Order Granting National Securities Exchanges a Limited Exemption From Rule 612 of Regulation NMS Under the Securities Exchange Act of 1934 To Permit Acceptance by Exchanges of Certain Sub-Penny Orders, 66352-66354 [E6-19120]
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66352
Federal Register / Vol. 71, No. 219 / Tuesday, November 14, 2006 / Notices
continue, adjust, or terminate benefits
based on eligibility criteria.
Type of Review: Extension.
Agency: Employment Standards
Administration.
Title: Claim for Compensation by
Dependents Information Reports.
OMB Number: 1215–0155.
Agency Number: CA–5, CA–5b, CA–
1031, CA–1074, Letter of Compensation
Forms
Respondents
Due at Death and Letter of Student/
Dependency.
Affected Public: Individuals or
households.
Total Respondents: 1,880.
Total Responses: 1,880.
Minute per
form
Frequency
Burden hours
CA–5 ........................................................................................................
CA–5b ......................................................................................................
CA–1031 ..................................................................................................
CA–1074 ..................................................................................................
Student/Dependency ...............................................................................
Compensation Due at Death ...................................................................
150
20
150
10
1,050
500
Once ......................
Once ......................
Annually .................
Once ......................
Semiannually .........
Once ......................
90
90
15
60
30
30
225
30
37
10
525
250
Total .................................................................................................
1,880
................................
........................
1,077
Estimated Total Burden Hours: 1,077.
Total Burden Cost (capital/startup):
$0.
Total Burden Cost (operating/
maintenance): $452.
Comments submitted in response to
this notice will be summarized and/or
included in the request for Office of
Management and Budget approval of the
information collection request; they will
also become a matter of public record.
Hazel Bell,
Acting Chief, Branch of Management Review
and Internal Control, Division of Financial
Management, Office of Management,
Administration and Planning, Employment
Standards Administration.
[FR Doc. E6–19157 Filed 11–13–06; 8:45 am]
BILLING CODE 4510–CH–P
NATIONAL CREDIT UNION
ADMINISTRATION
sroberts on PROD1PC70 with NOTICES
Notice of Meeting
Time and Date: 9 a.m., Thursday,
November 16, 2006.
Place: Board Room, 7th Floor, Room
7047, 1775 Duke Street, Alexandria, VA
22314–3428.
Status: Open.
Matters to be Considered:
1. NCUA’s 2007 Annual Performance
Budget.
2. NCUA’s 2007/2008 Operating Budget.
3. NCUA’s Overhead Transfer Rate.
4. NCUA’s 2007 Operating Fee Scale.
5. Final Rule: Part 740 of NCUA’s Rules
and Regulations, Accuracy of
Advertising and Notice of Insured
Status.
Recess: 10:15 a.m.
Time and Date: 10:30 a.m., Thursday,
November 16, 2006.
Place: Board Room, 7th Floor, Room
7047, 1775 Duke Street, Alexandria, VA
22314–3428.
Status: Closed.
VerDate Aug<31>2005
19:07 Nov 13, 2006
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Matters to be Considered:
1. One (1) Insurance Appeal. Closed
pursuant to Exemption (6).
For Further Information Contact:
Mary Rupp, Secretary of the Board,
Telephone: 703–518–6304.
Mary Rupp,
Secretary of the Board.
[FR Doc. 06–9208 Filed 11–9–06; 2:51 pm]
BILLING CODE 7535–01–M
SECURITIES AND EXCHANGE
COMMISSION
Sunshine Act Meeting
Notice is hereby given, pursuant to
the provisions of the Government in the
Sunshine Act, Public Law 94–409, that
the Securities and Exchange
Commission will hold the following
meeting during the week of November
20, 2006:
A closed meeting will be held on
Monday, November 20, 2006 at 2 p.m.
Commissioners, Counsels to the
Commissioners, the Secretary to the
Commission, and recording secretaries
will attend the closed meeting. Certain
staff members who have an interest in
the matters may also be present.
The General Counsel of the
Commission, or his designee, has
certified that, in his opinion, one or
more of the exemptions set forth in 5
U.S.C. 552b(c)(3), (5), (7), (9)(B) and (10)
and 17 CFR 200.402(a) (3), (5), (7),
(9)(ii), and (10) permit consideration of
the scheduled matters at the closed
meeting.
Commissioner Casey, as duty officer,
voted to consider the items listed for the
closed meeting in closed session.
The subject matters of the closed
meeting scheduled for Monday,
November 20, 2006 will be:
Formal orders of investigation;
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Institution and settlement of injunctive
actions;
Institution and settlement of
administrative proceedings of an
enforcement nature;
Amicus consideration;
Resolution of litigation claims; and
Other matters relating to enforcement
proceedings.
At times, changes in Commission
priorities require alterations in the
scheduling of meeting items.
For further information and to
ascertain what, if any, matters have been
added, deleted or postponed, please
contact:
The Office of the Secretary at (202)
551–5400.
Dated: November 9, 2006.
Nancy M. Morris,
Secretary.
[FR Doc. 06–9213 Filed 11–9–06; 3:47 pm]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–54714]
Order Granting National Securities
Exchanges a Limited Exemption From
Rule 612 of Regulation NMS Under the
Securities Exchange Act of 1934 To
Permit Acceptance by Exchanges of
Certain Sub-Penny Orders
November 6, 2006.
I. Introduction
The Securities and Exchange
Commission (‘‘Commission’’) is granting
national securities exchanges a limited
exemption from Rule 612 1 of Regulation
NMS under the Securities Exchange Act
of 1934 (‘‘Exchange Act’’) to permit
them to accept certain cross orders
priced in sub-penny increments, subject
1 17
CFR 240.612.
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Federal Register / Vol. 71, No. 219 / Tuesday, November 14, 2006 / Notices
sroberts on PROD1PC70 with NOTICES
to the conditions described below. Rule
612 prohibits a national securities
exchange (among other entities) from
displaying, ranking, or accepting a bid
or offer, an order, or indication of
interest in any national market system
(‘‘NMS’’) stock 2 that is priced in an
increment smaller than $0.01 per share,
unless the price of the bid or offer,
order, or indication of interest is priced
less than $1.00 per share.3 If the bid or
offer, order, or indication of interest is
priced less than $1.00 per share, the
minimum allowable increment is
$0.0001 per share.4
Recently, the Commission approved a
number of SRO rule changes that,
subject to the Commission’s grant of
exemptive relief, envision the
acceptance of certain cross orders
arranged by members in sub-penny
prices.5 A cross transaction involves a
buy order and sell order for the same
security at the same price that are prematched by an exchange member,
whether as principal or agent, and
submitted to the exchange for
execution.6 In absence of an exemption
from the Rule 612, an exchange is
prohibited from accepting cross orders
priced above $1.00 per share in subpenny increments,7 even if such orders
are immediately executed and printed
by the exchange. However, pursuant to
Rule 612(c), the Commission, by order,
may exempt from the provisions of Rule
612, either unconditionally or on
specified terms and conditions, any
person, security, quotation, or order (or
any class or classes of persons,
securities, quotations, or orders) if the
Commission determines that such
2 An NMS stock is any non-option security for
which transaction reports are collected, processed,
and made available pursuant to an effective
transaction reporting plan. See 17 CFR
242.600(b)(46) and (b)(47).
3 See 17 CFR 242.612(a).
4 See 17 CFR 242.612(b).
5 See, e.g., Securities Exchange Act Release No.
54550 (September 29, 2006), 71 FR 59563 (October
10, 2006) (SR–CHX–2006–05) (approving, among
other things, rules permitting cross transactions in
increments as small as $0.000001); Securities
Exchange Act Release No. 54538 (September 28,
2006), 71 FR 59184 (October 6, 2006) (SR–Phlx–
2006–43) (approving, among other things,
benchmark orders that could be priced in
increments as small as $0.0001).
6 For example, a member could pair together a
customer market order to buy and a customer
market order to sell at the midpoint between the
exchange’s best bid and offer (‘‘BBO’’), which
would result in a sub-penny execution (e.g.,
$17.895) if the BBO were an odd number of cents
wide (e.g., $17.89 × $17.90). In addition, a member
could offer sub-penny price improvement when
trading as principal with a customer order.
7 An exchange may, consistent with Rule 612(b)
of Regulation NMS, establish rules that permit it to
accept orders that are priced less than $1.00 per
share in increments as small as $0.0001, whether
or not as part of a cross transaction.
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19:07 Nov 13, 2006
Jkt 211001
exemption is necessary or appropriate
in the public interest, and is consistent
with the protection of investors.
II. Discussion
After careful consideration, the
Commission hereby grants the national
securities exchanges a limited
exemption from Rule 612 permitting
them to accept certain sub-penny cross
orders. This exemption is limited to the
acceptance by national securities
exchanges of cross orders arranged by
members that are priced in sub-penny
increments and immediately executed
against each other,8 and otherwise
accepted and handled in accordance
with rules approved or established
pursuant to Section 19(b) of the
Exchange Act.9
Among other things, Rule 612 is
designed to limit the ability of a market
participant to gain execution priority
over a competing limit order by an
economically insignificant amount. The
Commission noted that, ‘‘[i]f investors’
limit orders lose execution priority for
a nominal amount, investors may over
time decline to use them, thus depriving
the markets of liquidity.’’ 10 In addition,
Rule 612 is intended to reduce the
incidence of quote flickering, which
makes it more difficult for market
participants to identify the best price
available in the national market system
at a given moment, and to prevent
excessive reduction of depth at the best
inside quotation.11 In adopting Rule
612, the Commission explicitly declined
to prohibit sub-penny executions,
provided such executions do not result
from an impermissible sub-penny orders
or quotations.12 The Commission
observed that sub-penny trading ‘‘does
not raise the same concerns as subpenny quoting. Sub-penny executions
do not cause quote flickering and do not
decrease depth at the inside quotation.
Nor do they require the same systems
capacity as would sub-penny quoting. In
8 Therefore, if an exchange accepts two sub-penny
orders that are not immediately executed against
each other, the exchange must immediately cancel
both orders or be in violation of Rule 612. If the
exchange ranked or displayed either sub-penny
order, it also would be in violation of Rule 612, as
this exemption extends only to the acceptance of
such orders. For purposes of this exemption, a cross
order is immediately executed if the exchange
automatically executes the cross with no delay
other than for confirming that the conditions for the
cross imposed by the exchange’s rules are satisfied.
9 15 U.S.C. 78s(b).
10 See Securities Exchange Act Release No. 51808
(June 9, 2005), 70 FR 37496, 37551 (June 29, 2005)
(‘‘Regulation NMS Adopting Release’’).
11 See id. at 37752.
12 See id. at 37556. A sub-penny execution could
result, for example, from a midpoint or volumeweighted trading algorithm or from price
improvement that a broker-dealer provides to a
customer order.
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66353
addition, sub-penny executions due to
price improvement are generally
beneficial to retail investors.’’ 13
The Commission believes that this
exemption is consistent with the
protection of investors because allowing
the exchanges to accept sub-penny cross
orders for the limited purpose of
immediately executing them is akin to
a sub-penny execution and should not
implicate any of the problems with subpenny quoting identified by the
Commission in adopting Rule 612.
Because these sub-penny cross orders
are prohibited from being displayed,
they will not cause quote flickering,
decrease depth at the inside quotation,
or degrade systems capacity.
Furthermore, because this exemption
applies only to pre-arranged cross
orders, these sub-penny orders will not
gain any execution advantage over
resting limit orders on the book.14
Furthermore, the Commission
believes that this exemption is
necessary or appropriate in the public
interest to facilitate the execution of prearranged cross orders on the exchanges.
When the Commission adopted Rule
612, exchange rules did not contemplate
sub-penny crosses, which therefore
could occur only in the over-the-counter
(‘‘OTC’’) market. Since that time, some
exchanges have proposed to offer such
execution services.15 In the OTC market,
a broker-dealer could execute a subpenny cross without the two orders
involved having to be accepted by any
entity subject to Rule 612. The brokerdealer could simply arrange the trade at
the sub-penny price, as principal or
agent, and report the execution to the
13 Id.
14 Nothing in this exemption relieves a national
securities exchange of the requirement to establish
all rules, including its rules related to cross
transactions, in a manner consistent with Section
19(b) of the Exchange Act, 15 U.S.C. 78s(b), and
Rule 19b–4 thereunder, 17 CFR 240.19b–4, before
accepting sub-penny orders in reliance on this
exemption. In reviewing proposed rules relating to
cross transactions, the Commission would evaluate,
among other things, whether cross orders could
gain execution priority over resting limit orders in
a manner inconsistent with the Exchange Act. See,
e.g., Securities Exchange Act Release No. 54391
(August 31, 2006), 71 FR 52836 (September 7, 2006)
(SR–NSX–2006–08) (approving, among other things,
NSX Rule 11.12(b), which permits crosses that are
priced at least $0.01 better than any displayed order
on the book, and Rule 11.12(c), which permits
midpoint crosses); Securities Exchange Act Release
No. 54422 (September 11, 2006), 71 FR 54537
(September 15, 2006) (SR–CBOE–2004–21)
(approving, among other things, CBOE Rule 52.11,
which permits crosses to occur at the same price as
displayed orders on the book if the cross
transaction: (1) Is for at least 5000 shares; (2) is for
a principal amount of at least $100,000; and (3) is
greater in size than any single public customer
order displayed on the book at the proposed cross
price).
15 See supra note 5.
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66354
Federal Register / Vol. 71, No. 219 / Tuesday, November 14, 2006 / Notices
NASD.16 To execute the same trade on
an exchange, however, the exchange’s
systems might require the broker-dealer
to enter matching buy and sell orders
that are explicitly priced in a sub-penny
increment that, absent an exemption,
would not be permitted by Rule 612.
The Commission does not believe that
Rule 612 should preclude an immediate
sub-penny execution on an exchange
that results from the submission by a
member of a cross order arranged by
that member that otherwise is in
accordance with exchange rules
established consistent with Section
19(b) of the Exchange Act. The
Commission believes, therefore, that
this exemption is consistent with the
public interest because it will level the
playing field between the exchanges and
the OTC market as venues for sub-penny
crossing transactions.17
For these reasons, the Commission
concludes that this limited exemption is
necessary or appropriate in the public
interest, and is consistent with the
protection of investors.
III. Conclusion
It is hereby ordered, pursuant to Rule
612(c) of Regulation NMS, that a
national securities exchange may accept
cross orders priced in sub-penny
increments, provided that:
(1) The orders are immediately
executed against each other; and
(2) The cross transaction is effected in
accordance with exchange rules
approved or established pursuant to
Section 19(b) of the Exchange Act.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.18
Nancy M. Morris,
Secretary.
[FR Doc. E6–19120 Filed 11–13–06; 8:45 am]
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–54715; File No. SR–NASD–
2006–108]
Self-Regulatory Organizations;
National Association of Securities
Dealers, Inc.; Order Approving a
Proposed Rule Change and Notice of
Filing and Order Granting Accelerated
Approval of Amendment No. 1 to a
Proposed Rule Change Relating to an
NASD Trade Reporting Facility
Established in Conjunction With the
National Stock Exchange, Inc.
November 6, 2006.
I. Introduction
On September 14, 2006, the National
Association of Securities Dealers, Inc.
(‘‘NASD’’) filed with the Securities and
Exchange Commission (‘‘Commission’’),
pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a
proposal to establish an NASD trade
reporting facility (the ‘‘NASD/NSX
TRF’’) in conjunction with the National
Stock Exchange, Inc. (‘‘NSX’’). The
proposed rule change was published for
comment in the Federal Register on
September 27, 2006.3 The Commission
received one comment letter regarding
the proposal.4 The NASD filed
Amendment No. 1 to the proposed rule
change on November 2, 2006.5 This
order approves the proposal, as
amended. In addition, the Commission
is publishing notice to solicit comments
on, and is simultaneously approving, on
an accelerated basis, Amendment No. 1.
II. Description of the Proposal
A. NASD/NSX TRF
NASD proposes to establish a new
trade reporting facility, the NASD/NSX
TRF, that will provide NASD members
with an additional facility for reporting
transactions in NMS stocks, as defined
BILLING CODE 8011–01–P
1 15
sroberts on PROD1PC70 with NOTICES
16 While
a broker-dealer may execute a cross at a
sub-penny price without violating Rule 612, the
broker-dealer may not accept a sub-penny order.
For example, the broker-dealer could accept a
market order to buy, internalize it, and give the
customer an execution at $10.001 (assuming such
execution is consistent with all applicable
Commission and SRO rules including, for example,
rules relating to best execution and order
protection). Rule 612 prohibits the broker-dealer
from accepting a limit order to buy that the
customer has explicitly priced at $10.001.
17 However, as with sub-penny crosses arranged
in the OTC market, nothing in this exemption
permits a broker-dealer itself to accept a limit order
that a customer has explicitly priced in an
increment not permitted by Rule 612.
18 17 CFR 200.30–3(a)(83).
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19:07 Nov 13, 2006
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U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Securities Exchange Act Release No. 54479
(September 21, 2006), 71 FR 56573 (‘‘Notice’’).
4 See letter from Alden Adkins, Executive Vice
President, Boston Stock Exchange, Inc. (‘‘BSE’’), to
Nancy N. Morris, Secretary, Commission, dated
October 17, 2006 (‘‘BSE Letter’’).
5 In Amendment No. 1, NASD proposes to:
(1) Allow members to report transactions in all
NMS stocks, as defined in Rule 600(b)(47) of
Regulation NMS under the Act; (2) designate NASD
Rule 5140 regarding multiple Market Participant
Symbols (‘‘MPIDs’’) as a pilot set to expire on
January 26, 2007 and add language to IM–5140
regarding members’ obligations when using
multiple MPIDs for quoting and trade reporting
purposes; (3) implement the NASD/NSX TRF in
two phases; and (4) reflect final approval of the
proposed rule change by the NASD Executive
Committee of the Board of Governors.
2 17
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in Rule 600(b)(47) of Regulation NMS
under the Act,6 that are effected
otherwise than on an exchange. The
NASD/NSX TRF will be operated by the
NASD/NSX Trade Reporting Facility
LLC (‘‘NASD/NSX TRF LLC’’). The
NASD/NSX TRF structure and rules are
substantially similar to the trade
reporting facility established by the
NASD and the Nasdaq Stock Market,
Inc. (the ‘‘NASD/Nasdaq TRF’’), which
the Commission approved in June
2006.7
The NASD/NSX TRF will be a facility,
as defined under the Act,8 of the NASD,
subject to regulation by the NASD and
to the NASD’s registration as a national
securities association. NASD members 9
that match and/or execute orders
internally or through proprietary
systems may submit reports of these
trades, with appropriate information
and modifiers, to the NASD/NSX TRF,
which will then report them to the
appropriate exclusive securities
information processor (‘‘SIP’’).10
NASD/NSX TRF transaction reports
disseminated to the media will include
a modifier indicating the source of the
transactions that will distinguish them
from transactions executed on or
through the NSX. The NASD/NSX TRF
will provide the NASD with a real-time
copy of each trade report for regulatory
review purposes. At the option of the
participant, the NASD/NSX TRF may
provide the necessary clearing
information regarding transactions to
6 See
Amendment No. 1, supra note 5.
Securities Exchange Act Release No. 54084
(June 30, 2006), 71 FR 38935 (July 10, 2006)
(‘‘NASD/Nasdaq TRF Approval Order’’). NASD has
proposed to amend the NASD/Nasdaq TRF to
permit NASD members to report transactions in
NMS Stocks as defined in Rule 600 of Regulation
NMS under the Act. Currently, the NASD/Nasdaq
TRF only accepts transaction reports in Nasdaq
Global Market and Nasdaq Capital Market securities
and convertible bonds listed on The NASDAQ
Stock Market LLC (‘‘Nasdaq Exchange’’). See
Securities Exchange Act Release No. 54451
(September 15, 2006), 71 FR 55243 (September 21,
2006) (‘‘Pending NASD/Nasdaq TRF Proposal’’).
8 15 U.S.C. 78c(a)(2).
9 Only NASD members in good standing may
participate in the NASD/NSX TRF. See NASD Rule
6120C(a)(1). NASD/NSX TRF participants also must
meet the minimum requirements set forth in NASD
Rule 6120C, including the execution of, and
continuing compliance with, a Participant
Application Agreement; membership in, or
maintenance of, an effective clearing arrangement
with a participant of a registered clearing agency
registered pursuant to the Act; and the acceptance
and settlement of each trade that the NASD/NSX
TRF identifies as having been effected by the
participant.
10 The NASD/NSX TRF will have controls in
place to ensure that transactions reported to the
NASD/NSX TRF that are significantly away from
the current market will not be submitted to the SIP.
The NASD represented that this is consistent with
current practice and noted that the Alternative
Display Facility (‘‘ADF’’) and the NASD/Nasdaq
TRF currently do not submit such trades to the SIP.
7 See
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]]>Agencies
[Federal Register Volume 71, Number 219 (Tuesday, November 14, 2006)]
[Notices]
[Pages 66352-66354]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-19120]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-54714]
Order Granting National Securities Exchanges a Limited Exemption
From Rule 612 of Regulation NMS Under the Securities Exchange Act of
1934 To Permit Acceptance by Exchanges of Certain Sub-Penny Orders
November 6, 2006.
I. Introduction
The Securities and Exchange Commission (``Commission'') is granting
national securities exchanges a limited exemption from Rule 612 \1\ of
Regulation NMS under the Securities Exchange Act of 1934 (``Exchange
Act'') to permit them to accept certain cross orders priced in sub-
penny increments, subject
[[Page 66353]]
to the conditions described below. Rule 612 prohibits a national
securities exchange (among other entities) from displaying, ranking, or
accepting a bid or offer, an order, or indication of interest in any
national market system (``NMS'') stock \2\ that is priced in an
increment smaller than $0.01 per share, unless the price of the bid or
offer, order, or indication of interest is priced less than $1.00 per
share.\3\ If the bid or offer, order, or indication of interest is
priced less than $1.00 per share, the minimum allowable increment is
$0.0001 per share.\4\
---------------------------------------------------------------------------
\1\ 17 CFR 240.612.
\2\ An NMS stock is any non-option security for which
transaction reports are collected, processed, and made available
pursuant to an effective transaction reporting plan. See 17 CFR
242.600(b)(46) and (b)(47).
\3\ See 17 CFR 242.612(a).
\4\ See 17 CFR 242.612(b).
---------------------------------------------------------------------------
Recently, the Commission approved a number of SRO rule changes
that, subject to the Commission's grant of exemptive relief, envision
the acceptance of certain cross orders arranged by members in sub-penny
prices.\5\ A cross transaction involves a buy order and sell order for
the same security at the same price that are pre-matched by an exchange
member, whether as principal or agent, and submitted to the exchange
for execution.\6\ In absence of an exemption from the Rule 612, an
exchange is prohibited from accepting cross orders priced above $1.00
per share in sub-penny increments,\7\ even if such orders are
immediately executed and printed by the exchange. However, pursuant to
Rule 612(c), the Commission, by order, may exempt from the provisions
of Rule 612, either unconditionally or on specified terms and
conditions, any person, security, quotation, or order (or any class or
classes of persons, securities, quotations, or orders) if the
Commission determines that such exemption is necessary or appropriate
in the public interest, and is consistent with the protection of
investors.
---------------------------------------------------------------------------
\5\ See, e.g., Securities Exchange Act Release No. 54550
(September 29, 2006), 71 FR 59563 (October 10, 2006) (SR-CHX-2006-
05) (approving, among other things, rules permitting cross
transactions in increments as small as $0.000001); Securities
Exchange Act Release No. 54538 (September 28, 2006), 71 FR 59184
(October 6, 2006) (SR-Phlx-2006-43) (approving, among other things,
benchmark orders that could be priced in increments as small as
$0.0001).
\6\ For example, a member could pair together a customer market
order to buy and a customer market order to sell at the midpoint
between the exchange's best bid and offer (``BBO''), which would
result in a sub-penny execution (e.g., $17.895) if the BBO were an
odd number of cents wide (e.g., $17.89 x $17.90). In addition, a
member could offer sub-penny price improvement when trading as
principal with a customer order.
\7\ An exchange may, consistent with Rule 612(b) of Regulation
NMS, establish rules that permit it to accept orders that are priced
less than $1.00 per share in increments as small as $0.0001, whether
or not as part of a cross transaction.
---------------------------------------------------------------------------
II. Discussion
After careful consideration, the Commission hereby grants the
national securities exchanges a limited exemption from Rule 612
permitting them to accept certain sub-penny cross orders. This
exemption is limited to the acceptance by national securities exchanges
of cross orders arranged by members that are priced in sub-penny
increments and immediately executed against each other,\8\ and
otherwise accepted and handled in accordance with rules approved or
established pursuant to Section 19(b) of the Exchange Act.\9\
---------------------------------------------------------------------------
\8\ Therefore, if an exchange accepts two sub-penny orders that
are not immediately executed against each other, the exchange must
immediately cancel both orders or be in violation of Rule 612. If
the exchange ranked or displayed either sub-penny order, it also
would be in violation of Rule 612, as this exemption extends only to
the acceptance of such orders. For purposes of this exemption, a
cross order is immediately executed if the exchange automatically
executes the cross with no delay other than for confirming that the
conditions for the cross imposed by the exchange's rules are
satisfied.
\9\ 15 U.S.C. 78s(b).
---------------------------------------------------------------------------
Among other things, Rule 612 is designed to limit the ability of a
market participant to gain execution priority over a competing limit
order by an economically insignificant amount. The Commission noted
that, ``[i]f investors' limit orders lose execution priority for a
nominal amount, investors may over time decline to use them, thus
depriving the markets of liquidity.'' \10\ In addition, Rule 612 is
intended to reduce the incidence of quote flickering, which makes it
more difficult for market participants to identify the best price
available in the national market system at a given moment, and to
prevent excessive reduction of depth at the best inside quotation.\11\
In adopting Rule 612, the Commission explicitly declined to prohibit
sub-penny executions, provided such executions do not result from an
impermissible sub-penny orders or quotations.\12\ The Commission
observed that sub-penny trading ``does not raise the same concerns as
sub-penny quoting. Sub-penny executions do not cause quote flickering
and do not decrease depth at the inside quotation. Nor do they require
the same systems capacity as would sub-penny quoting. In addition, sub-
penny executions due to price improvement are generally beneficial to
retail investors.'' \13\
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\10\ See Securities Exchange Act Release No. 51808 (June 9,
2005), 70 FR 37496, 37551 (June 29, 2005) (``Regulation NMS Adopting
Release'').
\11\ See id. at 37752.
\12\ See id. at 37556. A sub-penny execution could result, for
example, from a midpoint or volume-weighted trading algorithm or
from price improvement that a broker-dealer provides to a customer
order.
\13\ Id.
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The Commission believes that this exemption is consistent with the
protection of investors because allowing the exchanges to accept sub-
penny cross orders for the limited purpose of immediately executing
them is akin to a sub-penny execution and should not implicate any of
the problems with sub-penny quoting identified by the Commission in
adopting Rule 612. Because these sub-penny cross orders are prohibited
from being displayed, they will not cause quote flickering, decrease
depth at the inside quotation, or degrade systems capacity.
Furthermore, because this exemption applies only to pre-arranged cross
orders, these sub-penny orders will not gain any execution advantage
over resting limit orders on the book.\14\
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\14\ Nothing in this exemption relieves a national securities
exchange of the requirement to establish all rules, including its
rules related to cross transactions, in a manner consistent with
Section 19(b) of the Exchange Act, 15 U.S.C. 78s(b), and Rule 19b-4
thereunder, 17 CFR 240.19b-4, before accepting sub-penny orders in
reliance on this exemption. In reviewing proposed rules relating to
cross transactions, the Commission would evaluate, among other
things, whether cross orders could gain execution priority over
resting limit orders in a manner inconsistent with the Exchange Act.
See, e.g., Securities Exchange Act Release No. 54391 (August 31,
2006), 71 FR 52836 (September 7, 2006) (SR-NSX-2006-08) (approving,
among other things, NSX Rule 11.12(b), which permits crosses that
are priced at least $0.01 better than any displayed order on the
book, and Rule 11.12(c), which permits midpoint crosses); Securities
Exchange Act Release No. 54422 (September 11, 2006), 71 FR 54537
(September 15, 2006) (SR-CBOE-2004-21) (approving, among other
things, CBOE Rule 52.11, which permits crosses to occur at the same
price as displayed orders on the book if the cross transaction: (1)
Is for at least 5000 shares; (2) is for a principal amount of at
least $100,000; and (3) is greater in size than any single public
customer order displayed on the book at the proposed cross price).
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Furthermore, the Commission believes that this exemption is
necessary or appropriate in the public interest to facilitate the
execution of pre-arranged cross orders on the exchanges. When the
Commission adopted Rule 612, exchange rules did not contemplate sub-
penny crosses, which therefore could occur only in the over-the-counter
(``OTC'') market. Since that time, some exchanges have proposed to
offer such execution services.\15\ In the OTC market, a broker-dealer
could execute a sub-penny cross without the two orders involved having
to be accepted by any entity subject to Rule 612. The broker-dealer
could simply arrange the trade at the sub-penny price, as principal or
agent, and report the execution to the
[[Page 66354]]
NASD.\16\ To execute the same trade on an exchange, however, the
exchange's systems might require the broker-dealer to enter matching
buy and sell orders that are explicitly priced in a sub-penny increment
that, absent an exemption, would not be permitted by Rule 612. The
Commission does not believe that Rule 612 should preclude an immediate
sub-penny execution on an exchange that results from the submission by
a member of a cross order arranged by that member that otherwise is in
accordance with exchange rules established consistent with Section
19(b) of the Exchange Act. The Commission believes, therefore, that
this exemption is consistent with the public interest because it will
level the playing field between the exchanges and the OTC market as
venues for sub-penny crossing transactions.\17\
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\15\ See supra note 5.
\16\ While a broker-dealer may execute a cross at a sub-penny
price without violating Rule 612, the broker-dealer may not accept a
sub-penny order. For example, the broker-dealer could accept a
market order to buy, internalize it, and give the customer an
execution at $10.001 (assuming such execution is consistent with all
applicable Commission and SRO rules including, for example, rules
relating to best execution and order protection). Rule 612 prohibits
the broker-dealer from accepting a limit order to buy that the
customer has explicitly priced at $10.001.
\17\ However, as with sub-penny crosses arranged in the OTC
market, nothing in this exemption permits a broker-dealer itself to
accept a limit order that a customer has explicitly priced in an
increment not permitted by Rule 612.
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For these reasons, the Commission concludes that this limited
exemption is necessary or appropriate in the public interest, and is
consistent with the protection of investors.
III. Conclusion
It is hereby ordered, pursuant to Rule 612(c) of Regulation NMS,
that a national securities exchange may accept cross orders priced in
sub-penny increments, provided that:
(1) The orders are immediately executed against each other; and
(2) The cross transaction is effected in accordance with exchange
rules approved or established pursuant to Section 19(b) of the Exchange
Act.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\18\
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\18\ 17 CFR 200.30-3(a)(83).
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Nancy M. Morris,
Secretary.
[FR Doc. E6-19120 Filed 11-13-06; 8:45 am]
BILLING CODE 8011-01-P
