[Federal Register Volume 59, Number 24 (Friday, February 4, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-2579]


[[Page Unknown]]

[Federal Register: February 4, 1994]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-33542; File No. SR-CHX-93-19]

 

Self-Regulatory Organizations; Proposed Rule Change by Chicago 
Stock Exchange, Incorporated Proposing to Establish Rules for an 
Institutional Trading System, Called the Match Market Exchange Facility

January 28, 1994.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on August 6, 1993, the 
Chicago Stock Exchange, Inc. (``CHX'' 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 self-regulatory organization. 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) (1988).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The CHX proposes to establish rules for an institutional trading 
system, the Match Market Exchange (``MMX'') facility, that integrates 
an electronic order match system with a facility for brokering trades.

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 self-regulatory organization 
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 self-regulatory organization 
has prepared summaries, set forth in section (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 establish rules for 
the MMX facility, an institutional trading system that integrates an 
electronic order match system with a facility for brokering trades. The 
MMX facility is designed to combine the advantages of current 
institutional order systems with the advantages of exchange trading.
    Although the MMX will be operated by the Exchange, it was jointly 
developed by the CHX and Global Trade, Inc. Users of the MMX will 
include institutional customers, specialists, MMX market makers and 
brokers. These users will communicate with the MMX facility through 
personal computers and modems. The MMX facility will electronically 
match users' orders in an allocation procedure described more fully 
below. If an electronic match occurs, the trade will be priced at the 
market price at a random time within a pre-determined ten minute window 
period and will be executed at that time. If a match does not occur, 
users will still have the opportunity to find the other side of their 
trades through participating brokers.
2. Description of How the MMX Facility Operates
    The following is a brief overview of the MMX facility, followed by 
a more detailed description about certain aspects of the system.
    MMX will permit direct order entry by both CHX members and 
customers of those members. Prior to the time a non-member user enters 
orders into the system, the user will enter into an agreement with CHX 
agreeing to be bound by the Exchange's rules governing MMX and will 
submit the names of the Midwest Clearing Corporation members through 
which the user will clear. In order for the non-member user to 
designate a clearing firm, it must enter into a give-up agreement with 
the clearing firm and provide a copy to the Exchange. CHX member users 
will clear MMX transactions through their existing clearing 
arrangements.
    For each order, the user will enter the following information:
     Stock ticker symbol;
     The number of shares;
     Capacity (buy, sell or sell short);
     The limit price (optional);
     Linked order conditions (optional);
     Minimum trade size (optional);
     Excluded category of contra parties (optional);
     Names of individual excluded users (optional);
     Liquidity fee or credit (optional);
     Near match range and near match broker (optional);
     Order visibility; and
     Clearing firm.
    The user will send this information via modem to the MMX during the 
Pre-Cross Period. During this time users can review, edit or cancel 
their orders.
    In addition to orders manually entered by users, MMX will include 
guarantees by MMX market makers. These market makers will be Exchange 
members who register with the Exchange to be MMX market makers. As 
such, they will be obligated to guarantee a maximum execution size to 
all users of the system. It is currently anticipated that the maximum 
size of the guarantee will be ten thousand shares per issue for a 
certain class of stocks, five thousand shares per issue for another 
class of stocks, and two thousand shares per issue for a third class of 
stocks. MMX market maker guarantees will automatically be entered at 
the beginning of the Pre-Cross Period and will include a default 
liquidity fee or credit to be associated with a specific MMX guarantee. 
(Liquidity fees and liquidity credits are discussed below.) MMX market 
makers can improve this liquidity fee or credit and increase the size 
of their guarantee during the Pre-Cross Period.
    Users other than MMX market makers will have the option of having 
their orders displayed to other users of MMX. If a non-market maker 
user elects to have its order displayed, the order will be displayed 
under certain circumstances. Users will be charged lower fees for using 
the MMX Facility if they agree to have their orders displayed.
    Finally, the CHX's CQS quotation will automatically be fed into the 
MMX Facility on a real-time basis. When the consolidated best bid and 
offer spread of an issue is 1/8, the MMX Facility will look at the CHX 
quote to determine whether there are orders which would be executed if 
a trade took place at the consolidated best bid or best offer (i.e., if 
the CHX quote equaled the consolidated quote). If so, this bid and/or 
offer will be entered as an order in MMX. If entered, these orders will 
have the highest priority of execution.

    All matched orders will be executed at a random time within a pre-
determined ten minute window period at the market price at such time. 
The market price will be calculated based upon the spread of a 
particular issue. In issues where the spread in the consolidated best 
bid and offer is \1/4\ or other even fraction point spread, the cross 
will be priced at the middle of the spread. In issues with a 
consolidated best bid and offer spread of \3/8\ or other odd fraction 
(other than \1/8\), the price will be at the \1/8\ closest to the last 
sale. In issues with a consolidated best bid and offer of \1/8\, if 
there are more shares offered for sale in the MMX Facility (excluding 
the MMX market maker guarantee), then the \1/8\ spread issues will 
cross at the bid. If, however, there are more bids than offers in the 
MMX facility, then the \1/8\ spread issues will be crossed at the offer 
price. In the event that there are an equal number of shares on both 
sides of the CHX quotation, the cross will execute at the offer. 
Executions in MMX will be limited to those equity securities that are 
either listed or admitted to unlisted trading privileges (``UTP'') on 
the CHX. Users may, however, enter orders for securities in which the 
Exchange does not have UTP; if a match is found in these securities, 
the cross will not be executed in MMX. Instead, these orders will be 
delivered to a broker-dealer who is eligible to execute the cross in 
the market in which it is traded.
    Those orders that have been executed in the cross will be 
immediately transmitted by MMX to the Exchange for recordation and 
reporting to the Consolidated Tape. Trades will then be cleared by the 
designated clearing firm. After receiving an execution report 
(described below), institutions will then be able to reallocate trades 
to different clearing brokers, if desired.
    Immediately after the cross, users will be notified if their orders 
have been executed. If an order was not executed, the user may receive 
an administrative message (depending on the ``near match'' parameters 
they have specified) asking whether the user wants a broker to call it 
to negotiate a trade with another user that has entered similar ``near 
match'' parameters.
3. Unique Aspects of the MMX Facility
    The most fundamental feature of the MMX facility is the use of 
liquidity fees and liquidity credits to determine the level of priority 
for order matching. Rather than matching orders on the basis of time 
priority, the MMX facility provides incentives to those users that 
provide liquidity to the system. The size of the liquidity fee or 
credit determines the level of priority for order matching, with those 
users that are willing to pay the highest liquidity fee having the 
highest execution priority (except for orders that are part of the CHX 
quote) and those users desiring to be paid for providing liquidity 
(i.e., orders with a liquidity credit) having the lowest execution 
priority. Liquidity fees and credits will only be paid when an order 
with a liquidity fee is matched with an order with a liquidity credit. 
When that happens, a liquidity fee that is equal to the size of the 
liquidity credit will be paid. In all other cases, no liquidity fees 
will be paid.
    In order to provide executions that are equitable, immediately 
prior to the match, all orders for a security are first sorted into 
groups and then each group is prioritized for execution. Except for 
orders that are part of CHX's quote, which will be placed in one group 
and will receive the highest priority for execution, a group will 
consist of either all buy orders or all sell orders in a security that 
have the same liquidity fee or credit. Groups will be prioritized by 
liquidity fee or credit (as stated earlier).
    Groups will only be matched if the liquidity credit required by 
orders in one group is less than or equal to the liquidity fee offered 
by orders in the other group. Groups will be matched starting with the 
group of buy orders with the highest priority. This group will be 
matched with the group of sell orders with the highest priority.
    If the aggregate size of all orders in both groups is the same, all 
orders in both groups will be matched. If the aggregate size of all 
orders in both groups is not the same, orders in the group with the 
smaller aggregate size will be allocated among orders in the group with 
the larger size on a pro-rata basis. If this results in any order 
receiving an odd lot or a mixed lot (e.g., 265 shares), the amount of 
shares that order receives shall be rounded down to the nearest round 
lot (e.g., 200 shares). All the odd lots for a particular Group (e.g., 
the 65 shares) shall be aggregated and then allocated to the largest 
order in the Group. If, after matching orders in a buy group with 
orders in a sell group, unmatched orders remain in the group of buy 
orders, MMX will continue the process of matching this group with 
successively lower priority groups of sell orders until all of the 
orders in the group of buy orders are either matched or are unable to 
be matched.
    After completion of the match described above, MMX will continue 
the process of matching groups and orders within those groups in 
accordance with the rules described above starting with successively 
lower priority buy order groups until no more matches can be made.
    Once all of the matches are made, MMX will determine whether any 
matched orders are conditional orders and if so, whether their 
conditions are fully satisfied. In the event that certain conditions 
are not fully satisfied, MMX will remove that order (and any other 
orders whose conditions are not fully satisfied). MMX will then erase 
the match for all orders in that security and will restart the matching 
process excluding all conditional orders whose conditions were not 
fully satisfied in the last matching process.
    This matching process and liquidity fee/credit payment scheme 
results in the liquidity fee being paid only when necessary, providing 
meaningful advantages to those willing to pay.
    a. Example #1:

Buy group 1: Order 1--BUY 2000 XYZ + will pay 1 cents/shr liquidity fee
Buy group 2: Order 1--BUY 2000 XYZ
Sell group 1: Order 1--SELL 2000 XYZ

    Because the order in Buy group 1 is willing to pay a liquidity fee, 
this order will have the highest priority and will match with the order 
in Sell group 1. It will not be necessary for the order in Buy group 1 
to pay a liquidity fee in this case.
    b. Example #2:

Buy group 1: Order 1--BUY 2000 XYZ + will pay 1 cents/shr liquidity fee
Buy group 2: Order 1--BUY 2000 XYZ
Sell group 1: Order 1--SELL 1000 XYZ
Sell group 2: Order 1--SELL 2000 XYZ + wants a 1 cents/shr liquidity 
credit
Sell group 2: Order 2--SELL 2000 XYZ + wants a 1 cents/shr liquidity 
credit

    Because the order in Buy group 1 is willing to pay a liquidity fee, 
this order will match first with the order in Sell group 1 (1000 
shares), then with the orders in Sell group 2 (each of whom will 
receive 500). The order in Buy group 1 will pay no liquidity fee for 
the order in Sell group 1, but will pay 1 cents/share for the orders in 
Sell group 2. Thus, the user will only pay an average liquidity fee of 
\1/2\ cents/share. Note: The order in Buy group 2 would not participate 
in the match as the only shares remaining to be matched require that a 
liquidity fee be paid.
    Orders willing to pay a liquidity fee will experience higher match 
rates than the other order types, with only an occasional payment of 
the liquidity fee. As in the above examples, because of the higher 
priority, a willingness to pay a higher liquidity fee will often result 
in a lower average liquidity fee paid or even no liquidity fee paid. 
Again, because of the priority rules, this system minimizes the 
liquidity fee rather than maximizing the shares matched. The CHX 
believes that this encourages users to enter liquidity fees and credits 
without fear of being disadvantaged by the system. These liquidity 
charges are exchange fees and credits and will be paid to the exchange 
for disbursal to those entitled to receive them.
4. Other Issues
    As discussed above, while entering stocks into his computer, a user 
can include a limit price. This feature allows a user to specify a 
maximum buy price or minimum sell price to protect the user against 
large swings in the price of a stock that may occur between the time he 
enters the trade into his computer and the cross. If a limit price is 
entered, the order will not participate in the match if the stock is 
above (or below) the limit price at the time of the cross, depending on 
whether the order is a buy order (or sell order). Of course, if the 
stock is within the limit range, the execution price will be the same 
as for all other stocks in the cross.
    In addition, as discussed above, users can enter linked orders. 
These are orders that are combined with other orders. For example, a 
user may only want to sell stock A if he can buy stock B. A user would 
then link his sell order of stock A to his buy order of stock B. Then, 
when the match occurs, the user's order to sell stock A will only be 
executed if the user's order to buy stock B is also executed. 
Otherwise, both orders will remain unmatched.
    The MMX facility, by allowing linked orders and allowing orders 
that specify a limit price, allows money managers greater cash 
management capabilities. The CHX believes that this in turn will cause 
the effective match rate of the MMX facility to be greater than other 
crossing systems.
    It should also be noted that a user can only prohibit a match with 
another particular user because of a concern that an ERISA violation 
might occur if a match took place.
5. Fees
    The Exchange will only charge a fee to users of the MMX Facility if 
their order is executed (or matched, in the case of securities that are 
not listed on the Exchange or have UTP). The Exchange fee will be as 
follows: Orders entered by MMX market makers and orders that are part 
of CHX's quote will not be charged a transaction fee; users who enter 
orders that the user is willing to display will be charged $.005 per 
share; and all other users will pay $.02 per share. There will be no 
fee to enter or cancel orders in the system. The Exchange fee does not 
cover liquidity fees and credits. The MMX market makers will be paid 
\1/8\th of a cent per share when they do not participate in a cross in 
their issue so long as the liquidity parameter enter by the MMX market 
maker is within a pre-determined range. This \1/8\ of a cent per share 
fee will be paid by the Exchange out of the \1/2\ of a cent (or 2 cent) 
user fee that CHX will receive from users of the MMX facility. This 
will provide the MMX Market Maker with an incentive to providing a 
guarantee. In the event there is more than one MMX market maker in an 
issue, the \1/8\ of a cent per share fee will be paid to the MMX market 
maker that enters the highest liquidity fee or lowest liquidity credit. 
If more than one MMX market maker enters the same fee or credit, such 
fee will be pro-rated. An additional Exchange fee will be imposed on 
all users equal to the liquidity fee to be paid with respect to a 
particular order, and an Exchange credit will occur that is equal to 
the liquidity credit to be received. The clearing broker will collect 
all fees from institutions and submit the appropriate amounts to 
Midwest Clearing Corporation (``MCC''). MCC, in turn, will pay the 
appropriate amounts to clearing brokers for forwarding to institutions.
6. Surveillance
    To protect against any potentially manipulative activity, the 
Exchange will monitor quote changes prior to the match and shortly 
thereafter to identify unusual trading activity.
7. ``Near Match Orders'' and Floor Broker Participation
    Because of the possibility that the match rate will be below 100%, 
the MMX facility will allow users to send orders that are not crossed 
in the match to a broker in the event of a ``near match.'' A near match 
is the presence of a buyer and seller in the MMX facility who did not 
match merely because the liquidity fees and credits that they required, 
differed. For example, a seller may be willing to sell and pay a 6 cent 
per share liquidity fee, but the buyer wants to be paid 7 cents per 
share for providing liquidity. If a near match occurs users will get 
administrative messages stating that a near match occurred. Each user 
would then have the option of indicating that it would like a pre-
determined broker to call to negotiate that order. If both parties to 
the near match wish to negotiate, then the broker (or brokers) will 
receive a negotiate message. Because the broker or brokers do not learn 
anything about the order unless both parties to the near match have 
given their approval, the users of the MMX facility retain complete 
control during this process.
    Similar to the ``near match'' function described above, floor 
brokers can enter a message that, after the match, will tell the users 
entering orders in a particular stock of an indication of interest in 
that stock (even when there is not an actual order). The user would 
then be free to contact the floor broker to negotiate a trade. The MMX 
facility will give users the ability to screen out indications if they 
become dissatisfied with the quality of the information.
8. Execution Reports
    Execution reports will be sent after any execution occurs. For 
customers using DTC's ID system, information will be forwarded to the 
clearing broker who will then submit the information to the ID system.
9. Statutory Basis
    The proposed rule change is consistent with Section 6(b)(5) of the 
Securities Exchange Act of 1934 in that it is designed to promote just 
and equitable principles of trade and to protect investors and the 
public interest, and is not designed to permit unfair discrimination 
between customers, issuers, brokers or dealers.

(B) Self-Regulatory Organization's Statement on Burden on Competition.

    The Exchange believes that no burden will be placed on competition 
as a result of the proposed rule change.

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

    No comments were received.

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 the self-regulatory organization 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. 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 submissions, 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 
principal office of the CHX. All submissions should refer to File No. 
SR-CHX-93-19 and should be submitted by February 25, 1994.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.
Jonathan G. Katz,
Secretary.
[FR Doc. 94-2579 Filed 2-3-94; 8:45 am]
BILLING CODE 8010-01-M