[Federal Register Volume 66, Number 119 (Wednesday, June 20, 2001)]
[Notices]
[Pages 33118-33120]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-15530]



[[Page 33118]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44426; File No. SR-CSE-2001-02]


Self-Regulatory Organizations; Notice of Filing of a Proposed 
Rule Change by the Cincinnati Stock Exchange, Inc. Relating to the 
Elimination of the Requirement To Expose Market and Marketable Limit 
Orders for Fifteen Seconds Before Formatting as Intermarket Trading 
System Trade Commitments

June 14, 2001.
    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 May 25, 2001, the Cincinnati Stock Exchange, Incorporated (``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 comment 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 CSE Rules 11.9(o)(2) and 11.9(o)(3) to 
eliminate the Exchange requirement that public agency market and 
marketable limit orders be exposed for fifteen seconds to all Approved 
Dealers \3\ before being formatted into an Intermarket Trading System 
(``ITS'') outbound commitment to trade. The text of the proposed rule 
change is available at the Office of the Secretary, the CSE and the 
Commission.
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    \3\ See CSE Rule 11.9(a)(4) (defining the term ``Approved 
Dealer''.)
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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 this proposed rule change is to eliminate the 
Exchange requirement that market and marketable limit orders be exposed 
for fifteen seconds (the ``Additional Probe'' or ``Additional Probing 
Requirement'') to all Approved Dealers \4\ before being formatted as an 
ITS outbound commitment to trade. The Operating Committee of the 
Intermarket Trading System (the ``ITS Committee'' or ``ITSOC'') imposed 
the Additional Probing Requirement, codified as CSE Rules 11.9(o)(2) 
and 11.9(o)(3), as a condition for implementing an automated interface 
with ITS in 1985.\5\ The ITS Committee claimed that such an Additional 
Probe was necessary because the CSE systems would be submitting 
computer generated commitments to ITS in lieu of using ITS stations 
located on an exchange floor. The ITSOC's concern was that such a 
practice would turn ITS into an order routing mechanism on behalf of 
CSE Members. However, the CSE maintains that the Additional Probing 
Requirement is an unfair anticompetitive burden upon the CSE because 
(1) the ITS Plan imposes no such systemic Additional Probing 
Requirement upon all ITS Participants; (2) the CSE ensures that it 
satisfies the ITS Plan's restrictions on automated routing practices by 
operating within the imposed formula restrictions; and (3) the ITS 
Committee has voted to accept the computer generated commitments of the 
Pacific Exchange in combination with Archipelago, LLC (``PCX/ARCA'') 
without an Additional Probing Requirement.
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    \4\ Id.
    \5\ The ITS Committee also imposed a formula restriction on CSE 
outbound commitments, as well as the requirement that all CSE rule 
filings be submitted for review by the ITS Committee before filing 
with the Commission.
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    The CSE believes that the imposition of the extraordinary 
Additional Probing Requirement upon the CSE has always been an 
unreasonable condition for automated participation in the ITS Plan. The 
ITS Plan itself does not impose specific Additional Probing 
Requirements for any ITS Participant, but instead states that ITS 
Participants should not automatically reroute orders to other ITS 
Participant markets without first making reasonable efforts to probe 
the market and achieve satisfactory execution in their own market. 
Section 8(a)(iv) (``Automated Generation of Commitments'') \6\ of the 
ITS Plan provides that ITS Participants should not routinely use ITS as 
an order delivery system to reroute a substantial portion of orders to 
ITS when those orders were originally sent to another Participant 
market for execution. As section 8(a)(iv) of the ITS Plan requires, ``* 
* * most orders received within the market of an Exchange Participant 
are expected to be executed within that market.'' CSE would not violate 
section 8(a)(iv) without the Additional Probe.
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    \6\ See Section 8(a)(iv) of the ITS Plan. On November 3, 2000, 
the Commission approved the Fifteenth Amendment to the ITS Plan, 
which the ITSOC, among other things, relabeled section 8(a)(v) as 
section 8(a)(iv). See Securities Exchange Act Release No. 43520 
(Nov. 3, 2000), 65 FR 68165 (Nov. 14, 2000).
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    In the CSE's electronic market environment, the CSE represents that 
every order entering its National Securities Trading System (``NSTS'') 
is exposed to all open interest on the Exchange. CSE Designated 
Dealers, in fulfilling their duties as specialists, display their best 
bids and offers and customer limit orders as required. Unlike in 1986 
when the ITS Committee imposed the Additional Probing Requirement, the 
CSE believes that the Commission's Limit Order Display Rule ensures 
that any agency interest in a given security is displayed in accordance 
with the Rule, and therefore subject to execution against contra-side 
interest. The CSE believes that its electronic market fully complies 
with section 8(a)(iv) of the ITS Plan. Moreover, with the CSE 
continuing to be subject to the ITS formula restrictions contained in 
section 8(e)(iv) of the ITS Plan, the CSE believes that the Additional 
Probe requirement is a redundant impediment that imposes anti-
competitive restrictions on the CSE, while providing little, if any, 
support to the policies expressed in section 8(a)(iv) of the ITS Plan. 
The ITS Committee itself has supported this position in a recent 
action, unanimously approving the 18th Amendment to the ITS Plan.
    As part of the approval process for the proposed 18th Amendment to 
the ITS Plan, which incorporates the configuration of the Pacific 
Exchange--Archipelago, LLC merger into the ITS Plan, the ITS Committee 
determined that PCX/ARCA would not be required to implement an 
Additional Probing Requirement despite the fact that PCX/ARCA computer 
generates orders into ITS commitments in a manner substantially similar 
to that of CSE.\7\

[[Page 33119]]

The ITS Committee's rationale was that PCX/ARCA's Facility Formula \8\ 
provided a sufficient mechanism to comply with section 8(a)(iv) of the 
ITS Plan. This position was reiterated in a recent letter drafted after 
the ITSOC's approval of the 18th Amendment to the ITS Operating 
Committee from the Committee's Chairman.\9\ In the letter, the Chairman 
emphasizes that compliance with the operational parameters (i.e., the 
PCX/ARCA Facility Formula) would satisfy the requirements of section 
8(a)(iv) of the ITS Plan.\10\ Although CSE believed that its 
affirmative vote on the 18th Amendment would be in return for ITSOC 
support for eliminating CSE's probe, the letter states that the New 
York Stock Exchange's (``NYSE'') proposal [to eliminate CSE's 
Additional Probe] was predicated on CSE signing on to the same 
operational parameters as PCX/ARCA.\11\
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    \7\ On April 16, 2001, the Sub-Committee of the ITS Committee 
met and determined that the Additional Probing Requirement was not a 
necessary condition for PCX/ARCA to generate automated computerized 
submissions of ITS formatted trades.
    \8\ Section 8(a)(ii)(B) (``Percentage of ARCA Facility ITS 
Volume'') of the proposed 18th Amendment to the ITS Plan.
    \9\ See Letter from Mr. Allen Bretzer, Senior Vice President, 
CHX, to the ITSOC (May 14, 2001).
    \10\ Id.
    \11\ Id. CSE Rejected the NYSE's proposal because the PCX/ARCA 
Facility Formula, designed to accommodate PCX/ARCA's market 
structure, failed to provide a ``period to cure.'' A period to cure 
is a period of time during which an ITS Participant that has 
violated the formula restrictions may take appropriate measures to 
address such violations without being subject to immediate 
prohibition of ITS use. Immediate cessation of ITS access is 
unacceptable to the CSE market model and is not contemplated by 
CSE's current forumla restrictions.
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    The CSE fails to see any rational basis for applying an Additional 
Probe under the CSE formula, while eliminating the Additional Probe 
under the PCX/ARCA formula.\12\ CSE bases this position on the complete 
reversal of positions by the NYSE and the ITS Committee. The Additional 
Probe requirement was originally claimed by the NYSE to be based on the 
methodology used by Participants to generate ITS commitments. The NYSE 
has long claimed that the probe requirement is paramount to the formula 
restriction. The NYSE has stated in the past: ``* * * assuming its 
compliance with the Plan's probing requirement, it would somewhat 
lessen our concerns that a primary market function of optimark would be 
to provide access to the primary market. In that event, we would have 
some flexibility in establishing the ``ceiling'' numbers in the 
formula.'' \13\
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    \12\ As noted above, the most significant difference between the 
two formulae is that PCX/ARCA's formula does not provide a period to 
cure. Apparently, the NYSE will not require an Additional Probe as 
long as it can ``pull the plug'' on a National Market System 
participant should such participant violate the PCX/ARCA formula.
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    The CSE believes that the ITSOC has now turned the probe and 
formula requirements on their respective heads. The ITS Committee 
proposed that if CSE is willing to accept the PCX/ARCA Formula, it may, 
with the support of the ITSOC, remove its Additional Probe. What this 
means is that the methodology for generating ITS commitments is now 
secondary to the limitation on outbound commitments. PCX/ARCA is in 
compliance with section 8(a)(iv) of the ITS Plan because it has agreed 
to the limitations contained in the PCX/ARCA Formula. Primarily, PCX/
ARCA is subject to an immediate cessation of access, not because it 
modified its systems to impose a probe. Today, the PCX/ARCA proposal is 
exactly as it was months ago when the NYSE begain its campaign to 
require PCX/ARCA to institute an Additional Probe.
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    \13\ See letter from Mr. James E. Buck, Senior Vice-President, 
NYSE, to mr. Jonathan Katz, Secretary, Commission (August 21, 1998).
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    If PCX/ARCA need not impose a fifteen second delay before computer 
generating outbound ITS commitments, CSE believes it should be relieved 
of that obligation as well. The CSE remains willing to comply with the 
CSE Formula so as to ensure that it does not send a significant portion 
of its order flow through ITS. Since the imposition of the formula 
restriction, CSE has never exceeded its formula limitations. However, 
based on the recent ITSOC action to emasculate the probe requirement, 
the CSE respectfully proposes that its Additional Probing Requirement 
is no longer an ITS requirement, and therefore requests Commission 
approval of its proposed rule change.
    In the interest of maintaining efficient trading rules and in order 
to conform CSE rules to the rules and procedures of other ITS 
Participants and the ITS Plan itself, the CSE proposes to eliminate the 
Additional Probing Requirement contained in CSE Rules 11.9(o)(2) and 
11.9(o)(3).
2. Statutory Basis
    The proposed rule change is consistent with section 6(b) of the Act 
in general,\14\ and furthers the objectives of sections 6(b)(5) in 
particular.\15\ The proposed rule change 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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    \14\ 15 U.S.C. 78f(b).
    \15\ 15 U.S.C. 78f(b)(5).
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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 CSE has neither solicited nor received written comments on the 
proposed rule change, not necessary or appropriate in furtherance of 
the purposes of the Act.

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 such 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 20549-0609. 
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.

[[Page 33120]]

    All submissions should refer to File No. SR-CSE-2001-02 and should 
be submitted by July 11, 2001.

    For the Commission, by the Division of Market Regulation, 
pursuant to the delegated authority.\16\
Margaret H. McFarland,
Deputy Secretary.
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    \16\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 01-15530 Filed 6-19-01; 8:45 am]
BILLING CODE 8010-01-M