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Self-Regulatory Organizations; Order Approving the Proposed Rule Change and Amendment No. 1 to the Proposed Rule Change by the Cincinnati Stock Exchange Enabling Members To Trade Nasdaq/NM Securities

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Information about this document as published in the Federal Register.

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Start Preamble April 10, 2000.

I. Introduction

On December 10, 1999, the Cincinnati Stock Exchange (“CSE” or “Exchange”) submitted to the Securities and Exchange Commission (“SEC” or “Commission”), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”) [1] and Rule 19b-4 thereunder,[2] a proposed rule change to enable its members to trade Nasdaq/NM securities.

The proposed rule change was published for comment in the Federal Register on January 27, 2000.[3] No comments were received on the proposal. On April 7, 2000, the Exchange submitted Amendment No. 1, making several technical changes to the proposed rule text.[4] This order approves the proposed rule change, as amended.

II. Description of the Proposal

The proposed rule change would amend the CSE Rules to permit members to trade Nasdaq/NM [5] securities traded on The Nasdaq Stock Start Printed Page 20499Market (“Nasdaq”), a wholly-owned subsidiary of the National Association of Securities Dealers (“NASD”) [6] on an UTP basis.[7] The majority of the proposed rule change to Chapter XI, “Trading Rules,” of the CSE rules relates to amendments to accommodate the trading of Nasdaq securities, however, certain changes are housekeeping in nature.

The proposed rule change would amend CSE Rule 11.1, “Hours of Trading” by converting the hours of trading on the Exchange from Cincinnati local time to Chicago local time and providing in subparagraphs (b) and (c) for the inclusion of Nasdaq securities in the determination of trading hours for dually or multiple-traded securities. The changes to CSE Rule 11.2, “Unit of Trading,” would reflect the inclusion of Nasdaq securities in determining the appropriate unit of trading. Similarly, the proposed rule change would amend CSE Rule 11.4, “Trading Ex-Dividend, Etc.”, and CSE Rule 11.5, “Orders to be Reduced and Increased on Ex-Date,” to include Nasdaq securities in the exception language of the rules.

In CSE Rule 11.3, “Price Variations,” the proposed rule change would amend the stated minimum variation to reflect the current primary market practice, i.e. 1/16 of $1.00 per share in stocks trading at or above $.50 per share and 1/32 of $1.00 per share in stocks trading below $.50 per share.[8] The changes would also include securities traded on Nasdaq in determining the appropriate variation. CSE Rule 11.7, “Cabinet Trading,” would be amended to reflect that the CSE facilities are now located in Chicago, Illinois.

The proposed rule change would make a number of amendments to CSE Rule 11.9, “National Securities Trading System” (“System”). The amendments to subparagraph (a) would define the terms “Nasdaq/NM Security,” “Nasdaq System,” “Nasdaq System BBO” and include the term “national securities association” in the definition of “Approved Dealer.” The changes to subparagraph (c) would add the term “Nasdaq System BBO” to the definition of marketable limit order, except Nasdaq/NM securities from the opening guarantee of 1099 shares, and implement a Nasdaq/NM opening guarantee up to 1099 shares at an opening price that is on or between the first unlocked/uncrossed Nasdaq System BBO. The changes to subparagraph (e) would add specialists or market makers who are members of other national securities associations to the entities that may submit bids or offers to the System. The changes to subparagraph (h) would ensure that the System displays the Nasdaq System BBO generated by Nasdaq System market makers [9] and permits Nasdaq System market makers telephonic, or other such access to the System as may be established between the Exchange and the Nasdaq System, and conversely, permit Designated Dealers to send orders from the Exchange via telephone, or by other such access as may be established between the Exchange and the Nasdaq System, to Nasdaq market makers.

Subparagraph (j) of CSE Rule 11.9 would be amended to include the Nasdaq System and the Nasdaq System BBO in the prohibition of executing a limit order only after a regular way transaction occurs in another market at a price equal or inferior to the limit price of the order. The amendments to subparagraph (n) would clarify that the public agency guarantee for 1099 shares at the opening price applies to securities other than Nasdaq/NM securities. However, the public agency guarantee applies to those market and marketable limit orders prices better than the first unlocked/uncrossed Nasdaq System BBO. In addition, the amendments would add the Nasdaq System BBO to the obligations to execute on the basis of the ITS BBO. Finally, the amendments to this subparagraph clarify that the execution guarantees and requirements of CSE Rule 12.6, Customer Priority, apply during the hours of trading on the Exchange (8:30 a.m. to 3:05 p.m. local Chicago time).

The proper rule change would also amend the “Interpretations and Policies” section of CSE Rule 11.9 Interpretation and Policies Section .01. “Market Order Requirement,” and .02, “Limit Order Protection Requirement,” would be amended to reflect that the obligations of the interpretation apply to securities other than Nasdaq/NM securities.

III. Discussion

The Commission finds that the proposed rule change, as amended, is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange, and in particular, with the requirements of Section 6(b).[10] Specifically, the Commission believes the proposal is consistent with the Section 6(b)(5) [11] requirements in that the proposed standards to permit CSE members to trade NASDAQ/NM securities should promote just and equitable principles of trade and facilitate transactions in securities, thereby removing impediments to and prefecting the mechanism of a free and open market in a manner consistent with the protection of investors and the public interest.[12]

Furthermore, the proposed rule change is consistent with Section 12(f)(2) of the Act. Section 12(f)(2) granted the Commission explicit authority to approve UTP in OTC securities. Section 12(f)(2) requires the Commission, prior to approving UTP, to determine that the granting of UTP is consistent with the maintenance of fair and orderly markets and the protection of investors. The Commission believes that the proposed rule change is consistent with these goals and thus, the Commission is approving the proposed rule change, subject to the CSE complying with the requirements of the UTP Plan.

IV. Conclusion

It is therefore ordered, pursuant to Section 19(b)(2) of the Act,[13] that the proposed rule change (SR-CSE-99-05), as amended, is approved.

Start Signature

For the Commission, by the Division of Market Regulation, pursuant to delegated authority.[14]

Margaret H. McFarland,

Deputy Secretary.

End Signature End Preamble

Footnotes

3.  Securities Exchange Act Release No. 42352 (January 20, 2000), 65 FR 4455.

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4.  See letter from Jeffrey T. Brown, Vice President Regulation and General Counsel, CSE, to Heather Traeger, Attorney, Division of Market Regulation, SEC, dated April 4, 2000 (“Amendment No. 1”). Because of the technical nature of this amendment, the Commission is not required to solicit comment on it.

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5.  The Exchange amended the text of the proposed rule change to replace “NASDAQ” with “Nasdaq.” id.

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6.  In Amendment No. 1, the Exchange clarified that the proposed rule change permits Exchange members to trade securities traded on Nasdaq, not securities traded on a “national securities association.” Id.

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7.  This filing is made in conjunction with the Exchange joining the Unlisted Trading Privileges Plan (“UTP Plan”) governing the collection, consolidation and dissemination of quotation and transaction information for Nasdaq/NM securities. See Securities Exchange Act Release No. 42269 (December 23, 1999), 65 FR 799 (January 6, 2000).

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8.  The Exchange represents that these variations will be revisited in any proposed rule changes to accommodate decimal pricing.

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9.  In Amendment No. 1, the Exchange clarified that the System does not generate but merely displays the Nasdaq System best bid or offer quotations generated and disseminated by the Nasdaq System. See Amendment No. 1, supra note 4.

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12.  In approving this rule, the Commission has considered the proposed rule's impact on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).

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[FR Doc. 00-9489 Filed 4-14-00; 8:45 am]

BILLING CODE 8010-01-M