[Federal Register Volume 67, Number 150 (Monday, August 5, 2002)]
[Notices]
[Pages 50743-50745]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-19616]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46274; File No. SR-CSE-2001-06]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change and Amendment 
Nos. 1 and 2 Thereto by the Cincinnati Stock Exchange, Inc. Amending 
CSE Rule 12.6, Customer Priority, to Require Designated Dealers to 
Better Customer Orders at the National Best Bid or Offer by Whole Penny 
Increments

July 29, 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 November 30, 2001, 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 and 
II below, which Items have been prepared by the Exchange. On April 22, 
2002, the CSE filed Amendment No. 1 to the proposal.\3\ On April 26, 
2002, the CSE filed Amendment No. 2 to the proposal.\4\ The Commission 
is publishing this notice to solicit comments on the proposed rule 
change from interested persons and to grant accelerated approval of the 
proposed rule change for a pilot period until September 30, 2002.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, the CSE requested that the proposal be 
converted to pilot status and that the pilot expire on September 30, 
2002. See Letter from Jeffrey T. Brown, Senior Vice President and 
General Counsel, CSE, to Katherine England, Assistant Director, 
Division of Market Regulation (``Division''), SEC (April 19, 2002).
    \4\ In Amendment No. 2, the CSE requested that additional 
proposed rule language be added to the proposal so that the rule 
would apply in instances when the customer limit order is not at the 
national best bid or offer (``NBBO''), rather than just instances 
when the customer limit order is at the NBBO. See Letter from 
Jeffrey T. Brown, Senior Vice President and General Counsel, CSE, to 
Katherine England, Assistant Director, Division, SEC (April 25, 
2002).
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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 CSE Rule 12.6, Customer Priority, by 
adding new Interpretation .02, which will require a CSE Designated 
Dealer (``Specialist'') to better the price of a customer limit order 
that is held by that Specialist if that Specialist determines to trade 
with an incoming market or marketable limit order. Under the rule, the 
Specialist will be required to better a customer limit order at the 
NBBO by at least one penny and at a price outside the current NBBO by 
at least the nearest penny increment. The Exchange is requesting 
approval of the proposed rule change on a pilot basis, through 
September 30, 2002. The text of the proposed rule change is set forth 
below. Proposed new language is in italics; proposed deletions are in 
brackets.
* * * * *
    Chapter XII
    Rule 12.6 Customer Priority
    (a)-(c) No change.
    Interpretations and Policies:
    .01--No change.
    .02(a)--A Designated Dealer shall be deemed to have violated Rule 
12.6 if, while holding a customer limit order (as rounded to a penny 
increment) representing the NBBO, the Designated Dealer, for his own 
account, trades with an incoming market or marketable limit order at a 
price which is less than one penny better than the price of such 
customer limit order (not the quoted price) held by such Designated 
Dealer.
    .02(b)--A Designated Dealer shall be deemed to have violated Rule 
12.6 if, while holding a customer limit order (as rounded to a penny 
increment) at a price outside the current NBBO, the Designated Dealer, 
for his own account, trades with an incoming market or marketable limit 
order at a price which is less than the nearest penny increment to the 
actual price of the customer limit order (not the quoted price) held by 
such Designated Dealer.

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 III 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 Exchange proposes to amend Exchange Rule 12.6 \5\ by adding an 
interpretation to the rule covering the trading of Nasdaq National 
Market (``NNM'') and SmallCap securities in subpenny increments.\6\ New 
Interpretation .02 to the Rule will require a Specialist to better the 
price of a customer limit order held by the Specialist by at least one 
penny (for those customer limit orders at the

[[Page 50744]]

NBBO) or by at least the nearest penny increment (for those customer 
limit orders that are not at the NBBO) if the Specialist determines to 
trade with an incoming market or marketable limit order.\7\
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    \5\ CSE Rule 12.6 provides, in pertinent part, that no member 
shall (i) personally buy or initiate the purchase of any security 
traded on the Exchange for its own account or for any account in 
which it or any associated person of the member is directly or 
indirectly interested while such a member holds or has knowledge 
that any person associated with it holds an unexecuted market or 
limit price order to buy such security in the unit of trading for a 
customer, or (ii) sell or initiate the sale of any such security for 
any such account while it personally holds or has knowledge that any 
person associated with it holds an unexecuted market or limit price 
order to sell such security in the unit of trading for a customer.
    \6\ In conjunction with this proposed rule change, the CSE is 
requesting that the Commission grant exemptive relief pursuant to 
Rules 11Ac1-1(e)(17 CFR 240.11Ac1-1(e)), 11Ac1-2(g) (17 CFR 
240.11Ac1-2(g)) and 11Ac1-4(d) (17 CFR 240.11Ac1-4(d)) to allow 
subpenny quotations to be rounded down (buy orders) and rounded up 
(sell orders) to the nearest penny for quote dissemination 
(``Exemptive Request''). See Letter to Annette Nazareth, Director, 
Division of Market Regulation (``Division''), Commission, from 
Jeffrey T. Brown, General Counsel, CSE (November 27, 2001).
    \7\ Interpretation .01 to Rule 12.6 provides that ``[i]f a 
Designated Dealer holds for execution on the Exchange a customer buy 
order and a customer sell order that can be crossed, the Designated 
Dealer shall cross them without interpositioning itself as a 
dealer.''
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    The purpose of the new Interpretation is to prevent a Specialist 
from taking unfair advantage of customer limit orders held by that 
Specialist by trading ahead of such orders with incoming market or 
marketable limit orders. Notwithstanding the fact that a Specialist may 
price-improve incoming orders by providing prices superior to that of 
customer limit orders it holds, customers should have a reasonable 
expectation to be filled at their limit order prices. This expectation 
should be reflected in reasonable access to incoming contra-side order 
flow, unless other customers place better-priced limit orders with the 
Specialist or the Specialist materially improves upon the customer 
limit order prices (not the customers' quoted prices) it holds.
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 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 requests that this rule be approved on a pilot basis until 
September 30, 2002, to be co-extensive with: (a) The conditional 
temporary exemptive relief requested in the Exemptive Request \10\; (b) 
the Chicago Stock Exchange's (``CHX's'') similar pilot related to 
customer limit order protection;\11\ and (c) the National Association 
of Securities Dealers, Inc.'s similar pilot related to customer limit 
order protection.\12\
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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
    \10\ See Letter from Robert L.D. Colby, Deputy Director, 
Division, Commission, to Jeffrey T. Brown, General Counsel, CSE 
(July 26, 2002) (``Exemptive Relief Letter''). The letter outlines 
several other conditions to trading in subpenny increments. The 
Commission will examine data provided by the CSE as specified in the 
Exemptive Relief Letter and information provided by all self-
regulatory organizations as required by the Commission's order 
concerning decimals implementation. See Exchange Act Release No. 
42914 (June 8, 2000), 65 FR 38010 (June 19, 2000). The Commission 
intends to reconsider the position expressed in its letter (July 26, 
2002) before the expiration of the exemption on September 30, 2002.
    \11\ See Exchange Act Release No. 45755 (April 15, 2002), 67 FR 
19607 (April 22, 2002).
    \12\ See Exchange Act Release No. 45762 (April 16, 2002), 67 FR 
19787 (April 23, 2002).
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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. 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-2001-06 and 
should be submitted by August 26, 2002.

IV. Commission's Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    The Commission finds that the proposed rule change is consistent 
with the Act and the rules and regulations thereunder applicable to a 
national securities exchange,\13\ and, in particular Section 6(b)(5) of 
the Act.\14\ Simultaneous with the filing of this proposal, the 
Commission received a request for exemptive relief submitted by the 
Exchange that would allow the Exchange, Exchange members, and vendors 
that disseminate Exchange quote information to display and disseminate 
their quotes for NNM and SmallCap securities in penny increments, while 
trading in sub-penny increments.\15\ By letter dated July 26, 2002, the 
Division, pursuant to delegated authority under Rules 11Ac1-1(e),\16\ 
11Ac1-2(g),\17\ and 11Ac1-4(d)\18\ under the Act, granted a conditional 
temporary exemption to the Exchange, Exchange members, and vendors that 
disseminate CSE quote information to permit them to display and 
disseminate their quotes for NNM and SmallCap securities in rounded, 
penny increments without a rounding identifier.\19\ The exemption 
expires September 30, 2002. The Commission believes that the proposed 
rule change should help to provide protection to customer limit orders 
in the subpenny trading environment by helping to ensure that such 
orders will continue to have access to market liquidity ahead of 
Exchange Specialists in appropriate circumstances.
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    \13\ In granting approval of the proposal, the Commission has 
considered the proposal's impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).
    \14\ 15 U.S.C. 78f(b)(5).
    \15\ See Exemptive Request, supra note 6.
    \16\ 17 CFR 240.11Ac1-1(e).
    \17\ 17 CFR 240.11Ac1-2(g).
    \18\ 17 CFR 240.11Ac1-4(d).
    \19\ See Exemptive Relief Letter, supra note 10.
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    The Commission finds good cause for approving the proposed rule 
change on a pilot basis prior to the thirtieth day after the date of 
publication of notice of filing thereof in the Federal Register. The 
Commission believes that granting accelerated approval to the proposed 
rule change will allow the Exchange to continue to provide protection 
to customer limit orders in subpenny increments for NNM and SmallCap 
securities. Moreover, the Commission believes that approving the 
proposal on an accelerated basis should help to ensure fair competition 
among the CSE, the CHX, and the Nasdaq Stock Market, Inc.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\20\ that the proposed rule change (SR-CSE-2001-06) is hereby 
approved on an accelerated basis for a pilot period ending on September 
30, 2002.
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    \20\ 15 U.S.C. 78s(b)(2).

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[[Page 50745]]

    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).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-19616 Filed 8-2-02; 8:45 am]
BILLING CODE 8010-01-P