[Federal Register Volume 69, Number 127 (Friday, July 2, 2004)]
[Notices]
[Pages 40437-40439]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-15082]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49913; File No. SR-NSX-2004-04]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the National Stock Exchange To 
Extend an Existing Pilot Rule That Stipulates the Price Increment by 
Which Designated Dealers Must Better Customer Orders

June 24, 2004.
    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 June 17, 2004, the 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 has filed this 
proposed rule change pursuant to section 19(b)(3)(A) of the Act \4\ and 
Rule 19b-4(f)(6) thereunder,\5\ which renders the proposal effective 
upon filing with the Commission. The Commission is publishing this 
notice to solicit comment 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.
    \3\ The Exchange recently changed its name and was formerly 
known as The Cincinnati Stock Exchange or ``CSE''. 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).
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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 pilot 
Exchange Rule 12.6, Interpretation .02, which requires an Exchange 
Designated Dealer (``Specialist'') to better the price of a customer 
limit order held by the Specialist if the Specialist decides to trade 
with an incoming market or marketable limit order.\6\ Pursuant to

[[Page 40438]]

Interpretation .02(a), the Specialist is required to better a customer 
limit order at the national best bid or offer (``NBBO'') by at least 
one penny. Pursuant to Interpretation .02(b), if the customer limit 
order is outside the current NBBO, the Specialist is required to better 
the customer limit order by at least the nearest penny increment.
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    \6\ See Securities Exchange Act Release Nos. 46274 (July 29, 
2002), 67 FR 50743 (August 5, 2002) (establishing pilot); 46554 
(September 25, 2002), 67 FR 6276 (October 4, 2002) (first extension 
of pilot); 46929 (November 27, 2002), 67 FR 72711 (December 6, 2002) 
(second extension of pilot); 47941 (May 29, 2003), 68 FR 33751 (June 
5, 2003) (third extension of pilot).
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    The Exchange seeks to extend the pilot through June 30, 2005.\7\ 
The Exchange does not seek to make substantive changes to the pilot at 
this time. The text of the proposed rule change is available at the 
Exchange's Office of the Secretary and at the Commission's Public 
Reference Room.
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    \7\ The Exchange understands that the Commission's proposed 
Regulation NMS may have an impact on this pilot program. 
Accordingly, the Exchange has stated that it will undertake to work 
with the Commission to ensure that the pilot program would be 
consistent with the rules and regulations contained in Regulation 
NMS, when it is adopted.
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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 IV below and is 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 Interpretation .02 under 
Exchange Rule 12.6,\8\ which relates to the trading of securities in 
subpenny increments.\9\ 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.\10\
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    \8\ 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.
    \9\ In connection with pilot Interpretation .02, the Exchange 
also has received a Commission exemption from Rules 11Ac-1, 11Ac1-2, 
and 11Ac1-4 under the Act, 17 CFR 240.11Ac-1, 240.11Ac1-2, and 
240.11Ac1-4, that allows Exchange members to display their quotes 
for Nasdaq National Market securities in whole penny increments 
while trading in subpenny increments. See letter from Robert L.D. 
Colby, Deputy Director, Division of Market Regulation 
(``Division''), Commission, to Jeffrey T. Brown, Senior Vice 
President and General Counsel, Exchange, dated July 26, 2002 
(granting initial exemption) in response to letter from Jeffrey T. 
Brown, Senior Vice President and General Counsel, the Exchange, to 
Annette Nazareth, Director, Division, Commission, dated November 27, 
2001 (requesting initial exemption); letter from Robert L.D. Colby, 
Deputy Director, Division, Commission, to Jeffrey T. Brown, Senior 
Vice President and General Counsel, Exchange, dated September 25, 
2002 (amending and extending initial exemption) in response to 
letter from Jeffrey T. Brown, Senior Vice President and General 
Counsel, Exchange, to Annette Nazareth, Director, Division, 
Commission, dated September 18, 2002 (requesting first extension); 
letter from Alden S. Adkins, Associate Director, Division, 
Commission, to Jeffrey T. Brown, Senior Vice President and General 
Counsel, Exchange, dated November 27, 2002 (granting second 
extension) in response to letter from Jeffrey T. Brown, Senior Vice 
President and General Counsel, Exchange, to Annette Nazareth, 
Director, Division, Commission, dated November 20, 2002 (requesting 
second extension); letter from Robert L.D. Colby, Deputy Director, 
Division, Commission, to Jeffrey T. Brown, Senior Vice President and 
General Counsel, Exchange, dated May 29, 2003 (granting third 
extension) in response to letter from Jeffrey T. Brown, Senior Vice 
President and General Counsel, Exchange, to Annette Nazareth, 
Director, Division, Commission, dated May 19, 2003 (requesting third 
extension); letter from Robert L.D. Colby, Deputy Director, 
Division, Commission, to Jennifer M. Lamie, Assistant General 
Counsel and Secretary, Exchange, dated December 1, 2003 (granting 
fourth extension) in response to letter from Jennifer M. Lamie, 
Assistant General Counsel and Secretary, Exchange, to Annette 
Nazareth, Director, Division, Commission, dated November 21, 2003 
(requesting fourth extension). In conjunction with the proposed rule 
change, the Exchange has requested that the Commission extend its 
exemption from Rules 11Ac1-1, 11Ac1-2, and 11Ac1-4 under the Act to 
allow subpenny quotations to be rounded down (for buy orders) and 
rounded up (for sell orders) to the nearest penny for quote 
dissemination for Nasdaq and listed securities. See letter from 
James C. Yong, Senior Vice President, Regulation and General 
Counsel, Exchange, to Annette Nazareth, Director, Division, 
Commission, dated May 20, 2004.
    \10\ 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 Interpretation is to prevent a Specialist from 
taking unfair advantage of customer limit orders held by that 
Specialist by trading with incoming market or marketable limit orders 
ahead of such orders. Although a Specialist may price-improve incoming 
orders by providing prices superior to that of the customer limit 
orders that he or she 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 prices of the customer limit order that he or she holds (not 
the customers' quoted prices).
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the provisions of Section 6(b) of the Act \11\ in general and 
Section 6(b)(5) of the Act \12\ 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.
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    \11\ 15 U.S.C. 78f(b).
    \12\ 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 inappropriate 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. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The Exchange asserts that the proposed rule change is immediately 
effective pursuant to section 19(b)(3)(A) of the Act \13\ and Rule 19b-
4(f)(6) thereunder \14\ because it: (1) Does not significantly affect 
the protection of investors or the public interest; (2) does not impose 
any significant burden on competition; and (3) does not become 
operative for 30 days from the date on which it was filed, or such 
shorter time as the Commission may designate if

[[Page 40439]]

consistent with protection of investors and the public interest.\15\
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    \13\ 15 U.S.C. 78s(b)(3)(A).
    \14\ 17 CFR 240.19b-4(f)(6).
    \15\ In addition, to submit a filing pursuant to Rule 19b-
4(f)(6) under the Act, paragraph (f)(6)(iii) thereof also requires 
the Exchange to give the Commission written notice of its intent to 
file the proposed rule change, along with a brief description and 
text of the proposed rule change, at least five business days prior 
to the date of filing of the proposed rule change, or such shorter 
time as designated by the Commission. The Exchange complied with 
this requirement. See letter from James C. Yong, Senior Vice 
President, Regulation and General Counsel, Exchange, to Nancy Sanow, 
Assistant Director, Division, Commission, dated May 20, 2004.
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    The Exchange has requested that the Commission waive the 30-day 
operative date in this case, and the Commission hereby grants this 
request.\16\ The Commission believes that waiving the 30-day pre-
operative period is consistent with the protection of investors and the 
public interest because it will allow the pilot to continue 
uninterrupted. At any time within 60 days of the filing of the proposed 
rule change, the Commission may summarily abrogate such proposed 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.
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    \16\ For purposes only of accelerating the operative date of 
this proposal, the Commission has considered the proposed rule's 
impact on efficiency, competition, and capital formation. See 15 
U.S.C. 78c(f).
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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. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please include 
SR-NSX-2004-04 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609.

    All submissions should refer to SR-NSX-2004-04. This file number 
should be included on the subject line if e-mail is used. To help the 
Commission process and review your comments more efficiently, please 
use only one method. The Commission will post all comments on the 
Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). 
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 Section, 450 Fifth Street, NW., 
Washington, DC 20549. Copies of such filing also will be available for 
inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to SR-NSX-2004-04 and should be submitted on 
or before July 23, 2004. 

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority. \17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-15082 Filed 7-1-04; 8:45 am]
BILLING CODE 8010-01-P