[Federal Register Volume 68, Number 182 (Friday, September 19, 2003)]
[Notices]
[Pages 54924-54925]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-23949]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48491; File No. SR-CSE-2003-10]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by The Cincinnati Stock Exchange, Inc. To Eliminate Market Order 
Exposure Requirements

September 12, 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 
Commission is publishing this notice to solicit comments on 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.
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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) to eliminate 
Interpretation .01, concerning market order exposure requirements 
(``Market Order Exposure Requirement'').\3\ The CSE is also proposing 
to amend CSE Rule 8.15 to remove a reference to Interpretation .01 of 
Rule 11.9(u). The text of the proposed rule change is set forth below. 
Proposed new language is in italics; proposed deletions are in 
[brackets].\4\
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    \3\ As a result of the amendment, the relevant interpretations 
and policies contained in CSE Regulatory Circulars 01-07, 99-03, 98-
06, 97-07, 96-04 will also be repealed.
    \4\ At the request of the Exchange, the Commission has revised 
the proposed rule text (i) to insert the word ``wide'' at the end of 
clauses (a)1, (a)2 and (a)3; (ii) to reflect that the proposed rule 
change would not change the text of paragraph (g) of CSE Rule 8.15, 
Interpretation .01; and (iii) to correct a typographical error in 
paragraph (b)1.i. of Rule 11.9(u), Interpretation .01. Telephone 
conversation between Jeffrey T. Brown, Senior Vice President, 
Regulation and General Counsel, Exchange and Ann E. Leddy, Attorney, 
Division of Market Regulation, Commission (September 12, 2003).
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Rule 8.15. Imposition of Fines for Minor Violation(s) of Rules
* * * * *

Interpretations and Policies

.01 List of Exchange Rule Violations and Fines Applicable thereto 
Pursuant to Rule 8.15:
    (a)-(g) No Change to Text.
    [(h) Rule 11.9(u) and Interpretation .01 related to the requirement 
to immediately execute market orders 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.
    Recommended Fine Amount
    $1,000 first violation of the 2% quarterly threshold
    $2,500 second violation
    Third violation Business Conduct Committee Hearing]
* * * * *

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, 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 ($.05) wide;
    2. market orders with sizes between 1001 shares and 5000 shares 
when the NBBO at time of order receipt is more than 10 cents ($.10) 
wide; and
    3. market orders with sizes above 5000 shares when the NBBO at time 
of order receipt is more than 15 cents ($.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.]
[.02].01 Limit Order Protection
    No Change to Text.
* * * * *

[[Page 54925]]

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 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 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

1. Purpose
    The purpose of the proposed rule change is to amend CSE Rule 
11.9(u) to eliminate Interpretation .01, which requires preferencing 
designated dealers (``PDDs'') trading Intermarket Trading System 
(``ITS'') securities, except under unusual market conditions or if it 
is not in the best interest of the customer, when the spread between 
the national best bid and offer is greater than the minimum price 
variation, immediately either to execute a market order at an improved 
price or expose the market order for a minimum of fifteen seconds in an 
attempt to improve the price.\5\ The CSE believes that it is the only 
market with such a requirement. In conjunction with the elimination of 
the requirement, the Exchange is also proposing to remove 
Interpretation .01 of Rule 11.9(u) from its schedule of Exchange Rules 
that are subject to the CSE's minor rule violation plan, CSE Rule 8.15.
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    \5\ This provision applies only to public agency buy/sell market 
orders in securities other than Nasdaq national market securities. 
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. See CSE Regulatory Circulars 
01-07, 99-03, 98-06, 97-07 and 96-04. These interpretations were 
incorporated into the text of the rule language through File No. SR-
CSE-2003-09. Securities Exchange Act Release No. 48388 (August 21, 
2003), 68 FR 51820 (August 28, 2003).
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    The Market Order Exposure Requirement was initially adopted as part 
of the Exchange's PDD program at a time when the industry minimum price 
variation was 1/8th of a dollar ($0.125) resulting in the CSE's market 
order exposure rule applying when bid/ask spreads were 1/4th of a 
dollar ($0.25).\6\ Given the advent of decimal pricing and today's 
narrow spreads, the CSE proposes to eliminate the rule. At the same 
time, PDDs' best execution responsibilities will continue to apply. 
This will provide the CSE's PDDs with more flexibility when handling 
customer market orders while also permitting them to operate on a level 
playing field with participants that trade ITS securities on other 
markets without being subject to similar requirements.
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    \6\ While over time the minimum trading increment has decreased 
from 1/8th to subpenny increments, until recently the requirements 
of Rule 11.9(u) Interpretation .01 remained applicable only when the 
price variation in the spread between the best national bid and 
offer is greater than or equal to \1/4\ 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). Through SR-CSE-2003-09, the Exchange modified its 
Market Order Exposure Requirement by reducing the exposure period 
from 15 seconds to 5 seconds and imposing the rule based on the size 
of the market order received by the CSE PDDs. Specifically, the CSE 
introduced 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. 
File No. SR-CSE-2003-09, note 4 supra.
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2. Statutory Basis
    The CSE believes that the proposed rule change is generally 
consistent with Section 6(b) of the Act.\7\ The proposed rule change 
also furthers the objectives of Section 6(b)(5) of the Act,\8\ 
particularly, 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.
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    \7\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The CSE does not believe that the proposed rule change impose any 
inappropriate burden on competition.

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

    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 self-regulatory organization consents, the Commission will:
    A. By order approve such proposed rule change, or
    B. institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. 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 
CSE. All submissions should refer to File No. SR-CSE-2003-10 and should 
be submitted by October 10, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 03-23949 Filed 9-18-03; 8:45 am]
BILLING CODE 8010-01-P