[Federal Register Volume 67, Number 91 (Friday, May 10, 2002)]
[Notices]
[Pages 31856-31858]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-11746]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45873; File No. SR-CSE-2002-04]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Cincinnati Stock Exchange, Inc. Relating to the 
Introduction of Order Delivery and Automated Response on the Cincinnati 
Stock Exchange, Inc.

May 3, 2002.
    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 April 22, 2002, the Cincinnati Stock Exchange, Inc. (``CSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by the 
Exchange. 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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[[Page 31857]]

I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange proposes to amend CSE Rule 11.9, National Securities 
Trading System (``NSTS''), to modify CSE's execution functionality 
within the CSE Over-the-Counter (``OTC'') Unlisted Trading Privileges 
(``UTP'') system (``CSE OTC-UTP System'') \3\ from a process of 
automatically matching and executing like-priced displayed orders and 
quotes to an optional process of delivering orders to quoting CSE 
members and requiring automated responses from such members back to the 
CSE OTC-UTP System. The text of the proposed rule change is set forth 
below. Proposed new language is in italics.
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    \3\ CSE proposed the creation of the CSE OTC-UTP System in 
proposed rule change CSE-2001-04. See Securities Exchange Act 
Release No. 45405 (February 6, 2002), 67 FR 6558 (February 12, 
2002).
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Chapter XI
Trading Rules
Rule 11.9(i)
    (1) No change.
    (2) The OTC-UTP System offers two modes of order interaction 
selected by members:
    (a) If automatic execution selected, the OTC-UTP System shall match 
and execute like-priced order, bids and offers in Nasdaq/NM Securities 
on an order-by-order basis only at the specific instruction of Users, 
including Designated Dealers. Subject to the obligations of best 
execution, Users may choose to execute like-priced orders without 
regard for the price/time and agency/principal priorities set forth in 
Rules 11.9(l) and (m).
    (b) If order delivery and automated response selected, the OTC-UTP 
System will deliver contra-side orders against displayed orders and 
quotations on an order-by-order basis and only at the specific 
instruction of Users, including Designated Dealers. To be eligible for 
order delivery service, Users must demonstrate to CSE examiners that 
the User's system can automatically process the inbound order and 
respond appropriately within 1 second.

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 purpose of the proposed rule change is to increase the 
flexibility of CSE execution systems to accommodate member needs. 
Specifically, CSE proposes to modify CSE's execution functionality 
within the CSE OTC-UTP System from a process of automatically matching 
and executing like-priced displayed orders and quotes to an optional 
process of delivering orders to quoting CSE members and requiring 
automated responses from such members back to the CSE OTC-UTP System. 
CSE is proposing this modification to facilitate a diverse membership 
base while promoting a fair and orderly market. CSE members that 
operate as electronic communications networks (``ECNs'') \4\ or 
alternative trading systems (``ATSs'') subject to SEC Regulation 
ATS,\5\ as well as members that act as Designated Dealers or 
specialists on CSE will have the option of selecting the type of 
centralized execution system that best fits their business model.
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    \4\ ECNs are defined in SEC Rule 11Ac1-1(a)(8), 17 CFR 
240.11Ac1-1(a)(8), as any electronic system that widely disseminates 
to third parties orders entered therein by an exchange market maker 
or OTC market maker, and permits such orders to be executed against 
in whole or in part.
    \5\ 17 CFR 242.300-303.
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    Currently, NSTS functions solely in an automatic execution mode. In 
an automatic execution system like NSTS, a Designated Dealer's 
quotation is held in NSTS, and NSTS executes any like-priced contra-
side order against the dealer's quotation. NSTS then informs the 
Designated Dealer and the contra-side CSE member that the quotation and 
the order have been executed by delivering execution messages to both 
parties.
    With the advent of ECN/ATS trading on CSE, members have expressed 
concern that CSE's automatic execution system exposes them to 
significant multiple execution liability. Given the speed with which 
ECN/ATSs operate, it is likely that displayed quotations will be 
subject to internal matches at the same time as another CSE member 
attempts to execute against the same quotations. When faced with a 
similar dilemma, the Nasdaq Stock Market, Inc. permitted ECN/ATSs to 
remain on SelectNet (an order delivery system) for inbound executions 
against the ECN/ATSs' displayed quotations rather than requiring them 
to migrate to the automatic execution methodology of the Nasdaq 
National Market Execution System (``NNMS'').\6\ Nasdaq even amended its 
Intermarket Trading System (``ITS'')/Computer Assisted Execution System 
(``CAES'') (together ``ITS/CAES'') definitions and functionality to 
permit ECN/ATSs to operate in an order delivery format when interacting 
with inbound commitments from ITS. Similarly, CSE now proposes to 
permit members to select order delivery and automated response for 
order interaction with displayed quotations within the CSE OTC-UTP 
System or to continue interacting through CSE's automatic execution 
facility.
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    \6\ See Securities Exchange Act Release No. 42344 (January 14, 
2000), 65 FR 3987 (January 25, 2000) in which Nasdaq designated 
SelectNet as the link to ECNs pursuant to the SEC's Order Handling 
Rules. See Securities Exchange Act Release No. 38156 (January 10, 
1997), 62 FR 2415 (January 16, 1997).
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    In an order delivery and automated response system, a member's 
quotation or displayed order will be held in the CSE OTC-UTP System, 
and when a contra-side order is received in the CSE OTC-UTP System, CSE 
will immediately forward the order message to the quoting member, who 
will be obligated by rule to instantaneously respond to the order 
message. Moreover, the quoting member must have a demonstrated 
capability to instantaneously respond to the order message. On receipt 
of the order message delivered by CSE, the quoting member will 
automatically determine whether its quote is still active. If so, the 
member will automatically deliver to the CSE OTC-UTP System matched 
orders representing its quote and the contra-side for execution. If the 
member's quote is in the process of changing due to a prior internal 
match at the displayed price, consistent with the Firm Quote Rule,\7\ 
the member will reject the inbound order and send it back to the CSE 
OTC-UTP System. The CSE OTC-UTP System will then automatically send a 
cancellation message to the member submitting the order. The entire 
duration of the order delivery and automated response process likely 
will be less than one second.
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    \7\ 17 CFR 240.11Ac1-1.
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    CSE reiterates that members must demonstrate the capacity to accept 
inbound orders and to automatically respond to the CSE OTC-UTP System 
before they will be permitted use of this

[[Page 31858]]

functionality. Moreover, CSE Rule 11.9(i)(2) shall provide that the CSE 
OTC-UTP System will offer order delivery and automated response subject 
to the requirement that members demonstrate the capability to respond 
in an automated manner. Therefore, by rule and through demonstrated 
capacity verified by CSE examiners prior to operation, the CSE will 
reduce the risk of multiple execution liability, while ensuring that 
members comply with their obligations under the Firm Quote Rule.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the provisions of Section 6(b) of the Act,\8\ in general, and 
Section 6(b)(5) of the Act,\9\ in particular, which requires, among 
other things, that the rules of an exchange be designed to prevent 
fraudulent and manipulative acts and practices, 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. Further, the 
Exchange believes that the proposal is consistent with Section 6(b)(8) 
of the Act\10\ in that it is not designed to impose any burden on 
competition not necessary or appropriate in furtherance of the Act.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
    \10\ 15 U.S.C. 78f(b)(8).
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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 burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received from Members, Participants or Others

    The Exchange has neither solicited nor received written comments on 
the proposed rule change.

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

    Within 35 days of the date of 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. All submissions should refer to File No. SR-CSE-2002-04 and 
should be submitted by May 31, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-11746 Filed 5-9-02; 8:45 am]
BILLING CODE 8010-01-P