[Federal Register Volume 70, Number 174 (Friday, September 9, 2005)]
[Notices]
[Pages 53695-53696]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-17954]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52382]


Order Pursuant to Section 11A of the Securities Exchange Act of 
1934 and Rule 608(e) Thereunder Extending a De Minimis Exemption for 
Transactions in Certain Exchange-Traded Funds from the Trade-Through 
Provisions of the Intermarket Trading System

September 6, 2005.
    This order extends, through June 28, 2006, a de minimis exemption 
to the provisions of the Intermarket Trading System Plan (``ITS 
Plan''),\1\ a national market system plan,\2\ governing intermarket 
trade-throughs that expired on September 4, 2005. The de minimis 
exemption was originally issued by the Commission on August 28, 2002 
\3\ and extended on May 30, 2003,\4\ on March 3, 2004,\5\ and on 
December 3, 2004.\6\
---------------------------------------------------------------------------

    \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 National Stock Exchange, Inc. 
(formerly 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 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 608(e) (formerly Rule 11Aa3-2(f)), 17 
CFR 242.608(e), 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 Securities Exchange Act Release No. 46428 (August 28, 
2002), 67 FR 56607 (September 4, 2002) (the ``August 2002 Order''). 
The August 2002 Order granted relief through June 4, 2003.
    \4\ See Securities Exchange Act Release No. 47950 (May 30, 
2003), 68 FR 33748 (June 5, 2003) (the ``May 2003 Order''). The May 
2003 Order granted relief through March 4, 2004.
    \5\ See Securities Exchange Act Release No. 49356 (March 3, 
2004), 69 FR 11057 (March 9, 2004) (the ``March 2004 Order''). The 
March 2004 Order granted relief through December 4, 2004.
    \6\ See Securities Exchange Act Release No. 50795 (December 3, 
2004), 69 FR 71445 (December 9, 2004) (the ``December 2004 Order''). 
The December 2004 Order granted relief through September 4, 2005.
---------------------------------------------------------------------------

    Specifically, this order continues the de minimis exemption from 
compliance with Section 8(d)(i) of the ITS Plan with respect to two 
specific exchange-traded

[[Page 53696]]

funds (``ETFs''), the Dow Jones Industrial Average ETF (``DIA'') and 
the Standard & Poor's 500 Index ETF (``SPY'').\7\ By its terms, the 
December 2004 Order continued the exemption from the trade-through 
provisions of the ITS Plan of any transactions in the two ETFs that are 
effected at prices at or within three cents away from the best bid and 
offer quoted in the Consolidated Quote System (``CQS'') for a period of 
nine months, which ended on September 4, 2005.
---------------------------------------------------------------------------

    \7\ The Commission limited the de minimis exemption to these two 
securities because they share certain characteristics that may make 
immediate execution of their shares highly desirable to certain 
investors. In particular, trading in the two 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. Unlike prior orders, the December 2004 extension of 
the de minimis exemption applied only to the DIA and the SPY, and 
not the QQQ, because, on December 1, 2004, trading of the QQQ 
transferred from the American Stock Exchange to Nasdaq, and thus 
trades in the QQQ ceased to be subject to the trade-through 
provisions of the ITS Plan. Accordingly, an exemption for the QQQ 
was no longer necessary. See December 2004 Order.
---------------------------------------------------------------------------

    Our August 2002, May 2003, March 2004, and December 2004 orders 
discussed our basis for determining that issuing and extending the de 
minimis exemption was 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 December 2004 Order further noted that:

    In March 2004 and in May 2003, the Commission extended the three 
cent de minimis exemption for additional nine-month periods, in 
order to assess trading data associated with the de minimis 
exemption and 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. As a result of its review of 
trading data associated with the de minimis exemption, the 
Commission has proposed, as part of its market structure 
initiatives, Regulation NMS under the Act, which would include a new 
rule relating to trade-throughs.

    On April 6, 2005, the Commission approved Regulation NMS under the 
Act.\8\ In Regulation NMS, the Commission adopted an approach that, 
among other things, protects only automated quotations and excludes 
manual quotations from trade-through protection, and renders the de 
minimis exemption unnecessary. However, until Regulation NMS is 
implemented in this regard, the reasons for maintaining the de minimis 
exemption in effect continue to be valid.
---------------------------------------------------------------------------

    \8\ See Securities Exchange Act Release No. 51808 (June 9, 
2005), 70 FR 37496 (June 29, 2005).
---------------------------------------------------------------------------

    Therefore, to maintain the status quo and avoid requiring market 
participants to make short-term trading or programming changes pending 
such implementation, it is appropriate to extend the de minimis 
exemption through June 28, 2006, the day before the first scheduled 
date of that implementation under Regulation NMS. The Commission will 
consider whether to extend the de minimis exemption further if the DIA 
or the SPY are not chosen to be included in the NMS compliance phase 
that begins on June 29, 2006. The Commission emphasizes, as it did in 
the December 2004 Order, the March 2004 Order, the May 2003 Order, and 
the 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 608(e) thereunder,\9\ 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 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 September 4, 2005 through June 28, 2006.
---------------------------------------------------------------------------

    \9\ 17 CFR 242.608(e).

    By the Commission.
Jonathan G. Katz,
Secretary.
[FR Doc. 05-17954 Filed 9-6-05; 4:12 pm]
BILLING CODE 8010-01-P