Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”), and Rule 19b-4 thereunder, notice is hereby given that on November 30, 2001, the Cincinnati Stock Exchange, Inc. (“CSE” or “Exchange”) filed with the Securities and Exchange Commission (“Commission”) the proposed rule change as described in Items I and II below, which Items have been prepared by the Exchange. On April 22, 2002, the CSE filed Amendment No. 1 to the proposal. On April 26, 2002, the CSE filed Amendment No. 2 to the proposal. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons and to grant accelerated approval of the proposed rule change for a pilot period until September 30, 2002.
17 CFR 240.19b-4.
In Amendment No. 1, the CSE requested that the proposal be converted to pilot status and that the pilot expire on September 30, 2002. See Letter from Jeffrey T. Brown, Senior Vice President and General Counsel, CSE, to Katherine England, Assistant Director, Division of Market Regulation (“Division”), SEC (April 19, 2002).
In Amendment No. 2, the CSE requested that additional proposed rule language be added to the proposal so that the rule would apply in instances when the customer limit order is not at the national best bid or offer (“NBBO”), rather than just instances when the customer limit order is at the NBBO. See Letter from Jeffrey T. Brown, Senior Vice President and General Counsel, CSE, to Katherine England, Assistant Director, Division, SEC (April 25, 2002).
I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change
The Exchange proposes to amend CSE Rule 12.6, Customer Priority, by adding new Interpretation .02, which will require a CSE Designated Dealer (“Specialist”) to better the price of a customer limit order that is held by that Specialist if that Specialist determines to trade with an incoming market or marketable limit order. Under the rule, the Specialist will be required to better a customer limit order at the NBBO by at least one penny and at a price outside the current NBBO by at least the nearest penny increment. The Exchange is requesting approval of the proposed rule change on a pilot basis, through September 30, 2002. The text of the proposed rule change is set forth below. Proposed new language is in italics; proposed deletions are in brackets.
Chapter XII
Rule 12.6 Customer Priority
(a)-(c) No change.
Interpretations and Policies:
.01—No change.
.02(a)—A Designated Dealer shall be deemed to have violated Rule 12.6 if, while holding a customer limit order (as rounded to a penny increment) representing the NBBO, the Designated Dealer, for his own account, trades with an incoming market or marketable limit order at a price which is less than one penny better than the price of such customer limit order (not the quoted price) held by such Designated Dealer.
.02(b)—A Designated Dealer shall be deemed to have violated Rule 12.6 if, while holding a customer limit order (as rounded to a penny increment) at a price outside the current NBBO, the Designated Dealer, for his own account, trades with an incoming market or marketable limit order at a price which is less than the nearest penny increment to the actual price of the customer limit order (not the quoted price) held by such Designated Dealer.
II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item III below. The Exchange has prepared summaries, set forth in Sections A, B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend Exchange Rule 12.6 by adding an interpretation to the rule covering the trading of Nasdaq National Market (“NNM”) and SmallCap securities in subpenny increments. New Interpretation .02 to the Rule will require a Specialist to better the price of a customer limit order held by the Specialist by at least one penny (for those customer limit orders at the NBBO) or by at least the nearest penny increment (for those customer limit orders that are not at the NBBO) if the Specialist determines to trade with an incoming market or marketable limit order.
CSE Rule 12.6 provides, in pertinent part, that no member shall (i) personally buy or initiate the purchase of any security traded on the Exchange for its own account or for any account in which it or any associated person of the member is directly or indirectly interested while such a member holds or has knowledge that any person associated with it holds an unexecuted market or limit price order to buy such security in the unit of trading for a customer, or (ii) sell or initiate the sale of any such security for any such account while it personally holds or has knowledge that any person associated with it holds an unexecuted market or limit price order to sell such security in the unit of trading for a customer.
In conjunction with this proposed rule change, the CSE is requesting that the Commission grant exemptive relief pursuant to Rules 11Ac1-1(e)(17 CFR 240.11Ac1-1(e)), 11Ac1-2(g) (17 CFR 240.11Ac1-2(g)) and 11Ac1-4(d) (17 CFR 240.11Ac1-4(d)) to allow subpenny quotations to be rounded down (buy orders) and rounded up (sell orders) to the nearest penny for quote dissemination (“Exemptive Request”). See Letter to Annette Nazareth, Director, Division of Market Regulation (“Division”), Commission, from Jeffrey T. Brown, General Counsel, CSE (November 27, 2001).
Interpretation .01 to Rule 12.6 provides that “[i]f a Designated Dealer holds for execution on the Exchange a customer buy order and a customer sell order that can be crossed, the Designated Dealer shall cross them without interpositioning itself as a dealer.”
The purpose of the new Interpretation is to prevent a Specialist from taking unfair advantage of customer limit orders held by that Specialist by trading ahead of such orders with incoming market or marketable limit orders. Notwithstanding the fact that a Specialist may price-improve incoming orders by providing prices superior to that of customer limit orders it holds, customers should have a reasonable expectation to be filled at their limit order prices. This expectation should be reflected in reasonable access to incoming contra-side order flow, unless other customers place better-priced limit orders with the Specialist or the Specialist materially improves upon the customer limit order prices (not the customers' quoted prices) it holds.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent with the provisions of Section 6(b) of the Act, in general, and Section 6(b)(5) of the Act, in particular, which requires, among other things, that the rules of an exchange be designed to promote just and equitable principles of trade, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest. The Exchange requests that this rule be approved on a pilot basis until September 30, 2002, to be co-extensive with: (a) The conditional temporary exemptive relief requested in the Exemptive Request ; (b) the Chicago Stock Exchange's (“CHX's”) similar pilot related to customer limit order protection; and (c) the National Association of Securities Dealers, Inc.'s similar pilot related to customer limit order protection.
15 U.S.C. 78f(b)(5).
See Letter from Robert L.D. Colby, Deputy Director, Division, Commission, to Jeffrey T. Brown, General Counsel, CSE (July 26, 2002) (“Exemptive Relief Letter”). The letter outlines several other conditions to trading in subpenny increments. The Commission will examine data provided by the CSE as specified in the Exemptive Relief Letter and information provided by all self-regulatory organizations as required by the Commission's order concerning decimals implementation. See Exchange Act Release No. 42914 (June 8, 2000), 65 FR 38010 (June 19, 2000). The Commission intends to reconsider the position expressed in its letter (July 26, 2002) before the expiration of the exemption on September 30, 2002.
See Exchange Act Release No. 45755 (April 15, 2002), 67 FR 19607 (April 22, 2002).
See Exchange Act Release No. 45762 (April 16, 2002), 67 FR 19787 (April 23, 2002).
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received from Members, Participants or Others
The Exchange has neither solicited nor received written comments on the proposed rule change.
III. Solicitation of Comments
Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Persons making written submissions should file six copies thereof with the Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for inspection and copying in the Commission's Public Reference Room. Copies of such filing will also be available for inspection and copying at the principal office of the Exchange. All submissions should refer to File No. SR-CSE-2001-06 and should be submitted by August 26, 2002.
IV. Commission's Findings and Order Granting Accelerated Approval of Proposed Rule Change
The Commission finds that the proposed rule change is consistent with the Act and the rules and regulations thereunder applicable to a national securities exchange, and, in particular Section 6(b)(5) of the Act. Simultaneous with the filing of this proposal, the Commission received a request for exemptive relief submitted by the Exchange that would allow the Exchange, Exchange members, and vendors that disseminate Exchange quote information to display and disseminate their quotes for NNM and SmallCap securities in penny increments, while trading in sub-penny increments. By letter dated July 26, 2002, the Division, pursuant to delegated authority under Rules 11Ac1-1(e), 11Ac1-2(g), and 11Ac1-4(d) under the Act, granted a conditional temporary exemption to the Exchange, Exchange members, and vendors that disseminate CSE quote information to permit them to display and disseminate their quotes for NNM and SmallCap securities in rounded, penny increments without a rounding identifier. The exemption expires September 30, 2002. The Commission believes that the proposed rule change should help to provide protection to customer limit orders in the subpenny trading environment by helping to ensure that such orders will continue to have access to market liquidity ahead of Exchange Specialists in appropriate circumstances.
In granting approval of the proposal, the Commission has considered the proposal's impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
15 U.S.C. 78f(b)(5).
See Exemptive Request, supra note 6.
17 CFR 240.11Ac1-1(e).
17 CFR 240.11Ac1-2(g).
17 CFR 240.11Ac1-4(d).
See Exemptive Relief Letter, supra note 10.
The Commission finds good cause for approving the proposed rule change on a pilot basis prior to the thirtieth day after the date of publication of notice of filing thereof in the Federal Register. The Commission believes that granting accelerated approval to the proposed rule change will allow the Exchange to continue to provide protection to customer limit orders in subpenny increments for NNM and SmallCap securities. Moreover, the Commission believes that approving the proposal on an accelerated basis should help to ensure fair competition among the CSE, the CHX, and the Nasdaq Stock Market, Inc.
V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the Act, that the proposed rule change (SR-CSE-2001-06) is hereby approved on an accelerated basis for a pilot period ending on September 30, 2002.
For the Commission, by the Division of Market Regulation, pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-19616 Filed 8-2-02; 8:45 am]
BILLING CODE 8010-01-P