Intermarket Trading System; Notice of Filing of Proposed Twelfth Amendment to the ITS Plan Relating To Amending the Pre-Opening Application, Deleting Text That Is No Longer Applicable, and To Make Technical Amendments

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38520; File No. 4-208]

Intermarket Trading System; Notice of Filing of Proposed Twelfth

Amendment to the ITS Plan Relating To Amending the Pre-Opening

Application, Deleting Text That Is No Longer Applicable, and To Make

Technical Amendments

April 17, 1997.

Pursuant to Rule 11Aa3-2 under the Securities Exchange Act of 1934

(``Act''), notice is hereby given that on January 31, 1997, the

Intermarket Trading System (``ITS'') submitted to the Securities and

Exchange Commission (``Commission'') an amendment (``Twelfth

Amendment'') to the restated ITS Plan.\1\ The purpose of the amendment

is to amend the Pre-Opening Application, to delete text that, by its

terms, is no longer applicable, and to make several technical

amendments to the Plan. The Commission is publishing this notice to

solicit comments on the amendment from interested persons.

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\1\ The ITS is a National Market System (``NMS'') plan approved

by the Commission pursuant to Section 11A of the Act and Rule 11Aa3-

2. Securities Exchange Act Release No. 19456 (January 27, 1983), 48

FR 4938.

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The ITS is a communications and order routing network linking eight

national securities exchanges and the electronic over-the-counter

(``OTC'') market operated by the National Association of Securities

Dealers, Inc. (``NASD''). The ITS was designed to facilitate

intermarket trading in exchange-listed equity securities based on

current quotation information emanating from the linked markets.

Participants to the ITS Plan include the American Stock Exchange,

Inc. (``Amex''), the Boston Stock Exchange, Inc. (``BSE''), the Chicago

Board Options Exchange, Inc. (``CBOE''), the Chicago Stock Exchange,

Inc. (``CHX''), the Cincinnati Stock Exchange, Inc. (``CSE''), the

NASD, the New York Stock Exchange, Inc. (``NYSE''), the Pacific Stock

Exchange, Inc. (``PSE''), and the Philadelphia Stock Exchange, Inc.

(``PHLX'').

I. Description of the Amendment

The purpose of the amendment is to trigger the use of the Pre-

Opening whenever an ``indication of interest'' (i.e., an opening price

range) is sent to the Consolidated Tape System (``CTS'') prior to the

opening or reopening of trading in a System security, to delete text

that, by its terms, is no longer applicable, and to make technical

revisions to update the rules. The amended language is as follows.

To cause Section 1(4) to read as follows:

(4) (``CAES'') means the ``Computer Assisted Execution System'',

the computerized order routing and execution facility, as from time to

time modified or supplemented, that is operated by The Nasdaq Stock

Market, Inc. (``Nasdaq''), a wholly-owned subsidiary of the NASD, and

that is supervised and surveilled by the NASD and made available to

NASD members by Nasdaq. CAES is not part of the System.

To cause Section 1(5) to read in full as follows:

(5) ``CAES Supervisory Center'' means the premises of Nasdaq at

which is located the ITS supervisory station that monitors the ITS/CAES

Third Market as described in section 5(a)(i).

To cause Section 1(11) to read in full as follows:

(11) ``Exchange (Participant's) Market'' means the floor(s) of an

Exchange Participant, except that, in the case of the CSE, ``Exchange

(Participant's) Market'' means in addition to the premises on which

NSTS terminals are located, NSTS and ITS stations located in the NSTS

Supervisory Center.

To cause Section 1(17) to read in full as follows:

(17) ``ITS/CAES security (stock)'' means a security (stock) (a)

that is a System security, (b) that is a 19c-3 security and (c) as to

which one or more ITS/CAES Market Makers are registered as such with

the NASD for the purposes of the Applications. When used with reference

to a particular ITS/CAES Market Maker, ``ITS/CAES security'' means any

such security (stock) as to which the particular ITS/CAES Market Maker

is so registered.

To delete Section 1(24):

(24) ``NASD Pilot Phase.'' [Deleted]

To delete Section 1(27A):

(27A) ``NSTS/ITS Automated Linkage Commencement Date.'' [Deleted]

To cause Section 5(b)(ii) to read in full as follows:

(ii) Selection of System Securities. The System is designed to

accommodate trading in any Eligible Security in the case of Exchange

Participants and, in the case of any ITS/CAES Market Maker, trading in

the one or more ITS/CAES securities in which he is registered as such

with the NASD for the purposes of the Applications. The particular

securities that may be traded through the System at any time (``System

securities'') shall be selected by the Operating Committee. The

Operating Committee may add or delete System securities as it deems

appropriate and may delay the commencement of trading in any Eligible

Security if capacity or other operational considerations shall require

such delay. ITS/CAES securities may be traded by Exchange Participants

and ITS/CAES Market Makers as provided in the ITS Plan and other System

securities may be traded by Exchange Participants as provided in the

ITS Plan.

To cause the first paragraph of Section 6(a)(i)(B) to read in full

as follows:

(B) Furnishing of Quotations. As to each System security that is

traded on its floor or otherwise in its Exchange Market, each Exchange

Participant shall furnish, or cause to be furnished, to each

``receiving Participant Market'' as defined below, or to a person

acting therefor, the current bid-asked quotation emanating from its

trading floor or otherwise from its Exchange Market. The NASD, as to

each ITS/CAES security, agrees to collect, or cause to be collected,

from each ITS/CAES Market Maker registered as such with the NASD for

the purposes of the Applications each current bid price and each

current offer price as made by such ITS/CAES Market Maker, each such

bid and offer to be accompanied by size. For each ITS/CAES security,

the NASD or its agent (1) shall select the best bid price and the best

offer price from the bid prices and offer prices so collected and (2)

shall furnish, or cause to be furnished, to each Receiving Participant,

or to a person acting therefor, such best bid price and best offer

price, together with the sum of the sizes accompanying the bids and

offers at the best bid price and best offer price (the ``ITS/CAES

BBO''). As to any System security, a Participant Market is a

``receiving Participant Market'' if (1) it is an Exchange Market in

which the security is traded or (2) it is the ITS/CAES Third Market and

the security is an ITS/CAES security in which one or more ITS/CAES

Market Makers are registered as such with the NASD for the purposes of

the Applications.

[[Page 19847]]

To cause the second paragraph of Section 6(a)(ii) to read in full

as follows:

If a trade involves the CSE, the commitment to trade or a response

thereto destined for or originating from the CSE will leave and enter

the System through the NSTS Switch. In the foregoing example, a trade

involving the CSE would occur as follows. Assume that the stock in

question is also one of the stocks traded in the CSE's Exchange Market.

Assume also that the continuously updated quotation display at the

appropriate NYSE trading post shows that the best offer from other

Participant Markets is one of 40\1/8\ on the CSE, rather than on the

PSE. Having learned this information, the NYSE member may decide to

attempt to buy the 100 shares for his customer from the 40\1/8\ offer

on the CSE. By using an ITS station located on the NYSE trading floor,

the broker would send, or cause to be sent, to NSTS a commitment to buy

100 shares of the stock at 40\1/8\.

To cause Section 6(b)(i) to read in full as follows:

(b) Technical Matters. (i) Commitment Information, Expiration. A

commitment to trade shall, at a minimum:

(A) include the number or symbol which identifies both (1) one

clearing member if originating in an Exchange Market or, if

originating with an ITS/CAES Market Maker, the ITS/CAES Market Maker

or the broker-dealer through whom he clears System trades and (2)

the clearing corporation through which the trade shall be settled,

(B) direct the commitment to a particular Participant Market,

(C) specify the security which is the subject of the commitment,

(D) designate the commitment as either a commitment to buy or a

commitment to sell,

(E) specify the amount of the security to be bought or sold,

which amount shall be for one unit of trading or any multiple

thereof,

(F) specify (1) a price equal to the offer or bid price then

being furnished by the destination Participant Market, which price

shall represent the price at or below which the security is to be

bought or the price at or above which the security is to be sold,

respectively, (2) a price at the clean-up price in the case of a

commitment to trade sent in compliance with a Participant's block

trade policy adopted pursuant to section 8(d)(iii) or (3) that the

commitment is a commitment to trade ``at the market'',

(G) designate the commitment ``short'' or ``short exempt''

whenever it is a commitment to sell short; this will permit the

short sale rule as in effect in the destination Participant Market

to apply, and

(H) specify the time period during which the commitment shall be

irrevocable (if the time period is not specified in the commitment,

the longer of the two available options shall be assumed by ITS).

The commitment shall be irrevocable for that time period following

acceptance by the System as is chosen by the sender of the commitment.

ITS provides two time period options, known as ``T-1'' (one minute) and

``T-2'' (two minutes). The sender of the commitment may designate which

of the two options is to apply. The Operating Committee may from time

to time change the length of the time period of either or both options.

To cause the first paragraph of Section 6(b)(v) to read in full as

follows:

(v) Response Validation; Partial Executions. Each response to a

commitment to trade must also be validated by the System when entered.

The CID must compare with that of the original commitment. The

response, if an execution, must represent the contra side of the

original commitment. The response must (A) identify as the contra side

one or more clearing members, (B) indicate that all of the one or more

clearing members (or the rest of the clearing members, if one or more,

but not all, clearing members are identified in the response) will be

identified to the System through a subsequent ``names later'' message.

If an execution is reported, the size executed must be equal to or

smaller than the committed size. The execution price must equal or

better the committed price. The validation process also assures that

the commitment associated with the response has not been previously

executed and has not expired through passage of time.

To cause the second paragraph of Section 7(a) to read in full as

follows:

The Pre-Opening Application applies in two instances. First, it

applies whenever a market maker in any Participant Market, in arranging

an opening transaction in his market in a System stock, anticipates

that the opening transaction will be at a price that represents a

change from the stock's ``previous day's consolidated closing price''

of more than the ``applicable price change''. Second, it applies

whenever an ``indication of interest'' (i.e., an anticipated opening

price range) is sent to the CTA Plan Processor as required or permitted

by the CTA Plan or a Participant Market's rules.

To delete Section 7(d):

(d) Commencement of Revised Pre-Opening Application. [Deleted]

To cause Section 8(a) (ii) and (iii) to read in full as follows:

(ii) CSE. No ITS station shall be located on the CSE floor except

at the NSTS Supervisory Center, where it shall be accessible only to

CSE employees. The components of NSTS other than NSTS terminals located

on the CSE floor or on the premises of a particular NSTS User shall be

accessible only to employees of the CSE or its facilities manager. Each

NSTS terminal located otherwise than on the CSE floor or in the NSTS

Supervisory Center shall be accessible only to and under the control of

the NSTS User on whose premises the station is located and to his

employees. The CSE shall assure that only Designated Dealers to whom a

security is assigned receive pre-opening notifications in the security.

(iii) NASD. Each ITS/CAES station shall be accessible only to the

ITS/CAES Market Maker on whose premises the station is located and to

his employees. The ITS station located at the CAES Supervisory Center,

and components of CAES and of any other NASD-sponsored facility linked

to the System other than those located on the premises of ITS/CAES

Market Makers, shall be accessible only to employees of the NASD or its

subsidiaries.

To cause the first paragraph of Section 8(b) to read in full as

follows:

(b) Participant Trading Rules. The trading rules applicable in

destination Participant Markets shall apply to commitments to trade

received in such market and executions of commitments therein. For

example, if a commitment to sell marked ``short'' is received in the

NYSE, the commitment can result in an execution only in accordance with

the short sale rule as in effect on the NYSE. A commitment to sell

marked ``short'' and sent to the BSE can result in an execution only in

accordance with the short sale rule as in effect on the BSE.

To cause Section 8(e)(iv)(A)(3) to read in full as follows:

(3) The calculation components are:

A =``NSTS/ITS-Outgoing Agency Interest''; i.e., the number of

shares entered in NSTS by NSTS Users during the calculation quarter

that are reformatted by NSTS as commitments to trade and routed

through the NSTS/ITS automated linkage to and executed in another

Participant Market. Excluded from A are shares sent (a) as

obligations to trade included in pre-opening responses, (b) pursuant

to the CSE block trade policy adopted as anticipated by section

8(d)(iii) or (c) for the proprietary accounts of Approved Dealers in

stocks assigned to them or in which they are registered.

B =``NSTS-Originating Agency Interest''; i.e., the number of

shares entered in NSTS by NSTS Users during the calculation quarter

that are either executed in NSTS or reformatted by NSTS as

commitments to trade and routed through the NSTS/ITS automated

linkage to and executed in another Participant Market. Excluded from

B are shares entered in NSTS for the proprietary accounts of

Approved Dealers in stocks assigned to them or in which they are

registered that are either (e) executed in NSTS as a consequence of

trading either with

[[Page 19848]]

a commitment to trade received from another Participant Market or

with shares entered in NSTS for the account of another Approved

Dealer in stocks assigned to him or in which he is registered or (f)

reformatted by NSTS as commitments to trade and routed through the

NSTS/ITS automated linkage to and executed in another Participant

Market.

CC =``NSTS/ITS-Incoming Dealer Executions (Constant Constant)'';

i.e., a constant that equals one-fourth of the number of shares

entered and executed in NSTS for the proprietary accounts of

Approved Dealers and Contributing Dealers in stocks assigned to them

or in which they are registered against commitments to trade

received from other Participant Markets in 1985.

IC =``NSTS/ITS-Incoming Dealer Executions (Incremental

Constant)''; i.e., the larger of (h) CC and (i) one-half CC plus

one-half of the number of shares entered and executed in NSTS during

the calculation quarter for the proprietary accounts of Approved

Dealers in stocks assigned to them or in which they are registered

against commitments to trade received from other Participant

Markets.

The CSE may elect to participate ``manually'' as to all or some stocks

during all or part of a calendar quarter by arranging for CSE

employees, acting on behalf of NSTS Users, to use either (j) the NSTS

terminal located in the NSTS Supervisory Center to enter into NSTS

interest that can result in the generation of commitments to trade and

responses or (k) the ITS station located in the NSTS Supervisory Center

as described in the sixth paragraph of section 6(a)(ii). If it does so

during the calculation quarter, shares in those stocks executed during

any period of ``manual'' participation are excluded from A, B and IC in

calculating the Applicable Share Ceiling (but not in calculating the

CSE/CTA Level) for the calculation quarter. Any development costs

incurred to accommodate ``manual'' participation as described in clause

(k) benefit the CSE alone for the purposes of section 11(a)(iii)(B).

To cause Section (8)(e)(iv)(A)(6) to read in full as follows:

(6) Subsections (1) and (5) shall not apply so long as the CSE/CTA

Level has never exceeded 1.25 percent unless, first, the NSTS/ITS-

Outgoing Agency Interest (``A'') has exceeded its Applicable Share

Ceiling during any calendar quarter (a ``nominal excess'') and, second,

during the first ``Periodic Review'' (referred to below) that follows

both the nominal excess and April 1, 1986, the CSE fails reasonably to

justify the nominal excess and thereby to rebut the presumption that

subsections (1) and (5) should apply thereafter in view of the

occurrence of the nominal excess.

To cause the first sentence of Section 8(e)(iv)(B) to read in full

as follows:

(B) Periodic Reviews. During the calendar quarter following each

anniversary of April 1, 1986, the Participants shall assess whether to

amend the ITS Plan to adjust the Applicable Share Ceilings, their

application, any component of their calculation and the consequences of

exceeding them.

To cause Section 8(f)(v) to read in full as follows:

(v) Nasdaq Clearing Corporation Arrangement. In order to enable the

NASD to perform its settlement obligations as provided in section 9(d),

Nasdaq shall maintain an arrangement with a registered clearing

corporation meeting the criteria of section 5(b)(i) that provides that

such clearing corporation shall book to an account of Nasdaq each side

of System trade that (A) is identified as attributable to the ITS/CAES

Third Market but (B) is not identified as constituted by one or more

ITS/CAES Market Makers or clearing members acting on his or their

behalf.

To delete Section 8(f)(vi):

(vi) CAES Modifications for Short Commitments. [Deleted]

To cause Section 8(f)(vii) to read in full as follows:

(vii) Nasdaq Representation. The NASD represents that Nasdaq, the

operator of CAES, is a wholly-owned subsidiary of the NASD. The NASD

shall cause Nasdaq to operate CAES in a manner consistent with the ITS

Plan and to fulfill Nasdaq's obligations under the ITS Plan.

To delete Section 10(d):

(d) NASD Pilot Phase. [Deleted]

To delete Section 10(e)(ii) (A) and (B):

(ii) CSE Linkage. (A) Capacity Relief. [Deleted]

(B) Terminal Interface Development Costs. [Deleted]

To delete Section (a)(x) of Exhibit A:

(x) ``Trading Halt'' [Deleted]

To cause Section (b)(i)(B) of Exhibit A to read in full as follows:

(B) Tape Indications--If the CTA Plan or the Exchange's rules

require or permit that an ``indication of interest'' (i.e., an

anticipated opening price range) in a security be furnished to the

consolidated last sale reporting system prior to the opening of

trading, or the reopening of trading following a halt or suspension in

trading in one or more Eligible Listed Securities, then the furnishing

of an indication of interest in such situations shall, without any

other additional action required of the specialists, (1) initiate the

Pre-Opening process, and, (2) if applicable, substitute for and satisfy

the requirements of paragraphs (b)(i)(A)(1), (b)(i)(A)(2)(I) and

(b)(i)(A)(2)(II). (While the furnishing of an indication of interest to

the consolidated last sale reporting system satisfies the notification

requirements of this rule, a specialist should also transmit the

indication through the System in the format of a standardized pre-

opening administrative message.) In any such situation, the specialist

shall not open or reopen the security until not less than three minutes

after his transmission of the opening or reopening indication of

interest. For the purposes of paragraphs (b)(ii)(A), (b)(ii)(B),

(b)(iii) and (c), ``pre-opening notification'' includes an indication

of interest furnished to the consolidated last sale reporting service.

To cause Section (b)(ii)(B) of Exhibit A to read in full as

follows:

(B) Pre-Opening Responses from Open Markets--An Exchange specialist

must accept only those pre-opening responses sent to the Exchange by

market makers in other Participant markets prior to the opening of

their markets for trading in the security.* Following a halt or

suspension in trading on the Exchange, a specialist must accept only

those pre-opening responses sent by market makers to the Exchange from

other Participant markets that halted trading in the security

contemporaneously with the Exchange and that had not resumed trading in

the security at the time the pre-opening response is sent

In the event that one or more market makers from Participant

markets that have already opened trading in a security or, with respect

to a halt or suspension in trading, either did not halt trading in a

security contemporaneously with the Exchange, or has already resumed

trading in a security, respond to a pre-opening notification in that

security, the specialist need not, but may in his discretion, accept

such responses for the purpose of inclusion in the opening or reopening

transaction. In the event that a Participant market opens or, with

respect to a halt or suspension in trading, resumes trading in a

security subsequent to a market maker in that Participant market

sending a pre-opening response but prior to the opening or reopening

transaction on the Exchange, the market maker who sent the pre-opening

response to the Exchange must confirm the pre-opening response by

sending an administrative message through the System stating that the

response remains valid; if the market maker fails to so confirm the

pre-opening response, the specialist need not, but may in his

discretion, accept the original response for the purpose of inclusion

in the opening or reopening transaction.

[[Page 19849]]

* For the purposes of this section, the market in a security is

opened (or reopened) with either a trade or quotation, if trades are

being reported to the Consolidated Tape and quotes are being

disseminated on the Consolidated Quotation System.

To cause Section (c)(ii) of Exhibit A to read in full as follows:

(ii) Responses When the Exchange is Open--Notwithstanding paragraph

(c)(i), an Exchange specialist who has received a pre-opening

notification in any Eligible Listed Security in which he is registered

as a specialist should not send a pre-opening response to the

originator of such notification if (A) the market for trading in the

security is open on the Exchange or (B) the Participant market from

which the notification emanated had declared a halt or suspension in

trading in such security, and the Exchange either had not halted

trading in the security contemporaneously with the Participant Market

or had resumed trading during the halt or suspension in trading. [*]

* Note: The NASD shall implement a comparable provision in its

rules to conform the restrictions on responses by ITS/CAES Market

Makers to the provisions of paragraph (b)(ii)(B) above.

To cause Section (c)(v) of Exhibit A to read in full as follows:

(v) Use of System before Opening or Reopening--No Exchange member,

whether acting as principal or agent, shall send an obligation to

trade, commitment to trade or order in any security from the Exchange

through the System to any other Participant market prior to the opening

of trading in the security in the Participant market (or prior to the

resumption of trading in the security in the Participant market

following the initiation of a halt or suspension in trading in the

security) until a pre-opening notification in the security has been

issued from the other Participant market or, if no pre-opening

notification is required, until the market in the security has opened

in such other Participant market.

To cause Section (c)(vii) of Exhibit A to read in full as follows:

(vii) Request for Participation Reports--The ITS Plan anticipates

that an Exchange member who has sent one or more obligations to trade

in response to a pre-opening notification will request a report through

the System as to his participation if he does not receive a report as

required promptly following the opening. If, on or following trade

date, he does request a report through the System as to his

participation before [4:00 p.m. eastern time *], and he does not

receive a response by [9:30 a.m. eastern time **] on the next trading

day, he need not accept a later report. If he fails to so request a

report, he must accept a report until [4:00 p.m. eastern time *] on the

third trading day following the trade (i.e., on T+3). The Exchange does

not intend this paragraph (c)(vii) to relieve him of the obligation,

when he does not receive a report as soon as he reasonably should

expect to have received it.

II. 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, 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 Room. Copies of such filing will also be

available for inspection and copying at the principal office of the

ITS. All submissions should refer to File No. 4-208 and should be

submitted by May 14, 1997.

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97-10517 Filed 4-22-97; 8:45 am]

BILLING CODE 8010-01-M