-Based Capital Adequacy (RBCA) framework.
• Conducting real-time trade surveillance to detect market manipulation, insider trading, and abusive trading practices.

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PSE Listing Boards: Main Board vs. SME Board

The PSE maintains Main and Small, Medium and Emerging (SME) boards. Board classification changes the operating and financial eligibility tests; it does not displace the SEC's current public-ownership rules.

Current Minimum Public Ownership Framework

SEC Memorandum Circular No. 11, Series of 2026 uses expected market capitalization to set the initial public-ownership requirement for ordinary share issuers:

An eligible issuer with expected market capitalization of at least ₱200 billion may seek SEC approval for a lower initial percentage, but not below 12%. After listing, an ordinary issuer with market capitalization up to ₱50 billion generally maintains 20% public ownership; above ₱50 billion the maintenance level is 15%. A specially approved level continues to govern that issuer. REITs remain subject to their separate one-third public-ownership regime.

The PSE also operates a sponsor model for qualifying SME applicants that cannot satisfy the ordinary profitability or equity test. Sponsor-model eligibility is a separate route and should not be confused with automatic waiver of disclosure, suitability, or public-ownership obligations.

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PSEtrade XTS and the Daily Trading Phases

The PSE's investor information identifies PSEtrade XTS, based on Nasdaq X-stream technology, as its trading engine. Orders in the central order book follow price-time priority: a better-priced order ranks first, and an earlier order ranks first among orders at the same price.

Current Daily Schedule

The opening and closing auction phases concentrate orders to establish reference prices. The 3:00-to-3:15 p.m. VWAP session is distinct from the run-off phase: run-off uses the established closing price, while the later facility uses the volume-weighted average price computed by the exchange.

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Order Types and Time-in-Force Qualifiers

Primary Order Types

• Market Order: An order to purchase or sell a specified quantity of shares immediately at the best prevailing market prices available in the order book. Prioritizes execution speed over price certainty.
• Limit Order: An order to buy at or below a specified limit price, or sell at or above a specified limit price. Guarantees price protection but carries the risk of non-execution if market prices move away.
• Stop / Stop-Loss Order: An order that remains dormant until a trade occurs at or through a specified trigger price, at which point the order activates as an aggressive market or limit order.

Time-in-Force (TIF) Attributes

• Day Order: Valid only for the duration of the current trading day; any unexecuted balance is automatically cancelled at market close.
• Good-'Til-Cancelled (GTC): Retains validity across successive trading sessions until filled or cancelled by the trader (subject to PSE maximum validity duration limits).
• Immediate-or-Cancel (IOC): Demands immediate execution of any available volume upon arrival; any remaining unexecuted portion is immediately cancelled without resting in the book.
• Fill-or-Kill (FOK): Requires the order to be filled completely and immediately in its entirety; if insufficient shares exist at the price, the entire order is cancelled instantly.

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Volatility Safeguards: Thresholds and Circuit Breakers

Static Price Limits

The current ordinary daily trading band uses an upper static threshold of 50% above the previous reference or adjusted closing price and a lower static threshold of 30% below it. The lower limit was reduced from 50% to 30% in March 2020; describing the current band as symmetric ±50% is therefore incorrect. The exchange may apply rule-based exceptions or lift a threshold for a particular security when authorized.

Dynamic Thresholds

The dynamic threshold limits the permitted change between a security's new last traded price and its preceding last traded price. The percentage depends on trading frequency: 20% for the least frequently traded cluster, 15% for the middle cluster, and 10% for the most frequently traded cluster. Dynamic thresholds are percentage controls, not a generic two-or-three-tick rule.

Three-Level Market-Wide Circuit Breaker

The circuit breaker is based on the PSEi's decline from the previous trading day's closing level:

Each level can be activated only once in a trading day. If a higher level is breached first, a lower level is not subsequently activated that day. A halt is not triggered when it would leave fewer than five minutes of continuous trading before pre-close. These controls address extraordinary market-wide volatility; the static and dynamic thresholds operate at the individual-security level.

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Clearing and Settlement: SCCP and the T+2 Cycle

Securities Clearing Corporation of the Philippines (SCCP)

The SCCP is a wholly owned subsidiary of the PSE licensed by the SEC as a clearing agency. The SCCP operates as the Central Counterparty (CCP) for all trades executed on the PSE. Through the legal mechanism of novation, the SCCP interposes itself between the buying and selling brokers—becoming the buyer to every seller and the seller to every buyer—thereby centralizing settlement obligations and reducing bilateral counterparty exposure. The CCP manages, rather than abolishes, settlement and default risk.

The T+2 Settlement Cycle

Effective August 24, 2023, the Philippine equities market officially transitioned its rolling settlement cycle from T+3 to T+2:

• Trades executed on Trade Date (T) formally clear and settle two business days later (T+2).
• On settlement day, cash and securities are exchanged simultaneously via Delivery Versus Payment (DVP).
• Scrip-less book-entry transfer of shares is executed within the Philippine Depository & Trust Corp. (PDTC), while cash transfers are finalized through SCCP-designated clearing commercial banks.

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Practical Exam Traps

• Settlement Timeline Trap: Be alert to outdated references claiming a T+3 settlement cycle. The Philippine equity market operates strictly on T+2.
• Run-Off Order Trap: During the Run-Off (Trading-at-Last) phase between 14:50 and 15:00, brokers cannot enter new limit prices. Orders must be submitted strictly at the established closing price.
• Tiered Public Float Trap: SEC MC No. 11, Series of 2026 replaced a universal 20% IPO rule. Initial public ownership is 33% up to ₱500 million expected market capitalization; 25% above ₱500 million through ₱1 billion (minimum ₱165 million offer); 20% above ₱1 billion through ₱50 billion (minimum ₱250 million offer); and 15% above ₱50 billion (minimum ₱10 billion offer). An issuer expected to be worth at least ₱200 billion may receive approved relief, but never below 12%.

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From primary issuance to secondary trading

The primary market transfers newly issued securities from an issuer to investors. An underwriter may buy the issue as principal or use best efforts to place it, and the issuer receives the net proceeds. After issuance, clearing, and delivery, the same security may enter the secondary market, where investors trade with one another. The issuer ordinarily receives no proceeds from those resales, but liquid secondary trading can lower the return investors demand in later primary offerings.

A market maker is a dealer that stands ready to quote both a bid and an offer in a specified security. The bid is the price at which the dealer will buy; the offer is the price at which it will sell. The bid-offer spread compensates the dealer for inventory, funding, operational, and adverse-selection risk. Market making supports continuity and price discovery, but it is not a promise that price cannot fall or that unlimited liquidity will always exist.

Market participants have distinct roles: issuers create claims; investors supply capital and bear investment risk; brokers act as agents; dealers trade as principals; underwriters distribute primary issues; transfer agents maintain ownership records; custodians safeguard assets; clearing agencies calculate obligations; depositories immobilize or dematerialize securities; exchanges and other self-regulatory organizations administer market rules subject to SEC oversight.

Foreign securities and Philippine regulation

A foreign security is issued by a foreign government or an entity organized outside the Philippines. Currency exposure, different accounting standards, sovereign and political risk, foreign settlement conventions, and the enforceability of investor rights add to ordinary credit and market risk. Foreign status does not itself create an exemption from Philippine law. An offer or sale in the Philippines must be registered under the SRC unless a statutory exemption applies, and an exchange-listed instrument must also satisfy the relevant exchange, disclosure, clearing, and custody requirements.

Fixed-income market institutions and international standards

The PDS group provides organized infrastructure for fixed-income dealing, disclosure, depository, and settlement functions, including the PDEx market. Within that market, the Market Governance Board (MGB) is the rule-making body responsible for creating and enhancing PDEx market rules. Its nine governors comprise four industry representatives drawn from issuers, intermediaries, and investors, four independent governors, and one governor representing PDEx as market operator. Standing committees chaired by independent governors develop rules for trading, settlement, listing, and systemic-risk matters; PDEx's Market Regulatory Services Group and Market Compliance and Enforcement Committee perform the separate surveillance and disciplinary functions. PDEx rules and amendments remain subject to SEC approval. This structure separates market governance from the commercial business of the market operator. The PSE, PDEx, and CMIC perform self-regulatory or front-line market functions within authority recognized and supervised by the SEC; they do not replace the SEC's statutory jurisdiction.

The SEC also participates in the international regulatory community associated with IOSCO. IOSCO principles emphasize investor protection, fair and transparent markets, reduction of systemic risk, cooperation, enforcement, and effective supervision of issuers, intermediaries, exchanges, and clearing infrastructure. For an exam scenario, identify the function first: registration and enforcement ultimately belong to the SEC, while an SRO administers its approved rules and conducts front-line surveillance subject to SEC oversight.