[Federal Register Volume 62, Number 78 (Wednesday, April 23, 1997)]
[Notices]
[Pages 19846-19849]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-10517]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38520; File No. 4-208]
Intermarket Trading System; Notice of Filing of Proposed Twelfth
Amendment to the ITS Plan Relating To Amending the Pre-Opening
Application, Deleting Text That Is No Longer Applicable, and To Make
Technical Amendments
April 17, 1997.
Pursuant to Rule 11Aa3-2 under the Securities Exchange Act of 1934
(``Act''), notice is hereby given that on January 31, 1997, the
Intermarket Trading System (``ITS'') submitted to the Securities and
Exchange Commission (``Commission'') an amendment (``Twelfth
Amendment'') to the restated ITS Plan.\1\ The purpose of the amendment
is to amend the Pre-Opening Application, to delete text that, by its
terms, is no longer applicable, and to make several technical
amendments to the Plan. The Commission is publishing this notice to
solicit comments on the amendment from interested persons.
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\1\ The ITS is a National Market System (``NMS'') plan approved
by the Commission pursuant to Section 11A of the Act and Rule 11Aa3-
2. Securities Exchange Act Release No. 19456 (January 27, 1983), 48
FR 4938.
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The ITS is a communications and order routing network linking eight
national securities exchanges and the electronic over-the-counter
(``OTC'') market operated by the National Association of Securities
Dealers, Inc. (``NASD''). The ITS was designed to facilitate
intermarket trading in exchange-listed equity securities based on
current quotation information emanating from the linked markets.
Participants to the ITS Plan include the American Stock Exchange,
Inc. (``Amex''), the Boston Stock Exchange, Inc. (``BSE''), the Chicago
Board Options Exchange, Inc. (``CBOE''), the Chicago Stock Exchange,
Inc. (``CHX''), the Cincinnati Stock Exchange, Inc. (``CSE''), the
NASD, the New York Stock Exchange, Inc. (``NYSE''), the Pacific Stock
Exchange, Inc. (``PSE''), and the Philadelphia Stock Exchange, Inc.
(``PHLX'').
I. Description of the Amendment
The purpose of the amendment is to trigger the use of the Pre-
Opening whenever an ``indication of interest'' (i.e., an opening price
range) is sent to the Consolidated Tape System (``CTS'') prior to the
opening or reopening of trading in a System security, to delete text
that, by its terms, is no longer applicable, and to make technical
revisions to update the rules. The amended language is as follows.
To cause Section 1(4) to read as follows:
(4) (``CAES'') means the ``Computer Assisted Execution System'',
the computerized order routing and execution facility, as from time to
time modified or supplemented, that is operated by The Nasdaq Stock
Market, Inc. (``Nasdaq''), a wholly-owned subsidiary of the NASD, and
that is supervised and surveilled by the NASD and made available to
NASD members by Nasdaq. CAES is not part of the System.
To cause Section 1(5) to read in full as follows:
(5) ``CAES Supervisory Center'' means the premises of Nasdaq at
which is located the ITS supervisory station that monitors the ITS/CAES
Third Market as described in section 5(a)(i).
To cause Section 1(11) to read in full as follows:
(11) ``Exchange (Participant's) Market'' means the floor(s) of an
Exchange Participant, except that, in the case of the CSE, ``Exchange
(Participant's) Market'' means in addition to the premises on which
NSTS terminals are located, NSTS and ITS stations located in the NSTS
Supervisory Center.
To cause Section 1(17) to read in full as follows:
(17) ``ITS/CAES security (stock)'' means a security (stock) (a)
that is a System security, (b) that is a 19c-3 security and (c) as to
which one or more ITS/CAES Market Makers are registered as such with
the NASD for the purposes of the Applications. When used with reference
to a particular ITS/CAES Market Maker, ``ITS/CAES security'' means any
such security (stock) as to which the particular ITS/CAES Market Maker
is so registered.
To delete Section 1(24):
(24) ``NASD Pilot Phase.'' [Deleted]
To delete Section 1(27A):
(27A) ``NSTS/ITS Automated Linkage Commencement Date.'' [Deleted]
To cause Section 5(b)(ii) to read in full as follows:
(ii) Selection of System Securities. The System is designed to
accommodate trading in any Eligible Security in the case of Exchange
Participants and, in the case of any ITS/CAES Market Maker, trading in
the one or more ITS/CAES securities in which he is registered as such
with the NASD for the purposes of the Applications. The particular
securities that may be traded through the System at any time (``System
securities'') shall be selected by the Operating Committee. The
Operating Committee may add or delete System securities as it deems
appropriate and may delay the commencement of trading in any Eligible
Security if capacity or other operational considerations shall require
such delay. ITS/CAES securities may be traded by Exchange Participants
and ITS/CAES Market Makers as provided in the ITS Plan and other System
securities may be traded by Exchange Participants as provided in the
ITS Plan.
To cause the first paragraph of Section 6(a)(i)(B) to read in full
as follows:
(B) Furnishing of Quotations. As to each System security that is
traded on its floor or otherwise in its Exchange Market, each Exchange
Participant shall furnish, or cause to be furnished, to each
``receiving Participant Market'' as defined below, or to a person
acting therefor, the current bid-asked quotation emanating from its
trading floor or otherwise from its Exchange Market. The NASD, as to
each ITS/CAES security, agrees to collect, or cause to be collected,
from each ITS/CAES Market Maker registered as such with the NASD for
the purposes of the Applications each current bid price and each
current offer price as made by such ITS/CAES Market Maker, each such
bid and offer to be accompanied by size. For each ITS/CAES security,
the NASD or its agent (1) shall select the best bid price and the best
offer price from the bid prices and offer prices so collected and (2)
shall furnish, or cause to be furnished, to each Receiving Participant,
or to a person acting therefor, such best bid price and best offer
price, together with the sum of the sizes accompanying the bids and
offers at the best bid price and best offer price (the ``ITS/CAES
BBO''). As to any System security, a Participant Market is a
``receiving Participant Market'' if (1) it is an Exchange Market in
which the security is traded or (2) it is the ITS/CAES Third Market and
the security is an ITS/CAES security in which one or more ITS/CAES
Market Makers are registered as such with the NASD for the purposes of
the Applications.
[[Page 19847]]
To cause the second paragraph of Section 6(a)(ii) to read in full
as follows:
If a trade involves the CSE, the commitment to trade or a response
thereto destined for or originating from the CSE will leave and enter
the System through the NSTS Switch. In the foregoing example, a trade
involving the CSE would occur as follows. Assume that the stock in
question is also one of the stocks traded in the CSE's Exchange Market.
Assume also that the continuously updated quotation display at the
appropriate NYSE trading post shows that the best offer from other
Participant Markets is one of 40\1/8\ on the CSE, rather than on the
PSE. Having learned this information, the NYSE member may decide to
attempt to buy the 100 shares for his customer from the 40\1/8\ offer
on the CSE. By using an ITS station located on the NYSE trading floor,
the broker would send, or cause to be sent, to NSTS a commitment to buy
100 shares of the stock at 40\1/8\.
To cause Section 6(b)(i) to read in full as follows:
(b) Technical Matters. (i) Commitment Information, Expiration. A
commitment to trade shall, at a minimum:
(A) include the number or symbol which identifies both (1) one
clearing member if originating in an Exchange Market or, if
originating with an ITS/CAES Market Maker, the ITS/CAES Market Maker
or the broker-dealer through whom he clears System trades and (2)
the clearing corporation through which the trade shall be settled,
(B) direct the commitment to a particular Participant Market,
(C) specify the security which is the subject of the commitment,
(D) designate the commitment as either a commitment to buy or a
commitment to sell,
(E) specify the amount of the security to be bought or sold,
which amount shall be for one unit of trading or any multiple
thereof,
(F) specify (1) a price equal to the offer or bid price then
being furnished by the destination Participant Market, which price
shall represent the price at or below which the security is to be
bought or the price at or above which the security is to be sold,
respectively, (2) a price at the clean-up price in the case of a
commitment to trade sent in compliance with a Participant's block
trade policy adopted pursuant to section 8(d)(iii) or (3) that the
commitment is a commitment to trade ``at the market'',
(G) designate the commitment ``short'' or ``short exempt''
whenever it is a commitment to sell short; this will permit the
short sale rule as in effect in the destination Participant Market
to apply, and
(H) specify the time period during which the commitment shall be
irrevocable (if the time period is not specified in the commitment,
the longer of the two available options shall be assumed by ITS).
The commitment shall be irrevocable for that time period following
acceptance by the System as is chosen by the sender of the commitment.
ITS provides two time period options, known as ``T-1'' (one minute) and
``T-2'' (two minutes). The sender of the commitment may designate which
of the two options is to apply. The Operating Committee may from time
to time change the length of the time period of either or both options.
To cause the first paragraph of Section 6(b)(v) to read in full as
follows:
(v) Response Validation; Partial Executions. Each response to a
commitment to trade must also be validated by the System when entered.
The CID must compare with that of the original commitment. The
response, if an execution, must represent the contra side of the
original commitment. The response must (A) identify as the contra side
one or more clearing members, (B) indicate that all of the one or more
clearing members (or the rest of the clearing members, if one or more,
but not all, clearing members are identified in the response) will be
identified to the System through a subsequent ``names later'' message.
If an execution is reported, the size executed must be equal to or
smaller than the committed size. The execution price must equal or
better the committed price. The validation process also assures that
the commitment associated with the response has not been previously
executed and has not expired through passage of time.
To cause the second paragraph of Section 7(a) to read in full as
follows:
The Pre-Opening Application applies in two instances. First, it
applies whenever a market maker in any Participant Market, in arranging
an opening transaction in his market in a System stock, anticipates
that the opening transaction will be at a price that represents a
change from the stock's ``previous day's consolidated closing price''
of more than the ``applicable price change''. Second, it applies
whenever an ``indication of interest'' (i.e., an anticipated opening
price range) is sent to the CTA Plan Processor as required or permitted
by the CTA Plan or a Participant Market's rules.
To delete Section 7(d):
(d) Commencement of Revised Pre-Opening Application. [Deleted]
To cause Section 8(a) (ii) and (iii) to read in full as follows:
(ii) CSE. No ITS station shall be located on the CSE floor except
at the NSTS Supervisory Center, where it shall be accessible only to
CSE employees. The components of NSTS other than NSTS terminals located
on the CSE floor or on the premises of a particular NSTS User shall be
accessible only to employees of the CSE or its facilities manager. Each
NSTS terminal located otherwise than on the CSE floor or in the NSTS
Supervisory Center shall be accessible only to and under the control of
the NSTS User on whose premises the station is located and to his
employees. The CSE shall assure that only Designated Dealers to whom a
security is assigned receive pre-opening notifications in the security.
(iii) NASD. Each ITS/CAES station shall be accessible only to the
ITS/CAES Market Maker on whose premises the station is located and to
his employees. The ITS station located at the CAES Supervisory Center,
and components of CAES and of any other NASD-sponsored facility linked
to the System other than those located on the premises of ITS/CAES
Market Makers, shall be accessible only to employees of the NASD or its
subsidiaries.
To cause the first paragraph of Section 8(b) to read in full as
follows:
(b) Participant Trading Rules. The trading rules applicable in
destination Participant Markets shall apply to commitments to trade
received in such market and executions of commitments therein. For
example, if a commitment to sell marked ``short'' is received in the
NYSE, the commitment can result in an execution only in accordance with
the short sale rule as in effect on the NYSE. A commitment to sell
marked ``short'' and sent to the BSE can result in an execution only in
accordance with the short sale rule as in effect on the BSE.
To cause Section 8(e)(iv)(A)(3) to read in full as follows:
(3) The calculation components are:
A =``NSTS/ITS-Outgoing Agency Interest''; i.e., the number of
shares entered in NSTS by NSTS Users during the calculation quarter
that are reformatted by NSTS as commitments to trade and routed
through the NSTS/ITS automated linkage to and executed in another
Participant Market. Excluded from A are shares sent (a) as
obligations to trade included in pre-opening responses, (b) pursuant
to the CSE block trade policy adopted as anticipated by section
8(d)(iii) or (c) for the proprietary accounts of Approved Dealers in
stocks assigned to them or in which they are registered.
B =``NSTS-Originating Agency Interest''; i.e., the number of
shares entered in NSTS by NSTS Users during the calculation quarter
that are either executed in NSTS or reformatted by NSTS as
commitments to trade and routed through the NSTS/ITS automated
linkage to and executed in another Participant Market. Excluded from
B are shares entered in NSTS for the proprietary accounts of
Approved Dealers in stocks assigned to them or in which they are
registered that are either (e) executed in NSTS as a consequence of
trading either with
[[Page 19848]]
a commitment to trade received from another Participant Market or
with shares entered in NSTS for the account of another Approved
Dealer in stocks assigned to him or in which he is registered or (f)
reformatted by NSTS as commitments to trade and routed through the
NSTS/ITS automated linkage to and executed in another Participant
Market.
CC =``NSTS/ITS-Incoming Dealer Executions (Constant Constant)'';
i.e., a constant that equals one-fourth of the number of shares
entered and executed in NSTS for the proprietary accounts of
Approved Dealers and Contributing Dealers in stocks assigned to them
or in which they are registered against commitments to trade
received from other Participant Markets in 1985.
IC =``NSTS/ITS-Incoming Dealer Executions (Incremental
Constant)''; i.e., the larger of (h) CC and (i) one-half CC plus
one-half of the number of shares entered and executed in NSTS during
the calculation quarter for the proprietary accounts of Approved
Dealers in stocks assigned to them or in which they are registered
against commitments to trade received from other Participant
Markets.
The CSE may elect to participate ``manually'' as to all or some stocks
during all or part of a calendar quarter by arranging for CSE
employees, acting on behalf of NSTS Users, to use either (j) the NSTS
terminal located in the NSTS Supervisory Center to enter into NSTS
interest that can result in the generation of commitments to trade and
responses or (k) the ITS station located in the NSTS Supervisory Center
as described in the sixth paragraph of section 6(a)(ii). If it does so
during the calculation quarter, shares in those stocks executed during
any period of ``manual'' participation are excluded from A, B and IC in
calculating the Applicable Share Ceiling (but not in calculating the
CSE/CTA Level) for the calculation quarter. Any development costs
incurred to accommodate ``manual'' participation as described in clause
(k) benefit the CSE alone for the purposes of section 11(a)(iii)(B).
To cause Section (8)(e)(iv)(A)(6) to read in full as follows:
(6) Subsections (1) and (5) shall not apply so long as the CSE/CTA
Level has never exceeded 1.25 percent unless, first, the NSTS/ITS-
Outgoing Agency Interest (``A'') has exceeded its Applicable Share
Ceiling during any calendar quarter (a ``nominal excess'') and, second,
during the first ``Periodic Review'' (referred to below) that follows
both the nominal excess and April 1, 1986, the CSE fails reasonably to
justify the nominal excess and thereby to rebut the presumption that
subsections (1) and (5) should apply thereafter in view of the
occurrence of the nominal excess.
To cause the first sentence of Section 8(e)(iv)(B) to read in full
as follows:
(B) Periodic Reviews. During the calendar quarter following each
anniversary of April 1, 1986, the Participants shall assess whether to
amend the ITS Plan to adjust the Applicable Share Ceilings, their
application, any component of their calculation and the consequences of
exceeding them.
To cause Section 8(f)(v) to read in full as follows:
(v) Nasdaq Clearing Corporation Arrangement. In order to enable the
NASD to perform its settlement obligations as provided in section 9(d),
Nasdaq shall maintain an arrangement with a registered clearing
corporation meeting the criteria of section 5(b)(i) that provides that
such clearing corporation shall book to an account of Nasdaq each side
of System trade that (A) is identified as attributable to the ITS/CAES
Third Market but (B) is not identified as constituted by one or more
ITS/CAES Market Makers or clearing members acting on his or their
behalf.
To delete Section 8(f)(vi):
(vi) CAES Modifications for Short Commitments. [Deleted]
To cause Section 8(f)(vii) to read in full as follows:
(vii) Nasdaq Representation. The NASD represents that Nasdaq, the
operator of CAES, is a wholly-owned subsidiary of the NASD. The NASD
shall cause Nasdaq to operate CAES in a manner consistent with the ITS
Plan and to fulfill Nasdaq's obligations under the ITS Plan.
To delete Section 10(d):
(d) NASD Pilot Phase. [Deleted]
To delete Section 10(e)(ii) (A) and (B):
(ii) CSE Linkage. (A) Capacity Relief. [Deleted]
(B) Terminal Interface Development Costs. [Deleted]
To delete Section (a)(x) of Exhibit A:
(x) ``Trading Halt'' [Deleted]
To cause Section (b)(i)(B) of Exhibit A to read in full as follows:
(B) Tape Indications--If the CTA Plan or the Exchange's rules
require or permit that an ``indication of interest'' (i.e., an
anticipated opening price range) in a security be furnished to the
consolidated last sale reporting system prior to the opening of
trading, or the reopening of trading following a halt or suspension in
trading in one or more Eligible Listed Securities, then the furnishing
of an indication of interest in such situations shall, without any
other additional action required of the specialists, (1) initiate the
Pre-Opening process, and, (2) if applicable, substitute for and satisfy
the requirements of paragraphs (b)(i)(A)(1), (b)(i)(A)(2)(I) and
(b)(i)(A)(2)(II). (While the furnishing of an indication of interest to
the consolidated last sale reporting system satisfies the notification
requirements of this rule, a specialist should also transmit the
indication through the System in the format of a standardized pre-
opening administrative message.) In any such situation, the specialist
shall not open or reopen the security until not less than three minutes
after his transmission of the opening or reopening indication of
interest. For the purposes of paragraphs (b)(ii)(A), (b)(ii)(B),
(b)(iii) and (c), ``pre-opening notification'' includes an indication
of interest furnished to the consolidated last sale reporting service.
To cause Section (b)(ii)(B) of Exhibit A to read in full as
follows:
(B) Pre-Opening Responses from Open Markets--An Exchange specialist
must accept only those pre-opening responses sent to the Exchange by
market makers in other Participant markets prior to the opening of
their markets for trading in the security.* Following a halt or
suspension in trading on the Exchange, a specialist must accept only
those pre-opening responses sent by market makers to the Exchange from
other Participant markets that halted trading in the security
contemporaneously with the Exchange and that had not resumed trading in
the security at the time the pre-opening response is sent
In the event that one or more market makers from Participant
markets that have already opened trading in a security or, with respect
to a halt or suspension in trading, either did not halt trading in a
security contemporaneously with the Exchange, or has already resumed
trading in a security, respond to a pre-opening notification in that
security, the specialist need not, but may in his discretion, accept
such responses for the purpose of inclusion in the opening or reopening
transaction. In the event that a Participant market opens or, with
respect to a halt or suspension in trading, resumes trading in a
security subsequent to a market maker in that Participant market
sending a pre-opening response but prior to the opening or reopening
transaction on the Exchange, the market maker who sent the pre-opening
response to the Exchange must confirm the pre-opening response by
sending an administrative message through the System stating that the
response remains valid; if the market maker fails to so confirm the
pre-opening response, the specialist need not, but may in his
discretion, accept the original response for the purpose of inclusion
in the opening or reopening transaction.
[[Page 19849]]
* For the purposes of this section, the market in a security is
opened (or reopened) with either a trade or quotation, if trades are
being reported to the Consolidated Tape and quotes are being
disseminated on the Consolidated Quotation System.
To cause Section (c)(ii) of Exhibit A to read in full as follows:
(ii) Responses When the Exchange is Open--Notwithstanding paragraph
(c)(i), an Exchange specialist who has received a pre-opening
notification in any Eligible Listed Security in which he is registered
as a specialist should not send a pre-opening response to the
originator of such notification if (A) the market for trading in the
security is open on the Exchange or (B) the Participant market from
which the notification emanated had declared a halt or suspension in
trading in such security, and the Exchange either had not halted
trading in the security contemporaneously with the Participant Market
or had resumed trading during the halt or suspension in trading. [*]
* Note: The NASD shall implement a comparable provision in its
rules to conform the restrictions on responses by ITS/CAES Market
Makers to the provisions of paragraph (b)(ii)(B) above.
To cause Section (c)(v) of Exhibit A to read in full as follows:
(v) Use of System before Opening or Reopening--No Exchange member,
whether acting as principal or agent, shall send an obligation to
trade, commitment to trade or order in any security from the Exchange
through the System to any other Participant market prior to the opening
of trading in the security in the Participant market (or prior to the
resumption of trading in the security in the Participant market
following the initiation of a halt or suspension in trading in the
security) until a pre-opening notification in the security has been
issued from the other Participant market or, if no pre-opening
notification is required, until the market in the security has opened
in such other Participant market.
To cause Section (c)(vii) of Exhibit A to read in full as follows:
(vii) Request for Participation Reports--The ITS Plan anticipates
that an Exchange member who has sent one or more obligations to trade
in response to a pre-opening notification will request a report through
the System as to his participation if he does not receive a report as
required promptly following the opening. If, on or following trade
date, he does request a report through the System as to his
participation before [4:00 p.m. eastern time *], and he does not
receive a response by [9:30 a.m. eastern time **] on the next trading
day, he need not accept a later report. If he fails to so request a
report, he must accept a report until [4:00 p.m. eastern time *] on the
third trading day following the trade (i.e., on T+3). The Exchange does
not intend this paragraph (c)(vii) to relieve him of the obligation,
when he does not receive a report as soon as he reasonably should
expect to have received it.
II. 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, NW., 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 Room. Copies of such filing will also be
available for inspection and copying at the principal office of the
ITS. All submissions should refer to File No. 4-208 and should be
submitted by May 14, 1997.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-10517 Filed 4-22-97; 8:45 am]
BILLING CODE 8010-01-M
