[Federal Register Volume 59, Number 126 (Friday, July 1, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-16038]


[[Page Unknown]]

[Federal Register: July 1, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34258; File No. SR-CSE-94-06]

 

Self-Regulatory Organizations; Cincinnati Stock Exchange, Inc.; 
Notice of Filing of Proposed Rule Change To Amend and Extend the Pilot 
Program on the Floor of the Exchange Relating to the Preferencing of 
Public Agency Market and Marketable Limit Orders by Approved Dealers 
and Other Proprietary Members

June 24, 1994.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 
1934, 15 U.S.C. 78s(b)(1), notice is hereby given that on June 24, 
1994, the Cincinnati Stock Exchange, Incorporated (``CSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II 
and III below, which Items have been prepared by the CSE. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to extend through May 18, 1995, its pilot 
program which governs preferenced trading. The Commission originally 
approved this pilot on February 7, 1991.\1\ In connection with this 
extension of the pilot, the Exchange is also proposing certain changes 
to its rules.
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    \1\See Securities Exchange Act Release No. 28866 (Feb. 13, 
1991), 56 FR 5854.
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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 CSE 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 IV below. The CSE has prepared summaries, set forth in sections 
(A), (B), and (C) below, of the most significant parts of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

(1) Purpose
    The purpose of the proposed new rule is to extend through May 18, 
1995, the Exchange's pilot program which governs preferenced trading. 
The Commission originally approved this pilot in February, 1991,\2\ and 
subsequently extended the pilot several times.\3\ The pilot is 
currently approved through August 6, 1994. The Commission's staff has 
requested that the Exchange seek a further extension up to the 
expiration of the recently-approved pilot preferencing program of the 
Boston Stock Exchange (``BSE'')\4\ so that the Commission can 
consolidate its future review of the preferencing programs of the 
various exchanges. The CSE requests no change at this time in the 
conditions under which its pilot currently operates.\5\
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    \2\See Id.
    \3\See Securities Exchange Act Release Nos. 29524 (Aug. 5, 
1991), 56 FR 38160; 30353 (Feb. 7, 1992), 57 FR 5918; 31011 (Aug. 7, 
1992), 57 FR 38704; 32280 (May 7, 1993), 58 FR 28422; and 33975 
(April 28, 1994), 59 FR 23243.
    \4\See Securities Exchange Act Release No. 34083 (May 18, 1994), 
59 FR 36229.
    \5\These conditions limit the number of issues in which a 
preferencing dealer may be registered; require the Exchange provide 
certain information to the Commission; prohibit preference trading 
for index arbitrage purposes when ``circuit breakers'' are in 
effect; and prohibit the preferencing of any order which the 
preferencing dealer has purchased from the customer for a direct 
cash payment. With respect to the furnishing of information to the 
Commission, the Exchange has agreed to certain new requirements 
described herein.
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    As part of a recent analysis of its preferencing program, the 
Exchange has reviewed the five recommendations of the Division of 
Market Regulation in Market 2000: An Examination of Current Equity 
Market Developments.\6\ In order to support the Division's efforts, the 
Exchange proposes to codify the Division's recommendations by adopting 
the rule changes described below.
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    \6\See Division of Market Regulation, Securities and Exchange 
Commission, Market 2000: An Examination of Current Equity Market 
Developments (``Market 2000''), Study III, p. 14 (Jan. 1994).
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    The first recommendation in Study III of Market 2000 is that 
dealers should expose customer limit orders that are priced better than 
the existing Intermarket Trading System (``ITS'') best bid or offer, 
unless a customer expressly requests that the order not be exposed. 
With respect to this recommendation, the Exchange proposes to add the 
following interpretive language to CSE Rule 12.10,\7\ the Exchange's 
``best execution'' rule:
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    \7\Rules of the Cincinnati Stock Exchange, Rule 12.10.

    As part of a member's fiduciary obligation to provide best 
execution for its customer orders, the member shall expose to the 
national market system all or a representative portion of any limit 
order which is priced either on or between the national best bid and 
offer, unless (1) such order is immediately executed, or (2) the 
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customer expressly requests that the order not be exposed.

    The above language goes beyond the Division's recommendation by 
requiring that orders priced at the national best bid or offer 
(``NBBO'') be exposed in addition to any orders priced between the 
NBBO. Moreover, in order to encourage all members to place public 
agency limit orders on the CSE book, the Exchange also proposes to 
amend CSE Rule 11.10(e)\8\ to eliminate the transaction charge on 
public agency limit orders.
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    \8\Rules of the Cincinnati Stock Exchange, Rule 11.10(e).
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    Second, the Division recommends that dealers should not trade ahead 
of customer limit orders. This recommendation is currently codified in 
CSE Rule 12.6,\9\ the Exchange's ``customer priority'' rule. This rule 
provides that no member may buy or sell a security for its own account 
when it holds an unexecuted customer market or like-priced limit order 
in that security.
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    \9\Rules of the Cincinnati Stock Exchange, Rule 12.6.
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    Third, the Division recommends that, if a dealer holds a customer 
buy order and a customer sell order that can be crossed, the dealer 
should cross those orders without interposing itself as dealer. The CSE 
has historically interpreted its Rule 12.6 to require the crossing of 
like-priced customer buy and sell orders. This requirement is a logical 
extension of the prohibition against trading ahead of customer orders 
contained in Rule 12.6. In order to remove any doubt, however, the CSE 
proposes to codify the Division's recommendation by adding the 
following interpretive language to Rule 12.6:

    If a Designated Dealer holds for execution a customer buy order 
and a customer sell order that can be crossed, the Designated Dealer 
shall cross them without interposing itself as dealer.

    Fourth, the Division recommends that dealers establish and adhere 
to fixed standards for queuing and executing customer orders. The 
Exchange has historically interpreted language in Chapter III--Rules of 
Fair Practice\10\ and Chapter V--Supervision\11\ of its rules to 
require such standards. Chapters III and V impose a wide range of 
obligations on members, specifically, Rule 3.6--Fair Dealing with 
Customers, mandates that all members have a responsibility for fair 
dealing with customers and Rule 5.1--Written Procedures, requires that 
members establish and enforce written procedures so that they can 
adequately supervise their employees and assure their compliance with 
applicable laws and regulations. Again, however, to remove any doubt on 
the subject, the Exchange proposes to codify the Division's 
recommendation by adding the following interpretive language to Rule 
3.6:
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    \10\Rules of the Cincinnati Stock Exchange, Chapter III.
    \11\Rules of the Cincinnati Stock Exchange, Chapter V.

    Designated Dealers who handle customer orders on the Exchange 
shall establish and enforce fixed standards for queuing and 
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executing customer orders.

    Fifth, the Division recommends that dealers should not trade at a 
price outside the ITS best bid or offer without satisfying the market 
interest at that price, in accordance with ITS trade-through and block 
policies. This recommendation is automatically enforced today by the 
Exchange's National Securities Trading System (``NSTS'').
    Finally, in order to gauge the impact of the preferencing program 
on the CSE and on the national market system, the Exchange agrees to 
provide the Commission with quarterly reports similar to those required 
of the BSE as part of its preferencing program pilot. These reports 
will provide the following information:

    (1) A list indicating how many preferencing specialists are on 
the exchange and the issues in which they make markets.
    (2) The volume of preferenced trades and shares and the 
percentage of total CSE trade and share volume that preferenced 
activity represents.
    (3) The CSE's volume attributable to ITS commitments sent by 
other ITS participants and the percentage of such commitments which 
are in issues which have preferencing specialists.
    (4) The number of preferenced orders effected against the NSTS 
limit order book.
    (5) The percentage of time that the CSE improves and matches the 
NBBO, and the percentage of time that the CSE achieves price 
improvement for customer orders when the market is wider than \1/
8\th point.
    (6) The CSE's share of Consolidated Tape trade reports, as 
compared to its share on the commencement date of this extension.

    Although the BSE is not currently required to provide NBBO and 
price improvement data, the CSE is offering to provide this additional 
data because it believes that such data would be helpful to the 
Commission in accurately assessing the contribution of preferencing to 
the national market system.
(2) Basis
    The proposed rule change is consistent with Section 6(b) of the Act 
in general and furthers the objectives of Section 6(b)(5) in particular 
in that it promotes just and equitable principals of trade and removes 
impediments to and perfects the mechanisms of a free and open market 
and a national market system.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The CSE does not believe that the proposed rule change will impose 
any inappropriate burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received from Members, Participants or Others

    The CSE solicited comments on the original filing regarding its 
preferencing pilot program from the ITS participants. See File No. SR-
CSE-90-06. The CSE has not solicited comment with regard to the 
additional changes set forth herein.

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve such proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549. 
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 the filing will also be 
available for inspection and copying at the principal office of the 
CSE. All submissions should refer to File No. SR-CSE-94-06 and should 
be submitted by July 22, 1994.

    For the Commission, by the Division of Market Regulation, 
pursuant to the delegated authority, 17 CFR 200.30-3(a)(12).
Jonathan G. Katz,
Secretary.
[FR Doc. 94-16038 Filed 6-30-94; 8:45 am]
BILLING CODE 8010-01-M