[Federal Register Volume 68, Number 236 (Tuesday, December 9, 2003)]
[Notices]
[Pages 68684-68685]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-30502]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48869; File No. SR-CSE-2003-16]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by National Stock Exchange To 
Extend a Pilot Amending Exchange Rule 12.6, Customer Priority, To 
Require Designated Dealers To Better Customer Orders at the National 
Best Bid or Offer by Whole Penny Increments

December 3, 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 November 28, 2003, National Stock Exchange (``Exchange'') \3\ 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 Exchange filed this proposal 
pursuant to section 19(b)(3)(A) of the Act \4\ and Rule 19b-4(f)(6) \5\ 
thereunder, which renders the proposal effective upon filing with the 
Commission.\6\ 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\ The Exchange was formerly known as The Cincinnati Stock 
Exchange. See Securities Exchange Act Release No. 48774 (November 
12, 2003), 68 FR 65332 (November 19, 2003) (SR-CSE-2003-12).
    \4\ 15 U.S.C. 78s(b)(3)(A).
    \5\ 17 CFR 240.19b-4(f)(6).
    \6\ The Exchange gave the Commission written notice of its 
intention to file the proposed rule change on November 24, 2003. The 
Commission reviewed the Exchange's submission, and asked the 
Exchange to file the instant proposed rule change pursuant to Rule 
19b-4(f)(6) under the Act. The Exchange asked the Commission to 
waive the 30-day operative delay. 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

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 a pilot 
that amended Exchange Rule 12.6, ``Customer Priority,'' to add 
Interpretation .02.
    Interpretation .02 requires an Exchange 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.\7\ Under the pilot rule, the 
Specialist is required to better a customer limit order at the national 
best bid or offer (``NBBO'') by at least one penny and at a price 
outside the current NBBO by at least the nearest penny increment. 
Through this proposal, the Exchange is seeking only to extend the 
existing pilot, and the exemption letters associated therewith,\8\ 
through June 30, 2004. The Exchange proposes no other substantive 
changes to the pilot. The text of the proposed rule change is available 
at the Exchange and at the Commission.
---------------------------------------------------------------------------

    \7\ See Securities Exchange Act Release Nos. 46274 (July 29, 
2002), 67 FR 50743 (August 5, 2002) (SR-CSE-2001-06)(``Pilot''); 
46554 (September 25, 2002), 67 FR 6276 (October 4, 2002)(SR-CSE-
2002-12)(``Pilot Extension''); 46929 (November 27, 2002), 67 FR 
72711 (December 6, 2002)(SR-CSE-2002-17)(``Second Extension''); and 
47941 (May 29, 2003), 68 FR 33751 (June 5, 2003)(SR-CSE-2003-
05)(``Third Exemption'').
    \8\ See letter from Robert L.D. Colby (``Colby''), Deputy 
Director (``DD''), Division of Market Regulation (``Division''), 
Commission, to Jeffrey T. Brown (``Brown''), Senior Vice President 
(``SVP'') and General Counsel (``GC''), the Exchange, (July 26, 
2002) (``Initial Exemption Letter'') in response to letter from 
Brown, SVP and GC, Exchange, to Annette Nazareth (``Nazareth''), 
Director, Division, Commission (November 27, 2001)(``Initial 
Exemptive Request''); letter from Colby, DD, Division, Commission, 
to Brown, SVP and GC, Exchange (September 25, 2002) (amending and 
extending Initial Exemption Letter)(``Amended Exemption Letter'') in 
response to letter from Brown, SVP and GC, Exchange, to Nazareth, 
Director, Division, Commission (September 18, 2002)(``Amended 
Exemption Request''); letter from Alden S. Adkins, Associate 
Director, Division, Commission, to Brown, SVP and GC, Exchange 
(November 27, 2002)(``Second Exemption Extension Letter'') in 
response to letter from Brown, SVP and GC, Exchange, to Nazareth, 
Director, Division, Commission (November 20, 2002)(``Second 
Exemption Request''); and letter from Colby, DD, Division, 
Commission, to Brown, SVP and GC, Exchange, (May 29, 2003)(``Third 
Exemption Extension Letter'') in response to letter from Brown, SVP 
and GC, Exchange, to Nazareth, Director, Division, Commission (May 
19, 2003)(``Third Exemption Request'').
---------------------------------------------------------------------------

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 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
    The Exchange proposes to extend its pilot program, under Exchange 
Rule 12.6,\9\ which relates to the trading of securities in subpenny 
increments.\10\ Under the pilot, Interpretation .02 of Exchange Rule 
12.6 requires 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 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.\11\
---------------------------------------------------------------------------

    \9\ Exchange 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 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.
    \10\ In conjunction with the proposed rule change, the Exchange 
has requested that the Commission again extend the Amended Exemption 
Request 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)) 
of the Act 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 from 
Jennifer M. Lamie (``Lamie''), Assistant General Counsel (``AGC'') 
and Secretary, to Nazareth, Director, Division, Commission (November 
21, 2003) (``Fourth Exemptive Request''). Concurrent with the 
instant rule proposal, the Commission has granted the Fourth 
Exemptive Request. See letter from Colby, DD, Division, Commission, 
to Lamie, AGC and Secretary, CSE (December 1, 2003)(``Fourth 
Exemption Letter'').
    \11\ Interpretation .01 to Exchange 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.''
---------------------------------------------------------------------------

    The purpose of the 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

[[Page 68685]]

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,\12\ in general, and 
section 6(b)(5) of the Act,\13\ 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.
---------------------------------------------------------------------------

    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

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

    The Exchange does not believe that the proposed rule change will 
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

    The Exchange has neither solicited nor received written comments on 
the proposed rule change.

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

    Because the foregoing proposed rule change does not:
    (i) Significantly affect the protection of investors or the public 
interest;
    (ii) Impose any significant burden on competition; and
    (iii) Become operative for 30 days from the date on which it was 
filed, or such shorter time as the Commission may designate, it has 
become effective pursuant to section 19(b)(3)(A) of the Act \14\ and 
Rule 19b-4(f)(6) \15\ thereunder. 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.
---------------------------------------------------------------------------

    \14\ 15 U.S.C. 78s(b)(3)(A).
    \15\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

    The Exchange has requested that the Commission waive the 30-day 
operative delay. The Commission believes that such waiver is consistent 
with the protection of investors and the public interest, for it will 
allow the pilot to continue without interruption. For these reasons, 
the Commission designates the proposal to be effective and operative 
upon filing with the Commission.\16\
---------------------------------------------------------------------------

    \16\ For purposes only of accelerating the operative date of the 
proposed rule change, the Commission has considered the proposed 
rule's impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
---------------------------------------------------------------------------

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. 
Comments may also be submitted electronically at the following e-mail 
address: [email protected]. All comment letters should refer to 
File No. SR-CSE-2003-16. This file number should be included on the 
subject line if e-mail is used. To help us process and review comments 
more efficiently, comments should be sent in hardcopy or by e-mail but 
not by both methods. 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 number SR-CSE-2003-16 and should be 
submitted by December 30, 2003.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\17\
---------------------------------------------------------------------------

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

Jill M. Peterson,
Assistant Secretary.
[FR Doc. 03-30502 Filed 12-8-03; 8:45 am]
BILLING CODE 8010-01-P