Document ID: SEC-2007-0144-0001
Agency: sec
Document Type: Notice
Title: Intermarket Trading System Plan; de minimis exemption
Posted Date: 2007-01-31T05:00Z

[Federal Register: January 31, 2007 (Volume 72, Number 20)]
[Notices]               
[Page 4545-4547]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr31ja07-107]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55165]

 
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

January 25, 2007.
    This order extends, through March 4, 2007, a de minimis exemption 
to the provisions of the Intermarket Trading System Plan (``ITS 
Plan''),\1\ a national

[[Page 4546]]

market system plan,\2\ governing intermarket trade-throughs that 
currently is due to expire on February 4, 2007. 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\ on December 
3, 2004,\6\ on September 6, 2005,\7\ and on June 28, 2006.\8\
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    \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 LLC, NYSE Arca, Inc. (formerly 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 608(c) 
(formerly Rule 11Aa3-2(d)), 17 CFR 242.608(c), 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.
    \7\ See Securities Exchange Act Release No. 52382 (September 6, 
2005), 70 FR 53695 (September 9, 2005) (the ``September 2005 
Order''). The September 2005 Order granted relief through June 28, 
2006.
    \8\ See Securities Exchange Act Release No. 54063 (June 28, 
2006), 71 FR 38433 (July 6, 2006) (the ``June 2006 Order''). The 
June 2006 Order granted relief through February 4, 2007.
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    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 funds (``ETFs''), the Dow Jones Industrial 
Average ETF (``DIA'') and the Standard & Poor's 500 Index ETF 
(``SPY'').\9\ By its terms, the June 2006 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'') through February 4, 2007.
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    \9\ 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, September 
2005, and June 2006 extensions 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, September 2005 Order, and June 2006 Order.
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    In the Commission's previous orders to issue and extend the de 
minimis exemption,\10\ the Commission discussed its basis for 
determining that the de minimis 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. In the June 2006 Order, 
the Commission further noted that:
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    \10\ See supra notes 3 to 8.

    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 
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rule relating to trade-throughs.

    On April 6, 2005, the Commission approved Regulation NMS under the 
Act.\11\ 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. Given the significant systems and other 
changes necessary to implement Rule 610 and Rule 611,\12\ the 
Commission originally established delayed compliance dates for Rule 610 
and Rule 611, the first of which was scheduled to begin on June 29, 
2006.\13\ In the September 2005 Order, the Commission stated that until 
Regulation NMS is implemented, the reasons for maintaining the de 
minimis exemption in effect continue to be valid, and thus the 
Commission extended the de minimis exemption though June 28, 2006, 
which was the date before the initial compliance date for Rule 610 and 
Rule 611.
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    \11\ See Securities Exchange Act Release No. 51808 (June 9, 
2005), 70 FR 37496 (June 29, 2005).
    \12\ Rule 610 generally prohibits national securities exchanges 
and national securities associations from imposing unfairly 
discriminatory terms that prevent or inhibit access to quotations, 
and establishes a limit on access fees, and requires each national 
securities exchange and national securities association to adopt, 
maintain, and enforce written rules that prohibit their members from 
engaging in a pattern or practice of displaying quotations that lock 
or cross protected quotations. Rule 611 requires trading centers to 
establish, maintain, and enforce written policies and procedures 
reasonably designed to prevent the execution of trades at prices 
inferior to protected quotations displayed by other trading centers, 
subject to an applicable exception.
    \13\ See supra note 11.
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    On May 18, 2006, the Commission extended the compliance dates for 
Rule 610 and Rule 611 to give trading centers additional time to 
finalize the development of their new or modified trading systems, and 
to give the securities industry sufficient time to establish the 
necessary access to such trading systems.\14\ The initial compliance 
date was extended to a series of five dates, beginning on October 16, 
2006, for different functional stages of compliance, with February 5, 
2007 (the ``Trading Phase Date'') being the final date for full 
operation of Regulation NMS-compliant trading systems for initial 
trade-through protection under Rule 611, as described in the First NMS 
Extension Release. The Commission also extended the de minimis 
exemption through February 4, 2007, which was the day before the 
Trading Phase Date.\15\
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    \14\ Securities Exchange Act Release No. 53829 (May 18, 2006), 
71 FR 30037 (May 24, 2006) (``First NMS Extension Release'').
    \15\ See supra note 8.
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    On January 24, 2007, the Commission extended the Trading Phase Date 
to March 5, 2007.\16\ Therefore, to maintain the status quo and avoid 
requiring market participants to make short-term trading or programming 
changes pending the extended implementation period for Rule 610 and 
Rule 611 of Regulation NMS, it is appropriate to extend the de minimis 
exemption through March 4, 2007, the day before

[[Page 4547]]

the extended Trading Phase Date.\17\ The Commission emphasizes, as it 
did in the previous orders,\18\ that the de minimis exemption does not 
relieve brokers and dealers of their best execution obligations under 
the federal securities laws and SRO rules.
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    \16\ Securities Exchange Act Release No. 55160 (January 24, 
2007) (``Second NMS Extension Release''). To reflect the extended 
Trading Phase Date and avoid coinciding with major trading days in 
June 2007, the Commission also extended the Pilot Stocks Phase Date 
(as defined in the Second NMS Extension Release) until July 9, 2007, 
and the All Stocks Phase Date (as defined in the Second NMS 
Extension Release) until August 20, 2007. In contrast, the 
Specifications Date (as defined in the Second NMS Extension Release) 
of October 16, 2006 has already passed and was not extended. In 
addition, the Completion Date (as defined in the Second NMS 
Extension Release) of October 8, 2007 was not changed.
    \17\ The Commission expects most trading centers to be operating 
consistent with the requirements of Rule 611 by the Trading Phase 
Date.
    \18\ See supra notes 3 to 8.
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    Accordingly, it is ordered, pursuant to Section 11A of the Act and 
Rule 608(e) thereunder,\19\ 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 February 5, 2007 through March 4, 2007.
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    \19\ 17 CFR 242.608(e).

    By the Commission.
Nancy M. Morris,
Secretary.
[FR Doc. E7-1475 Filed 1-30-07; 8:45 am]

BILLING CODE 8011-01-P