[Federal Register Volume 67, Number 235 (Friday, December 6, 2002)]
[Notices]
[Pages 72711-72713]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-30887]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46929; File No. SR-CSE-2002-17]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by the Cincinnati 
Stock Exchange, Inc. Relating to an Extension of an Existing Pilot 
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

November 27, 2002.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and rule 19b-4 thereunder,\2\

[[Page 72712]]

notice is hereby given that on November 21, 2002, 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. 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 through May 31, 2003.
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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 Exchange proposes to extend the termination date of the pilot 
that amends CSE rule 12.6, Customer Priority, by adding new 
Interpretation .02, which requires 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.\3\ Under the pilot rule, the 
Specialist is 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 an extension of 
the pilot, and the exemption letters associated therewith.\4\ The 
proposed extension of the pilot requires no changes to the Initial 
Pilot rule text, which is available at the CSE and at the Commission.
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    \3\ See Securities Exchange Act Release No. 46274 (July 29, 
2002), 67 FR 50743 (August 5, 2002) (File No.SR-CSE-2001-06) 
(``Initial Pilot''). See also Securities Exchange Act Release No. 
46554 (September 25, 2002), 67 FR 6276 (October 4, 2002) (``Pilot 
Extension'').
    \4\ See letter from Robert L.D. Colby, Deputy Director, Division 
of Market Regulation (``Division''), Commission, to Jeffrey T. 
Brown, General Counsel, CSE (July 26, 2002) (``Initial Exemption 
Letter'') and letter from Jeffrey T. Brown, General Counsel, CSE, to 
Annette Nazareth, Director, Division, Commission (November 27, 2001) 
(``Initial Exemption Request''). See also letter from Robert L.D. 
Colby, Deputy Director, Division, Commission, to Jeffrey T. Brown, 
General Counsel, CSE (September 25, 2002) (amending and extending 
the Initial Exemption Letter) (``Amended Exemption Letter'') and 
letter from Jeffrey T. Brown, General Counsel, CSE, to Annette 
Nazareth, Director, Division, Commission (September 18, 2002) 
(``Amended Exemption Request'').
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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 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 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 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 has 
requested that the Commission extend the relief provided by the 
Initial Exemption Letter and the Amended Exemption Letter 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 for 
Nasdaq and listed securities. See Letter to Annette Nazareth, 
Director, Division, Commission, from Jeffrey T. Brown, Senior Vice 
President & General Counsel, CSE (November 20, 2002) (``Instant 
Exemption Request''). Concurrent with the instant accelerated 
approval, the Commission has granted the Instant Exemption Request. 
See letter from Alden S. Adkins, Associate Director, Division, 
Commission, to Jeffrey T. Brown, Senior Vice President & General 
Counsel, CSE (November 27, 2002) (``Instant Exemption Letter'').
    \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 have their orders 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 through 
May 31, 2003, to be co-extensive with the conditional temporary 
exemptive relief granted concurrently by the Commission in the Instant 
Exemption Letter.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 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 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

[[Page 72713]]

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-2002-17 and 
should be submitted by December 27, 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,\10\ and, in particular section 6(b)(5) of 
the Act.\11\ As discussed above, through the Instant Exemption Letter, 
the Division has extended the relief granted by the Amended Exemption 
Letter. The Commission believes that the proposed rule change should 
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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    \10\ 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).
    \11\ 15 U.S.C. 78f(b)(5).
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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 provide uninterrupted protection 
to customer limit orders in subpenny increments in Nasdaq securities 
and expedite the protection of customer limit orders in subpenny 
increments in listed securities.

V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\12\ that the proposed rule change (SR-CSE-2002-17) is hereby 
approved on an accelerated basis for a pilot period through May 31, 
2003.
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    \12\ 15 U.S.C. 78s(b)(2).

    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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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 02-30887 Filed 12-5-02; 8:45 am]
BILLING CODE 8010-01-P