[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