

[Federal Register: June 27, 2006 (Volume 71, Number 123)]
[Notices]               
[Page 36576-36578]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr27jn06-76]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54018; File No. SR-NSX-2006-06]

 
Self-Regulatory Organizations; National Stock Exchange; Notice of 
Filing of Proposed Rule Change To Allow the Primary Market Print 
Protection Rule To Be Applied on an Optional Basis

June 20, 2006.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on April 12, 2006, the National Stock Exchange (``NSX'' 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

[[Page 36577]]

prepared by the Exchange. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend NSX Rule 11.9(u), which pertains to 
the preferencing of public agency limit orders that a dealer represents 
as agent, to eliminate the specific requirement that a Designated 
Dealer execute eligible limit order if certain conditions occur in the 
primary market (referred to as the ``primary market print protection'' 
or the ``limit order protection'' provision). Dealers and members would 
still be permitted, but not required, to guarantee the execution of a 
limit order as principal upon the occurrence of a transaction in 
another market. The text of the proposed rule change is set forth 
below. Proposed new language is in italics. Proposed deletions are in 
[brackets].

Rule 11.9 National Securities Trading System

    (a)-(u) No change.
Interpretations And Policies
.01 Limit Order Protection
    Public agency limit orders in securities [other than Nasdaq/NNM 
Securities shall] may be filled if one of the following conditions 
occur:
    (a) the bid or offering at the limit price has been exhausted in 
the primary market (NOTE: orders will be executed in whole or in part, 
based on the rules of priority and precedence, on a share for share 
basis with trades executed at the limit price in the primary market);
    (b) there has been a price penetration of the limit in the primary 
market; or
    (c) the issue is trading at the limit price on the primary market, 
unless it can be demonstrated that such order would not have been 
executed if it had been transmitted to the primary market or the 
customer and the Designated Dealer agree to a specific volume related 
or other criteria for requiring a fill.
    (d) with respect to paragraph (c) above, if the issue has traded in 
a primary market's after-hours closing price trading session, the 
Designated Dealer shall fill limit orders designated as eligible for 
limit order protection based on volume that prints in a primary 
market's after-hours closing price trading session (a ``GTX'' order) at 
such limit price.
    [In unusual trading situations, a Designated Dealer may seek relief 
from the above requirements from two Trading practices Committee 
members or a designated member of the Exchange staff who would have the 
authority to set execution prices.]

II. Self-Regulatory Organization's Statement on the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, NSX included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it had received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. NSX has prepared summaries, set forth in Sections A, B, 
and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to amend NSX Rule 11.9(u), which pertains to 
the preferencing of public agency limit orders that a dealer represents 
as agent, to eliminate the primary market print protection provision 
contained in Interpretation and Policy .01.\3\ However, dealers and 
other members would still be permitted, but not required, to execute 
orders pursuant to the limit order guarantee provisions in NSX Rule 
11.9(a)(12), (k), (l), and (p).
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    \3\ Interpretation and Policy .01 to NSX Rule 11.9(u) was 
initially adopted as part of the Exchange's (then known as The 
Cincinnati Stock Exchange or ``CSE'') preferencing program in 1996. 
See Securities Exchange Act Release No. 37046 (March 29, 1996), 61 
FR 15322 (April 5, 1996) (File No. SR-CSE-95-03).
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    NSX Rule 11.9(u), Interpretation and Policy .01 sets out specific 
primary market-related execution guarantees for non-Nasdaq-listed 
securities. Under the primary market print protection policy, a public 
agency limit order in an exchange-listed security routed to an NSX 
dealer for execution on NSX would be filled if the bid or offering at 
the limit price has been exhausted in the primary market; there has 
been a price penetration of the limit in the primary market; or the 
issue is trading at the limit price on the primary market, unless it 
can be demonstrated that such order would not have been executed if it 
had been transmitted to the primary market or the customer and the 
Designated Dealers agree to a specific volume related or other criteria 
for requiring a fill.\4\ NSX states that, at the time this policy was 
adopted, the listing markets were generally the primary source of 
liquidity, the minimum price variation was \1/8\ point, and more size 
was available at the national best bid or offer (``NBBO''). The larger 
spreads and quote sizes could create situations where a security might 
trade in the primary market all day at a customer limit price without 
an NSX dealer's customer limit order being filled absent the 
requirement that Designated Dealers provide primary market print 
protection. The Exchange states that the primary market print 
protection thus provided a means to ensure that a customer limit order 
received as timely an execution as it would have received on the 
primary and was also a competitive tool to attract order flow to the 
NSX dealer units.
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    \4\ With respect to paragraph (c), the rule provides that, if 
the issue has traded in a primary market's after-hours closing price 
trading session, the Designated Dealer shall fill limit orders 
designated as eligible for limit order protection based on volume 
that prints in a primary market's after-hours closing trading 
session (a ``GTX'' order) at such limit price. The interpretation 
also provides that dealers may seek relief from the limit order 
protection requirements in unusual trading situations.
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    The Exchange proposes to eliminate the requirement for Designated 
Dealers to provide primary market print protection in light of changes 
in the industry that have occurred since the requirement was first 
adopted in 1996. Since that time, the industry has converted to decimal 
trading and the availability of liquidity at the NBBO price point has 
declined, in many cases significantly. NSX states that, as a result, a 
dealer that may choose to offset his position in the primary market may 
often encounter great difficulty in accessing liquidity at the primary 
market price that it is obligated to provide. This is particularly true 
in the case of manually-executed orders, given the associated time 
latency and the frequency with which quotes in markets change.
    In addition to decimalization, the Commission has adopted the order 
handling rules, including the limit order display requirements of Rule 
604 of Regulation NMS under the Act.\5\ The display of a limit order, 
in conjunction with the requirements that other markets not trade-
through that price, makes it more likely that the limit order will be 
executed. NSX states that there is also increased competition between 
the various markets, and the primary market may not necessarily be the 
best source for liquidity. Electronic communication networks have also 
formed as alternative liquidity providers to the markets, and automated 
order routing system capabilities to the various markets have been 
enhanced.

[[Page 36578]]

The Exchange also notes that, in contrast to the environment when NSX 
enacted its rule provisions mandating primary market print protection 
for exchange-listed issues, NSX order-sending firms now have access to 
comprehensive order execution quality statistics.
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    \5\ 17 CFR 242.604.
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    These changes make it such that the mandatory aspects of the 
primary market print protection policy are no longer necessary to 
ensure timely executions or as a ``front-end'' execution price 
guarantee to attract order flow. The Exchange notes that many dealers 
believe that it is no longer appropriate to mandate they guarantee the 
execution of resting limit orders for exchange-listed issues based on 
activity in the primary market. NSX states that they believe that, in 
today's trading environment, the exchange-listed primary market print 
protection exposes them to unwarranted liability, which they often have 
no ability to mitigate.
    Accordingly, the Exchange believes that the primary market print 
protection provisions of its Rules should be eliminated. In making this 
proposal, the Exchange notes that under separate provisions of the NSX 
Rules, dealers and other members are currently permitted, but not 
required, to guarantee the execution of a limit order as principal upon 
the occurrence of a transaction in another market, not just the primary 
markets, at the price of such order.\6\ Dealers and other members will 
continue to have this ability after the elimination of the primary 
market print protection rule. Accordingly, NSX dealers can continue to 
execute resting limit orders voluntarily when executions at the limit 
price occur in other markets as a means of satisfying their best 
execution obligations and maintaining superior execution quality 
statistics, but they not have more flexibility to determine how best to 
service those orders.
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    \6\ Under the Exchange's priority principles, dealers and 
members are permitted to effect the execution of a public agency 
limit order on NSX pursuant to a limit order guarantee. The 
execution of an order pursuant to a limit order guarantee takes 
priority over orders and bids or offers in the Exchange's trading 
system (known as the National Securities Trading System or ``NSTS'') 
and is deemed to be a transaction effected on NSX in the same manner 
as if the transaction were executed through NSTs and must be 
reported to the Exchange as promptly as possible and in any event 
within one minute of execution. See NSX Rules 11.9(a)(12), (k), (l) 
and (p).
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    Importantly, the Exchange notes that these revisions do not affect 
the trading ahead prohibitions of NSX Rule 12.6, the best execution 
obligations of NSX Rule 12.10, or any other dealer obligations. The 
Exchange states that its Regulatory Services Division will continue its 
surveillance of order executions to ensure that NDX dealers meet their 
obligations to each order.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act,\7\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act,\8\ in particular, in that it 
is designed to promote just and equitable principles of trade; to 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system; and, in general, to protect 
investors and the public interest.
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    \7\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change would 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange has neither solicited nor received written comments on 
the proposed rule change.

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 NSX 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, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or     Send an e-mail to rule-comments@sec.gov. Please include 

File Number SR-NSX-2006-06 on the subject line.

Paper Comments

    Send paper comments in triplicate to Nancy M. Morris, Secretary, 
Securities and Exchange Commission, Station Place, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NSX-2006-06. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). 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 such 
filing also will be available for inspection and copying the principal 
office of NSX. All comments received will be posed without change; the 
Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
publicly available. All submissions should refer to File Number SR-NSX-
2006-06 and should be submitted on or before July 18, 2006.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 06-5681 Filed 6-26-06; 8:45 am]

BILLING CODE 8010-01-M
