[Federal Register Volume 60, Number 48 (Monday, March 13, 1995)]
[Notices]
[Pages 13493-13495]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-6085]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35448; File No. SR-CSE-95-03]
Self-Regulatory Organization; Notice of Filing of Proposed Rule
Change by the Cincinnati Stock Exchange, Inc. Relating to Preferencing
of Agency Orders by Approved Dealers
March 7, 1995.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on March 1,
1995, 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, II and III below, which
Items have been prepared by the self-regulatory organization. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The CSE hereby proposes to permanently adopt Exchange Rule 11.9(u)
and related portions of Rule 11.9(a) and (m). The rules were approved
by the Commission on a pilot basis on February 7, 1991, and have been
in effect since then.\1\ The current pilot expires May 18, 1995.
\1\See, Securities Exchange Act Release Nos. 28866 (February 7,
1991), 56 FR 5854 (February 13, 1991); 29524 (August 5, 1991), 56 FR
38160 (August 12, 1991), 30353 (February 7, 1992), 57 FR 5918
(February 18, 1992); 31011 (August 7, 1992), 57 FR 38704 (August 26,
1992); 32280 (May 7, 1993), 58 FR 28424 (May 13, 1993); 33975 (April
28, 1994), 59 FR 23243 (May 5, 1994); 34493 (August 5, 1994), 59
41531 (August 12, 1994).
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The Exchange is also requesting that, in granting permanent
approval, the Commission not impose two restrictions related to payment
for order flow and the number of securities in which an Exchange
specialist may preference. These conditions appear only in the text of
certain Commission releases approving and extending the pilot program;
they are not part of the text of the Exchange's rules. The text of the
proposed rule change is as follows [[Page 13494]] whereby the additions
are italicized and deletions are [bracketed]:
Rule 11.9 National Securities Trading System
(a) through (k)--No change.
(l) Public agency orders to buy or sell at a particular price
shall, in all cases except execution of such an order pursuant to a
limit order guarantee, have priority over all other bids and offers
in the System at the same price. Subject to the foregoing condition,
(1) All bids entered in the System shall be queued for execution
so that the highest price bid shall be the first to be executed and
so that, in the case of bids at the same price, except in the case
of Approved Dealer bids entered pursuant to subparagraph (u), the
bid entered earliest in time shall be the first to be executed; and
(2) all offers entered in the System shall be queued for
execution so that the lowest price offered shall be the first to be
executed and so that, in the case of offers at the same price,
except in the case of Approved Dealer [bids] offers entered pursuant
to subparagraph (u), the offer entered earliest in time shall be the
first to be executed.
(m) It shall be the responsibility of each Approved Dealer or
other Proprietary Member when trading on the Exchange for his own
account or as agent for professional agency orders in round lots of
designated Issues to effect such transactions through the System
and, in so doing, to yield priority to:
(1) all public agency orders in the System at prices equal to,
or better than, his order, bid, or offer; and
(2) all orders, bids and offers of Approved Dealers and other
Proprietary Members for their own accounts and as agents for
professional agency orders in the System at prices better than his
order, bid or offer or at the same price in the event any such
orders, bids or offers were entered in the System (i) at an earlier
time than his order, bid or offer, or (ii) in the case of Approved
Dealers, for the purpose of trading for their own account against
public agency orders which such approved Dealers are representing as
agent pursuant to subparagraph (u).
(n) through (t)--No change.
(u) Public agency market and marketable limit orders which an
Approved Dealer represents as agent may be preferenced to such
Approved Dealer in accordance with the price-time and agency/
principal priorities set forth in Rule 11.9(l) and (m).
Notwithstanding subparagraphs (c) and (n), an Approved Dealer shall
be Dealer of the day with respect to orders preferenced under this
subparagraph (u). Additionally, Designated Dealers shall be allowed
to preference their customer order flow that is related to index
arbitrage only on plus or zero plus ticks when the Dow Jones
Industrial Average (``DJIA'') declines by fifty points or more from
the previous day's closing value.
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 self-regulatory organization
included statements concerning the purpose of the 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. The self-regulatory organization
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 make permanent Rule 11.9(u) and selected
portions of Rule 11.9(l) and (m), which were approved by the Commission
on a pilot basis in February, 1991. The rules provide an exception to
the Exchange's time priority requirements between competing specialists
when one specialist is interacting with his or her own customer order
flow.
On the New York Stock Exchange (``NYSE'') and other exchanges, a
unitary specialist can, without the price competition of other
specialists, internalize the order flow of his or her firm or an
affiliated firm. On CSE, however, a competing specialist system limited
the ability of a specialist to interact with his or her own order flow.
Therefore, in order to provide the same advantage which specialists on
other exchanges have vis-a-vis their own customer order flow, the CSE
modified its time priority rules in order to permit one specialist to
step ahead of another specialist at the same price when that first
specialist is trading with his or her own customer order. This is the
essence of the Exchange's program. All other aspects of a traditional
auction market are preserved on CSE: public orders in the CSE book
continue to have priority over all competing specialist interest, and a
specialist who participates in the program must still provide ``best
execution'' to his customer's order.
CSE's pilot has been operating for over four years and as
documented within the Exchange's ``Quality of Markets Analysis'' dated
January 18, 1995,\2\ the program has served as a means of improving the
Exchange's market. In light of the favorable impact the program has
exhibited on CSE's market and CSE's participation in the National
Market System, the Exchange is requesting that the rules be approved on
a permanent basis.
\2\The report is available in the Commission Public Reference
room.
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The Exchange is also requesting that the Commission eliminate two
of the three restrictions imposed on the pilot when permanently
approving the rules. When the pilot was first approved, Approved
Dealers could only execute preferenced trades in 60 securities to which
they had been appointed. With the approval of subsequent pilot
extensions the number has been raised to 350 securities, where it has
been capped for over two years. The Exchange believes that this
restrictive cap should be removed since it serves no regulatory
purpose.
The second restriction, prohibiting preferencing specialists from
making direct cash payments for retail orders, conflicts with the
practice of specialists on other regional markets. When the CSE program
was initially approved, the Commission had not yet reached a
determination and was studying what impact the payment for order flow
had on the market. Recently, the Commission reached a conclusion and
decided that payment for order flow should be addressed through
enhanced disclosure requirements to make investors aware of how their
orders were handled. CSE specialists must abide by these disclosure
standards just as their counterparts on other markets. On the other
hand, CSE specialists currently have the additional restrictions that
prohibits payment for order flow. The Exchange believes that this
restriction is now unnecessary in light of the Commission's decision.
The third restriction addresses trading when the Dow Jones
Industrial Average declines by more than fifty points from the previous
day's closing value. The Exchange has included this restriction as part
of paragraph (u).
2. Statutory Basis
The CSE believes that the proposed rule change is consistent with
Section 6(b) of the Act in general and furthers the objectives of
Section 6(b)(5) in particular in that it will promote just and
equitable principles of trade and remove impediments to and perfect the
mechanism of a free and open market and a national market system as
required by Section 6(b)(5).
B. Self-Regulatory Organization's Statement on Burden on Competition
The CSE does not believe that the proposed rule change will impose
any inappropriate burden on competition. [[Page 13495]]
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
On February 10, 1995, the Exchange requested comments from the
participants of the Intermarket Trading System (``ITS'') pursuant to
Section 8(e)(iii) of the ITS Plan. On February 17, 1995, the NYSE
submitted a brief comment letter in which they had only one substantive
and one procedural comment. The NYSE believes that the CSE
mischaracterized the functioning of NYSE specialists and misapplied the
term ``internalize'' within the Statement of Purpose of the filing. The
NYSE contends that the term ``internalize'' is inapplicable to the
NYSE. The CSE, within the Statement of Purpose, states ``On the NYSE
and other exchanges, a unitary specialist can (emphasis added), without
the price competition of other specialists, internalize order flow of
his or her firm or an affiliated firm.''
Regarding the procedural comment, the NYSE states that the CSE has
not summarized or responded in detail to prior comments made on CSE's
preferencing pilot. The CSE has not received any comments, prior to
this NYSE letter, on either CSE's initial filing proposing preferencing
(SR-CSE-90-06, Release No. 34-27910) or any of the six amendments/
extensions subsequently approved by the Commission. However, on August
25, 1993, the NYSE took the opportunity to include within their comment
letter regarding the Boston Stock Exchange's Competing Specialists
proposal (SR-BSE-93-12, Release No. 34-32549), comments on the
preferencing pilot at the CSE. The CSE, in a letter to Brandon Becker,
Director, Division of Market Regulation dated March 18, 1994,
accordingly addressed certain assertions concerning the CSE which
appeared in correspondence from the NYSE. The CSE, under separate
letter, requested the Secretary to place copies within files SR-CSE-93-
03 and SR-CSE-94-01.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the publication of this notice in the Federal
Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve the proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.
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 at the
Commission's Public Reference Section, 450 Fifth Street, N.W.,
Washington, DC 20549. Copies of such filing will also be available for
inspection and copying at the principal office of the CSE. All
submissions should refer to File No. (SR-CSE-95-03 and should be
submitted by April 3, 1995.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-6085 Filed 3-10-95; 8:45 am]
BILLING CODE 8010-01-M
