[Federal Register: June 5, 2003 (Volume 68, Number 108)]
[Notices]
[Page 33748-33749]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr05jn03-117]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-47950]
Order Pursuant to Section 11A of the Securities Exchange Act of
1934 and Rule 11Aa3-2(f) Thereunder Extending a De Minimis Exemption
for Transactions in Certain Exchange-Traded Funds From the Trade-
Through Provisions of the Intermarket Trading System
May 30, 2003.
Effective September 4, 2002, the Commission granted a nine-month de
minimis exemption to the provisions of the Intermarket Trading System
Plan (``ITS Plan''),\1\ a national market system plan,\2\ governing
intermarket trade-
[[Page 33749]]
throughs.\3\ This order extends this de minimis exemption.
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\1\ The self-regulatory organizations (``SROs'') participating
in the ITS Plan include the American Stock Exchange LLC, the Boston
Stock Exchange, Inc., the Chicago Board Options Exchange, Inc., the
Chicago Stock Exchange, Inc., the Cincinnati Stock Exchange, Inc.,
the National Association of Securities Dealers, Inc. (``NASD''), the
New York Stock Exchange, Inc., the Pacific Exchange, Inc., and the
Philadelphia Stock Exchange, Inc. (collectively, the
``participants''). See Securities Exchange Act Release No. 19456
(January 27, 1983), 48 FR 4938 (February 3, 1983).
\2\ Securities Exchange Act of 1934 (``Act'') Rule 11Aa3-2(d),
17 CFR 240.11Aa3-2(d), promulgated under Section 11A, 15 U.S.C. 78k-
1, of the Act requires each self-regulatory organization (``SRO'')
to comply with, and enforce compliance by its members and their
associated persons with, the terms of any effective national market
system plan of which it is a sponsor or participant. Rule 11Aa3-
2(f), 17 CFR 240.11Aa3-2(f), under the Act authorizes the Commission
to exempt, either unconditionally or on specified terms and
conditions, any SRO, member of an SRO, or specified security from
the requirement of the rule if the Commission determines that such
exemption is consistent with the public interest, the protection of
investors, the maintenance of fair and orderly markets and the
removal of impediments to, and perfection of the mechanisms of, a
national market system.
\3\ See generally Securities Exchange Act Release No. 46428, 67
FR 56607 (September 4, 2002).
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The ITS Plan system is an order routing network designed to
facilitate intermarket trading in exchange-listed securities among
participating SROs based on current quotation information emanating
from their markets. Quotations in exchange-listed securities are
collected and disseminated by the Consolidated Quote System (``CQS''),
which is governed by a national market system plan that the Commission
has approved pursuant to Rule 11Aa3-2 under the Act.\4\ Under the ITS
Plan, a member of a participating SRO may access the best bid or offer
displayed in CQS by another Participant by sending an order (a
``commitment to trade'') through ITS to that Participant. Exchange
members participate in ITS through facilities provided by their
respective exchanges. NASD members participate in ITS through a
facility of the Nasdaq Stock Market (``Nasdaq'') known as the Computer
Assisted Execution System (``CAES''). Market makers and electronic
communications networks (``ECNs'') that are members of the NASD and
seek to display their quotes in exchange-listed securities through
Nasdaq must register with the NASD as ITS/CAES Market Makers.\5\
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\4\ 17 CFR 240.11Aa3-2.
\5\ See Securities Exchange Act Release No. 42536 (March 16,
2000), 65 FR 15401 (March 22, 2000). Market Makers and ECNs are
required to provide their best-priced quotations and customer limit
orders in certain exchange-listed and Nasdaq securities to an SRO
for public display under Commission Rule 11Ac1-1 and Regulation ATS.
17 CFR 240.11Ac1-1 and 242.301(b)(3).
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The Commission's August 2002 order granted a de minimis exemption
from compliance with Section 8(d)(i) of the ITS Plan with respect to
three specific exchange-traded funds (``ETFs''), the Nasdaq-100 Index
ETF (``QQQ''), the Dow Jones Industrial Average ETF (``DIA''), and the
Standard & Poor's 500 Index ETF (``SPY'').\6\ Section 8(d)(i) of the
ITS Plan provides that participants should not purchase or sell any
security that trades on the ITS Plan system at a price that is worse
than the price at which that security is otherwise being offered on the
ITS Plan system.\7\ By its terms, the Commission's order exempts from
the trade-through provisions of the ITS Plan any transactions in the
three ETFs that are effected at prices at or within three cents away
from the best bid and offer quoted in the CQS for a period of nine
months, which ends on June 4, 2003.
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\6\ The Commission limited the de minimis exemption to the three
securities because they share certain characteristics that may make
immediate execution of their shares highly desirable to certain
investors. In particular, trading in the three ETFs is highly liquid
and market participants may value an immediate execution at a
displayed price more than the opportunity to obtain a slightly
better price.
\7\ Each ITS participant has adopted a trade-through rule
substantially similar to the rule of the ITS Plan. See ITS Plan,
Section 8(d)(ii); See, e.g., NYSE Rule 15A, NASD Rule 5262.
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The three cent de minimis exemption allows ITS participants and
their members to execute transactions, through automated execution or
otherwise, without attempting to access the quotes of other
participants when the expected price improvement would not be
significant. In providing the three cent de minimis exemption, the
Commission believed that, on balance, exempting the specified
transactions from the ITS trade-through provisions would provide
investors increased liquidity and expand the choice of execution
venues, while limiting the possibility that investors would receive
significantly inferior prices.
The Commission granted the three cent de minimis exemption on a
temporary, nine-month basis, in order to gather the data necessary to
study the effects of an exemption from the ITS trade-through provisions
and the desirability of extending the exemption. The Commission is
currently assessing trading data associated with the de minimis
exemption, and over the next nine-months intends to consider whether to
adopt the de minimis exemption on a permanent basis, to adopt some
other alternative solution, or to allow the exemption to expire.
In view of the foregoing, the Commission believes that an extension
of the de minimis exemption for an additional nine-month period is
consistent with the public interest, the protection of investors, the
maintenance of fair and orderly markets and the removal of impediments
to, and perfection of the mechanisms of, a national market system. The
Commission emphasizes, as it did in its August 2002 order, that the de
minimis exemption does not relieve brokers and dealers of their best
execution obligations under the federal securities laws and SRO rules.
Accordingly, it is ordered, pursuant to Section 11A of the Act and
Rule 11Aa3-2(f) thereunder,\8\ that participants of the ITS Plan and
their members are hereby exempt from Section 8(d) of the ITS Plan
during the period covered by this Order with respect to transactions in
QQQs, DIAs, and SPYs that are executed at a price that is no more than
three cents lower than the highest bid displayed in CQS and no more
than three cents higher than the lowest offer displayed in CQS. This
Order extends the de minimis exemption from June 4, 2003 through March
4, 2004.
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\8\ 17 CFR 240.11Aa3-2(f).
By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-14113 Filed 6-4-03; 8:45 am]
BILLING CODE 8010-01-P