[Federal Register Volume 64, Number 39 (Monday, March 1, 1999)]
[Notices]
[Pages 10035-10037]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-4959]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-41082; File No. SR-CSE-99-02]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Cincinnati Stock Exchange, Inc. Relating to a Specialist
Revenue Sharing Program
February 22, 1999.
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 February 18, 1999, the Cincinnati Stock Exchange, Inc. (``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.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The CSE proposes to amend the schedule of fees set forth in
Exchange Rule 11.10. The text of the proposed rule change is as follows
(additions are italicized; deletions are bracketed):
[[Page 10036]]
Rule 11.10 National Securities Trading System Fees
A. Trading Fees.
(a) Agency Transactions. As in the case for Preferenced
transactions members acting as an agent will be charged the per
share incremental rates as noted below for public agency
transactions:
------------------------------------------------------------------------
Charge per
Avg. daily share* volume share
------------------------------------------------------------------------
1 to 250,000............................................ $0.0015
250,001 to 500,000...................................... 0.0013
500,001 to 750,000...................................... 0.0009
750,001 to 1,250,000.................................... 0.0007
1,250,001 and higher [2,000,000]........................ 0.0005
------------------------------------------------------------------------
*Odd-Lot Shares Excluded.
(b)-(g) No Change.
(h) Preferenced Transactions. Designated Dealers that are
Preferencing transactions are charged for one side of their
preferenced transactions and are subject to the incremental rates as
noted below:
------------------------------------------------------------------------
Charge per
Avg. daily share* volume share
------------------------------------------------------------------------
1 to 250,000............................................ $0.0015
250,001 to 500,000...................................... 0.0013
500,001 to 750,000...................................... 0.0009
750.001 to 1,250,000.................................... 0.0007
1,250,001 and higher [2,000,000]........................ 0.0005
------------------------------------------------------------------------
* Odd-Lot Shares Excluded.
(i) No Change.
(j) Revenue Sharing Program. After the Exchange earns total
operating revenue sufficient to offset actual expenses and working
capital needs, a percentage of all Specialist Operating Revenue
(``SOR'') shall be eligible for sharing with Designated Dealers. SOR
is defined as operating revenue which is generated by specialist
firms. SOR consists of transaction fees, book fees, technology fees,
and market data revenue which is attributable to specialist firm
activity. SOR shall not include any investment income or regulatory
monies. The sharing of SOR shall be based on each Designated
Dealers' pro rata contribution to SOR. In no event shall the amount
of revenue shared with Designated Dealers exceed SOR.
(j)-(o) To be renumbered (k)-(p).
* * * * *
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 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 purpose of the proposed rule change is to provide an incentive
for growth in specialist activity on the Exchange. CSE believes that
its strength lies in its ability to operate at significantly lower
expense levels than its competitors. To utilize this operating leverage
and compete more effectively for order flow, the Exchange proposes to
significantly reduce the cost of doing business for specialist firms by
means of a quarterly revenue sharing program.
The proposed rule change contemplates the Exchange sharing with
specialist firms all or a portion of CSE's Specialist Operating Revenue
(``SOR''), after operating expenses and working capital needs have been
met. SOR is defined as all operating revenue which is generated by
specialists. Such revenue consists of transaction fees, book fees,
technology fees, and Consolidated Tape Network A and B market data
(``Tape A'' and ``Tape B'') revenue which is attributable to specialist
trade activity. All regulatory monies and investment income are
excluded from SOR.
Under the proposal, CSE's Board of Trustees would have the
authority to determine on an ongoing basis the appropriate amount of
SOR to be shared with specialist firms. In making this determination,
the Board would be guided first by CSE's objective of offsetting all
specialist fees and then by the need to balance the objective of
sharing the remainder of SOR with the objective of retaining the
financial integrity of the Exchange. To simplify the administration of
the revenue sharing program and smooth out monthly expense
fluctuations, the program will operate on a quarterly basis. Initially,
the Board has determined to share 100% of the first $750,000 in
quarterly SOR and 50% of all quarterly SOR over $750,000, after actual
expenses have been paid and the budgeted working capital goal has been
set aside.
SOR will be shared with specialist firms on a pro rata basis. After
the Exchange has accounted for operating expenses and working capital
contributions, each specialist firm will receive a percentage of the
SOR to be shared which is equal to that specialist firm's percentage
contribution to SOR. In no event will the amount of revenue shared with
specialist firms exceed SOR. Furthermore, while Tape B revenue is
included in SOR, it is excluded from the specialist firm percentage
contribution calculation because CSE's current transaction charge on
Tape B activity is already zero and the Exchange already has in place a
program which shares up to 40% of Tape B revenue with its specialist
firms.\3\ Finally, the proposed rule
[[Page 10037]]
change eliminates the current two-million-share average daily cap on
preferencing charges.
---------------------------------------------------------------------------
\3\ See Securities Exchange Act Release No. 39395 (December 3,
1997) 62 FR 65113 (December 10, 1997).
---------------------------------------------------------------------------
The application of the proposed revenue sharing program can be
demonstrated by the following example. Assume that the Exchange has SOR
in a given quarter of $2 million, that all other operating revenue
equals $250,000 during that quarter, that actual quarterly expenses
equal $1.5 million, and that the working capital target for the quarter
is $250,000. In addition, assume that Specialist Firm #1 contributes
$500,000 in quarterly SOR (or 25% of total SOR), Specialist Firm #2
contributes $300,000 (15%), and Specialist Firms #3, #4, and #5 each
contribute $200,000 (10%). In this event, $500,000 (i.e. $2.25 million
minus $1.75 million) would be available for sharing with specialist
firms. Specialist Firm #1 would receive $125,000, or 25% of $500,000;
Specialist Firm #2 would receive $75,000; and Specialist Firms #3, #4,
and #5 would each receive $50,000. In this example, the Exchange would
never share more than $2 million with its specialist firms even if
actual expenses and working capital needs were less than $250,000.
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
Section 6(b) of the Act,\4\ in general, and furthers the objectives of
section 6(B)(5) \5\ 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.
The Exchange believes that the proposed rule change will create an
incentive for members to bring order flow to the Exchange, thereby
increasing competition which, in turn, will enhance the National Market
System.
---------------------------------------------------------------------------
\4\ 15 U.S.C. 78f(b).
\5\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
In addition, the Exchange believes the proposed rule change
furthers the objectives of section 6(b)(4) \6\ in that it is designed
to provide for the equitable allocation of reasonable fees among its
members. Specifically, the proposal provides for revenue sharing with
CSE's specialist firms, who are primarily responsible for the
Exchange's financial viability and growth.
---------------------------------------------------------------------------
\6\ 15 U.S.C. 78f(b)(4).
---------------------------------------------------------------------------
B. Self-Regulatory Organization's Statement on Burden on Competition
The CSE does not believe that the proposed rule change would 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
Written comments on the proposed rule change were neither solicited
nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing
for Commission Action
Within 35 days of the 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 Exchange consents, the Commission will:
(A) by order approve the 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. 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 such 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-99-02 and should
be submitted by March 22, 1999.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\7\
---------------------------------------------------------------------------
\7\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-4959 Filed 2-26-99; 8:45 am]
BILLING CODE 8010-01-M