Self-Regulatory Organizations; Cincinnati Stock Exchange, Inc.; Notice of Filing of Proposed Rule Change To Amend and Extend the Pilot Program on the Floor of the Exchange Relating to the Preferencing of Public Agency Market and Marketable Limit Orders by Approved Dealers and Other Proprietary Members

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-34258; File No. SR-CSE-94-06]

Self-Regulatory Organizations; Cincinnati Stock Exchange, Inc.;

Notice of Filing of Proposed Rule Change To Amend and Extend the Pilot

Program on the Floor of the Exchange Relating to the Preferencing of

Public Agency Market and Marketable Limit Orders by Approved Dealers

and Other Proprietary Members

June 24, 1994.

Pursuant to Section 19(b)(1) of the Securities Exchange Act of

1934, 15 U.S.C. 78s(b)(1), notice is hereby given that on June 24,

1994, the Cincinnati Stock Exchange, Incorporated (``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 CSE. 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 Exchange proposes to extend through May 18, 1995, its pilot

program which governs preferenced trading. The Commission originally

approved this pilot on February 7, 1991.\1\ In connection with this

extension of the pilot, the Exchange is also proposing certain changes

to its rules.

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\1\See Securities Exchange Act Release No. 28866 (Feb. 13,

1991), 56 FR 5854.

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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 CSE included statements

concerning the purpose of and 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 CSE has prepared summaries, set forth in sections

(A), (B), and (C) below, of the most significant parts of such

statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule Change

(1) Purpose

The purpose of the proposed new rule is to extend through May 18,

1995, the Exchange's pilot program which governs preferenced trading.

The Commission originally approved this pilot in February, 1991,\2\ and

subsequently extended the pilot several times.\3\ The pilot is

currently approved through August 6, 1994. The Commission's staff has

requested that the Exchange seek a further extension up to the

expiration of the recently-approved pilot preferencing program of the

Boston Stock Exchange (``BSE'')\4\ so that the Commission can

consolidate its future review of the preferencing programs of the

various exchanges. The CSE requests no change at this time in the

conditions under which its pilot currently operates.\5\

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\2\See Id.

\3\See Securities Exchange Act Release Nos. 29524 (Aug. 5,

1991), 56 FR 38160; 30353 (Feb. 7, 1992), 57 FR 5918; 31011 (Aug. 7,

1992), 57 FR 38704; 32280 (May 7, 1993), 58 FR 28422; and 33975

(April 28, 1994), 59 FR 23243.

\4\See Securities Exchange Act Release No. 34083 (May 18, 1994),

59 FR 36229.

\5\These conditions limit the number of issues in which a

preferencing dealer may be registered; require the Exchange provide

certain information to the Commission; prohibit preference trading

for index arbitrage purposes when ``circuit breakers'' are in

effect; and prohibit the preferencing of any order which the

preferencing dealer has purchased from the customer for a direct

cash payment. With respect to the furnishing of information to the

Commission, the Exchange has agreed to certain new requirements

described herein.

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As part of a recent analysis of its preferencing program, the

Exchange has reviewed the five recommendations of the Division of

Market Regulation in Market 2000: An Examination of Current Equity

Market Developments.\6\ In order to support the Division's efforts, the

Exchange proposes to codify the Division's recommendations by adopting

the rule changes described below.

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\6\See Division of Market Regulation, Securities and Exchange

Commission, Market 2000: An Examination of Current Equity Market

Developments (``Market 2000''), Study III, p. 14 (Jan. 1994).

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The first recommendation in Study III of Market 2000 is that

dealers should expose customer limit orders that are priced better than

the existing Intermarket Trading System (``ITS'') best bid or offer,

unless a customer expressly requests that the order not be exposed.

With respect to this recommendation, the Exchange proposes to add the

following interpretive language to CSE Rule 12.10,\7\ the Exchange's

``best execution'' rule:

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\7\Rules of the Cincinnati Stock Exchange, Rule 12.10.

As part of a member's fiduciary obligation to provide best

execution for its customer orders, the member shall expose to the

national market system all or a representative portion of any limit

order which is priced either on or between the national best bid and

offer, unless (1) such order is immediately executed, or (2) the

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customer expressly requests that the order not be exposed.

The above language goes beyond the Division's recommendation by

requiring that orders priced at the national best bid or offer

(``NBBO'') be exposed in addition to any orders priced between the

NBBO. Moreover, in order to encourage all members to place public

agency limit orders on the CSE book, the Exchange also proposes to

amend CSE Rule 11.10(e)\8\ to eliminate the transaction charge on

public agency limit orders.

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\8\Rules of the Cincinnati Stock Exchange, Rule 11.10(e).

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Second, the Division recommends that dealers should not trade ahead

of customer limit orders. This recommendation is currently codified in

CSE Rule 12.6,\9\ the Exchange's ``customer priority'' rule. This rule

provides that no member may buy or sell a security for its own account

when it holds an unexecuted customer market or like-priced limit order

in that security.

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\9\Rules of the Cincinnati Stock Exchange, Rule 12.6.

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Third, the Division recommends that, if a dealer holds a customer

buy order and a customer sell order that can be crossed, the dealer

should cross those orders without interposing itself as dealer. The CSE

has historically interpreted its Rule 12.6 to require the crossing of

like-priced customer buy and sell orders. This requirement is a logical

extension of the prohibition against trading ahead of customer orders

contained in Rule 12.6. In order to remove any doubt, however, the CSE

proposes to codify the Division's recommendation by adding the

following interpretive language to Rule 12.6:

If a Designated Dealer holds for execution a customer buy order

and a customer sell order that can be crossed, the Designated Dealer

shall cross them without interposing itself as dealer.

Fourth, the Division recommends that dealers establish and adhere

to fixed standards for queuing and executing customer orders. The

Exchange has historically interpreted language in Chapter III--Rules of

Fair Practice\10\ and Chapter V--Supervision\11\ of its rules to

require such standards. Chapters III and V impose a wide range of

obligations on members, specifically, Rule 3.6--Fair Dealing with

Customers, mandates that all members have a responsibility for fair

dealing with customers and Rule 5.1--Written Procedures, requires that

members establish and enforce written procedures so that they can

adequately supervise their employees and assure their compliance with

applicable laws and regulations. Again, however, to remove any doubt on

the subject, the Exchange proposes to codify the Division's

recommendation by adding the following interpretive language to Rule

3.6:

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\10\Rules of the Cincinnati Stock Exchange, Chapter III.

\11\Rules of the Cincinnati Stock Exchange, Chapter V.

Designated Dealers who handle customer orders on the Exchange

shall establish and enforce fixed standards for queuing and

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executing customer orders.

Fifth, the Division recommends that dealers should not trade at a

price outside the ITS best bid or offer without satisfying the market

interest at that price, in accordance with ITS trade-through and block

policies. This recommendation is automatically enforced today by the

Exchange's National Securities Trading System (``NSTS'').

Finally, in order to gauge the impact of the preferencing program

on the CSE and on the national market system, the Exchange agrees to

provide the Commission with quarterly reports similar to those required

of the BSE as part of its preferencing program pilot. These reports

will provide the following information:

(1) A list indicating how many preferencing specialists are on

the exchange and the issues in which they make markets.

(2) The volume of preferenced trades and shares and the

percentage of total CSE trade and share volume that preferenced

activity represents.

(3) The CSE's volume attributable to ITS commitments sent by

other ITS participants and the percentage of such commitments which

are in issues which have preferencing specialists.

(4) The number of preferenced orders effected against the NSTS

limit order book.

(5) The percentage of time that the CSE improves and matches the

NBBO, and the percentage of time that the CSE achieves price

improvement for customer orders when the market is wider than \1/

8\th point.

(6) The CSE's share of Consolidated Tape trade reports, as

compared to its share on the commencement date of this extension.

Although the BSE is not currently required to provide NBBO and

price improvement data, the CSE is offering to provide this additional

data because it believes that such data would be helpful to the

Commission in accurately assessing the contribution of preferencing to

the national market system.

(2) Basis

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 promotes just and equitable principals of trade and removes

impediments to and perfects the mechanisms of a free and open market

and a national market system.

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.

C. Self-Regulatory Organization's Statement on Comments on the Proposed

Rule Change Received from Members, Participants or Others

The CSE solicited comments on the original filing regarding its

preferencing pilot program from the ITS participants. See File No. SR-

CSE-90-06. The CSE has not solicited comment with regard to the

additional changes set forth herein.

III. Date of Effectiveness of the Proposed Rule Change and Timing

for Commission Action

Within 35 days of the date of 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 such 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, NW., Washington, DC 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 in the

Commission's Public Reference Room. Copies of the 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-94-06 and should

be submitted by July 22, 1994.

For the Commission, by the Division of Market Regulation,

pursuant to the delegated authority, 17 CFR 200.30-3(a)(12).

Jonathan G. Katz,

Secretary.

[FR Doc. 94-16038 Filed 6-30-94; 8:45 am]

BILLING CODE 8010-01-M