[Federal Register Volume 65, Number 63 (Friday, March 31, 2000)]
[Notices]
[Pages 17323-17325]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-7976]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42576; File No. SR-CSE-99-06]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment Nos. 1, 2, and 3 by the Cincinnati Stock Exchange, 
Inc., To Extend Limit Order Protection to GTX Orders

March 24, 2000.

    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 December 27, 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 Exchange. On March 
9, 2000, the Exchange filed an amendment to the proposal.\3\ On March 
21, 2000, the Exchange filed two additional amendments to the 
proposal.\4\ The Exchange has filed this proposal pursuant to Section 
19(b)(3)(A) of the Act \5\ and rule 19b-4(f)(6) \6\ thereunder, which 
renders the proposal effective upon filing with the Commission. The 
Commission is publishing this notice to solicit comments on the 
proposal rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See March 2, 2000 letter from Jeffrey T. Brown, Vice 
President Regulation and General Counsel, CSE, to Constance Kiggins, 
Special Counsel, Division of Market Regulation, SEC (``Amendment No. 
1''). In Amendment No. 1, the Exchange provided the date on which 
the CSE's Executive Committee of the Board of Trustees approved the 
proposed rule change.
    \4\ See March 7, 2000 letter from Jeffrey T. Brown, Vice 
President Regulation and General Counsel, CSE, to Alton Harvey, 
Chief, Office of Market Watch, Commission (``Amendment No. 2''). In 
Amendment No. 2, the CSE added a summary of the purpose of the 
proposed rule change in Section I of the proposal. See also March 
20, 2000 letter from Jeffrey T. Brown, Vice President Regulation and 
General Counsel, CSE, to Alton Harvey, Chief, Office of Market 
Watch, Commission (``Amendment No. 3''). In Amendment No. 3, the CSE 
requested that the proposal be effective upon filing with the 
Commission pursuant to Section 19(b)(3)(A) of the Act and Rule 19b-
4(f)(6) thereunder. The Exchange further requested that the 
Commission waive the requirement that the proposed rule change not 
become operative before 30 days from the date of filing pursuant to 
Rule 19b-4(f)(6)(iii), and that the Commission accept the Exchange's 
original filing as satisfying the requirement under Rule 19b-
4(f)(6)(iii) that the Exchange provide the Commission with five 
business days notice of its intent to file the proposed rule change. 
15 U.S.C. 78s(b)(3)(A) and 17 CFR 240.19b-4(f)(6)(iii).
    \5\ 15 U.S.C. 78s(b)(3)(A).
    \6\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange proposes to amend Interpretation and Policy .02 to CSE 
Rule 11.9(u) to ensure execution of limit orders on the books of CSE 
Designated Dealers by extending the CSE's limit order protection 
interpretation to orders eligible for execution in a primary market's 
after-hours trading session. The text of the proposed rule change is 
available at the CSE and at the Commission.

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 Exchange 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 Exchange 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 CSE proposal is designed to ensure execution of limit orders on 
the books of CSE Designated Dealers by extending the CSE's limit order 
protection interpretation to orders eligible for execution in a primary 
market's after-hours trading session.\7\ The Exchange believes that its 
proposal presents no novel issues and is substantially similar to those 
primary market print protection rules previously approved by the 
Commission.\8\
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    \7\ The NYSE's Crossing Session I, which permits the execution 
of single-stock, single-sided closing-price orders and crosses of 
single-stock closing-price buy and sell orders, was approved by the 
Commission on May 20, 1991, and began operation on June 13, 1991. 
See Securities Exchange Act Release No. 29237 (May 24, 1991), 56 FR 
24853 (May 31, 1991) (SR-NYSE-90-52 and SR-NYSE-90-53). The American 
Stock Exchange, LLC's (``Amex'') After-Hours Trading (``AHT'') 
facility was approved by the Commission on August 2, 1991. See 
Securities Exchange Act Release No. 29515 (August 2, 1991), 56 FR 
37736 (August 8, 1991) (SR-Amex-91-15).
    \8\ Procedures established by the other regional exchanges in 
1991 require their specialists to provide primary market protection 
to limit orders based on the volume that prints in the primary 
market's after-hours session. See Securities Exchange Act Release 
Nos. 29301 (June 13, 1991), 56 FR 28182 (June 19, 1991) (SR-BSE-91-
4) (``Boston Stock Exchange Approval Order''); 29297 (June 13, 
1991), 56 FR 28191 (June 19, 1991) (SR-MSE-91-11) (``MSE Approval 
Order''); 29300 (June 13, 1991), 56 FR 28212 (June 19, 1991) (SR-
Phlx-91-26) (``Philadelphia Stock Exchange Approval Order''); 29749 
(September 27, 1991), 56 FR 50405 (October 4, 1991) (SR-Phlx-91-32) 
(``Philadelphia Stock Exchange Amendment''); 29305 (June 13, 1991), 
56 FR 28208 (June 19, 1991) (SR-PSE-91-21) (``Pacific Strock 
Exchange Approval Order''); and 29543 (August 9, 1991), 56 FR 40929 
(August 16, 1991) (SR-PSE-91-28) (``Pacific Stock Exchange 
Amendment''). While CSE Interpretation and Policy .02 to Rule 
11.9(u) requires similar primary market print protection during 
regular trading hours, the Chapter 11 rules are applicable currently 
only to the regular trading session.
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    Under the proposal, during the extended period, Designated Dealers 
will hold within their systems GTX orders in any security traded on the 
Exchange pursuant to unlisted trading privileges (``UTP'') and deliver 
the orders to the CSE after 5 p.m.\9\ These orders will be executed by 
the CSE on a first-in, first-out (``FIFO'') basis after 5 p.m.
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    \9\ All references to time are Eastern Time unless noted 
otherwise. Presently, the primary markets for CSE securities traded 
according to UTP, the NYSE and the Amex, end their regular trading 
sessions and report closing prices shortly after 4 p.m.
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    The CSE does not propose to establish a separate after-hours 
trading session to compete with NYSE's Crossing Session I. Instead, it 
proposes to amend the limit order protection requirements to require

[[Page 17324]]

its Designated Dealers to fill certain limit orders (orders which 
satisfy certain stated criteria) after the close of the regular CSE 
auction market trading session based upon CSE Rule 11.1(b) which 
permits CSE to execute orders during the hours which a security is 
traded on a principal exchange.\10\
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    \10\ Currently, pursuant to CSE Rule 11.1(b), the hours of 
trading for any security traded on the Exchange which is also traded 
on another national securities exchange (``dually traded'') or 
exchanges (``multiply traded'') shall be, in addition to the hours 
of trading set forth in paragraph (a) of this rule 9:30 a.m. to 4:05 
p.m.), the hours during which the security is traded on the 
principal exchange (emphasis added). Therefore, trades may be 
executed immediately after the primary exchange's after-hours 
session.
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    Under the proposal, CSE Designated Dealers will scan their limit 
order books at 4 p.m. for limit orders that are priced at the primary 
market's closing price and have been designated as ``GTX'' (``good 'til 
cancelled, executable in the after-hours session'').\11\ The CSE 
proposal would give customers the option of deciding whether they want 
their limit orders to be designated as GTX orders and thus eligible for 
execution after the close of the regular primary market.\12\ If a limit 
order meets these criteria, then it would become eligible for a fill at 
the primary market closing price based on volume that prints in the 
primary market's after-hours session. The only two situations under 
which a CSE Designated Dealer would not be obligated to fill customer 
limit orders, designated as GTX, based on volume that prints in the 
primary market's after-hours session are: (1) If it can be demonstrated 
that the order would not have been executed if it had been transmitted 
to the primary market; and (2) if a customer cancels a GTX order.\13\ 
GTX orders will retain the priority among themselves that exists on the 
Designated Dealers' books and would be entitled to an execution based 
on that priority. If a limit order that is eligible for limit order 
protection in an after-hours session does not get executed, it will 
remain on the limit order books of the CSE Designated Dealer and would 
retain its priority during the next day's regular trading session.
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    \11\ Members will designate limit orders that are eligible for 
limit order protection based on the volume that prints in a primary 
market's after-hours trading session as ``GTX'' orders. Any customer 
Good 'til Cancelled (``GTC'') limit orders on the book of the member 
during the regular trading session of 9:30 a.m. to 4:05 p.m. will 
remain there and will not be eligible for limit order protection 
based on the volume that prints in the primary market's after-hours 
session.
    \12\ CSE will use its existing systems to implement the proposed 
rule change and execute GTX orders. The CSE has no systems capacity 
concerns regarding the execution of GTX orders.
    \13\ Under the CSE proposal, a customer can cancel a GTX order 
during the regular 8:30 a.m. to 3:05 p.m. (Central Time) session and 
at any time up until the execution based on the NYSE Crossing 
Session I print.
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    Designated Dealers will deliver to the CSE for execution GTX orders 
once the appropriate volume in a particular security in the primary 
market's crossing session has been determined. The Exchange proposes to 
implement trade reporting for GTX orders by reporting each execution 
immediately after the primary market's after-hours session. As 
executions occur between 5:00 p.m. and 5:05 p.m., they will be reported 
to the consolidated tape as ``Out-of-Sequence'' (or ``Sold'' sale) 
transactions. Because other exchanges may be operating during this 
time, printing the GTX after-hours crossing session trades in this 
manner will ensure that the transaction reports do not update the 
consolidated last sale.
Clearance and Settlement
    Clearance and settlement of trades that result from after-hours 
limit order protection will occur in the same manner and at the same 
time as regular way trading session transactions. Once the CSE Control 
Room Staff have completed their end-of-day procedures at approximately 
5:15 p.m., they inform the Operations area to bring down the National 
Securities Trading System (``NSTS'').\14\ Operations will initiate the 
process of bringing down the system, which includes clearing out the 
book and running roll files to update the Dealer of the Day 
obligations. Approximately one hour after the initiation of bringing 
down the system, the clearing files are delivered to National 
Securities Clearing Corporation.
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    \14\ NSTS is the CSE's electronic communication and execution 
facility through which bids and offers of competing dealers, as well 
as public orders, are consolidated for review and execution by 
system users. NSTS is the platform supporting the CSE's regular 
trading session and will be the platform supporting the proposed 
limit order protection of GTX orders. Use of NSTS in this manner 
will not adversely impact the capacity or operation of NSTS during 
the regular trading session.
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Trading Halts in Eligible Securities
    Executions of GTX orders will not be available for any issue that 
remained halted as of the close of the traditional trading session on 
the primary market. In addition, executions will be prohibited if a 
market-wide ``circuit breaker'' trading half remained in effect at the 
close of the primary market traditional trading session.
Surveillance and Oversight
    The Exchange will conduct surveillance and oversee all GTX orders 
in the same manner and using the same techniques as used during the 
traditional trading session. These systems should reduce the 
possibility for intentional or inadvertent mishandling of orders and 
should detect any trading abuses.
Exemptive Relief
    The Exchange requested, and was granted, an exemption from Rule 
10a-1 under the Act, the Commission's short sale rule.\15\
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    \15\ The Commission has granted the Exchange an exemption from 
Rule 10a-1 under the Act for limit orders for NYSE listed securities 
that are priced at the NYSE's closing price and have been designated 
for execution based on the volume that prints in NYSE's Crossing 
Session I. See March 23, 2000 letter to Jeffrey T. Brown, Vice 
President Regulation and General Counsel, CSE, from James A. 
Brigagliano, Assistant Director, Division of Market Regulation, 
Commission. The Exchange must seek further exemptive relief should 
it expand the scope of limit order protection to include orders for 
securities that are priced at the close and designated for execution 
based on volume that prints on additional primary markets.
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2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
Section 6(b) of the Act \16\ in general, and furthers the objectives of 
Section 6(b)(5) \17\ in particular. The Exchange believes the proposed 
rule is consistent with Section 6(b)(5) in that it is designed 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, and, in general, to protect investors and the 
public interest.
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    \16\ 15 U.S.C. 78f(b).
    \17\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange 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

    No comments were solicited or received in connection with the 
proposed rule change.

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

    Because the foregoing proposed rule change does not:
    (i) Significantly affect the protection of investors or the public 
interest;

[[Page 17325]]

    (ii) Impose any significant burden on competition; and
    (iii) Become operative for 30 days from the date on which it was 
filed, or such shorter time as the Commission may designate, it has 
become effective pursuant to Section 19(b)(3)(A) of the Act \18\ and 
Rule 19b-4(f)(6) \19\ thereunder. At any time within 60 days of the 
filing of the proposed rule change, the Commission may summarily 
abrogate such rule change if it appears to the Commission that such 
action is necessary or appropriate in the public interest, for the 
protection of investors, or otherwise in furtherance of the purposes of 
the Act.
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    \18\ 15 U.S.C. 78s(b)(3)(A).
    \19\ 17 CFR 240.19b-4(f)(6).
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    The Exchange has requested that the Commission accelerate the 
operative date. The Commission finds good cause to designate the 
proposal to become immediately operative upon filing, because such 
designation is consistent with the protection of investors and the 
public interest. Acceleration of the operative date will provide 
investors immediately with a choice of having GTX orders filled at a 
primary market or at the CSE. For these reasons, the Commission finds 
good cause to designate that the proposal become operative 
immediately.\20\
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    \20\ In reviewing this rule, the Commission has considered the 
proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
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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 20549-0609. 
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 
Exchange. All submissions should refer to file number SR-CSE-99-06 and 
should be submitted by April 21, 2000.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-7976 Filed 3-30; 8:45 am]
BILLING CODE 8010-01-M