[Federal Register Volume 64, Number 39 (Monday, March 1, 1999)]
[Notices]
[Pages 10035-10037]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-4959]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41082; File No. SR-CSE-99-02]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Cincinnati Stock Exchange, Inc. Relating to a Specialist 
Revenue Sharing Program

February 22, 1999.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on February 18, 1999, 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 CSE. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The CSE proposes to amend the schedule of fees set forth in 
Exchange Rule 11.10. The text of the proposed rule change is as follows 
(additions are italicized; deletions are bracketed):

[[Page 10036]]

Rule 11.10  National Securities Trading System Fees

    A. Trading Fees.
    (a) Agency Transactions. As in the case for Preferenced 
transactions members acting as an agent will be charged the per 
share incremental rates as noted below for public agency 
transactions:

------------------------------------------------------------------------
                                                            Charge per
                Avg. daily share* volume                       share
------------------------------------------------------------------------
1 to 250,000............................................         $0.0015
250,001 to 500,000......................................          0.0013
500,001 to 750,000......................................          0.0009
750,001 to 1,250,000....................................          0.0007
1,250,001 and higher [2,000,000]........................          0.0005
------------------------------------------------------------------------
*Odd-Lot Shares Excluded.

    (b)-(g) No Change.
    (h) Preferenced Transactions. Designated Dealers that are 
Preferencing transactions are charged for one side of their 
preferenced transactions and are subject to the incremental rates as 
noted below:

------------------------------------------------------------------------
                                                            Charge per
                Avg. daily share* volume                       share
------------------------------------------------------------------------
1 to 250,000............................................         $0.0015
250,001 to 500,000......................................          0.0013
500,001 to 750,000......................................          0.0009
750.001 to 1,250,000....................................          0.0007
1,250,001 and higher [2,000,000]........................          0.0005
------------------------------------------------------------------------
* Odd-Lot Shares Excluded.

    (i) No Change.
    (j) Revenue Sharing Program. After the Exchange earns total 
operating revenue sufficient to offset actual expenses and working 
capital needs, a percentage of all Specialist Operating Revenue 
(``SOR'') shall be eligible for sharing with Designated Dealers. SOR 
is defined as operating revenue which is generated by specialist 
firms. SOR consists of transaction fees, book fees, technology fees, 
and market data revenue which is attributable to specialist firm 
activity. SOR shall not include any investment income or regulatory 
monies. The sharing of SOR shall be based on each Designated 
Dealers' pro rata contribution to SOR. In no event shall the amount 
of revenue shared with Designated Dealers exceed SOR.
    (j)-(o) To be renumbered (k)-(p).
* * * * *

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 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 provide an incentive 
for growth in specialist activity on the Exchange. CSE believes that 
its strength lies in its ability to operate at significantly lower 
expense levels than its competitors. To utilize this operating leverage 
and compete more effectively for order flow, the Exchange proposes to 
significantly reduce the cost of doing business for specialist firms by 
means of a quarterly revenue sharing program.
    The proposed rule change contemplates the Exchange sharing with 
specialist firms all or a portion of CSE's Specialist Operating Revenue 
(``SOR''), after operating expenses and working capital needs have been 
met. SOR is defined as all operating revenue which is generated by 
specialists. Such revenue consists of transaction fees, book fees, 
technology fees, and Consolidated Tape Network A and B market data 
(``Tape A'' and ``Tape B'') revenue which is attributable to specialist 
trade activity. All regulatory monies and investment income are 
excluded from SOR.
    Under the proposal, CSE's Board of Trustees would have the 
authority to determine on an ongoing basis the appropriate amount of 
SOR to be shared with specialist firms. In making this determination, 
the Board would be guided first by CSE's objective of offsetting all 
specialist fees and then by the need to balance the objective of 
sharing the remainder of SOR with the objective of retaining the 
financial integrity of the Exchange. To simplify the administration of 
the revenue sharing program and smooth out monthly expense 
fluctuations, the program will operate on a quarterly basis. Initially, 
the Board has determined to share 100% of the first $750,000 in 
quarterly SOR and 50% of all quarterly SOR over $750,000, after actual 
expenses have been paid and the budgeted working capital goal has been 
set aside.
    SOR will be shared with specialist firms on a pro rata basis. After 
the Exchange has accounted for operating expenses and working capital 
contributions, each specialist firm will receive a percentage of the 
SOR to be shared which is equal to that specialist firm's percentage 
contribution to SOR. In no event will the amount of revenue shared with 
specialist firms exceed SOR. Furthermore, while Tape B revenue is 
included in SOR, it is excluded from the specialist firm percentage 
contribution calculation because CSE's current transaction charge on 
Tape B activity is already zero and the Exchange already has in place a 
program which shares up to 40% of Tape B revenue with its specialist 
firms.\3\ Finally, the proposed rule

[[Page 10037]]

change eliminates the current two-million-share average daily cap on 
preferencing charges.
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    \3\ See Securities Exchange Act Release No. 39395 (December 3, 
1997) 62 FR 65113 (December 10, 1997).
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    The application of the proposed revenue sharing program can be 
demonstrated by the following example. Assume that the Exchange has SOR 
in a given quarter of $2 million, that all other operating revenue 
equals $250,000 during that quarter, that actual quarterly expenses 
equal $1.5 million, and that the working capital target for the quarter 
is $250,000. In addition, assume that Specialist Firm #1 contributes 
$500,000 in quarterly SOR (or 25% of total SOR), Specialist Firm #2 
contributes $300,000 (15%), and Specialist Firms #3, #4, and #5 each 
contribute $200,000 (10%). In this event, $500,000 (i.e. $2.25 million 
minus $1.75 million) would be available for sharing with specialist 
firms. Specialist Firm #1 would receive $125,000, or 25% of $500,000; 
Specialist Firm #2 would receive $75,000; and Specialist Firms #3, #4, 
and #5 would each receive $50,000. In this example, the Exchange would 
never share more than $2 million with its specialist firms even if 
actual expenses and working capital needs were less than $250,000.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
Section 6(b) of the Act,\4\ in general, and furthers the objectives of 
section 6(B)(5) \5\ in particular, in that it is 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 believes that the proposed rule change will create an 
incentive for members to bring order flow to the Exchange, thereby 
increasing competition which, in turn, will enhance the National Market 
System.
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    \4\ 15 U.S.C. 78f(b).
    \5\ 15 U.S.C. 78f(b)(5).
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    In addition, the Exchange believes the proposed rule change 
furthers the objectives of section 6(b)(4) \6\ in that it is designed 
to provide for the equitable allocation of reasonable fees among its 
members. Specifically, the proposal provides for revenue sharing with 
CSE's specialist firms, who are primarily responsible for the 
Exchange's financial viability and growth.
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    \6\ 15 U.S.C. 78f(b)(4).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The CSE does not believe that the proposed rule change would 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

    Written comments on the proposed rule change were neither solicited 
nor received.

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 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 Exchange 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, 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. 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 
CSE. All submissions should refer to File No. SR-CSE-99-02 and should 
be submitted by March 22, 1999.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-4959 Filed 2-26-99; 8:45 am]
BILLING CODE 8010-01-M