[Federal Register Volume 68, Number 108 (Thursday, June 5, 2003)]
[Notices]
[Pages 33748-33749]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-14113]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47950]


Order Pursuant to Section 11A of the Securities Exchange Act of 
1934 and Rule 11Aa3-2(f) Thereunder Extending a De Minimis Exemption 
for Transactions in Certain Exchange-Traded Funds From the Trade-
Through Provisions of the Intermarket Trading System

May 30, 2003.
    Effective September 4, 2002, the Commission granted a nine-month de 
minimis exemption to the provisions of the Intermarket Trading System 
Plan (``ITS Plan''),\1\ a national market system plan,\2\ governing 
intermarket trade-

[[Page 33749]]

throughs.\3\ This order extends this de minimis exemption.
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    \1\ The self-regulatory organizations (``SROs'') participating 
in the ITS Plan include the American Stock Exchange LLC, the Boston 
Stock Exchange, Inc., the Chicago Board Options Exchange, Inc., the 
Chicago Stock Exchange, Inc., the Cincinnati Stock Exchange, Inc., 
the National Association of Securities Dealers, Inc. (``NASD''), the 
New York Stock Exchange, Inc., the Pacific Exchange, Inc., and the 
Philadelphia Stock Exchange, Inc. (collectively, the 
``participants''). See Securities Exchange Act Release No. 19456 
(January 27, 1983), 48 FR 4938 (February 3, 1983).
    \2\ Securities Exchange Act of 1934 (``Act'') Rule 11Aa3-2(d), 
17 CFR 240.11Aa3-2(d), promulgated under Section 11A, 15 U.S.C. 78k-
1, of the Act requires each self-regulatory organization (``SRO'') 
to comply with, and enforce compliance by its members and their 
associated persons with, the terms of any effective national market 
system plan of which it is a sponsor or participant. Rule 11Aa3-
2(f), 17 CFR 240.11Aa3-2(f), under the Act authorizes the Commission 
to exempt, either unconditionally or on specified terms and 
conditions, any SRO, member of an SRO, or specified security from 
the requirement of the rule if the Commission determines that such 
exemption is consistent with the public interest, the protection of 
investors, the maintenance of fair and orderly markets and the 
removal of impediments to, and perfection of the mechanisms of, a 
national market system.
    \3\ See generally Securities Exchange Act Release No. 46428, 67 
FR 56607 (September 4, 2002).
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    The ITS Plan system is an order routing network designed to 
facilitate intermarket trading in exchange-listed securities among 
participating SROs based on current quotation information emanating 
from their markets. Quotations in exchange-listed securities are 
collected and disseminated by the Consolidated Quote System (``CQS''), 
which is governed by a national market system plan that the Commission 
has approved pursuant to Rule 11Aa3-2 under the Act.\4\ Under the ITS 
Plan, a member of a participating SRO may access the best bid or offer 
displayed in CQS by another Participant by sending an order (a 
``commitment to trade'') through ITS to that Participant. Exchange 
members participate in ITS through facilities provided by their 
respective exchanges. NASD members participate in ITS through a 
facility of the Nasdaq Stock Market (``Nasdaq'') known as the Computer 
Assisted Execution System (``CAES''). Market makers and electronic 
communications networks (``ECNs'') that are members of the NASD and 
seek to display their quotes in exchange-listed securities through 
Nasdaq must register with the NASD as ITS/CAES Market Makers.\5\
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    \4\ 17 CFR 240.11Aa3-2.
    \5\ See Securities Exchange Act Release No. 42536 (March 16, 
2000), 65 FR 15401 (March 22, 2000). Market Makers and ECNs are 
required to provide their best-priced quotations and customer limit 
orders in certain exchange-listed and Nasdaq securities to an SRO 
for public display under Commission Rule 11Ac1-1 and Regulation ATS. 
17 CFR 240.11Ac1-1 and 242.301(b)(3).
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    The Commission's August 2002 order granted a de minimis exemption 
from compliance with Section 8(d)(i) of the ITS Plan with respect to 
three specific exchange-traded funds (``ETFs''), the Nasdaq-100 Index 
ETF (``QQQ''), the Dow Jones Industrial Average ETF (``DIA''), and the 
Standard & Poor's 500 Index ETF (``SPY'').\6\ Section 8(d)(i) of the 
ITS Plan provides that participants should not purchase or sell any 
security that trades on the ITS Plan system at a price that is worse 
than the price at which that security is otherwise being offered on the 
ITS Plan system.\7\ By its terms, the Commission's order exempts from 
the trade-through provisions of the ITS Plan any transactions in the 
three ETFs that are effected at prices at or within three cents away 
from the best bid and offer quoted in the CQS for a period of nine 
months, which ends on June 4, 2003.
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    \6\ The Commission limited the de minimis exemption to the three 
securities because they share certain characteristics that may make 
immediate execution of their shares highly desirable to certain 
investors. In particular, trading in the three ETFs is highly liquid 
and market participants may value an immediate execution at a 
displayed price more than the opportunity to obtain a slightly 
better price.
    \7\ Each ITS participant has adopted a trade-through rule 
substantially similar to the rule of the ITS Plan. See ITS Plan, 
Section 8(d)(ii); See, e.g., NYSE Rule 15A, NASD Rule 5262.
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    The three cent de minimis exemption allows ITS participants and 
their members to execute transactions, through automated execution or 
otherwise, without attempting to access the quotes of other 
participants when the expected price improvement would not be 
significant. In providing the three cent de minimis exemption, the 
Commission believed that, on balance, exempting the specified 
transactions from the ITS trade-through provisions would provide 
investors increased liquidity and expand the choice of execution 
venues, while limiting the possibility that investors would receive 
significantly inferior prices.
    The Commission granted the three cent de minimis exemption on a 
temporary, nine-month basis, in order to gather the data necessary to 
study the effects of an exemption from the ITS trade-through provisions 
and the desirability of extending the exemption. The Commission is 
currently assessing trading data associated with the de minimis 
exemption, and over the next nine-months intends to consider whether to 
adopt the de minimis exemption on a permanent basis, to adopt some 
other alternative solution, or to allow the exemption to expire.
    In view of the foregoing, the Commission believes that an extension 
of the de minimis exemption for an additional nine-month period is 
consistent with the public interest, the protection of investors, the 
maintenance of fair and orderly markets and the removal of impediments 
to, and perfection of the mechanisms of, a national market system. The 
Commission emphasizes, as it did in its August 2002 order, that the de 
minimis exemption does not relieve brokers and dealers of their best 
execution obligations under the federal securities laws and SRO rules.
    Accordingly, it is ordered, pursuant to Section 11A of the Act and 
Rule 11Aa3-2(f) thereunder,\8\ that participants of the ITS Plan and 
their members are hereby exempt from Section 8(d) of the ITS Plan 
during the period covered by this Order with respect to transactions in 
QQQs, DIAs, and SPYs that are executed at a price that is no more than 
three cents lower than the highest bid displayed in CQS and no more 
than three cents higher than the lowest offer displayed in CQS. This 
Order extends the de minimis exemption from June 4, 2003 through March 
4, 2004.
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    \8\ 17 CFR 240.11Aa3-2(f).

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-14113 Filed 6-4-03; 8:45 am]
BILLING CODE 8010-01-P