[Federal Register Volume 68, Number 167 (Thursday, August 28, 2003)]
[Notices]
[Pages 51820-51822]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-22031]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48388; File No. SR-CSE-2003-09]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by The Cincinnati Stock Exchange, 
Inc. Relating to Market Order Exposure Requirements

August 21, 2003.
    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 August 7, 2003, 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, II, 
and III below, which Items have been prepared by the CSE. The Exchange 
filed the proposal pursuant to Section 19(b)(3)(A)(i) of the Act,\3\ 
and Rule 19b-4(f)(1)\4\ thereunder, as one constituting a stated 
policy, practice, or interpretation with respect to the meaning, 
administration, or enforcement of an existing rule, which renders the 
proposal effective upon filing with the Commission. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A)(i).
    \4\ 17 CFR 240.19b-4(f)(1).
---------------------------------------------------------------------------

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

    The CSE is proposing to amend CSE Rule 11.9(u), Interpretation .01, 
concerning market order exposure requirements (``Market Order Exposure 
Requirement''). The proposed rule change would modify the rule language 
in light of the current $0.01 minimum price variation and codify 
certain of the Exchange's stated policies and interpretations contained 
in CSE Regulatory Circulars.\5\
---------------------------------------------------------------------------

    \5\ See Regulatory Circulars 01-07, 99-03, 98-06, 97-07 and 96-
04.
---------------------------------------------------------------------------

    The text of the proposed rule change is set forth below. Proposed 
new language is in italics; proposed deletions are in [brackets].\6\
---------------------------------------------------------------------------

    \6\ At the request of the Exchange, the Commission has revised 
the proposed rule change to insert the word ``wide'' at the end of 
clauses (a)1, (a)2 and (a)3. Telephone conversation between John 
Polise, Senior Special Counsel, Joseph P. Morra, Special Counsel and 
Ann E. Leddy, Attorney, Division of Market Regulation, Commission, 
and Jeffrey T. Brown, Senior Vice President, Regulation and General 
Counsel, Exchange (August 20, 2003).
---------------------------------------------------------------------------

* * * * *
Rule 11.9(u), Interpretations and Policies
* * * * *
.01 Market Order Exposure Requirement
    (a) Consistent with his or her agency responsibility to exercise 
due diligence, a member must comply with the following procedures which 
provide the opportunity for public agency buy/sell market orders in 
securities other than Nasdaq/NM securities to receive a price lower/
higher than the disseminated national best offer/bid.
    Except under unusual market conditions or if it is not in the best 
interests of the customer, [when the spread between the national best 
bid and offer is greater than the minimum price variation a member must 
either immediately execute the market order at an improved price or 
expose the market order on the Exchange for a minimum of fifteen 
seconds in an attempt to improve the price.] Preferencing Dealers must 
immediately price improve or expose for a minimum of five seconds in an 
attempt to improve the price:
    1. market orders with sizes less than or equal to 1000 shares when 
the NBBO at time of order receipt is more than 5 cents ($0.05) wide;
    2. market orders with sizes between 1001 shares and 5000 shares 
when the NBBO at time of order receipt is more than 10 cents ($0.10) 
wide; and
    3. market orders with sizes above 5000 shares when the NBBO at time 
of order receipt is more than 15 cents ($0.15) wide.
    (b) to assist Preferencing Dealers in satisfying their obligations 
under the rule, the following exceptions apply:

1. Unusual Market Conditions

    Unusual market conditions include the following conditions:
    i. The NBBO is more than 1 dollar ($1.00) wide at receipt;
    ii. the market is locked or crossed at receipt or becomes that way 
during exposure;
    iii. when circuit breakers have been activated;
    iv. during and immediately after the opening (a period not to 
exceed 5 minutes);
    v. immediately prior to the close (a period not to exceed 5 
minutes);
    vi. when the Exchange has declared a fast market; and
    vii. when non-firm markets exist.

2. Best Interests of the Customer

    In order to protect the best interests of the customer, the 
following orders may require unique handling subject to the application 
of a member's brokerage judgment and experience as required by CSE Rule 
12.10, Best Execution:
    i. block size market orders as defined in the Intermarket Trading 
System Plan;
    ii. odd-lot orders;
    iii. contingent orders;
    iv. a market order for a quantity that exceeds the existing NBBO 
size;
    v. NBBO moves in direction of market order stop price; and
    vi. Primary market trades at market order stop price.
* * * * *

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 CSE included statements 
concerning the purpose of and basis for its proposal and discussed any 
comments it received regarding the proposal. The text of these 
statements may be examined at the places specified in Item IV below. 
The CSE 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

    The purpose of the proposed rule change is to amend CSE Rule 
11.9(u),

[[Page 51821]]

Interpretation .01, to modify the rule language in light of the current 
$0.01 minimum price variation in quoted spreads.\7\ In addition, the 
proposed rule change would codify certain of the Exchange's stated 
policies and interpretations contained in CSE Regulatory Circulars.\8\ 
Rule 11.9(u), Interpretation .01, which applies only to ITS eligible 
securities, requires Preferencing Designated Dealers (``PDDs'') in 
greater than minimum price variation spreads between the national best 
bid and offer (``NBBO'') to, except under unusual market conditions or 
if it is not in the best interest of the customer, either immediately 
execute a market order at an improved price or expose it on the 
Exchange for a minimum of fifteen seconds.\9\
---------------------------------------------------------------------------

    \7\ While over time the minimum trading increment has decreased 
from one-eighth to subpenny increments, under the current 
interpretation the requirements of Rule 11.9(u) Interpretation .01 
remain applicable only when the price variation in the spread 
between the best national bid and offer is greater than or equal to 
one-fourth of a $1 ($0.25). See CSE Regulatory Circular 97-07; see 
also Securities Exchange Act Release Nos. 39720 (March 4, 1998), 63 
FR 11942 (March 11, 1998)(SR-CSE-97-13); 43471 (October 20, 2000), 
65 FR 64463 (October 27, 2000) (SR-CSE-00-08); and 43653 (December 
1, 2000), 65 FR 77055 (December 8, 2000) (SR-CSE-00-08) (each of 
which references CSE Regulatory Circular 97-07 for further 
discussion of CSE's Market Order Exposure Requirement).
    \8\ See supra, note 5.
    \9\ This provision applies only to public agency buy/sell market 
orders in securities other than Nasdaq national market securities.
---------------------------------------------------------------------------

    The Market Order Exposure Requirement was adopted when the industry 
minimum price variation was one-eighth of a dollar ($0.125) resulting 
in the CSE's market order exposure rule applying when bid/ask spreads 
were one-fourth of a dollar ($0.25).\10\ Given the advent of decimal 
pricing and today's narrow spreads, the CSE proposes to update its 
rule. The CSE seeks to reduce the exposure period from 15 seconds to 5 
seconds and to impose the Market Order Exposure Requirement based on 
the size of the market order received by the CSE PDDs. Specifically, 
the CSE proposes a three-tiered application of the rule to require PDDs 
to: (1) Expose for 5 seconds or execute immediately at an improved 
price market orders of 1000 shares or less received when the NBBO is 
more than 5 cents ($0.05) wide; (2) expose for 5 seconds or execute 
immediately at an improved price market orders with share size between 
1001 and 5000 shares received when the NBBO is more than 10 cents 
($0.10) wide; and (3) expose for 5 seconds or execute immediately at an 
improved price market orders with size greater than 5001 shares when 
the NBBO is more than 15 cents ($0.15) wide.\11\
---------------------------------------------------------------------------

    \10\ See supra, note 7.
    \11\ In a separate rule filing, SR-CSE-2003-10, CSE is proposing 
to eliminate the Market Order Exposure Requirement completely.
---------------------------------------------------------------------------

    As noted above, the CSE's Market Order Exposure Requirement 
anticipates that certain market conditions preclude application of the 
rule. The rule carves out these market conditions by providing that: 
``[e]xcept under unusual market conditions or if it is not in the best 
interests of the customer * * * ''\12\ Over the years, the CSE has 
disseminated Regulatory Circulars describing the Exchange's 
interpretations of ``unusual market conditions'' or when ``it is not in 
the best interests of the customer'' to expose a market order.\13\ The 
CSE proposes now to incorporate these interpretations into the language 
of the rule. Therefore, to assist PDDs in satisfying their obligations 
under the rule, the following exceptions apply:
---------------------------------------------------------------------------

    \12\ CSE Rule 11.9(u), Interpretations and Policies .01.
    \13\ See supra, note 5.
---------------------------------------------------------------------------

Unusual Market Conditions

    Unusual market conditions include the following conditions:
    1. The NBBO is more than 1 dollar ($1.00) wide at receipt;
    2. the market is locked or crossed at receipt or becomes that way 
during exposure;
    3. when circuit breakers have been activated;
    4. during and immediately after the opening (a period not to exceed 
5 minutes);
    5. immediately prior to the close (a period not to exceed 5 
minutes);
    6. when the exchange has declared a fast market; and
    7. when non-firm markets exist.

Best Interests of the Customer

    In order to protect the best interests of the customer, the 
following orders may require unique handling subject to the application 
of a member's brokerage judgment and experience as set forth by CSE 
Rule 12.10, Best Execution:\14\
---------------------------------------------------------------------------

    \14\ CSE Rule 12.10, Best Execution.
---------------------------------------------------------------------------

    1. block size market orders as defined in the Intermarket Trading 
System Plan;
    2. odd-lot orders;
    3. contingent orders;
    4. a market order for a quantity that exceeds the existing NBBO 
size;
    5. NBBO moves in direction of market order stop price; and
    6. primary market trades at market order stop price.
1. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the provisions of Section 6(b) of the Act,\15\ in general, and 
with Section 6(b)(5) of the Act,\16\ in particular, in that it is 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade and to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system and, generally, in that it protects investors 
and the public interest.
---------------------------------------------------------------------------

    \15\ 15 U.S.C. 78f(b).
    \16\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement of Burden on Competition

    The CSE does not believe that the proposed rule change will result 
in any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act, as amended.

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

    Written comments were neither solicited nor received.

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

    The foregoing proposal has become effective pursuant to Section 
19(b)(3)(A)(i) of the Act,\17\ and Rule 19b-4(f)(1)\18\ thereunder, in 
that it constitutes a stated policy, practice, or interpretation with 
respect to the meaning, administration, or enforcement of an existing 
rule. At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.
---------------------------------------------------------------------------

    \17\ 15 U.S.C. 78s(b)(3)(A)(i).
    \18\ 17 CFR 240.19b-4(f)(1).
---------------------------------------------------------------------------

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposal 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

[[Page 51822]]

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 
number SR-CSE-2003-09 and should be submitted by September 18, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\19\
---------------------------------------------------------------------------

    \19\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-22031 Filed 8-27-03; 8:45 am]
BILLING CODE 8010-01-P