[Federal Register: December 6, 2002 (Volume 67, Number 235)]
[Notices]
[Page 72711-72713]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr06de02-103]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-46929; File No. SR-CSE-2002-17]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval of Proposed Rule Change by the Cincinnati
Stock Exchange, Inc. Relating to an Extension of an Existing Pilot
Amending CSE Rule 12.6, Customer Priority, To Require Designated
Dealers to Better Customer Orders at the National Best Bid or Offer by
Whole Penny Increments
November 27, 2002.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and rule 19b-4 thereunder,\2\
[[Page 72712]]
notice is hereby given that on November 21, 2002, the Cincinnati Stock
Exchange, Inc. (``CSE'' or ``Exchange'') 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 Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons and to
grant accelerated approval of the proposed rule change for a pilot
period through May 31, 2003.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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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 the pilot
that amends CSE rule 12.6, Customer Priority, by adding new
Interpretation .02, which requires a CSE 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.\3\ Under the pilot rule, the
Specialist is required to better a customer limit order at the NBBO by
at least one penny and at a price outside the current NBBO by at least
the nearest penny increment. The Exchange is requesting an extension of
the pilot, and the exemption letters associated therewith.\4\ The
proposed extension of the pilot requires no changes to the Initial
Pilot rule text, which is available at the CSE and at the Commission.
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\3\ See Securities Exchange Act Release No. 46274 (July 29,
2002), 67 FR 50743 (August 5, 2002) (File No.SR-CSE-2001-06)
(``Initial Pilot''). See also Securities Exchange Act Release No.
46554 (September 25, 2002), 67 FR 6276 (October 4, 2002) (``Pilot
Extension'').
\4\ See letter from Robert L.D. Colby, Deputy Director, Division
of Market Regulation (``Division''), Commission, to Jeffrey T.
Brown, General Counsel, CSE (July 26, 2002) (``Initial Exemption
Letter'') and letter from Jeffrey T. Brown, General Counsel, CSE, to
Annette Nazareth, Director, Division, Commission (November 27, 2001)
(``Initial Exemption Request''). See also letter from Robert L.D.
Colby, Deputy Director, Division, Commission, to Jeffrey T. Brown,
General Counsel, CSE (September 25, 2002) (amending and extending
the Initial Exemption Letter) (``Amended Exemption Letter'') and
letter from Jeffrey T. Brown, General Counsel, CSE, to Annette
Nazareth, Director, Division, Commission (September 18, 2002)
(``Amended Exemption Request'').
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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 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 amend Exchange rule 12.6 \5\ by adding an
interpretation to the rule covering the trading of securities in
subpenny increments.\6\ New Interpretation .02 to the rule will require
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 by 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.\7\
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\5\ CSE 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 a 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.
\6\ In conjunction with this proposed rule change, the CSE has
requested that the Commission extend the relief provided by the
Initial Exemption Letter and the Amended Exemption Letter 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)) 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 to Annette Nazareth,
Director, Division, Commission, from Jeffrey T. Brown, Senior Vice
President & General Counsel, CSE (November 20, 2002) (``Instant
Exemption Request''). Concurrent with the instant accelerated
approval, the Commission has granted the Instant Exemption Request.
See letter from Alden S. Adkins, Associate Director, Division,
Commission, to Jeffrey T. Brown, Senior Vice President & General
Counsel, CSE (November 27, 2002) (``Instant Exemption Letter'').
\7\ 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 new 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
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,\8\ in general, and
section 6(b)(5) of the Act,\9\ 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. The
Exchange requests that this rule be approved on a pilot basis through
May 31, 2003, to be co-extensive with the conditional temporary
exemptive relief granted concurrently by the Commission in the Instant
Exemption Letter.
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\8\ 15 U.S.C. 78f(b).
\9\ 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 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. 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.
Copies of the submission, all subsequent amendments, all written
statements
[[Page 72713]]
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 No. SR-CSE-2002-17 and
should be submitted by December 27, 2002.
IV. Commission's Findings and Order Granting Accelerated Approval of
Proposed Rule Change
The Commission finds that the proposed rule change is consistent
with the Act and the rules and regulations thereunder applicable to a
national securities exchange,\10\ and, in particular section 6(b)(5) of
the Act.\11\ As discussed above, through the Instant Exemption Letter,
the Division has extended the relief granted by the Amended Exemption
Letter. The Commission believes that the proposed rule change should
provide protection to customer limit orders in the subpenny trading
environment by helping to ensure that such orders will continue to have
access to market liquidity ahead of Exchange Specialists in appropriate
circumstances.
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\10\ In granting approval of the proposal, the Commission has
considered the proposal's impact on efficiency, competition, and
capital formation. 15 U.S.C. 78c(f).
\11\ 15 U.S.C. 78f(b)(5).
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The Commission finds good cause for approving the proposed rule
change on a pilot basis prior to the thirtieth day after the date of
publication of notice of filing thereof in the Federal Register. The
Commission believes that granting accelerated approval to the proposed
rule change will allow the Exchange to provide uninterrupted protection
to customer limit orders in subpenny increments in Nasdaq securities
and expedite the protection of customer limit orders in subpenny
increments in listed securities.
V. Conclusion
It is therefore ordered, pursuant to section 19(b)(2) of the
Act,\12\ that the proposed rule change (SR-CSE-2002-17) is hereby
approved on an accelerated basis for a pilot period through May 31,
2003.
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\12\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\13\
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\13\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 02-30887 Filed 12-5-02; 8:45 am]
BILLING CODE 8010-01-P