[Federal Register Volume 67, Number 198 (Friday, October 11, 2002)]
[Notices]
[Pages 63484-63485]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-26023]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46599; File No. SR-CSE-2002-04]


Self-Regulatory Organizations; Notice of Filing of Amendment Nos. 
1 and 2 to a Proposed Rule Change by the Cincinnati Stock Exchange, 
Inc. Relating to the Introduction of Order Delivery and Automated 
Response

October 4, 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. The proposed rule 
change was published for comment in the Federal Register on May 10, 
2002.\3\ On September 13, 2002, the CSE filed Amendment No. 1 to the 
proposed rule change \4\ and on September 17, 2002, filed Amendment No. 
2 to the proposed rule change.\5\ Amendment Nos. 1 and 2 are 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 Amendment Nos. 1 and 2 to 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.
    \3\ See Securities Exchange Act Release No. 45873 (May 3, 2002), 
67 FR 31856 (``Initial Notice''). No comments have been received on 
the proposal.
    \4\ See letter from Jennifer M. Lamie, CSE, to Katherine 
England, Assistant Director, Division of Market Regulation 
(``Division''), Commission (September 12, 2002) (``Amendment No. 
1'').
    \5\ See letter from Jennifer M. Lamie, CSE, to Katherine 
England, Assistant Director, Division, Commission (September 16, 
2002) (``Amendment No. 2'').
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    As discussed in the Initial Notice, the Exchange proposed to amend 
CSE Rule 11.9, National Securities Trading System (``NSTS'' or 
``System''), to modify CSE's execution functionality 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 System.\6\ The Exchange filed Amendment No. 1 to delete proposed 
rule language in Paragraph 11.9(i)(2)(a) regarding price/time and 
agency/principal priorities, which was inadvertently included in the 
original proposal. The Exchange filed Amendment No. 2 to expand the 
proposed order delivery and automated response alternative to all 
securities traded through the Exchange's NSTS, rather than simply 
Nasdaq National Market Securities. In addition, Amendment No. 2 made 
certain non-substantive grammatical changes. The text of the proposed 
rule change, incorporating Amendment Nos. 1 and 2, is set forth below 
in its entirety. Proposed new language is in italics; proposed 
deletions are in brackets.
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    \6\ In the Initial Notice, reference was made to a defined term, 
the CSE Over-the-Counter Unlisted Trading Privileges System (``CSE 
OTC-UTP System''). This reference created ambiguity, because the 
term CSE OTC-UTP System is defined in and ostensibly created by a 
pending CSE rule filing (File No. SR-CSE-2001-04) that has been 
published in the Federal Register for comment, but has not been 
approved by the Commission. See Securities Exchange Act Release No. 
45405 (February 6, 2002), 67 FR 6558 (February 12, 2002). Because of 
this ambiguity and because of the lack of need for such a defined 
term in the instant proposal, the Exchange requested that the 
Commission remove the defined term, CSE OTC-UTP System, from the 
purpose section of the instant proposal. Telephone discussion 
between Jeffrey, T. Brown, Vice President, Regulation and General 
Counsel, CSE, and Katherine England, Assistant Director, and, 
Christopher B. Stone, Attorney Advisor, Division, Commission 
(October 3, 2002).
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* * * * *
Chapter XI
Trading Rules
Rule 11.9(i)
    The System [shall automatically match and execute like-priced 
orders, bids and offers in accordance with the price-time and agency/
principal priorities set forth in Rule 11.9(l) and (m).] offers two 
modes of order interaction selected by members:
    (1) If automatic execution is selected, the System shall match and 
execute like-priced orders, bids and offers on an order by order basis 
only at the specific instruction of Users, including Designated 
Dealers.
    (2) If order delivery and automated response is selected, the 
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 Exchange 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, as 
amended. 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
    As discussed in the Initial Notice and Amendment Nos. 1 and 2, 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 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 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'') \7\ or alternative trading systems (``ATSs'') subject to SEC 
Regulation ATS,\8\ 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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    \7\ 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.
    \8\ 17 CFR 242.300-303.
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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 System, and when a 
contra-side order is received in the CSE System, CSE will immediately 
forward the order

[[Page 63485]]

message to the quoting member, who will be obligated by rule to respond 
instantaneously to the order message. Moreover, the quoting member must 
have a demonstrated capability to respond instantaneously 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 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,\9\ 
the member will reject the inbound order and send it back to the CSE 
System. The CSE 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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    \9\ 17 CFR 240.11Ac1-1.
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2. Statutory Basis
    The Exchange believes that the proposed rule change, as amended, is 
consistent with the provisions of Section 6(b) of the Act,\10\ in 
general, and Section 6(b)(5) of the Act,\11\ 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, as amended, is 
consistent with Section 6(b)(8) of the Act \12\ 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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    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(5).
    \12\ 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, as 
amended by Amendment Nos. 1 and 2, 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, including Amendment Nos. 1 and 2.

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, as amended, or
    (B) Institute proceedings to determine whether the proposed rule 
change, as amended, should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment Nos. 1 and 2, including whether the 
amendments are 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 November 1, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-26023 Filed 10-10-02; 8:45 am]
BILLING CODE 8010-01-P