[Federal Register Volume 64, Number 77 (Thursday, April 22, 1999)]
[Notices]
[Pages 19843-19844]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-10020]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41286; File No. SR-CSE-99-02]


Self-Regulatory Organizations; Cincinnati Stock Exchange, Inc.; 
Order Granting Approval to Proposed Rule Change Relating to a 
Specialist Revenue Sharing Program

April 14, 1999.

I. Introduction

    On February 18, 1999, the Cincinnati Stock Exchange, Inc. (``CSE'' 
or ``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to establish a specialist revenue 
sharing program.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    The proposed rule change was published for comment in the Federal 
Register on March 1, 1999.\3\ No comments were received on the 
proposal.\4\ This order approves the proposal.
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    \3\ Securities Exchange Act Release No. 41082 (February 22, 
1999) 64 FR 10035 (File No. SR-CSE-99-02).
    \4\ On March 30, 1999, Sam Scott Miller, Orrick, Herrington & 
Sutcliffe, on behalf of Charles Schwab & Co. (``Schwab'') sent a 
letter advising the Commission that Schwab would submit comments on 
the proposed rule change in mid-April. On April 2, 1999, Mr. Miller 
informed Kathy England, Assistant Director, Division of Market 
Regulation, Commission, by telephone that Schwab would not comment 
on CSE's proposal.
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II. Description of the Proposal

    The Exchange proposes to amend Exchange Rule 11.10 to provide an 
incentive for growth in specialist activity by implementing a quarterly 
revenue sharing program and to eliminate the current two-million-share 
average daily cap on preference charges. Under the proposal, the 
Exchange would share with specialist firms all or a portion of the 
CSE's Specialist Operating Revenue (``SOR''), after operating expenses 
and working capital needs have been met. Under the definition contained 
in proposed Exchange Rule 11.10(j), SOR consists of transaction fees, 
book fees, technology fees, and market data revenue which is 
attributable to specialist firm activity. Further, all regulatory 
monies and investment income are excluded from SOR.
    Under the proposal, the Exchange's Board of Trustees will determine 
on an ongoing basis the appropriate amount of SOR to be shared with 
specialist firms. The Exchange represents that its Board of Trustees 
has initially 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 of the 
Exchange has been set aside.
    The proposed rule change provides that 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. Accordingly, the 
specialist firms will share the SOR on a pro rata basis. Although Tape 
B revenue is included in SOR, it will be excluded from each specialist 
firm's percentage contribution calculation.\5\ The Exchange represents 
that in no event will the amount of revenue shared with specialist 
firms exceed SOR.
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    \5\ CSE's current transaction charge on Tape B activity is 
already zero and CSE already has in place a program which shares up 
to 40% of Tape B revenue with its specialist firms. See Securities 
Exchange Act Release No. 39395 (December 3, 1997) 62 FR 65113 
(December 10, 1997).
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III Discussion

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities exchange \6\ 
and, in particular, with the Section 6(b)(5) requirements that the 
rules of an exchange be designed 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.\7\
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    \6\ In approving this rule, the Commission has considered the 
proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \7\ 15 U.S.C. 78f(b)(5).
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    The Commission notes that, in recent years, several markets have 
instituted various forms of incentive programs for their members, in 
attempts to attract

[[Page 19844]]

additional order flow to the exchange.\8\ As an incentive to its 
specialists, the CSE has chosen to distribute a portion of operating 
revenue which is solely attributable to specialist trade activity 
(e.g., transaction fees, book fees, and market data fees).\9\ The 
Commission believes that the CSE's revenue sharing program should allow 
the Exchange to remain competitive with other markets which have 
implemented similar programs, which, in turn, should enhance the 
National Market System.
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    \8\ See Securities Exchange Act Release Nos. 38237 (February 4, 
1997) 62 FR 6592 (February 12, 1997) (notice of filing and immediate 
effectiveness of amendments to the Chicago Stock Exchange's pricing 
schedule relating to specialist fees); 40591 (October 22, 1998) 63 
FR 58078 (October 29, 1998) (notice of filing and immediate 
effectiveness of the Boston Stock Exchange's revenue sharing program 
for member firms); and 41174 (March 16, 1999) 64 FR 14034 (March 23, 
1999) (notice of filing and immediate effectiveness of the NASD's 
pilot program to provide transaction credits to NASD members who 
exceed certain levels of trading activity).
    \9\ The Commission has recently undertaken a review of market 
data fees, including the current structure of such fees and the role 
such fees serve in the operation of the markets. Exchange programs 
that rebate or share revenue generated from market data fees to 
market participants, including the present proposal, are relevant to 
that study. Accordingly, it is likely that the Commission will 
examine the use of market data rebate programs in the context of the 
study.
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    The Commission further finds that the parameters of the Exchange's 
revenue sharing program are consistent with the requirements of Section 
6(b)(1).\10\ The Commission believes it is appropriate for the CSE to 
distribute operating revenue generated by specialists only after the 
Exchange accumulates sufficient revenue to offset its actual expenses 
and working capital needs. In accordance with this principle, the 
Commission also finds that it is reasonable for the CSE's Board of 
Trustees to adjust the percentage of SOR to be distributed to reflect 
the changing financial needs of the Exchange over time. As a national 
securities exchange, it is the obligation of CSE to have the necessary 
resources to adequately conduct surveillance, examination and other 
regulatory responsibilities. While the Commission understands CSE's 
need to remain competitive with other securities markets, the 
Commission expects CSE to not compromise its regulatory 
responsibilities by sharing revenue that would more appropriately be 
used to fund regulatory responsibilities. More specifically, CSE, when 
determining its ``working capital needs,'' should be mindful of its 
regulatory responsibilities.
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    \10\ 15 U.S.C. 78f(b)(1).
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    The Commission believes it is appropriate for the Exchange to 
exclude all regulatory monies, such as fines paid by specialists, from 
the definition of SOR. The deterrent and punished effect of a fine 
would be compromised if the Exchange essentially credited the fine 
amount back to the member. The Commission also finds that it is 
reasonable to exclude investment income from the definition of SOR, as 
that income is not generated by specialist activity.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\11\ that the proposed rule change (SR-CSE-99-02) is approved.

    \11\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 99-10020 Filed 4-21-99; 8:45 am]
BILLING CODE 8010-01-M