99-12817. Joint Industry Plan; Solicitation of Comments and Approval of Request To Increase the Number of Securities Eligible for Trading Pursuant to the Reporting Plan for Nasdaq/'National Market Securities Traded on an Exchange on an Unlisted or ...  

  • [Federal Register Volume 64, Number 98 (Friday, May 21, 1999)]
    [Notices]
    [Pages 27839-27840]
    From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
    [FR Doc No: 99-12817]
    
    
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    SECURITIES AND EXCHANGE COMMISSION
    
    [Release No. 34-41392; File No. S7-24-89]
    
    
    Joint Industry Plan; Solicitation of Comments and Approval of 
    Request To Increase the Number of Securities Eligible for Trading 
    Pursuant to the Reporting Plan for Nasdaq/'National Market Securities 
    Traded on an Exchange on an Unlisted or Listed Basis, Submitted by the 
    Chicago Stock Exchange, Inc.
    
    May 12, 1999.
    
    I. Introduction
    
        On November 6, 1998, the Chicago Stock Exchange, Inc. (``CHX''), 
    submitted to the Securities and Exchange Commission (``Commission'' or 
    ``SEC'') a request to increase the number of Nasdaq National Market 
    (``Nasdaq/NM'') securities eligible for trading \1\ pursuant to the 
    Joint Transaction Reporting Plan for the National Market Securities 
    Traded on an Exchange on an Unlisted or Listed Basis (``Plan'').\2\ The 
    Commission is approving the request to expand the number of eligible 
    securities that may be traded by the CHX pursuant to the Plan from 500 
    to 1000.
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        \1\ Section 12(f) of the Securities Exchange Act of 1934 
    (``Act'') describes the circumstances under which an exchange may 
    trade a security that is not listed on the exchange, i.e., by 
    extending unlisted trading privileges (``UTP'') to the security. See 
    15 U.S.C. 781(f). Section 12(f) required exchanges to apply to the 
    Commission before extending UTP to any security. In order to approve 
    an exchange UTP application for a registered security not listed on 
    any exchange (``OTC/UTP''), Section 12(f) required the Commission to 
    determine that various criteria had been met concerning fair and 
    orderly markets, the protection of investors, and certain national 
    market initiatives. Section 12(f) was amended on October 22, 1994; 
    the amendment removed the application requirement. OTC/UTP is now 
    allowed only pursuant to a Commission order or rule, which is to be 
    issued or promulgated under essentially the same standards that 
    previously applied to Commission review of UTP applications. The 
    present order fulfills these Section 12(f) requirements.
        \2\ The signatories to the Plan, i.e., the National Association 
    of Securities Dealers, Inc. (``NASD''), the CHX (previously, the 
    Midwest Stock Exchange, Inc.), the Philadelphia Stock Exchange, Inc. 
    (``Phlx''), and the Boston Stock Exchange, Inc. (``BSE''), are the 
    ``Participants.'' The BSE, however, joined the Plan as a ``Limited 
    Participant,'' and reports quotation information and transaction 
    reports only in Nasdaq/National Market (previously referred to as 
    ``Nasdaq/NMS'') securities listed on the BSE. Originally, the 
    American Stock Exchange, Inc., was a Participant to the Plan, but 
    did not trade securities pursuant to the Plan, and withdrew from 
    participation in the Plan in August 1994.
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    II. Background
    
        The Commission originally approved the Plan on June 26, 1990.\3\ 
    The Plan governs the collection, consolidation and dissemination of 
    quotation and transaction information for Nasdaq/NM securities listed 
    on an exchange or traded on an exchange pursuant to unlisted trading 
    privileges.\4\ The Commission originally approved trading pursuant to 
    the Plan on a one-year pilot basis, with the pilot period to commence 
    when transaction reporting pursuant to the Plan commenced. Accordingly, 
    the pilot period commenced on July 12, 1993. The Plan has been in 
    operation on a pilot basis since that time.\5\
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        \3\ See Securities Exchange Act Release No. 28146 (June 26, 
    1990), 55 FR 27917 (July 6, 1990) (``1990 Approval Order''). See 
    also 1994 Extension Order, infra note 5 (providing a detailed 
    discussion of the history of unlisted trading privileges in OTC 
    securities, and the events that led to the plan and pilot program).
        \4\ See Section 12(f) of the Act. See also December 1998 
    Extension Order, infra note 5, for a more in depth description of 
    the Plan.
        \5\ See Stock Exchange Act Release No. 34371 (July 13, 1994), 59 
    FR 37103 (July 20, 1994) (``1994 Extension Order''), Securities 
    Exchange Act Release No. 35221 (January 11, 1995), 60 FR 3886 
    (January 19, 1995); Securities Exchange Act Release No. 36102 
    (August 14, 1995), 60 FR 43626 (August 22, 1995); Securities 
    Exchange Act Release No. 36226 (September 13, 1995), 60 FR 49029 
    (September 21, 1995); Securities Exchange Act Release No. 36368 
    (October 13, 1995) 60 FR 54091 (October 19, 1995); Securities 
    Exchange Act Release No. 36481 (November 13, 1995), 60 FR 58119 
    (November 24, 1995); Securities Exchange Act Release No. 36589 
    (December 13, 1995), 60 FR 65696 (December 20, 1995); Securities 
    Exchange Act Release No. 36650 (December 28, 1995), 61 FR 358 
    (January 4, 1996); Securities Exchange Act Release No. 36934 (March 
    6, 1996), 61 FR 10408 (March 13, 1996); Securities Exchange Act 
    Release No. 36985 (March 18, 1996), 61 FR 12122 (March 25, 1996); 
    Securities Exchange Act Release No. 37689 (September 16, 1996), 61 
    FR 50058 (September 24, 1996); Securities Exchange Act Release No. 
    37772 (October 1, 1996), 61 FR 52980 (October 9, 1996); Securities 
    Exchange Act Release No. 38457 (March 31, 1997), 62 FR 16880 (April 
    8, 1997); Securities Exchange Act Release No. 38794 (June 30, 1997), 
    62 FR 36586 (July 8, 1997); Securities Exchange Act Release No. 
    39505 (December 31, 1997), 63 FR 1515 (January 9, 1998); Securities 
    Exchange Act Release No. 40151 (July 1, 1998), 63 FR 36979 (July 8, 
    1998) (``July 1998 Extension Order''); and Securities Exchange Act 
    Release No. 40896 (December 31, 1998), 64 FR 1834 (January 12, 1999) 
    (``December 1998 Extension Order'').
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    III. Discussion
    
        Prior to 1985, the Commission generally did not permit exchanges to 
    extend unlisted trading privileges to non-exchange listed securities 
    such as Nasdaq/NM securities. However, in 1985, the Commission began to 
    permit exchanges, on a temporary basis and subject to certain 
    limitations, to extend unlisted trading privileges to a maximum of 
    twenty five securities. These limitations, to required the NASD and the 
    exchanges to enter into a plan for consolidated transaction and 
    quotation dissemination of the UTP securities.\6\ In 1986, the Midwest 
    Stock Exchange (now the CHX) entered into an interim plan which 
    subsequently was superseded by the Plan, which is currently operating 
    on a pilot basis. In 1990, the Commission expanded the maximum number 
    of eligible securities to 100,\7\ and in 1995, the Commission approved 
    a request by the CHX\8\ to further increase the number to 500.\9\ 
    Accordingly, CHX today trades up to 500 Nasdaq/NM securities pursuant 
    to unlisted trading privileges.
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        \6\ See Securities Exchange Act Release No. 22412 (September 16, 
    1985), 50 FR 38640.
        \7\See 1990 Approval Order, supra note 3.
        \8\See letter from George T. Simon, Foley and Lardner, to 
    Katherine England, Assistant Director, Commission, dated January 9, 
    1995.
        \9\See Release No. 34-36102, Supra note 5.
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        The CHX would now like to raise the number of UTP-eligible 
    securities from 500 to 1000. In commenting on the Commission's July 
    1998 Extension Order, the CHX asked the Commission to expand the number 
    of Nasdaq stocks eligible for unlisted trading from 500 to 1000 
    issues.\10\ In support of the proposal, the CHX cited to the 
    Commission's approval of the previous increase. Further, the Exchange 
    believes that investors directly benefit from the proposal because the 
    CHX is the only auction-based market for Nasdaq securities. In the 
    December 1998 Extension Order, the Commission solicited comment 
    regarding the CHX's request.\11\
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        \10\ See letter from George T. Simon, Foley and Lardner, to 
    Robert Colby, Commission, dated November 6, 1998. In response to a 
    request by the Commission for additional information, the CHX 
    submitted a second letter regarding its proposal. See letter from 
    Patricia L. Levy, CHX, to Mariane H. Duffy, SEC, dated January 27, 
    1999. In this letter, the CHX represented that 485 Nasdaq stocks are 
    currently assigned to its specialists and due to the 500 issue 
    limit, it had to drop 18 Nasdaq stocks. Additionally, the Exchange 
    represented its capacity to handle the increase to 1000 issues and, 
    further noted that despite a recent increase in volume, excess 
    capacity remains. The CHX also represented that it is in the process 
    of expanding its capacity. Id.
        \11\ See December 1998 Extension Order, supra note 5.
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        The Commission received two comment letters addressing the CHX's 
    proposal, as well as two letters from the CHX responding to the NASD's 
    letter.\12\
    
    [[Page 27840]]
    
    The NASD states that it opposes the expansion to 1000 securities. 
    First, the NASD notes that over-the counter market makers are not able 
    to trade the most actively traded exchange listed securities and argues 
    that it is still trying to obtain access to trading of non-19c-3 
    securities through the Intermarket Trading System/Computer Assisted 
    Execution System (``ITS/CAES'') linkage.\13\ Second, the NASD raised 
    concerns regarding autoquoting.\14\ The NASD argues that the proposal 
    could create significant message traffic in the Nasdaq system, as well 
    as needless and avoidable capacity repercussions for Nasdaq. Moreover, 
    the NASD believes that the proposal is not consistent with the Act 
    because it believes that the expansion would not serve to achieve the 
    goals of unlisted trading privileges since ``data gathered by the 
    NASD's Economic Research Department shows that a significant portion of 
    the CHX specialist quotes are not competitive.''\15\ The NASD asserts 
    that: CHX specialists are almost never at the national best bid/best 
    offer (``NBBO'') in the securities in which they make a market; CHX 
    specialists account for a disproportionate number of quote updates; CHX 
    specialists account for an insignificant portion of the volume in the 
    securities in which they make a market; and CHX specialists have a 
    disproportionately higher quote to trade ratio than Nasdaq market 
    makers. For these reasons, the NASD concludes that permitting CHX 
    specialists to trade an additional 500 securities might harm market 
    quality. Finally, the NASD submitted statistical data regarding CHX and 
    NASD volume in OTC/UTP securities, as well as quotation information 
    concerning securities quoted under the Plan, to support its supposition 
    to the proposal.
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        \12\ See letter from Robert E. Aber, Senior Vice President and 
    General Counsel, NASD, to Jonthan G. Katz, Secretary, Commission, 
    dated February 12, 1999 (``NASD Letter''); letter from Gene L. Finn, 
    Finn Associates, to Jonathan G. Katz, Secretary, Commission, dated 
    February 11, 1999; letter from Paticia L. Levy, Senior Vice 
    President and General Counsel, CHX, to Jonathan G. Katz, Secretary, 
    Commission, dated March 3, 1999 (``CHX Letter No. 3''); and letter 
    from George T. Simon, Foley and Lardner, to Robert Colby, Deputy 
    Director, Division of Market Regulation, Commission, dated April 1, 
    1999.
        \13\See Securities Exchange Act Release No. 40260 (July 24, 
    1998), 63 FR 40748 (July 30, 1998) requesting comments on whether to 
    extend the ITS/CAES linkage to non-19c-3 securities.
        \14\See Autoquoting is the computerized updating of stock 
    prices. The CHX allows its members to autoquote Plan securities. The 
    NASD generally prohibits this conduct, in part to ensure adequate 
    capacity. See NASD IM-4613.
        \15\See NASD Letter, supra note 12.
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        The CHX submitted a third letter responding to the NASD's 
    comments.\16\ In the third letter, the CHX provided statistical 
    information to refute the position of the NASD. Further, the CHX 
    addressed the NASD concerns regarding ITS/CAES, autoquote, and the 
    goals of unlisted trading privileges. The CHX further noted that the 
    Commission approved the previous expansion from 100 to 500 securities, 
    notwithstanding similar comments from the NASD regarding ITS/CAES at 
    that time. The CHX also challenged the validity of the NASD's capacity 
    concerns resulting from the CHX member's use of autoquote.
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        \16\ See Letter CHX Letter No. 3, supra note 12.
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        The Commission does not find the NASD's arguments determinative and 
    believes that it is appropriate at this time to expand the number of 
    Nasdaq/NM securities that the CHX may trade under the Plan. As noted, 
    the Commission has separately solicited comment on the issue of 
    expanding the ITS/CAES linkage to non-19c-3 securities. Although CHX 
    autoquoting substantially increases capacity burdens of Nasdaq, the 
    Commission does not view these quotes as in themselves negative for the 
    markets. Nor has the Commission received evidence that expanding the 
    number of securities would otherwise have a negative effect on the 
    markets or on the protection of investors. On the contrary, the 
    Commission believes this expansion, from 500 to 1000 Nasdaq/MN 
    securities has the potential to enhance competition and result in 
    better executions for investors. The expansion should enhance the 
    protection of investors and the public interest, further competition, 
    increase the transparency of the markets, and is a prudent approach 
    that will enable the Participants and the Commission to gain useful, 
    instructive experience concerning operation of the Joint OTC/UTP Plan 
    and its competitive effects, pending permanent approval of the Plan. In 
    addition, the Commission notes that it will continue to monitor the 
    CHX's ability to perform its responsibilities under the Joint Plan.
    
    IV. Solicitation of Comment
    
        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, DC 20549-0609. 
    Copies of the submission, all subsequent amendments, all written 
    statements with respect to the proposed amendment that are filed with 
    the Commission, and all written communications relating to the proposed 
    amendment 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. All submissions should refer to 
    File No. S7-24-89 and should be submitted by June 11, 1999.
    
    V. Conclusion
    
        The Commission finds that it is consistent with Section 11A of the 
    Act to increase the number of UTP-eligible Nasdaq/NM securities that 
    the CHX may trade from 500 to 1000 securities.\17\ In reviewing the 
    proposal described herein, the Commission has considered the public 
    trading activity in Nasdaq/NM securities, the character of the trading, 
    the impact of the increase on the existing markets for the securities 
    and the desirability of removing impediments to, and the progress that 
    has been made towards, development of a national market system.\18\ 
    Specifically, the Commission believes that the expansion should 
    increase transparency and serve to provide the Participants with 
    additional information to evaluate the effects of the proposed course 
    of action for the pilot program. This, in turn, should further the 
    objectives of the Act in general, and specifically those set forth in 
    Sections 12(f) and 11A of the Act and in Rule 11Aa3-1 and Rule 11Aa3-2 
    thereunder.
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        \17\ The Commission has considered the proposal's impact on 
    efficiency, competition and capital formation.
        \18\ 15 U.S.C. 781(f)(1)(E)(i) and (ii).
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        It is therefore ordered, Pursuant to Sections 12(f) and 11A of the 
    Act and (c)(2) of Rule 11Aa3-2 thereunder, that the CHX's request to 
    expand the number securities eligible for trading pursuant to the Joint 
    Transaction Reporting Pan for Nasdaq/National Market securities traded 
    on an exchange on an unlisted or listed basis is hereby approved.
    
        For the Commission, by the Division of Market Regulation, 
    pursuant to delegated authority.\19\
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        \19\ 17 CFR 200.30-39a)(29).
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    Margaret H. McFarland,
    Deputy Secretary.
    [FR Doc. 99-12817 Filed 5-20-99; 8:45 am]
    BILLING CODE 8010-01-M
    
    
    

Document Information

Published:
05/21/1999
Department:
Securities and Exchange Commission
Entry Type:
Notice
Document Number:
99-12817
Pages:
27839-27840 (2 pages)
Docket Numbers:
Release No. 34-41392, File No. S7-24-89
PDF File:
99-12817.pdf