[Federal Register Volume 71, Number 214 (Monday, November 6, 2006)]
[Notices]
[Pages 65018-65019]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-18635]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54678]


Order Exempting Certain Sub-Penny Trade-Throughs From Rule 611 of 
Regulation NMS Under the Securities Exchange Act of 1934

October 31, 2006.

I. Introduction

    Pursuant to Rule 611(d) \1\ of Regulation NMS \2\ under the 
Securities Exchange Act of 1934 (``Exchange Act''), the Securities and 
Exchange Commission (``Commission''), by order, may exempt from the 
provisions of Rule

[[Page 65019]]

611 of Regulation NMS (``Rule 611'' or ``Rule''), either 
unconditionally or on specified terms and conditions, any person, 
security, transaction, quotation, or order, or any class or classes of 
persons, securities, quotations, or orders, if the Commission 
determines that such exemption is necessary or appropriate in the 
public interest, and is consistent with the protection of investors.\3\ 
As discussed below, the Commission is exempting from Rule 611 trading 
centers executing transactions that trade through a low-priced 
protected quotation by less than $0.01 per share. The exemption is 
designed to promote more workable and efficient intermarket price 
priority in NMS stocks with quoted prices of $1.00 or less per share 
that can be quoted in increments as small as $0.0001.
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    \1\ 17 CFR 242.611(d).
    \2\ 17 CFR 242.600 et seq.
    \3\ See also 15 U.S.C. 78mm(a)(1) (providing general authority 
for Commission to grant exemptions from provisions of Exchange Act 
and rules thereunder).
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II. Background

    The Commission adopted Regulation NMS in June 2005.\4\ Rule 
611(a)(1) requires a trading center to establish, maintain, and enforce 
written policies and procedures that are reasonably designed to prevent 
trade-throughs on that trading center of protected quotations in NMS 
stocks that do not fall within an exception set forth in the Rule. Rule 
611(b)(6) provides an exception for a trade-through transaction 
effected by a trading center that simultaneously routes an intermarket 
sweep order (``ISO'') to execute against the full displayed size of any 
protected quotation in the NMS that was traded through.
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    \4\ See Securities Exchange Act Release No. 51808 (June 9, 
2005), 70 FR 37496 (June 29, 2005) (``Regulation NMS Adopting 
Release'').
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    Rule 612(a) of Regulation NMS prohibits, among other things, the 
display of quotations priced in an increment smaller than $0.01 if the 
quotation is priced equal to or greater than $1.00 per share.\5\ Under 
Rule 612(b), however, it is permissible to display quotations in 
increments as small as $0.0001 if the quotation is priced less than 
$1.00 per share. As a result, quotations priced in increments as small 
as $0.0001 could qualify as ``protected quotations'' under Rule 
600(b)(58).\6\
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    \5\ 17 CFR 242.612(a).
    \6\ 17 CFR 242.600(b)(58). A ``protected quotation'' is defined 
as a protected bid or protected offer. Under Rule 600(b)(57), a 
``protected bid'' or ``protected offer'' means a quotation in an NMS 
stock that: (i) is displayed by an automated trading center; (ii) is 
disseminated pursuant to an effective national market system plan; 
and (iii) is an automated quotation that is the best bid or best 
offer of a national securities exchange or a national securities 
association.
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III. Discussion

    The Commission has decided to exempt trading centers from the 
requirement in Rule 611(a) to establish, maintain, and enforce written 
policies and procedures that are reasonably designed to prevent trade-
throughs when: (1) The price of the protected quotation that is traded 
through is $1.00 or less; and (2) the price of the trade-through 
transaction is less than $0.01 away from the price of the protected 
quotation that was traded through (``Sub-Penny Trade-Throughs'').
    The Commission believes that granting an exemption for Sub-Penny 
Trade-Throughs will promote a more workable and efficient trade-through 
rule in NMS stocks that can be priced in very small increments of less 
than $0.01. The Regulation NMS Adopting Release notes that 
implementation of the Rule 611 trade-through provisions is likely to 
present the greatest challenge for agency markets trading active stocks 
that handle a large volume of buy and sell orders.\7\ These trading 
centers must assure that such orders interact in an orderly and 
efficient manner in compliance with all applicable priority rules. The 
Rule 611(a) requirement of written policies and procedures is designed 
to achieve the objective of eliminating all trade-throughs that 
reasonably can be prevented, while also acknowledging the inherent 
difficulties of eliminating trade-through transactions in active stocks 
with quotations that change rapidly.\8\
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    \7\ 70 FR at 37524.
    \8\ 70 FR at 37534.
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    Consistent with this approach, the Commission is adopting an 
exemption for Sub-Penny Trade-Throughs, particularly to allow active 
agency trading centers that continuously display quotations and execute 
orders against such quotations to operate their trading systems 
efficiently in stocks that can be quoted in increments of as small as 
$0.0001. Given these small quoting increments for protected quotations 
priced at less than $1.00 per share, the Commission does not believe it 
is appropriate to require trading centers to prevent trade-throughs of 
less than $0.01. In the absence of an exemption, trading centers 
generally would be required to prevent the execution of incoming orders 
against their own displayed quotations with prices that could be only 
$0.0001 away from a protected quotation displayed by another trading 
center. The Commission does not believe that the very small economic 
benefit to be gained by protecting such a quotation would justify the 
practical difficulties faced by trading centers in operating their 
trading systems efficiently.
    For the foregoing reasons, the Commission finds that granting an 
exemption for Sub-Penny Trade-Throughs is necessary and appropriate in 
the public interest, and is consistent with the protection of 
investors.

IV. Conclusion

    It is hereby ordered, pursuant to Rule 611(d) of Regulation NMS, 
that trading centers shall be exempt from the requirement in Rule 
611(a) to establish, maintain, and enforce written policies and 
procedures that are reasonably designed to prevent trade-throughs when: 
(1) The price of the protected quotation that is traded through is 
$1.00 or less; and (2) the price of the trade-through transaction is 
less than $0.01 away from the price of the protected quotation that was 
traded through.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
Nancy M. Morris,
Secretary.
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    \9\ 7 CFR 200.30-3(a)(82).
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 [FR Doc. E6-18635 Filed 11-3-06; 8:45 am]
BILLING CODE 8011-01-P