[Federal Register Volume 62, Number 78 (Wednesday, April 23, 1997)]
[Notices]
[Pages 19846-19849]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-10517]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38520; File No. 4-208]


Intermarket Trading System; Notice of Filing of Proposed Twelfth 
Amendment to the ITS Plan Relating To Amending the Pre-Opening 
Application, Deleting Text That Is No Longer Applicable, and To Make 
Technical Amendments

April 17, 1997.
    Pursuant to Rule 11Aa3-2 under the Securities Exchange Act of 1934 
(``Act''), notice is hereby given that on January 31, 1997, the 
Intermarket Trading System (``ITS'') submitted to the Securities and 
Exchange Commission (``Commission'') an amendment (``Twelfth 
Amendment'') to the restated ITS Plan.\1\ The purpose of the amendment 
is to amend the Pre-Opening Application, to delete text that, by its 
terms, is no longer applicable, and to make several technical 
amendments to the Plan. The Commission is publishing this notice to 
solicit comments on the amendment from interested persons.
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    \1\ The ITS is a National Market System (``NMS'') plan approved 
by the Commission pursuant to Section 11A of the Act and Rule 11Aa3-
2. Securities Exchange Act Release No. 19456 (January 27, 1983), 48 
FR 4938.
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    The ITS is a communications and order routing network linking eight 
national securities exchanges and the electronic over-the-counter 
(``OTC'') market operated by the National Association of Securities 
Dealers, Inc. (``NASD''). The ITS was designed to facilitate 
intermarket trading in exchange-listed equity securities based on 
current quotation information emanating from the linked markets.
    Participants to the ITS Plan include the American Stock Exchange, 
Inc. (``Amex''), the Boston Stock Exchange, Inc. (``BSE''), the Chicago 
Board Options Exchange, Inc. (``CBOE''), the Chicago Stock Exchange, 
Inc. (``CHX''), the Cincinnati Stock Exchange, Inc. (``CSE''), the 
NASD, the New York Stock Exchange, Inc. (``NYSE''), the Pacific Stock 
Exchange, Inc. (``PSE''), and the Philadelphia Stock Exchange, Inc. 
(``PHLX'').

I. Description of the Amendment

    The purpose of the amendment is to trigger the use of the Pre-
Opening whenever an ``indication of interest'' (i.e., an opening price 
range) is sent to the Consolidated Tape System (``CTS'') prior to the 
opening or reopening of trading in a System security, to delete text 
that, by its terms, is no longer applicable, and to make technical 
revisions to update the rules. The amended language is as follows.
    To cause Section 1(4) to read as follows:
    (4) (``CAES'') means the ``Computer Assisted Execution System'', 
the computerized order routing and execution facility, as from time to 
time modified or supplemented, that is operated by The Nasdaq Stock 
Market, Inc. (``Nasdaq''), a wholly-owned subsidiary of the NASD, and 
that is supervised and surveilled by the NASD and made available to 
NASD members by Nasdaq. CAES is not part of the System.
    To cause Section 1(5) to read in full as follows:
    (5) ``CAES Supervisory Center'' means the premises of Nasdaq at 
which is located the ITS supervisory station that monitors the ITS/CAES 
Third Market as described in section 5(a)(i).
    To cause Section 1(11) to read in full as follows:
    (11) ``Exchange (Participant's) Market'' means the floor(s) of an 
Exchange Participant, except that, in the case of the CSE, ``Exchange 
(Participant's) Market'' means in addition to the premises on which 
NSTS terminals are located, NSTS and ITS stations located in the NSTS 
Supervisory Center.
    To cause Section 1(17) to read in full as follows:
    (17) ``ITS/CAES security (stock)'' means a security (stock) (a) 
that is a System security, (b) that is a 19c-3 security and (c) as to 
which one or more ITS/CAES Market Makers are registered as such with 
the NASD for the purposes of the Applications. When used with reference 
to a particular ITS/CAES Market Maker, ``ITS/CAES security'' means any 
such security (stock) as to which the particular ITS/CAES Market Maker 
is so registered.
    To delete Section 1(24):
    (24) ``NASD Pilot Phase.'' [Deleted]
    To delete Section 1(27A):
    (27A) ``NSTS/ITS Automated Linkage Commencement Date.'' [Deleted]
    To cause Section 5(b)(ii) to read in full as follows:
    (ii) Selection of System Securities. The System is designed to 
accommodate trading in any Eligible Security in the case of Exchange 
Participants and, in the case of any ITS/CAES Market Maker, trading in 
the one or more ITS/CAES securities in which he is registered as such 
with the NASD for the purposes of the Applications. The particular 
securities that may be traded through the System at any time (``System 
securities'') shall be selected by the Operating Committee. The 
Operating Committee may add or delete System securities as it deems 
appropriate and may delay the commencement of trading in any Eligible 
Security if capacity or other operational considerations shall require 
such delay. ITS/CAES securities may be traded by Exchange Participants 
and ITS/CAES Market Makers as provided in the ITS Plan and other System 
securities may be traded by Exchange Participants as provided in the 
ITS Plan.
    To cause the first paragraph of Section 6(a)(i)(B) to read in full 
as follows:
    (B) Furnishing of Quotations. As to each System security that is 
traded on its floor or otherwise in its Exchange Market, each Exchange 
Participant shall furnish, or cause to be furnished, to each 
``receiving Participant Market'' as defined below, or to a person 
acting therefor, the current bid-asked quotation emanating from its 
trading floor or otherwise from its Exchange Market. The NASD, as to 
each ITS/CAES security, agrees to collect, or cause to be collected, 
from each ITS/CAES Market Maker registered as such with the NASD for 
the purposes of the Applications each current bid price and each 
current offer price as made by such ITS/CAES Market Maker, each such 
bid and offer to be accompanied by size. For each ITS/CAES security, 
the NASD or its agent (1) shall select the best bid price and the best 
offer price from the bid prices and offer prices so collected and (2) 
shall furnish, or cause to be furnished, to each Receiving Participant, 
or to a person acting therefor, such best bid price and best offer 
price, together with the sum of the sizes accompanying the bids and 
offers at the best bid price and best offer price (the ``ITS/CAES 
BBO''). As to any System security, a Participant Market is a 
``receiving Participant Market'' if (1) it is an Exchange Market in 
which the security is traded or (2) it is the ITS/CAES Third Market and 
the security is an ITS/CAES security in which one or more ITS/CAES 
Market Makers are registered as such with the NASD for the purposes of 
the Applications.

[[Page 19847]]

    To cause the second paragraph of Section 6(a)(ii) to read in full 
as follows:
    If a trade involves the CSE, the commitment to trade or a response 
thereto destined for or originating from the CSE will leave and enter 
the System through the NSTS Switch. In the foregoing example, a trade 
involving the CSE would occur as follows. Assume that the stock in 
question is also one of the stocks traded in the CSE's Exchange Market. 
Assume also that the continuously updated quotation display at the 
appropriate NYSE trading post shows that the best offer from other 
Participant Markets is one of 40\1/8\ on the CSE, rather than on the 
PSE. Having learned this information, the NYSE member may decide to 
attempt to buy the 100 shares for his customer from the 40\1/8\ offer 
on the CSE. By using an ITS station located on the NYSE trading floor, 
the broker would send, or cause to be sent, to NSTS a commitment to buy 
100 shares of the stock at 40\1/8\.
    To cause Section 6(b)(i) to read in full as follows:
    (b) Technical Matters. (i) Commitment Information, Expiration. A 
commitment to trade shall, at a minimum:

    (A) include the number or symbol which identifies both (1) one 
clearing member if originating in an Exchange Market or, if 
originating with an ITS/CAES Market Maker, the ITS/CAES Market Maker 
or the broker-dealer through whom he clears System trades and (2) 
the clearing corporation through which the trade shall be settled,
    (B) direct the commitment to a particular Participant Market,
    (C) specify the security which is the subject of the commitment,
    (D) designate the commitment as either a commitment to buy or a 
commitment to sell,
    (E) specify the amount of the security to be bought or sold, 
which amount shall be for one unit of trading or any multiple 
thereof,
    (F) specify (1) a price equal to the offer or bid price then 
being furnished by the destination Participant Market, which price 
shall represent the price at or below which the security is to be 
bought or the price at or above which the security is to be sold, 
respectively, (2) a price at the clean-up price in the case of a 
commitment to trade sent in compliance with a Participant's block 
trade policy adopted pursuant to section 8(d)(iii) or (3) that the 
commitment is a commitment to trade ``at the market'',
    (G) designate the commitment ``short'' or ``short exempt'' 
whenever it is a commitment to sell short; this will permit the 
short sale rule as in effect in the destination Participant Market 
to apply, and
    (H) specify the time period during which the commitment shall be 
irrevocable (if the time period is not specified in the commitment, 
the longer of the two available options shall be assumed by ITS).

    The commitment shall be irrevocable for that time period following 
acceptance by the System as is chosen by the sender of the commitment. 
ITS provides two time period options, known as ``T-1'' (one minute) and 
``T-2'' (two minutes). The sender of the commitment may designate which 
of the two options is to apply. The Operating Committee may from time 
to time change the length of the time period of either or both options.
    To cause the first paragraph of Section 6(b)(v) to read in full as 
follows:
    (v) Response Validation; Partial Executions. Each response to a 
commitment to trade must also be validated by the System when entered. 
The CID must compare with that of the original commitment. The 
response, if an execution, must represent the contra side of the 
original commitment. The response must (A) identify as the contra side 
one or more clearing members, (B) indicate that all of the one or more 
clearing members (or the rest of the clearing members, if one or more, 
but not all, clearing members are identified in the response) will be 
identified to the System through a subsequent ``names later'' message. 
If an execution is reported, the size executed must be equal to or 
smaller than the committed size. The execution price must equal or 
better the committed price. The validation process also assures that 
the commitment associated with the response has not been previously 
executed and has not expired through passage of time.
    To cause the second paragraph of Section 7(a) to read in full as 
follows:
    The Pre-Opening Application applies in two instances. First, it 
applies whenever a market maker in any Participant Market, in arranging 
an opening transaction in his market in a System stock, anticipates 
that the opening transaction will be at a price that represents a 
change from the stock's ``previous day's consolidated closing price'' 
of more than the ``applicable price change''. Second, it applies 
whenever an ``indication of interest'' (i.e., an anticipated opening 
price range) is sent to the CTA Plan Processor as required or permitted 
by the CTA Plan or a Participant Market's rules.
    To delete Section 7(d):
    (d) Commencement of Revised Pre-Opening Application. [Deleted]
    To cause Section 8(a) (ii) and (iii) to read in full as follows:
    (ii) CSE. No ITS station shall be located on the CSE floor except 
at the NSTS Supervisory Center, where it shall be accessible only to 
CSE employees. The components of NSTS other than NSTS terminals located 
on the CSE floor or on the premises of a particular NSTS User shall be 
accessible only to employees of the CSE or its facilities manager. Each 
NSTS terminal located otherwise than on the CSE floor or in the NSTS 
Supervisory Center shall be accessible only to and under the control of 
the NSTS User on whose premises the station is located and to his 
employees. The CSE shall assure that only Designated Dealers to whom a 
security is assigned receive pre-opening notifications in the security.
    (iii) NASD. Each ITS/CAES station shall be accessible only to the 
ITS/CAES Market Maker on whose premises the station is located and to 
his employees. The ITS station located at the CAES Supervisory Center, 
and components of CAES and of any other NASD-sponsored facility linked 
to the System other than those located on the premises of ITS/CAES 
Market Makers, shall be accessible only to employees of the NASD or its 
subsidiaries.
    To cause the first paragraph of Section 8(b) to read in full as 
follows:
    (b) Participant Trading Rules. The trading rules applicable in 
destination Participant Markets shall apply to commitments to trade 
received in such market and executions of commitments therein. For 
example, if a commitment to sell marked ``short'' is received in the 
NYSE, the commitment can result in an execution only in accordance with 
the short sale rule as in effect on the NYSE. A commitment to sell 
marked ``short'' and sent to the BSE can result in an execution only in 
accordance with the short sale rule as in effect on the BSE.
    To cause Section 8(e)(iv)(A)(3) to read in full as follows:
    (3) The calculation components are:

    A =``NSTS/ITS-Outgoing Agency Interest''; i.e., the number of 
shares entered in NSTS by NSTS Users during the calculation quarter 
that are reformatted by NSTS as commitments to trade and routed 
through the NSTS/ITS automated linkage to and executed in another 
Participant Market. Excluded from A are shares sent (a) as 
obligations to trade included in pre-opening responses, (b) pursuant 
to the CSE block trade policy adopted as anticipated by section 
8(d)(iii) or (c) for the proprietary accounts of Approved Dealers in 
stocks assigned to them or in which they are registered.
    B =``NSTS-Originating Agency Interest''; i.e., the number of 
shares entered in NSTS by NSTS Users during the calculation quarter 
that are either executed in NSTS or reformatted by NSTS as 
commitments to trade and routed through the NSTS/ITS automated 
linkage to and executed in another Participant Market. Excluded from 
B are shares entered in NSTS for the proprietary accounts of 
Approved Dealers in stocks assigned to them or in which they are 
registered that are either (e) executed in NSTS as a consequence of 
trading either with

[[Page 19848]]

a commitment to trade received from another Participant Market or 
with shares entered in NSTS for the account of another Approved 
Dealer in stocks assigned to him or in which he is registered or (f) 
reformatted by NSTS as commitments to trade and routed through the 
NSTS/ITS automated linkage to and executed in another Participant 
Market.
    CC =``NSTS/ITS-Incoming Dealer Executions (Constant Constant)''; 
i.e., a constant that equals one-fourth of the number of shares 
entered and executed in NSTS for the proprietary accounts of 
Approved Dealers and Contributing Dealers in stocks assigned to them 
or in which they are registered against commitments to trade 
received from other Participant Markets in 1985.
    IC =``NSTS/ITS-Incoming Dealer Executions (Incremental 
Constant)''; i.e., the larger of (h) CC and (i) one-half CC plus 
one-half of the number of shares entered and executed in NSTS during 
the calculation quarter for the proprietary accounts of Approved 
Dealers in stocks assigned to them or in which they are registered 
against commitments to trade received from other Participant 
Markets.

The CSE may elect to participate ``manually'' as to all or some stocks 
during all or part of a calendar quarter by arranging for CSE 
employees, acting on behalf of NSTS Users, to use either (j) the NSTS 
terminal located in the NSTS Supervisory Center to enter into NSTS 
interest that can result in the generation of commitments to trade and 
responses or (k) the ITS station located in the NSTS Supervisory Center 
as described in the sixth paragraph of section 6(a)(ii). If it does so 
during the calculation quarter, shares in those stocks executed during 
any period of ``manual'' participation are excluded from A, B and IC in 
calculating the Applicable Share Ceiling (but not in calculating the 
CSE/CTA Level) for the calculation quarter. Any development costs 
incurred to accommodate ``manual'' participation as described in clause 
(k) benefit the CSE alone for the purposes of section 11(a)(iii)(B).
    To cause Section (8)(e)(iv)(A)(6) to read in full as follows:
    (6) Subsections (1) and (5) shall not apply so long as the CSE/CTA 
Level has never exceeded 1.25 percent unless, first, the NSTS/ITS-
Outgoing Agency Interest (``A'') has exceeded its Applicable Share 
Ceiling during any calendar quarter (a ``nominal excess'') and, second, 
during the first ``Periodic Review'' (referred to below) that follows 
both the nominal excess and April 1, 1986, the CSE fails reasonably to 
justify the nominal excess and thereby to rebut the presumption that 
subsections (1) and (5) should apply thereafter in view of the 
occurrence of the nominal excess.
    To cause the first sentence of Section 8(e)(iv)(B) to read in full 
as follows:
    (B) Periodic Reviews. During the calendar quarter following each 
anniversary of April 1, 1986, the Participants shall assess whether to 
amend the ITS Plan to adjust the Applicable Share Ceilings, their 
application, any component of their calculation and the consequences of 
exceeding them.
    To cause Section 8(f)(v) to read in full as follows:
    (v) Nasdaq Clearing Corporation Arrangement. In order to enable the 
NASD to perform its settlement obligations as provided in section 9(d), 
Nasdaq shall maintain an arrangement with a registered clearing 
corporation meeting the criteria of section 5(b)(i) that provides that 
such clearing corporation shall book to an account of Nasdaq each side 
of System trade that (A) is identified as attributable to the ITS/CAES 
Third Market but (B) is not identified as constituted by one or more 
ITS/CAES Market Makers or clearing members acting on his or their 
behalf.
    To delete Section 8(f)(vi):
    (vi) CAES Modifications for Short Commitments. [Deleted]
    To cause Section 8(f)(vii) to read in full as follows:
    (vii) Nasdaq Representation. The NASD represents that Nasdaq, the 
operator of CAES, is a wholly-owned subsidiary of the NASD. The NASD 
shall cause Nasdaq to operate CAES in a manner consistent with the ITS 
Plan and to fulfill Nasdaq's obligations under the ITS Plan.
    To delete Section 10(d):
    (d) NASD Pilot Phase. [Deleted]
    To delete Section 10(e)(ii) (A) and (B):
    (ii) CSE Linkage. (A) Capacity Relief. [Deleted]
    (B) Terminal Interface Development Costs. [Deleted]
    To delete Section (a)(x) of Exhibit A:
    (x) ``Trading Halt'' [Deleted]
    To cause Section (b)(i)(B) of Exhibit A to read in full as follows:
    (B) Tape Indications--If the CTA Plan or the Exchange's rules 
require or permit that an ``indication of interest'' (i.e., an 
anticipated opening price range) in a security be furnished to the 
consolidated last sale reporting system prior to the opening of 
trading, or the reopening of trading following a halt or suspension in 
trading in one or more Eligible Listed Securities, then the furnishing 
of an indication of interest in such situations shall, without any 
other additional action required of the specialists, (1) initiate the 
Pre-Opening process, and, (2) if applicable, substitute for and satisfy 
the requirements of paragraphs (b)(i)(A)(1), (b)(i)(A)(2)(I) and 
(b)(i)(A)(2)(II). (While the furnishing of an indication of interest to 
the consolidated last sale reporting system satisfies the notification 
requirements of this rule, a specialist should also transmit the 
indication through the System in the format of a standardized pre-
opening administrative message.) In any such situation, the specialist 
shall not open or reopen the security until not less than three minutes 
after his transmission of the opening or reopening indication of 
interest. For the purposes of paragraphs (b)(ii)(A), (b)(ii)(B), 
(b)(iii) and (c), ``pre-opening notification'' includes an indication 
of interest furnished to the consolidated last sale reporting service.
    To cause Section (b)(ii)(B) of Exhibit A to read in full as 
follows:
    (B) Pre-Opening Responses from Open Markets--An Exchange specialist 
must accept only those pre-opening responses sent to the Exchange by 
market makers in other Participant markets prior to the opening of 
their markets for trading in the security.* Following a halt or 
suspension in trading on the Exchange, a specialist must accept only 
those pre-opening responses sent by market makers to the Exchange from 
other Participant markets that halted trading in the security 
contemporaneously with the Exchange and that had not resumed trading in 
the security at the time the pre-opening response is sent
    In the event that one or more market makers from Participant 
markets that have already opened trading in a security or, with respect 
to a halt or suspension in trading, either did not halt trading in a 
security contemporaneously with the Exchange, or has already resumed 
trading in a security, respond to a pre-opening notification in that 
security, the specialist need not, but may in his discretion, accept 
such responses for the purpose of inclusion in the opening or reopening 
transaction. In the event that a Participant market opens or, with 
respect to a halt or suspension in trading, resumes trading in a 
security subsequent to a market maker in that Participant market 
sending a pre-opening response but prior to the opening or reopening 
transaction on the Exchange, the market maker who sent the pre-opening 
response to the Exchange must confirm the pre-opening response by 
sending an administrative message through the System stating that the 
response remains valid; if the market maker fails to so confirm the 
pre-opening response, the specialist need not, but may in his 
discretion, accept the original response for the purpose of inclusion 
in the opening or reopening transaction.


[[Page 19849]]


    * For the purposes of this section, the market in a security is 
opened (or reopened) with either a trade or quotation, if trades are 
being reported to the Consolidated Tape and quotes are being 
disseminated on the Consolidated Quotation System.

    To cause Section (c)(ii) of Exhibit A to read in full as follows:
    (ii) Responses When the Exchange is Open--Notwithstanding paragraph 
(c)(i), an Exchange specialist who has received a pre-opening 
notification in any Eligible Listed Security in which he is registered 
as a specialist should not send a pre-opening response to the 
originator of such notification if (A) the market for trading in the 
security is open on the Exchange or (B) the Participant market from 
which the notification emanated had declared a halt or suspension in 
trading in such security, and the Exchange either had not halted 
trading in the security contemporaneously with the Participant Market 
or had resumed trading during the halt or suspension in trading. [*]

    * Note: The NASD shall implement a comparable provision in its 
rules to conform the restrictions on responses by ITS/CAES Market 
Makers to the provisions of paragraph (b)(ii)(B) above.

    To cause Section (c)(v) of Exhibit A to read in full as follows:
    (v) Use of System before Opening or Reopening--No Exchange member, 
whether acting as principal or agent, shall send an obligation to 
trade, commitment to trade or order in any security from the Exchange 
through the System to any other Participant market prior to the opening 
of trading in the security in the Participant market (or prior to the 
resumption of trading in the security in the Participant market 
following the initiation of a halt or suspension in trading in the 
security) until a pre-opening notification in the security has been 
issued from the other Participant market or, if no pre-opening 
notification is required, until the market in the security has opened 
in such other Participant market.
    To cause Section (c)(vii) of Exhibit A to read in full as follows:
    (vii) Request for Participation Reports--The ITS Plan anticipates 
that an Exchange member who has sent one or more obligations to trade 
in response to a pre-opening notification will request a report through 
the System as to his participation if he does not receive a report as 
required promptly following the opening. If, on or following trade 
date, he does request a report through the System as to his 
participation before [4:00 p.m. eastern time *], and he does not 
receive a response by [9:30 a.m. eastern time **] on the next trading 
day, he need not accept a later report. If he fails to so request a 
report, he must accept a report until [4:00 p.m. eastern time *] on the 
third trading day following the trade (i.e., on T+3). The Exchange does 
not intend this paragraph (c)(vii) to relieve him of the obligation, 
when he does not receive a report as soon as he reasonably should 
expect to have received it.

II. 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, 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 Room. Copies of such filing will also be 
available for inspection and copying at the principal office of the 
ITS. All submissions should refer to File No. 4-208 and should be 
submitted by May 14, 1997.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-10517 Filed 4-22-97; 8:45 am]
BILLING CODE 8010-01-M