[Federal Register Volume 60, Number 20 (Tuesday, January 31, 1995)]
[Notices]
[Pages 5951-5952]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-2267]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-35268; File No. SR-CSE-95-01]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by Cincinnati Stock Exchange, Inc. Relating to Designated Dealer 
Market Quotations Requirements

January 24, 1995.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on January 
17, 1995, 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, II and III below, which 
Items have been prepared by the self-regulatory organization. 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 CSE hereby proposes to amend Rule 11.9 by revising spread 
parameter requirements for Designated Dealers (``DDs''), which have 
been part of the Exchange's quality market policy, and by imposing new 
requirements on market quotes entered by DDs.
    The text of the proposed rule change to CSE Rule 11.9(c) is as 
follows, with additions in italics:
    Interpretations and Policies:
    .01  Except during unusual market conditions or as otherwise 
permitted by an Exchange Official, the maximum allowable spread that 
may be entered by a Designated Dealer in a particular security shall be 
125% (rounded out to the next \1/8\ point increment) of the average of 
the three narrowest applicable spreads in that security. Applicable 
spreads shall include the inside quote of CSE and all ITS Participant 
market centers. In no event shall the maximum allowable spread that a 
Designated Dealer is required to quote be less than \1/4\ point. 
Nothing in this paragraph, however, shall prohibit a Designated Dealer 
from entering a quote whose bid/ask spread is less than \1/4\ point.
    .02  Designated Dealers shall not furnish bid-asked quotations that 
are generated by an automated quotation tracking system (such as the 
Autoquote system or the Centramart system employed by certain ITS 
Participants).
    .03  Except during unusual market conditions or as otherwise 
permitted by an Exchange official, the average firmwide quote-to-trade 
ratio for Designated Dealers shall not exceed ten-to-one. This ratio 
shall be measured on a quarterly basis.

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 self-regulatory organization 
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 self-regulatory organization 
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 purpose of the proposed rule change is to enhance the quality 
of the CSE's market. First, the Exchange seeks to prohibit the 
furnishing of ``bid-asked quotations which are generated by an 
automated quotation tracking system.'' This prohibition broadens the 
current quotation restrictions contained in Section 8(d)(2) of the 
Intermarket Trading System (``ITS'') Plan, which limits such quotations 
to a size of 100 shares. Second, the Exchange seeks to impose a 
requirement that competing specialists spread their quotations no more 
than 125% of the average of the three best quote spreads provided by 
all markets that participate in the national market system. Finally, 
the Exchange proposes to require that the average firmwide quote-to-
trade ratio for competing specialists, measured on a quarterly basis, 
not exceed ten-to-one.
    The CSE is the first exchange to propose the complete elimination 
of autoquoting. Currently, regional exchange specialists use 
autoquoting as a means to technically comply with their obligation to 
provide continuous two-sided markets. The CSE believes that it is 
generally agreed that autoquoted markets provide no meaningful 
liquidity to the national market system: they are usually away from the 
NBBO; they must be limited to 100 shares by ITS rules; and they are 
exempt from ITS's national price protection rules, which means that 
they can be traded through without penalty. If extended to all 
exchanges, the CSE believes that the elimination of autoquoting would 
reduce capacity [[Page 5952]] demands on the consolidated quotation 
system and significantly enhance the transparency of the national 
market system.
2. Statutory 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 is intended to promote just and equitable principles of 
trade and to remove impediments to and perfect the mechanism 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 proposed rule change is similar to that contained within File 
No. SR-CSE-94.11, which was circulated to ITS Participants and which 
has been withdrawn by the Exchange. The CSE received comments on SR-
CSE-94-11 from the New York Stock Exchange, Inc. (``NYSE'').\1\ The 
NYSE reiterated the positions it took on autoquoting, spread 
parameters, and quote-to-trade ratios in an earlier comment letter that 
was filed in response to File No. SR-CSE-94-01,\2\ the CSE's earlier 
quality of markets filings.\3\ In brief, the NYSE questioned the 
effectiveness of spread parameter and quote-to-trade ratios in 
improving market quality, and alleged that the CSE was attempting to 
codify a practice that violated the ITS Plan by permitting specialists 
to disseminate computer-generated quotes, all forms of which, the NYSE 
argued, were autoquoting. The NYSE acknowledged, however, in a letter 
dated September 15, 1994, that ``the method of autoquoting in and of 
itself is not the issue'' as much as the impact on market quality which 
flows from it.\4\

    \1\See letter from James K.C. Doran, NYSE, to David Colker, CSE, 
dated December 22, 1994.
    \2\See letter from James Buck, NYSE, to Jonathan Katz, 
Secretary, SEC, dated May 16, 1994 (commenting on File No. SR-CSE-
94-01). This and other comment letters received by the Commission 
regarding SR-CSE-94-01 and SR-CSE-94-11 are available in the public 
file for this proposed rule change (File No. SR-CSE-95-1).
    \3\The CSE withdrew SR-CSE-94-01 on December 22, 1994. See 
letter from Robert Ackerman, to Sharon Lawson, SEC, dated December 
22, 1994.
    \4\See letter from James K.C. Doran, NYSE, to ITS Operating 
Committee, dated September 15, 1994.
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    The CSE responded in depth to the NYSE's earlier comments in a 
letter dated July 29, 1994, and the Exchange incorporates, by 
reference, that response here.\5\ Partly in response to industry 
comment, the CSE withdrew SR-CSE-94-01 and replaced it with SR-CSE-94-
11, which has been withdrawn and replaced with this filing. In both of 
the recent filings, the CSE has simplified its autoquote prohibition by 
utilizing the language contained in Section 8(d)(ii) of the ITS Plan. 
The CSE believes that the elimination of autoquoting, as proposed by 
the CSE, will contribute significantly to the transparency and 
liquidity of the national market system without stifling the benefits 
of competition and technical innovation.

    \5\See letter from David Colker, CSE, to Jonathan G. Katz, 
Secretary, SEC, dated July 29, 1994.
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III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the publication of this notice in the Federal 
Register or within such other 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 the 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, N.W., Washington, D.C. 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 at the 
Commission's Public Reference Section, 450 Fifth Street, N.W., 
Washington, D.C. 20549. Copies of such 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-95-01 and should be 
submitted by February 21, 1995.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-2267 Filed 1-30-95; 8:45 am]
BILLING CODE 8010-01-M