[Federal Register Volume 59, Number 234 (Wednesday, December 7, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-30028]


[[Page Unknown]]

[Federal Register: December 7, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35030; FIle No. SR-CHX-93-19]

 

Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; 
Order Approving Proposed Rule Change Creating the Chicago Match System

November 30, 1994.

I. Introduction

    On August 6, 1993, the Chicago Stock Exchange, Inc. (``CHX'' or 
``Exchange'') submitted to the Securities and Exchange Commission 
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'')\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to establish rules for an 
institutional trading system, the Chicago Match,\3\ that integrates an 
electronic order match system with a facility for brokering trades.
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    \1\15 U.S.C. Sec. 78s(b)(1) (1988).
    \2\17 CFR 240.19b-4 (1992).
    \3\Among other things, Amendment No. 1 changed the name of this 
proposed system from ``Match Market Exchange'' to ``Chicago Match.'' 
See letter from David T. Rusoff, Attorney, Foley & Lardner, to 
Cheryl Dunfee, Attorney, SEC. dated August 18, 1993.
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    On August 19, 1993, the CHX submitted to the Commission Amendment 
No. 1 to the proposed rule change.\4\ On April 4, 1994, the CHX 
submitted to the Commission Amendment No. 2 to the proposed rule 
change.\5\ On June 7, 1994, the CHX submitted to the Commission 
Amendment No. 3 to the proposed rule change.\6\ On July 11, 1994, the 
CHX submitted to the Commission Amendment No. 4 to the proposed rule 
change.\7\ The Commission published all of these amendments for comment 
on August 5, 1994.\8\ On July 27, 1994, the CHX submitted to the 
Commission amendment No. 5 to the proposed rule change.\9\ By letter 
dated September 15, 1994, the CHX submitted Amendment No. 6 to the 
proposed rule change, which addressed trading halts.\10\ Finally, on 
September 20, 1994, the CHX submitted to the Commission amendment No. 7 
to the proposed rule change to clarify the language concerning the 
priority of the CHX quote in the Chicago Match.\11\ These amendments 
made a variety of non-substantive, clarifying changes to the proposal 
and are incorporated into the discussion below.
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    \4\See note 3 supra.
    \5\See letter from David T. Rusoff, Attorney, Foley & Lardner, 
to Sandra Sciole, Special Counsel, SEC, dated March 29, 1994.
    \6\See Letter from David T. Rusoff, Attorney, Foley & Lardner to 
Sharon M. Lawson, Assistant Director, SEC, dated June 7, 1994.
    \7\See Amendment No. 4 to SR-CHX-93-19, dated July 7, 1994.
    \8\See Securities Exchange Act Release No. 34469 (August 1, 
1994), 59 FR 40073.
    \9\See Amendment No. 5 to SR-CHX-93-19, dated July 27, 1994. 
Amendment No. 5 contained a restatement of the Chicago Match rules 
and, in addition, a non-substantive amendment.
    \10\See letter from George T. Simon, Foley & Lardner, to Sharon 
Lawson, Assistant Director, SEC, dated September 15, 1994.
    \11\See letter from George T. Simon, Foley & Lardner, to Sharon 
Lawson, Assistant Director, SEC, dated September 20, 1994.
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    The Commission received two comment letters from the New York Stock 
Exchange (``NYSE'') on this proposal\12\ and two letters from the CHX 
supporting its proposal and addressing the NYSE's comments.\13\ This 
order approves the proposed rule change, including all the amendments.
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    \12\See letters from James E. Buck, Senior Vice President and 
Secretary, NYSE, to Jonathan G. Katz, Secretary, SEC, dated May 2, 
1994 and August 15, 1994.
    \13\See letter from George T. Simon, Foley & Lardner, to 
Jonathan G. Katz, Secretary, SEC, dated June 7, 1994, and letter 
from George T. Simon, Foley & Lardner, to Sharon Lawson, Assistant 
Director, SEC, dated July 25, 1994.
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II. Overview of Proposal

A. General Description

    Chicago Match is an electronic order matching system that will 
cross orders entered by users during regular trading hours for 
securities that are listed on the CHX or for which the CHX has unlisted 
trading privileges. The match will occur once a day at mid-day. Users 
may be CHX members or non-members, and will likely include 
institutional customers, broker-dealers, and Chicago Match market 
makers. Users will be able to enter orders directly into Chicago Match 
through personal computers and modems. A CHX member must be responsible 
for controlling and clearing the orders entered by non-members.\14\
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    \14\When a non-member is given access to the Chicago Match it 
must enter into several agreements to ensure that a member has 
responsibility and control over the non-member's activities. In 
addition, non-member users of the Chicago Match will be required to 
have $10 million for investment purposes. See discussion infra.
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    The Chicago Match will electronically match users' orders in an 
allocation procedure described below. If an electronic match occurs, 
the trade will be priced at the market price\15\ at a random time 
within a pre-determined ten minute 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 orders through participating 
brokers.\16\
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    \15\The market price is equal to the mid-point between the 
Consolidated Best Bid and Offer.
    \16\Users may take advantage of the ``near match'' function 
discussed infra.
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    The Chicago Match will primarily operate off the Exchange floor, 
but CHX market makers may enter guarantees through their regular 
terminals on the Exchange floor. Other users will be able to place buy 
and sell orders directly and anonymously into the electronic system 
through off-floor terminals. Quotations from the CHX trading floor will 
automatically be fed into the Chicago Match on a real time basis.\17\ 
The system will not otherwise directly interact with the Exchange's 
regular auction process.
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    \17\Quotations will be updated until the time of the match.
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    All Chicago Match users will enter into a user agreement\18\ with 
the Exchange to be bound by the Exchange's rules governing the Chicago 
Match. Prior to the time a non-member user enters an order into the 
system, it will be required to submit to the Exchange the name of the 
Midwest Clearing Corporation (``MCC'') member through which the user 
will clear its trades and provide the Exchange with a copy of a ``Give-
Up Agreement'' with such member. CHX clearing members will clear 
Chicago Match transactions through their existing clearing 
arrangements.\19\
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    \18\The user agreement will provide, inter alia, that the user 
has entered into a ``Give-Up Agreement'' with a CHX clearing member 
or already clears through the Midwest Clearing Corp.; that the CHX 
clearing member agrees to be jointly or severally liable for all 
actions of the user; that the user agrees to be bound by the 
policies of the Board of Governors of the Exchange that are 
applicable to Chicago Match; and that the Exchange reserves the 
right to terminate the user's access to the Chicago Match.
    \19\The clearing agreements set the user's daily credit limits.
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    Prior to the cross, users will enter the following information for 
each order:\20\
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    \20\Users will be able to enter orders from the time the 
Exchange opens for trading until the match time.
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     stock ticker symbol;
     number of shares to be bought or sold;
     capacity (buy, sell or sell short);
     limit price (optional);
     minimum trade size (optional);
     excluded category of contra parties;
     names of individual excluded users (optional);\21\
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    \21\An excluded user is defined under CHX Rule 2(l) as a user 
whose order cannot be matched with another user because the match 
might result in a prohibited transaction as that term is defined in 
the Employee Retirement Income Security Act of 1974, as amended 
(``ERISA''), 29 U.S.C. Secs. 1001--1461 (1988). This function will 
not be available immediately.
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     liquidity fee or credit (optional);
     linked order conditions (optional);
     near match range and near match broker (optional);
     order visibility; and
     clearing firm.
    At any time up until the cross, users can review, edit or cancel 
their orders.

B. Market Maker Guarantees

    In addition to orders entered by users, Chicago Match will include 
guarantees by Chicago Match market makers. Theses market makers will be 
Exchange members who register with the Exchange to be Chicago Match 
market makers. As such, they will be obligated to guarantee a minimum 
execution size to all users of the system. The minimum size of the 
guarantee will be ten thousand shares for the two hundred securities 
listed or admitted to unlisted trading privileges on the Exchange with 
the highest consolidated trading volume, five thousand shares for the 
one hundred securities with the next highest trading volume and two 
thousand shares for all other securities.\22\ Market maker guarantees 
automatically will be entered into the Chicago Match at the start of 
the time for order entry.
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    \22\See proposed CHX Article XXXVII, Rule 2(g).
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C. Priority and Liquidity Fees and Credits

    Chicago Match permits the use of liquidity fees and liquidity 
credits to determine the level of priority for order matching. In the 
Chicago Match, the size of the liquidity fee or liquidity credit 
determines the level of priority for order matching. Those users that 
are willing to pay the highest liquidity fee will have the highest 
execution priority (except for orders that are a part of the CHX quote, 
which have the highest priority of all orders). Those users desiring to 
be paid for providing liquidity will have the lowest 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 a 
match occurs, 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. Users enter liquidity fees and credits when they enter 
orders. The Chicago Match will include a default liquidity fee or 
credit to be associated with a specific Chicago Match guarantee by a 
CHX market maker.\23\ Chicago Match market makers can improve this 
liquidity fee or credit and increase the size of their guarantee before 
the cross takes place.
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    \23\The term ``default liquidity fee or credit'' refers to the 
liquidity fee or liquidity credit associated with buy and sell 
orders in each security in which a Chicago Match market maker is 
registered, which are automatically entered into the Chicago Match. 
The size of each such Chicago Match Market Maker Order shall be 
equal to the Default Size, which is the minimum guarantee the market 
maker must provide. (See proposed Article XXXVII, Rules 2(g) and 
6(C).)
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    The Chicago Match will limit the size of liquidity fees and 
liquidity credits entered by users. If a liquidity fee is greater than 
\1/2\ of the spread of the Consolidated Best Bid and Offer for the 
particular security at cross time it will be reduced to \1/2\ of the 
spread at cross time. For example, if \1/2\ of the spread is 6\1/4\ 
cents, and an order with a liquidity fee of 10 cents is entered, the 
maximum liquidity fee that order can pay will be 6\1/4\ cents. 
Liquidity credits, however, will be treated differently than liquidity 
fees. The Chicago Match will not permit liquidity credits to be entered 
in an amount greater than \1/2\ of the spread of the Consolidated Best 
Bid and Offer. For example, if the spread of the Consolidated Best Bid 
and Offer at cross time was \1/2\ (50 cents), the maximum liquidity 
credit allowed would be 25 cents. If an order was entered with a 
liquidity credit greater than 25 cents, the user would have the option 
of either having the liquidity credit reduced to half of the spread or 
having the order excluded from the match.

D. Order Execution

    The CHX's publicly disseminated bid or offer will be entered into 
Chicago Match as an order.\24\ Once entered, these orders will have the 
highest priority for execution.\25\
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    \24\Quotations will be updated until the time of the order 
matching.
    \25\These orders will be entered with a liquidity credit equal 
to \1/2\ of the spread of the consolidated best bid and offer. These 
orders will be entitled to full execution ahead of the other orders 
within the group that have the same liquidity credit.
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    All matched orders will be executed at a random time within a 
predetermined ten minute window period at the market price at such 
time. The Chicago Match will calculate the market price as the mid-
point between the Consolidated Best Bid and Offer regardless of the 
size of the spread. For example, if the Consolidated Best Bid and Best 
Offer of stock X was 20-20\1/8\, the cross price would be 20\1/16\.
    Limited price orders, orders with a liquidity fee or credit entered 
in cents, and orders that are entered with a liquidity fee or credit 
relative to the Consolidated Best Bid or Offer or as a computed 
quantity (in addition to liquidity fees or credits entered in cents) 
will be eligible to be displayed over the system. The Exchange will 
assign numeric values to these orders based on the then current 
Consolidated Best Bid and Offer. The Exchange anticipates that 
initially it will update displayed information at least every fifteen 
minutes.\26\
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    \26\In particular, the numerical values of orders entered 
relative to the Consolidated Bid and Offer will need to be updated 
as the market price changes prior to the match.
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    Chicago Match users also may enter linked orders, which are defined 
as orders whose execution are conditioned on the execution (or non-
execution) of one or more orders. For example, a user may only want to 
sell stock X if he can buy stock Z. A user would than link his sell 
order of stock X to his buy order of stock Z. When the match occurs, 
the user's order to sell stock X will only be executed if the user's 
order to buy stock Z is also executed. Otherwise, both orders will 
remain unmatched. The Exchange believes that permitting the linking of 
orders, and permitting orders that specify a limit price, will give 
money managers greater cash management capabilities. The CHX states 
that this flexibility will increase the effective match rate of the 
system relative to that of other crossing systems.
    Immediately prior to the match, all orders for a particular 
security first will be sorted into groups and then each group will be 
prioritized for execution. Except for orders that are part of CHX's 
quote, which 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. 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, except that orders that are 
represented as part of the CHX quote will be entitled to complete 
execution before the remaining orders are allocated 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 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, Chicago Match will continue to 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, Chicago Match will 
continue to 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, Chicago Match will determine 
whether any matched orders are conditional orders and if so, whether 
their conditions are fully satisfied.
    A user may enter conditional orders specified in proposed Rule 6(e) 
of Article XXXVII of the CHX Rules.\27\ The possible conditions 
include, inter alia, a limit price, linked order condition, minimum 
size, and/or names of excluded users.\28\ In the event that certain 
conditions are not fully satisfied, Chicago Match will remove that 
order (and any other orders whose conditions are not fully satisfied). 
Chicago Match will then erase the match for all orders in that security 
and will restart the matching process excluding all conditional orders 
whose conditions are not fully satisfied in the last matching process.
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    \27\The Chicago Match rules provide that conditional orders can 
be displayed orders. There will not be any notation on the displayed 
order screen to indicate which, if any, displayed order is also a 
conditional order.
    \28\Pursuant to proposed Rule 6(e)(8) of Article XXXVIII of the 
CHX Rules a user may enter the name of an ``excluded user'' only if 
a match with such user could result in a ``prohibited transaction'' 
as that term is defined in ERISA. The Exchange states that proposed 
CHX Rule 6(e)(7) of Article XXXVII also permits a user to exclude an 
entire category of contra parties such as market makers or 
specialists.
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E. Near Match Procedures and Floor Broker Participation

    The Chicago Match will allow users to send orders that are not 
executed in the match to a broker in the event of a ``near match.'' A 
``near match'' occurs when a buyer and seller in the system did not 
match merely because their required liquidity fees and credits 
differed.\29\ In the event of a ``near match,'' the user will receive 
an administrative message over the system asking whether the user wants 
a predetermined broker to negotiate a trade with another user that has 
entered similar ``near match'' parameters. If both parties of the near 
match wish to negotiate, then the broker (or brokers) will receive a 
negotiate message.\30\ Users enter their specific ``near match'' 
parameters when they sign on to the system.
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    \29\The term ``near match'' refers to two orders for a 
particular security in which the number of shares of each order 
equals or exceeds the minimum size specified by the other order and 
the liquidity credit required by one side is greater than the 
liquidity fee offered by the other side. Each user will set its own 
``near match'' parameters when it signs on to the system. An 
individual user's ``near match'' parameters allow users to decide 
under what circumstances it should be contacted by a broker to 
negotiate a trade which did not match because of varying liquidity 
fees and credits.
    \30\The Exchange states that 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 Chicago Match 
retain complete control during this process.
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    In addition, the Chicago Match provides another function similar to 
the ``near match'' function. The system allows floor brokers to enter a 
message that, after the daily match, will tell the users of unexecuted 
orders in a particular stock of an indication of continuing interest in 
buying or selling that stock.\31\ A user would then be free to contact 
the floor broker to negotiate a trade. Users will have the ability to 
prevent indications from appearing on their screens.\32\
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    \31\``Indications of interest'' would be entered by floor 
brokers before the cross. The floor broker's ``indication'' would 
not constitute an order entered into Chicago Match but it would 
merely indicate that a particular broker may be interested in 
negotiating a trade in a particular security.
    \32\If the user does not screen out ``indications of interest,'' 
they would be made known to those users whose orders were not 
executed during the matching process.
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F. Fees

    Users other than Chicago Match market makers will have the option 
of having their orders displayed to other users of the system. If a 
non-market maker user elects to have its order displayed, the order 
will be displayed under certain circumstances.\33\ Orders entered by 
Chicago Match market makers and orders that are part of CHX's quote 
will not be charged a transaction fee. Users who display orders will be 
charged \1/2\ cent per share, and all other users will pay 2 cents per 
share. The Exchange fee is separate from any liquidity fees and 
credits.
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    \33\See proposed Rule 8(b) of Article XXXVI dealing with 
display-eligible orders. Non-Display eligible orders are charged 
transaction fees four times the fee charged display eligible orders. 
See discussion infra.
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    Chicago Match market makers will be paid \1/8\ of a cent per share, 
per order, when they do not participate in a cross in their issue so 
long as the liquidity parameter entered by the Chicago Match market 
maker is within a pre-determined range.\34\ This \1/8\ of a cent per 
share fee will be paid by the Exchange out of the \1/2\ cent or 2 cent 
user fee it will receive from users of the Chicago Match. The Exchange 
believes that this will provide the Chicago Match market maker with an 
incentive to provide guarantees.\35\
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    \34\This range will be determined by the CHX. The Chicago Match 
Rules provide that the CHX will pay the market maker responsible for 
the order with the highest priority liquidity fee or credit $.00125 
per share for each order executed in Chicago Match, other than 
orders entered from the specialist's book and other than orders of 
other Chicago Match market makers. See proposed Rule 15(c) of 
Article XXXVII.
    \35\In the event that there is more than one market maker in an 
issue, that \1/8\ of a cent per share fee will be paid to the 
Chicago Match market maker that enters the highest liquidity fee or 
lowest liquidity credit. If more than one Chicago Match market 
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 the MCC. In turn, 
MCC will pay the appropriate amounts to clearing brokers for 
forwarding to institutions.
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G. Reporting

    Those orders that have been executed in the cross will be 
transmitted in a timely manner by Chicago Match to the Exchange for 
recordation and reporting to the Consolidated Tape. The CHX will report 
trades to the Consolidated Tape or Nasdaq, with one trade report for 
each stock executed in the Chicago Match. That trade report will 
include the total number of shares executed in that stock and a price 
equal to the cross price plus (or minus) the volume weighted average of 
liquidity fees paid (or liquidity credit received) for that stock. 
Trades will then be cleared by the designated clearing firm. After 
receiving an execution report, users will 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 a ``near match'' administrative 
message, described above.

H. Trading Halts

    The Chicago Match rules provides that in the event of a halt in 
trading pursuant to CHX Article IX, Rule 10A (trading halts due to 
extraordinary market volatility),\36\ the Exchange may delay the cross 
time until trading is permitted under that rule.\37\
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    \36\CHX Article IX, Rule 10A.
    \37\Trading in the Chicago Match will, under all circumstances, 
be halted in accordance with the provisions of CHX Article IX, Rule 
10A.
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I. Short Sales

    In order to ensure that an order to sell short will have no market 
impact, no order to sell short will be permitted to be executed if it 
includes a liquidity fee. Liquidity credits, however, will be 
allowed.\38\
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    \38\Rules 3b-3 and 10a-1 under the Act govern short-sale 
activities. The CHX requested short-sale relief which was granted 
separately by the Division of Market Regulation by way of exemptive 
letter from Brandon Becker, Director, Division of Market Regulation, 
SEC, to George T. Simon, dated November 30, 1994, (``Exemptive 
Letter'').
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J. Surveillance

    To protect against any potentially manipulative activity, the 
Exchange will, among other surveillance procedures, monitor quote 
changes prior to the match and shortly thereafter to identify unusual 
trading activity. In addition, by varying the cross time each day, the 
Chicago Match was designed to make it inherently more difficult to 
manipulate the Consolidated Best Bid and Offer in order to receive a 
more favorable execution.

III. Comments and the CHX Response to Comments

A. The NYSE's First Comment Letter

    The Commission received two comment letters on the proposal from 
the NYSE recommending that the Commission disapprove the creation of 
Chicago Match. The first NYSE comment letter, submitted before 
publication of the amendments to the CHX proposal, summarizes the 
Chicago Match, raises concerns about investors' orders, and discusses 
why the NYSE believes the CHX proposal is inconsistent with the 
requirements of the Exchange Act regarding the national market system's 
(``NMS'') disclosure and market integration requirements.\39\ The NYSE 
asserts that the Chicago Match would be a facility of the CHX, a 
national securities exchange, and as such, the Commission cannot 
approve the proposal unless it concludes that the Chicago Match is 
consistent with Sections 6 and 11A of the Exchange Act.\40\ The NYSE 
asserts that the Chicago Match is not a passive order crossing system 
but rather a private auction being conducted outside existing exchange 
facilities that are designed to protect investors.
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    \39\Letter from James E. Buck, Senior Vice President and 
Secretary, NYSE, to Jonathan G. Katz, Secretary, SEC, dated May 2, 
1994 (``NYSE Letter No. 1'').
    \40\Section 6 of the Exchange Act governs the activities of 
national securities exchanges and it sets conditions for 
registration as a national securities exchange. Section 11A of the 
Exchange Act governs the national market system for securities and 
securities information processors. 15 U.S.C. Sec. 78(f) and (k) 
(1988).
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    The NYSE also believes that the CHX is attempting to operate a form 
of ``proprietary trading system'' (``PTS'') or exempt exchange. The 
NYSE states that the Commission has limited the operation of PTSs and 
refused to allow national securities exchanges to operate them. The 
NYSE asserts that if the Commission decides to approve the Chicago 
Match and applies the standards applicable to exempt exchanges and 
PTSs, it should do so only after a formal review of its PTS policy. The 
NYSE further asserts that if such review results in a change of 
Commission policy, the Commission should announce that all national 
securities exchanges are free to offer private systems outside existing 
NMS regulations.
    The NYSE expressed concern that the Chicago Match's failure to 
report the true price to the Consolidated Tape Association (``CTA'') 
would mislead investors. The NYSE asserts that the true price of the 
executions includes liquidity charges.\41\ The NYSE disputes the CHX's 
characterization of the liquidity charges as ``fees,'' asserting that 
when one investor's payment is simply passed through to the investor on 
the other side of the trade, the payment is actually a part of the 
price of the security purchased. Thus, the NYSE asserts that the 
liquidity charges should be included in the price of the 
transaction.\42\
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    \41\The NYSE's comment is based on the original CHX filing, 
which would have effected trades at a single price based on the 
current inside quotation. The CHX would have reported this price to 
the CTA for dissemination to the investing public.
    \42\The NYSE further asserts that the CHX has acknowledged that 
the liquidity charges or fees are actually a part of the price in 
its Chicago Match marketing material.
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    The NYSE states that the proposal raises two transparency concerns. 
First, the NYSE asserts that Exchange Act Rule 11Aa3-1\43\ requires all 
exchanges to file a transaction reporting plan for securities traded 
through its facilities. Such plan must provide for the collection and 
dissemination of ``transaction reports'' that contain, inter alia, the 
price associated with a transaction in a security. The NYSE essentially 
argues that the original proposal left open the possibility of 
liquidity fees not being reported as a part of the price, thus 
violating Rule 11Aa3-1.
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    \43\17 CFR 240.11Aa3-1 (1994).
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    Second, the NYSE asserts that the CHX is proposing a private 
auction market outside of the NMS quotation facilities. The NYSE states 
that the Chicago Match raises market structure issues similar to the 
issues it claims are raised by the ``Selectnet'' System operated by the 
National Association of Securities Dealers (``NASD'').\44\ The NYSE 
asserts that both Selectnet and Chicago Match are inappropriately 
driven by orders that are hidden from public view and that do not have 
the opportunity to interact with trading interest from other markets. 
The NYSE further asserts that the presence of the ``near match'' 
function emphasizes that the proposal is merely a hidden auction market 
conducted outside of the NMS because the ``near match'' function allows 
the participants to have a broker negotiate the transaction outside of 
the auction process. The NYSE concludes that, while the Commission has 
sanctioned this result in the case of PTSs, there is no precedent for 
allowing a national stock exchange to operate such a ``hidden 
auction.''
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    \44\The NYSE states that it previously commented on the 
``Selectnet'' system by way of a Letter from Janes E. Buck, 
Secretary, NYSE, to Jonathan G. Katz, Secretary, SEC, dated October 
30, 1992.
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    The NYSE letter also asserts that the Chicago Match violates 
Exchange Act Rule 11Ac1-1 (the ``Firm Quote Rule'' or ``Quote 
Rule'').\45\ The NYSE states that, like the Selectnet trading interest, 
Chicago Match orders that are displayed to other Chicago Match 
participants are bids and offers under the Commission's rules because 
``bid'' and ``offer'' are defined as the ``prices communicated by an 
exchange member * * * to any broker or dealer, or to any customer, at 
which he is willing to buy or sell one or more round lots of a reported 
security.''\46\ The NYSE states that Chicago Match users are bidding 
for and offering stock in accordance with the definition in Rule 11Ac1-
1 and because the trading interest is firm, the CHX must take these 
quotations into account in calculating the best bid and offer that it 
provides to the Consolidated Quote System (``CQS'').\47\
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    \45\17 CFR 240.11Ac1-1 (1994).
    \46\NYSE Letter No. 1, citing Exchange Act Section 6(c)(1).
    \47\The NYSE states that paragraph (b)(1)(i) of the Firm Quote 
Rule requires an exchange to collect, process and make available to 
quotation vendors the best bid and best offer ``communication on the 
floor of the exchange . . . by any responsible broker or dealer.'' 
The NYSE also states that paragraph (a)(3)(i) of that rule defines a 
responsible broker or dealer basically as any member of the 
exchange.
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    The NYSE believes that the original proposal would lead to a 
failure to protect displayed limit orders. The NYSE states that the 
Intermarket Trading System (``ITS'') has rules discouraging trade 
throughs, i.e., the trading of a stock in one market at a price 
inferior to that in another market. Similarly, the ITS ``Block Policy'' 
provides price protection for quotations at the quoted price when a 
Block Policy transaction prints at inferior prices. The NYSE states 
that the Chicago Match proposal violates these price protection rules. 
The NYSE further asserts that the Chicago Match would ``formally 
bifurcate the retail and institutional markets, allowing large 
institutional investors to trade outside the current market, without 
providing price protection for publicly-displayed retail customer limit 
orders.''\48\
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    \48\NYSE Letter No. 1 at 6.
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    The NYSE asserts that the initial proposal\49\ would allow the 
Chicago Match to accept short sales and would therefore operate in 
violation of Exchange Act Rule 10a-1 (``Short Sale Rule''), which 
prohibits a short sale at a price below the last different reported 
price. The NYSE asserts that the system would allow the seller to sell 
stock at a price that is actually below the price reported to the tape.
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    \49\As of the time of filing of Amendment No. 1.
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    Finally, the NYSE argues that the Chicago Match should not be able 
to trade securities that are neither listed on the Exchange nor traded 
pursuant to unlisted trading privileges (``UTP'').\50\ The NYSE states 
that pursuant to Sections 5, 6 and 12 of the Act, an exchange can trade 
only securities that are registered under the Act (or exempt from 
registration), and then only if the securities are listed on the 
exchange or if the exchange receives UTP.
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    \50\The NYSE states that, ``there appear to be no limits on the 
securities to be included in the Chicago Match. These could be (i) 
securities listed on another exchange for which the CHX does not 
have UTP; (ii) Nasdaq securities that are outside the Commission's 
over-the-counter UTP pilot, or (iii) securities that are not 
registered under the Exchange Act, such as non-U.S. securities 
exempt from registration under Exchange Act Rule 12q3-2(b), or even 
non-U.S. securities that should be registered under the Exchange Act 
and which are neither registered nor exempt from registration. NYSE 
Letter No. 1 at 7.
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B. The NYSE's Second Comment Letter

    The NYSE filed a second comment letter with the Commission\51\ 
after publication of the first four amendments to the proposed Chicago 
Match rules.\52\ The second letter states that the proposed amendments 
fail to address the problems associated with Chicago Match. The NYSE 
continues to believe that the Chicago Match will conduct an auction 
based on hidden liquidity charges. The NYSE states that the proposal 
presents transparency concerns and would allow CHX specialists to trade 
ahead of customers.
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    \51\Letter from James E. Buck, Senior Vice President and 
Secretary, NYSE, to Jonathan G. Katz, Secretary, SEC, dated August 
15, 1994 (``NYSE Letter No. 2'').
    \52\See note 8, supra.
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    First, the NYSE believes that the reporting methodology/plan 
proposed by the CHX continues to violate the Commission's rules and the 
CTA plan. Because the final Chicago Match proposal fails to require a 
report of the price at which the transaction would be executed, the 
NYSE states that the Chicago Match actually would provide inaccurate 
trading information, thereby violating the reliability of the tape.
    Second, the NYSE letter asserts that the Chicago Match will allow 
specialists to trade ahead of customer orders. The NYSE argues that, 
because of liquidity credits, a specialist quote that is entered into 
the Chicago Match may be able to have priority over customer orders 
entered into the system.

C. The CHX's Responses

    In June of 1994, the CHX submitted a letter to the Commission 
responding to the NYSE's first comment letter.\53\ The CHX states that 
the NYSE requests that the Commission disapprove the Chicago Match 
because it is different from floor based trading systems existing on 
traditional exchanges. The CHX believes that this fact alone should not 
warrant Commission disapproval of the Chicago Match. The CHX states 
that, to the contrary, the ``National Market System envisions the 
emergence of different trading vehicles and systems in response to 
market developments.''\54\
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    \53\Letter from George T. Simon, Foley & Lardner, to Jonathan G. 
Katz, Secretary, SEC, dated June 7, 1994. The CHX also amended its 
filing, and submitted a second letter giving greater detail about 
the institutional access issue. Letter from George T. Simon, Foley & 
Lardner, to Sharon Lawson, Assistant Director, SEC, dated July 25, 
1994. The substance of this second letter is incorporated into the 
Discussion section, supra.
    \54\Id. at 1. the CHX also points out that all other national 
securities exchanges were invited to participate in the Chicago 
Match but none requested to participate.
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    The CHX asserts that the Chicago Match is not a hidden market but 
is designed to bring together buying and selling interest on 
traditional exchanges with institutional trading interest that has 
preferred to do business on a more anonymous basis. The CHX also 
asserts that, unlike a PTS, the Chicago Match is a part of a registered 
securities exchange and, therefore, is subject to full Commission 
regulation, and unlike a PTS, the Chicago Match is integrated with the 
CHX trading floor.
    The CHX disputes assertions that the Chicago Match actually 
sponsors hidden quotations that must be disseminated through CQS. The 
CHX asserts that buying and selling interest in the Chicago Match does 
not constitute bids or offers within the meaning of the Firm Quote 
Rule. The CHX states that in order to constitute a bid or offer within 
the purview of the Firm Quote Rule, an order must be disseminated at a 
specific price. The CHX states that none of the indications in the 
Chicago Match are at a specific price; rather the execution price is a 
function of the Consolidated Best Bid and Offer at the randomly 
selected execution time. As such, the indications are not required to 
be disseminated pursuant to the Firm Quote Rule. The CHX asserts that, 
similarly, the CQS facilities that were designed by the NYSE are 
incapable of processing indications without prices. Thus, even if CQS 
wanted to disseminate Chicago Match indications, it could not do so.
    The CHX response letter states that, without resolving the issue of 
whether liquidity fees are a part of the execution price or not, these 
fees are reported in cents and thus not reportable on the Consolidated 
Tape.\55\ This point, however, has been largely addressed because, as 
previously noted, the CHX has finalized its tape reporting process to 
include reporting of an average weight of liquidity fees. The cross 
price plus or minus the average liquidity fee or liquidity credit for 
each stock stated in up to 1/256ths will be reported to the 
Consolidated Tape or Nasdaq. In addition, the maximum liquidity fee or 
liquidity credit is limited to \1/2\ of the spread of the Consolidated 
Best Bid and Offer at cross time, regardless of the size of the spread.
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    \55\The CHX response letter stated that it amended its rules to 
require liquidity fees to be reported as administrative messages on 
the Consolidated Tape.
---------------------------------------------------------------------------

    The CHX amended its proposal to address the NYSE's concern that 
trades executed in the Chicago Match could trade through another 
market's published quotations if liquidity fees are deemed to be a part 
of the price. The amendment will change the cross price of the match to 
the mid-point between the Consolidated Best Bid and Offer regardless of 
the size of the spread and limit the maximum size of liquidity fees and 
liquidity credits. If a liquidity fee is greater than \1/2\ of the 
spread of the Consolidated Best Bid and Offer at cross time, it will be 
reduced to \1/2\ of the spread at cross time. The Chicago Match will 
not permit liquidity credits to be received in an amount greater than 
\1/2\ of the spread of the Consolidated Best Bid and Offer. The CHX 
states that these changes will eliminate the possibility of trading 
through another market's published quotations.
    The CHX states that it disagrees with the NYSE's assertions that 
the Chicago Match's plan to permit paired orders will violate Section 
12 of the Act. The CHX further states that, while it disagrees with the 
NYSE's view on this, it has filed amendments to its rules to preclude 
orders from being entered in securities not traded on the CHX.\56\
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    \56\Amendment No. 3 would amend Rule 3 to provide that only 
exchange contracts in securities that are listed or admitted to 
unlisted trading privileges on the Exchange may be entered into the 
Chicago Match.
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    Finally, the CHX disagrees with the NYSE's concern that short sale 
orders will be displayed through the system and thereby influence the 
market. The CHX states that short sale orders are currently displayed 
on every market whenever a short sale offer is the best offer in the 
market. The CHX further states that the Short Sale Rule has never 
prohibited the dissemination of quotations reflecting offers to sell 
short.
    The CHX also disputes the NYSE's general argument that short sales 
through the Chicago Match should be prohibited. The CHX states that the 
Chicago Match is a passive trading system that is derivatively priced. 
As such, trades executed through the system cannot impact the market by 
exerting downward pressure on prices.

IV. Discussion

    After careful consideration of the comments received, as well as 
applicable statutory provisions, the Commission believes that the 
proposed Chicago Match is consistent with the Act, and in particular, 
Sections 6(b)(4), 6(b)(5), and 11A of the Act. Separately, the Division 
of Market Regulation has granted the CHX exemptions for the Chicago 
Match from the Short Sale Rule, the Firm Quote Rule, and Rule 11Ac3-
3.\57\
---------------------------------------------------------------------------

    \57\See Exemptive Letter, supra note 38.
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    The Commission believes that the Chicago Match is consistent with 
Section 11A(a)(1)(B) of the Act which states that new data processing 
and communications techniques create the opportunity for more efficient 
and effective market operations. The Chicago Match employs significant 
new information technology and an automated system that adds to the 
existing trading facilities of the CHX. As a result, the Chicago Match 
will serve as an innovative adjunction to the CHX's existing market 
structure.
    The Commission historically has encouraged the creation of new 
electronic trading systems such as the Chicago Match that may 
contribute to increased execution alternatives available to investors. 
At the same time, it is important to ensure that new exchange trading 
systems are consistent with the investor protection and fair and 
orderly market standards contained in the Act. The Commission believes 
that the Chicago Match achieves this objective.
    The Chicago Match represents a blending of some of the attributes 
of off-exchange trading systems with the market making and brokerage 
features of the CHX trading floor. In addition, it will blend the 
features of a unitary call market with the continuous auction of the 
CHX floor. The operation of such a hybrid system will differ in 
important respects from the traditional trading floor design. The 
Commission disagrees with assertions that these differences would cause 
the Chicago Match to violate Exchange Act provisions. While the 
proposal does involve regulatory issues regarding transparency, 
institutional access, and regulatory structure, for the reasons 
discussed below, the amended proposal adequately addresses these issues 
and is consistent with the maintenance of free and open markets and 
investor protection in accordance with Section 6(b)(5) of the Act.\58\
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    \58\15 U.S.C. Sec. 78(f)(5) (1988).
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    First, the Commission believes that, contrary to the NYSE's 
assertions, the Chicago Match is properly regulated as a facility of an 
exchange and not as a proprietary trading system.\59\ The Chicago Match 
will use exchange equipment, including software and lines as well as 
exchange personnel, to run the system. The Chicago Match will also 
include CHX market maker participation as well as CHX's Midwest 
Clearing Corporation to clear trades. Therefore, the Chicago Match will 
be using the CHX's premises, property, and services for effecting and 
reporting Chicago Match transactions and, thus, will be using the 
facilities of an exchange as defined in Section 3(a)(2) of the Act.\60\
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    \59\Section 3(a)(2) provides that the term ``facility'' when 
used with respect to an exchange includes its premises, tangible or 
intangible property whether on the premises or not, any right to the 
use of such premises or property or any service thereof for the 
purpose of effecting or reporting a transaction on an exchange 
(including, among other things, any system of communications to or 
from the exchange, by ticker or otherwise, maintained by or with the 
consent of the exchange), and any right of the exchange to the use 
of any property or service.
    \60\An opposite conclusion could lead to the situation where an 
exchange creates a separate trading system to avoid exchange 
regulation by directing its core operations to the ``separate'' 
system.
---------------------------------------------------------------------------

    Regulating the Chicago Match as a ``facility'' of the CHX is 
consistent with the approach the Commission has followed in similar 
cases. For example, the NYSE's off-hours trading system is regulated as 
a facility of the NYSE and not as a separately operated PTS.\61\ 
Indeed, if another exchange wanted to operate a similar system to 
Chicago Match, it would also be permissible as a facility of that 
exchange.
---------------------------------------------------------------------------

    \61\Because the Chicago Match will be operated as a facility of 
an exchange, the Commission does not need to resolve issues relating 
to the regulation of PTSs in order to address the CHX proposal.
---------------------------------------------------------------------------

    Second, the Chicago Match adequately displays orders and reports 
prices. The NYSE, in its comment letters, expressed concern that the 
Chicago Match transaction prices reported to the Consolidated Tape will 
be inaccurate due to the use of liquidity fees and credits, and 
therefore, Chicago Match would violate Rule 11Aa3-1 under the Act. Rule 
11Aa3-1 provides for the collection and dissemination of ``transaction 
reports'' that contain, among other things, the price associated with a 
transaction in a security. The Commission disagrees with the NYSE's 
concern and instead believes that, as amended, the Chicago Match is 
consistent with rules regarding the dissemination of quotations and 
reporting of transactions. The amended Chicago Match rules require the 
CHX to report one trade for each stock executed in the Chicago Match. 
This report will include the total number of shares executed in that 
stock and a price equal to the cross price plus (or minus) the volume 
weighted average of liquidity fees paid (or liquidity credits received) 
for that stock. This approach will provide public disclosure of 
liquidity fees by including them, albeit in averaged form, in the price 
reported to the tape. The Commission believes that this method informs 
market participants of the value of the security including any 
liquidity fees or credits. The Commission further notes that the block 
market currently reports in average prices. The Commission feels that 
this reporting will provide investors with adequate transaction price 
information in compliance with Rule 11Aa3-1 of the Act.\62\
---------------------------------------------------------------------------

    \62\The CHX has informed the Division that Chicago Match trades 
can be reported in up to 1/256ths, thereby allowing for greater 
accuracy in this system of volume weighted trade reporting.
---------------------------------------------------------------------------

    In addition, the NYSE asserts that the Commission should not allow 
the CHX to operate Chicago Match because the bids and offers on the 
system are hidden from view, thereby violating the Firm Quote Rule. The 
NYSE asserts that Chicago Match orders that are displayed to other 
Chicago Match participants are bids and offers under Rule 11Ac1-1 of 
the Act and, therefore, should be taken into account when the CHX is 
calculating the best bid and offer that it provides to the CQS. The 
Commission disagrees with this assertion.
    While it is true that the Firm Quote Rule requires exchanges to 
collect bids, offers, quotation sizes and aggregate quotation sizes 
from ``responsible brokers or dealers,'' as defined in the Act,\63\ for 
each reported security or each security admitted to unlisted trading 
privileges and make them available to quotation vendors, the Commission 
does not believe that the provisions of this rule apply to the Chicago 
Match. First, users of Chicago Match may not always be ``responsible 
broker-dealers.'' Second, the Firm Quote Rule contemplates bids and 
offers at specific prices. The execution prices in the Chicago Match, 
however, are a function of the Consolidated Best Bid and Offer at a 
randomly selected time in the future that is unknown to the users at 
the time the orders are entered. Because the execution price also may 
vary with the addition of liquidity fees and credits, prices are 
essentially unspecified. Third, the Firm Quote Rule contemplates 
dissemination throughout the trading day of bids and offer quotations 
with respect to reported securities traded on the trading floor. This 
will not occur with the Chicago Match, were orders can be entered and 
changed without being subject to execution until a single cross time.
---------------------------------------------------------------------------

    \63\Rule 11Ac1-1 defines a ``responsible broker or dealer,'' 
when used with respect to bids or offers communicated on the floor 
of an exchange, as ``any member of such exchange who communicates to 
another member on the floor of such exchange, at the location (or 
locations) designated by such exchange for trading in a reported 
security, a bid or offer for such reported security, as either 
principal or agent.'' The Rule provides, however, that if two or 
more members of an exchange have communicated on the floor bids or 
offers at the same price, each member is a ``responsible broker or 
dealer'' with respect to that bid or offer, subject to the rules of 
priority and precedence then in effect on the exchange. Furthermore, 
if a member represents as agent another member's bid or offer, only 
the member representing the bid or offer on the floor will be 
considered the ``responsible broker or dealer.''
---------------------------------------------------------------------------

    The Commission also believes that the near match function does not 
involve a hidden auction market, but rather is simply a service 
provided to cross participants that fail to achieve execution in the 
match. This service is no different than a broker negotiating a trade 
in the crowd on an exchange floor or off an exchange. In the near match 
function, willing participants will have the option to have a near 
match broker call them to negotiate an order. There is no further 
participation at this point with CHX or the Chicago Match.\64\
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    \64\Users who have entered orders which are not executed can 
also receive indications of interest from CHX floor brokers and may 
choose independently to contact a floor broker to negotiate a trade.
---------------------------------------------------------------------------

    Third, the CHX has addressed issues relating to its order execution 
priority. The NYSE expressed concern that trades executed in the 
Chicago Match could trade through other markets' published quotations 
if liquidity fees or credits are deemed a part of the price. The 
Commission believes that the amended Chicago Match rules address this 
issue. As amended, the Chicago Match rules will limit the maximum size 
of liquidity fees or credits to one half of the best bid-offer spread 
at the time of execution. Therefore, even if the liquidity fees and 
credits are counted as a part of the execution price, no market's 
quotation will be traded through.
    The Commission also disagrees with the NYSE's assertions that by 
granting the CHX quote priority the Chicago Match will allow 
specialists to trade ahead of customer orders. The NYSE's concern 
arises in the case where the specialist enters a proprietary quote. In 
this instance, it is possible that a specialist could be trading ahead 
of a separately-entered customer order. The Commission believes that 
this possibility is not a significant concern in this context for two 
reasons. First, a specialist could not trade ahead of customer orders 
that he was holding, but only orders that brokers or other customers 
separately entered into the system. Second, a customer has the choice 
to enter an order by sending it to the CHX floor (in which case it will 
be displayed) so that his order will be a part of the specialist's 
quotation if the customer is concerned about the possibility of a 
specialist trading ahead of his order.
    Fourth, the Commission believes that the Chicago Match, as finally 
amended, will not raise significant short-sale issues under Rule 10a-1 
of the Act.\65\ The Division has granted the Chicago Match, as amended, 
an exemption from this rule\66\ because the orders that are eligible to 
be entered into the Chicago Match are not susceptible to the abusive 
practices that the rule was designed to prevent. The final Chicago 
Match rules do not allow short sellers to enter a liquidity fee, and 
thus any order to sell short is less likely to be used for manipulative 
purposes. Moreover, the current Chicago Match rules provide for order 
execution at midpoints between the spread, and therefore Chicago Match 
transactions will not change the inside market price. In addition, the 
Chicago Match pricing system is strictly derivative in nature and thus 
we believe it is unlikely to lend itself to short-sale abuses.
---------------------------------------------------------------------------

    \65\Paragraph (a) of Rule 10a-1 covers transactions in any 
security registered on a national securities exchange, if trades in 
such security are reported in the consolidated transaction reporting 
system. A short sale of a reported security listed on a national 
securities exchange may not be effected at a price either: (1) below 
the last reported price of a transaction reported in the 
consolidated transaction reporting system (``minus tick''), or (2) 
at the last reported price if that price is lower than the last 
reported difference price (``zero-minus tick'').
    \66\A short sale is defined in Rule 3b-3 under the Act as any 
sale of a security that the seller does not own or any sale that is 
consummated by delivery of a security borrowed by, or for the 
account of, the seller. Rule 3b-3 further provides that a person 
shall be deemed to own a security only to the extent that the person 
has a net long position in that security.
---------------------------------------------------------------------------

    Fifth, the Commission believes that the Chicago Match has adequate 
controls over non-member access. The Act contemplates that transactions 
on a national securities exchange would be conducted by ``members.'' 
Section 3(a)(3)(A) of the Act refers to transactions being conducted by 
various categories of exchange ``members.'' Section 6(c)(1) of the Act 
states that national securities exchanges shall deny membership to any 
person who is not a registered broker or dealer or any natural person 
who is not, or is not associated with, a registered broker or 
dealer.\67\ The Chicago Match, however, allows non-members to enter 
orders into the system if a CHX member is responsible for controlling 
and clearing these orders.
---------------------------------------------------------------------------

    \67\Section 3(a)(3)(A) of the Act also defines members as 
natural persons permitted to effect transactions on the floor of the 
exchange without the services of another person acting as a broker 
(i.e., an exchange member such as a registered trader).
---------------------------------------------------------------------------

    The Commission believes that the Chicago Match does not violate the 
Act by allowing some limited non-member access to its system. First, a 
non-member entering orders may only do so after arranging with a CHX 
member to be legally responsible for the orders the non-member enters 
into the Chicago Match. The non-member must notify the CHX of this 
arrangement with the CHX member.
    In addition, each non-member must enter into a Non-Member User's 
Agreement with the CHX wherein the non-member agrees to be bound by the 
applicable rules of the Exchange. The CHX asserts that the Non-Member 
User's Agreement, by its express terms, gives the Exchange control over 
non-member users. This agreement states that the CHX has ``the right to 
terminate the user's use of, and access to, the Chicago Match, without 
prior notice for any reason * * * or no reason whatsoever.'' The CHX 
states that this authority to remove the non-member user's Chicago 
Match terminal will allow the Exchange to act quickly to react to any 
problems with a non-member user.
    Finally, the CHX asserts that there will be supervision over non-
members through the use of the clearing agreement.\68\ This agreement 
provides that the clearing member agrees to clear all trades for the 
non-member users up to a specified dollar amount. Each user's maximum 
user threshold will be programmed into the Chicago Match to prevent the 
non-member user from exceeding its threshold. Orders that exceed the 
programmed threshold will be rejected and will not be included in the 
match. Clearing members will review daily reports of trades in the 
system which will allow for the early detection and correction of 
problems.\69\
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    \68\See letter from George T. Simon, Attorney, Foley & Lardner, 
to Sharon Lawson, Assistant Director, SEC, dated July 25, 1994.
    \69\The CHX also states that the clearing member can terminate 
the non-member user's access to the Chicago Match by terminating the 
give-up agreement at will and this would cause the CHX to 
immediately terminate the non-member user's access to Chicago Match.
---------------------------------------------------------------------------

    The Commission agrees with the CHX's assertions that non-member use 
of the Chicago Match can be analogized to non-member access to the 
NYSE's Designated Order Turnaround System (the revised system is now 
referred to as ``SuperDot'').\70\ The NYSE's SuperDot System allows 
computer terminals to be placed with the customers of members who may 
then send their orders directly\71\ to the NYSE for processing. 
SuperDot requires NYSE members to monitor customers' electronic orders 
and to provide the exchange with an acknowledgment statement indicating 
their responsibility for orders.\72\ The Commission believes that: (1) 
the requirement that Chicago Match users gain access only through an 
arrangement with a CHX member, which has legal responsibilities as to 
all user activities described above; (2) the Chicago Match's clearing 
thresholds for non-members; (3) the ability to immediately terminate a 
user's access to Chicago Match; and (4) the fact that CHX matches 
currently will occur only once a day,\73\ all serve to assure 
sufficient control by CHX members over the activities of non-members to 
satisfy the requirements of the Act.
---------------------------------------------------------------------------

    \70\The SuperDot System is an electronic order-routing system 
that enables NYSE members and their customers to quickly transmit 
market and limit orders in all NYSE-listed securities directly to 
the specialist post where the securities are traded, or to the 
member firm's booth. After the order has been executed in the 
auction market, a report of execution is returned directly to the 
member firm office over the same electronic circuit that brought the 
order to the trading floor, and the execution is submitted directly 
to the comparison system.
    \71\Customers must obtain the electronic means to access 
SuperDot through a broker-dealer member. In some cases, the member's 
participation in the subsequent transmission of orders is limited to 
providing this access.
    \72\NYSE Information Memo Number 89-6, January 25, 1989.
    \73\The CHX has indicated that it may wish to add more matches, 
upon Commission approval. The CHX would have to submit a proposal 
pursuant to Section 19(b) of the Act to add additional matches 
during the trading day.
---------------------------------------------------------------------------

    Finally, the Commission believes that the Chicago Match is 
consistent with Section 6(b)(4) of the Act which requires the equitable 
allocation of reasonable dues and fees among members and persons using 
exchange facilities. The differentiation of fees between displayed and 
non-displayed orders is reasonable in that it is intended to encourage 
the display of orders. Likewise, the payment of fees to market makers 
is reasonably intended to provide incentives for market makers to 
provide liquidity to the system and increase the match rate.

V. Conclusion

    In summary, the Commission believes that the CHX has presented a 
proposal that satisfies the standards under the Act relating to 
national securities exchanges. In analyzing the CHX proposal, the 
Commission recognizes that the Chicago Match is a mixture that brings 
together features of a call market with the market making capabilities 
of the CHX floor. Obviously, such systems represent certain challenges 
in fitting into the traditional regulatory mold envisioned for an 
exchange system under the Act. For the reasons discussed above, 
however, we believe that the CHX has adequately addressed the 
transparency, institutional access, and auction market trading 
concerns. The combination of the limited nature of the proposal as a 
once-a-day call market, the integration of the CHX quote into the 
match, the limitations designed to prevent trade throughs of the 
Consolidated Best Bid and Offer, the reporting of trades to the tape 
including average weighted liquidity fees and credits, the limitations 
of access through agreements with a CHX clearing member, and the fee 
structure to encourage the display of orders during the match, all lead 
the Commission to conclude that the proposal is consistent with the 
Act.
    It is therefore ordered, Pursuant to Section 19(b)(2) of the 
Act,\74\ that the proposed rule change (SR-CHX-93-19) be, and hereby is 
approved.

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    \74\15 U.S.C. 78s(b)(2) (1988).

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-30028 Filed 12-6-94; 8:45 am]
BILLING CODE 8010-01-M