[Federal Register: July 6, 2006 (Volume 71, Number 129)]
[Notices]
[Page 38433-38434]
[DOCID:fr06jy06-118]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54063]

Order Pursuant to Section 11A of the Securities Exchange Act of
1934 and Rule 608(e) Thereunder Extending a De Minimis Exemption for
Transactions in Certain Exchange-Traded Funds From the Trade-Through
Provisions of the Intermarket Trading System

June 28, 2006.
    This order extends, through February 4, 2007, a de minimis
exemption to the provisions of the Intermarket Trading System Plan
(``ITS Plan''),\1\ a national market system plan,\2\ governing
intermarket trade-throughs that currently is due to expire on June 28,
2006. The de minimis exemption was originally issued by the Commission
on August 28, 2002 \3\ and extended on May 30, 2003,\4\ on March 3,
2004,\5\ on December 3, 2004,\6\ and on September 6, 2005.\7\
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    \1\ The self-regulatory organizations (``SROs'') participating
in the ITS Plan include the American Stock Exchange LLC, the Boston
Stock Exchange, Inc., the Chicago Board Options Exchange, Inc., the
Chicago Stock Exchange, Inc., the National Stock Exchange, Inc.
(formerly the Cincinnati Stock Exchange, Inc.), the National
Association of Securities Dealers, Inc. (``NASD''), the New York
Stock Exchange, Inc., the Pacific Exchange, Inc., and the
Philadelphia Stock Exchange, Inc. (collectively, the
``participants''). See Securities Exchange Act Release No. 19456
(January 27, 1983), 48 FR 4938 (February 3, 1983).
    \2\ Securities Exchange Act of 1934 (``Act'') Rule 608(c)
(formerly Rule 11Aa3-2(d)), 17 CFR 242.608(c), promulgated under
Section 11A, 15 U.S.C. 78k-1, of the Act requires each SRO to comply
with, and enforce compliance by its members and their associated
persons with, the terms of any effective national market system plan
of which it is a sponsor or participant. Rule 608(e) (formerly Rule
11Aa3-2(f)), 17 CFR 242.608(e), under the Act authorizes the
Commission to exempt, either unconditionally or on specified terms
and conditions, any SRO, member of an SRO, or specified security
from the requirement of the rule if the Commission determines that
such exemption is consistent with the public interest, the
protection of investors, the maintenance of fair and orderly markets
and the removal of impediments to, and perfection of the mechanisms
of, a national market system.
    \3\ See Securities Exchange Act Release No. 46428 (August 28,
2002), 67 FR 56607 (September 4, 2002) (the ``August 2002 Order'').
The August 2002 Order granted relief through June 4, 2003.
    \4\ See Securities Exchange Act Release No. 47950 (May 30,
2003), 68 FR 33748 (June 5, 2003) (the ``May 2003 Order''). The May
2003 Order granted relief through March 4, 2004.
    \5\ See Securities Exchange Act Release No. 49356 (March 3,
2004), 69 FR 11057 (March 9, 2004) (the ``March 2004 Order''). The
March 2004 Order granted relief through December 4, 2004.
    \6\ See Securities Exchange Act Release No. 50795 (December 3,
2004), 69 FR 71445 (December 9, 2004) (the ``December 2004 Order'').
The December 2004 Order granted relief through September 4, 2005.
    \7\ See Securities Exchange Act Release No. 52382 (September 6,
2005), 70 FR 53695 (September 9, 2005) (the ``September 2005
Order''). The September Order granted relief through June 28, 2006.
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    Specifically, this order continues the de minimis exemption from
compliance with Section 8(d)(i) of the ITS Plan with respect to two
specific exchange-traded funds (``ETFs''), the Dow Jones Industrial
Average ETF (``DIA'') and the Standard & Poor's 500 Index ETF
(``SPY'').\8\ By its terms, the September 2005 Order continued the
exemption from the trade-through provisions of the ITS Plan of any
transactions in the two ETFs that are effected at prices at or within
three cents away from the best bid and offer quoted in the Consolidated
Quote System (``CQS'') through June 28, 2006.
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    \8\ The Commission limited the de minimis exemption to these two
securities because they share certain characteristics that may make
immediate execution of their shares highly desirable to certain
investors. In particular, trading in the two ETFs is highly liquid
and market participants may value an immediate execution at a
displayed price more than the opportunity to obtain a slightly
better price. Unlike prior orders, the December 2004 and September
2005 extensions of the de minimis exemption applied only to the DIA
and the SPY, and not the QQQ, because, on December 1, 2004, trading
of the QQQ transferred from the American Stock Exchange to Nasdaq,
and thus trades in the QQQ ceased to be subject to the trade-through
provisions of the ITS Plan. Accordingly, an exemption for the QQQ
was no longer necessary. See December 2004 Order and September 2005
Order.
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    In the Commission's previous orders to issue and extend the de
minimis exemption,\9\ the Commission discussed its basis for
determining that the de minimis exemption is consistent with the public
interest, the protection of investors, the maintenance of fair and
orderly markets and the removal of impediments to, and perfection of
the mechanisms of, a national market system. In the September 2005
Order, the Commission further noted that:
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    \9\ See supra notes 3 to 7.

    In March 2004 and in May 2003, the Commission extended the three
cent de minimis exemption for additional nine-month periods, in
order to assess trading data associated with the de minimis
exemption and to consider whether to adopt the de minimis exemption
on a permanent basis, to adopt some other alternative solution, or
to allow the exemption to expire. As a result of its review of
trading data associated with the de minimis exemption, the
Commission has proposed, as part of its market structure
initiatives, Regulation NMS under the Act, which would include a new
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rule relating to trade-throughs.

    On April 6, 2005, the Commission approved Regulation NMS under the
Act.\10\ In Regulation NMS, the Commission adopted an approach that,
among other things, protects only automated quotations and excludes
manual quotations from trade-through protection, and renders the de
minimis exemption unnecessary. Given the significant systems and other
changes necessary to implement Rule 610 and Rule 611,\11\ the
Commission originally established delayed compliance dates for Rule 610
and Rule 611, the first of which was scheduled to begin on June 29,
2006.\12\ In the September 2005 Order, the Commission stated that until
Regulation NMS is implemented, the reasons for maintaining the de
minimis exemption in effect continue to be valid, and thus the
Commission extended the de minimis exemption though June 28, 2006,
which was the date before the initial compliance date for Rule 610 and
Rule 611.
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    \10\ See Securities Exchange Act Release No. 51808 (June 9,
2005), 70 FR 37496 (June 29, 2005).
    \11\ Rule 610 generally prohibits national securities exchanges
and national securities associations from imposing unfairly
discriminatory terms that prevent or inhibit access to quotations,
and establishes a limit on access fees, and requires each national
securities exchange and national securities association to adopt,
maintain, and enforce written rules that prohibit their members from
engaging in a pattern or practice of displaying quotations that lock
or cross protected quotations. Rule 611 requires trading centers to
establish, maintain, and enforce written policies and procedures
reasonably designed to prevent the execution of trades at prices
inferior to protected quotations displayed by other trading centers,
subject to an applicable exception.
    \12\ See supra note 10.
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    On May 18, 2006, the Commission extended the compliance dates for
Rule 610 and Rule 611 to give trading centers additional time to
finalize the development of their new or modified trading systems, and
to give the securities industry sufficient time to establish the
necessary access to such trading systems.\13\ The initial compliance
date was extended to a series of five dates, beginning on October 16,
2006, for different functional stages of compliance, with February 5,
2007 (the ``Trading Phase Date'') being the final date for full
operation of Regulation NMS-compliant trading systems for initial
trade-through protection under Rule 611, as described in the NMS
Extension Release.
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    \13\ Securities Exchange Act Release No. 53829 (May 18, 2006),
71 FR 30037 (May 24, 2006) (``NMS Extension Release'').
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    Therefore, to maintain the status quo and avoid requiring market
participants to make short-term trading or programming changes pending
the extended implementation period for Rule 610 and Rule 611 of
Regulation NMS, it is appropriate to extend the de minimis exemption
through February 4, 2007, the day before the Trading Phase Date.\14\
The Commission emphasizes, as

it did in the previous orders,\15\ that the de minimis exemption does
not relieve brokers and dealers of their best execution obligations
under the federal securities laws and SRO rules.
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    \14\ The Commission expects most trading centers to be operating
consistent with the requirements of Rule 611 by the Trading Phase
Date.
    \15\See supra notes 3 to 7.
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    Accordingly, it is ordered, pursuant to Section 11A of the Act and
Rule 608(e) thereunder,\16\ that participants of the ITS Plan and their
members are hereby exempt from Section 8(d) of the ITS Plan during the
period covered by this Order with respect to transactions in DIAs and
SPYs that are executed at a price that is no more than three cents
lower than the highest bid displayed in CQS and no more than three
cents higher than the lowest offer displayed in CQS. This Order extends
the de minimis exemption from June 29, 2006 through February 4, 2007.
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    \16\ 17 CFR 242.608(e).

    By the Commission.
Nancy M. Morris,
Secretary.
[FR Doc. E6-10493 Filed 7-5-06; 8:45 am]

BILLING CODE 8010-01-P