[Federal Register Volume 70, Number 130 (Friday, July 8, 2005)]
[Notices]
[Pages 39540-39542]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-3592]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51936; File No. SR-NSX-2005-04]


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

June 29, 2005.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on June 27, 2005, the National Stock ExchangeSM 
(``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 proposal 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 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 has a pilot program under Exchange Rule 12.6, 
``Customer Priority,'' Interpretation .02, which 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. 
Under the pilot program, the Specialist is required to better a 
customer limit order at the national best bid or offer (``NBBO'') by at 
least one penny, or by at least the nearest penny increment if the 
customer limit order is priced outside the NBBO.
    The pilot program currently in effect is scheduled to expire on 
June 30, 2005.\6\ With the instant proposed rule

[[Page 39541]]

change, the Exchange extends the pilot through June 30, 2006.\7\ The 
Exchange is making no substantive changes to the pilot program, other 
than extending its operation through June 30, 2006. The text of the 
proposed rule change is available at the Exchange's principal office 
and at the Commission's Public Reference Room.
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    \6\ See Securities Exchange Act Release Nos. 46274 (July 29, 
2002), 67 FR 50743 (August 5, 2002) (File No. SR-CSE-2001-06) 
(establishing pilot); 46554 (September 25, 2002), 67 FR 6276 
(October 4, 2002) (first extension of pilot) and 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); 48869 (December 3, 2003), 68 FR 68684 (December 9, 2003) 
(fourth extension of pilot); and 49913 (June 24, 2004), 69 FR 40437 
(July 2, 2004) (fifth extension of pilot).
    \7\ The Exchange understands that the Commission's Regulation 
NMS (``Reg NMS'') may have an impact on this pilot program. See 
Securities Exchange Act Release No. 51808 (June 9, 2005), 70 FR 
37496 (June 29, 2005). The Exchange intends to assess what impact 
Rule 612 may have on the pilot program and to accordingly revise the 
pilot program as appropriate to be consistent with the Rule 612 when 
it becomes effective.
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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 III below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant parts 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,\8\ which relates to the trading of securities in subpenny 
increments.\9\ Interpretation .02 of 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 the pilot Interpretation .02, the 
Exchange has also received a Commission exemption from Rules 11Ac1-
1, 11Ac1-2, and 11Ac1-4 under the Act, 17 CFR 240.11Ac1-1, 
240.11Ac1-2, and 240.11Ac1-4, that allows Exchange members to 
display their quotes for Nasdaq- and exchange-listed 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 & General Counsel, Exchange, (July 26, 2002) 
(granting initial exemption) in response to letter from Jeffrey T. 
Brown, Senior Vice President & General Counsel, Exchange, to Annette 
Nazareth, Director, Division, Commission (November 27, 2001) 
(requesting initial exemption); letter from Robert L.D. Colby, 
Deputy Director, Division, Commission, to Jeffrey T. Brown, Senior 
Vice President & General Counsel, Exchange (September 25, 2002) 
(amending and extending initial exemption) in response to letter 
from Jeffrey T. Brown, Senior Vice President & General Counsel, 
Exchange, to Annette Nazareth, Director, Division, Commission 
(September 18, 2002) (requesting first extension); letter from Alden 
S. Adkins, Associate Director, Division, Commission, to Jeffrey T. 
Brown, Senior Vice President & General Counsel, Exchange (November 
27, 2002) (granting second extension) in response to letter from 
Jeffrey T. Brown, Senior Vice President & General Counsel, Exchange, 
to Annette Nazareth, Director, Division, Commission (November 20, 
2002) (requesting second extension); letter from Robert L.D. Colby, 
Deputy Director, Division, Commission, to Jeffrey T. Brown, Senior 
Vice President & General Counsel, Exchange, (May 29, 2003) (granting 
third extension) in response to letter from Jeffrey T. Brown, Senior 
Vice President & General Counsel, Exchange, to Annette Nazareth, 
Director, Division, Commission (May 19, 2003) (requesting third 
extension); letter from Robert L.D. Colby, Deputy Director, 
Division, Commission, to Jennifer M. Lamie, Assistant General 
Counsel & Secretary, Exchange (December 1, 2003) (granting fourth 
extension) in response to letter from Jennifer M. Lamie, Assistant 
General Counsel & Secretary, Exchange, to Annette Narareth, 
Director, Division, Commission (November 21, 2003) (requesting 
fourth extension); letter from David S. Shillman, Associate 
Director, Division, Commission, to James C. Yong, Senior Vice 
President, Regulation and General Counsel, Exchange (June 30, 2004) 
(granting fifth extension) in response to letter from James C. Yong, 
Senior Vice President, Regulation and General Counsel, Exchange, to 
Annette Nazareth, Director, Division, Commission (May 20, 2004) 
(requesting fifth 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 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 
James C. Yong, Senior Vice President and Chief Regulatory Officer, 
Exchange, to Annette Nazareth, Director, Division, Commission (June 
28, 2005).
    \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 a customer limit order held by that 
Specialist by trading ahead of the order with an incoming market or 
marketable limit order. Notwithstanding the fact that a Specialist may 
price-improve the incoming order by providing a price superior to that 
of the customer limit orders it holds, the customer should have a 
reasonable expectation of having its order filled at the limit order 
price. 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 price that he or she holds (not 
the customer's quoted price).
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(6).
    \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.

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 forgoing rule change has become 
effective pursuant to Section 19(b)(3)(A) of the Act\13\ and Rule 19b-
4(f)(6) thereunder\14\ because the rule change: (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 
consistent with protection of investors

[[Page 39542]]

and the public interest.\15\ The Exchange has requested that the 
Commission waive the 30-day operative delay and designate the proposed 
rule change to become effective immediately, so that the pilot can 
continue uninterrupted.
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    \13\ 15 U.S.C. 78s(b)(3)(A).
    \14\ 17 CFR 240.19b-4(f)(6).
    \15\ In addition, Rule 19b-4(f)(6)(iii) states that the Exchange 
must provide the Commission with written notice of its intent to 
file the proposed rule change at least five days prior to the date 
of filing of the proposed rule change. The Exchange has satisfied 
this pre-filing requirement.
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    The Commission hereby grants the request.\16\ The Commission 
believes that such waiver is consistent with the protection of 
investors and the public interest because it will allow the benefits of 
Manning protection provided by the pilot to continue without 
interruption. For these reasons, the Commission designates the proposed 
rule change to be operative upon filing with the Commission.
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    \16\ For purposes only of accelerating the operative date of the 
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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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate the 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.

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 
File Number SR-NSX-2005-04 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-9303.
    All submissions should refer to File No. SR-NSX-2005-04. This file 
number should be included in the subject line if e-mail is used. To 
help the Commission process and review 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, 100 F Street, 
NE., Washington, DC 20549. Copies of such filings will also 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 file number SR-NSX-
2005-04 and should be submitted on or before July 29, 2005.

    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. E5-3592 Filed 7-7-05; 8:45 am]
BILLING CODE 8010-01-P