[Federal Register Volume 60, Number 99 (Tuesday, May 23, 1995)]
[Notices]
[Pages 27358-27360]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-12519]



-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35722; File No. SR-CHX-95-11]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Stock Exchange, Incorporated Relating to the 
Automatic Execution of Limit Orders

May 16, 1995.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on March 
31, 1995, the Chicago Stock Exchange, Incorporated (``CHX'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change and on May 5, 1995, filed 
Amendment No. 1 to the proposed rule change,\1\ 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.

    \1\ See letter from Craig Long, Foley & Lardner, to Glen 
Barrentine, Senior Counsel, SEC, dated May 4, 1995. In Amendment No. 
1, the Exchange requests that the rule filing be approved on a one-
year pilot basis and makes certain clarifying changes to the text of 
Item I.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to reactivate its system enhancement relating 
to the automatic execution of limit orders \2\ with one modification. 
This system enhancement was originally approved by the Commission as a 
one-year pilot program. See Securities Exchange Act Release No. 32124 
(Apr. 13, 1993), 58 FR 21325 (approving File No. SR-MSE-92-03) (``Pilot 
Approval Order''). The original one-year pilot program lapsed on April 
15, 1994 without the Exchange filing for an extension or permanent 
approval.\3\

    \2\ A limit order is an order to buy or sell a stated amount of 
a security at a specified price or at a better price.
    \3\ In the Pilot Approval Order, the Commission described its 
concerns with the program and requested that the Exchange submit a 
report detailing the use of the pilot. The Exchange, however, did 
not submit the report because specialists on the Exchange made 
little or no use of the pilot program. Telephone conversation 
between Craig Long, Foley & Lardner, and Jennifer Choi, SEC, on 
April 17, 1995.
---------------------------------------------------------------------------

    The proposed automatic execution feature (``Auto-Ex'') will operate 
by comparing the size of the CHX-entered limit order against the amount 
of stock ahead of that order in the primary market when the issue is 
trading in the primary market at the limit price.\4\ The 
[[Page 27359]] comparison will be made against the primary market 
quotation size. The Auto-Ex system will keep track of all prints in the 
primary market and will automatically execute the limit order once 
sufficient size prints in the primary market.\5\ As additional limit 
orders at the same price are received by the specialist, comparisons 
will be made and entered based upon the shares ahead of those limit 
orders at the time of receipt, including shares ahead on the CHX. The 
Auto-Ex feature will not permit a limit order to be filled out of 
sequence. Limit orders will not be compared for Auto-Ex purposes until 
such time as the limit price equals the bid or offer, as the case may 
be, quoted in the primary market for the first time.\6\

    \4\ In the original pilot program,the Auto-Ex was to operate by 
comparing the size of CHX-entered limit order against the amount of 
stock ahead of that order in the ``consolidated market'' rather than 
in the primary market. This change is the one modification made by 
the Exchange to the original pilot program. Telephone conversation 
with Craig Long, Foley & Lardner, and Jennifer Choi, SEC, on April 
17, 1995.
    \5\ For example, assume a CHX specialist receives an agency 
limit order to buy 2,000 shares of ABC at \1/2\. The primary market 
quotation is \1/2\ bid, \3/4\ offered, 5,000 shares bid and 5,000 
shares offered, meaning there are 5,000 shares ahead of the CHX 
order. The Auto-Ex system will automatically execute the entire CHX 
limit order after 7,000 shares print at \1/2\ in the primary market. 
However, when more than 5,000 but less than 7,000 shares print at 
\1/2\ in the primary market, the order will be flagged with a 
flashing prompt to alert the specialist that the order may be due at 
least a partial fill. See CHX Article XX, Rule 37(a) governing 
primary market protection of certain limit orders.
    \6\ For example, if the primary market quotation is \1/4\ bid, 
\1/2\ offered, 4,000 shares bid and 4,000 shares offered, and a CHX 
specialist receives a limit order to buy 2,000 shares for \1/8\, 
that limit order will not be compared against the amount of stock 
ahead of the order in the primary market until such time as the \1/
4\ bid is exhausted and the \1/8\ bid becomes the best bid. At that 
time, the size that is disseminated with the \1/8\ bid is the size 
against which the limit order is compared for Auto-Ex purposes.
---------------------------------------------------------------------------

    The Auto-Ex feature will execute limit orders in accordance with 
existing CHX rules.\7\ Auto-Ex will be available for all dually traded 
issues; however, specialists will be permitted to choose Auto-Ex on an 
issue by issue basis.\8\ Generally, the Exchange believes that 
specialists will choose to use Auto-Ex for issues that, based on 
experience, have demonstrated reliable and accurate quotes in the 
primary market.\9\ Limit orders not subject to Auto-Ex will be 
``flagged'' with a prompt to alert the specialist that a fill may be 
due. The proposal to establish an Auto-Ex feature applies only to non-
marketable limit orders.\10\ It is not applicable to marketable limit 
orders or to market orders.\11\ The text of the proposed rule change is 
as follows [new text is italicized]:

    \7\ The CHX specialist will be the contra-side of all Auto-Ex 
trades. See Securities Exchange Act Release No. 32124 (Apr. 13, 
1993), 58 FR 21325 (approving File No. SR-MSE-92-03).
    \8\ The CHX will limit a specialist's ability to activate and 
then deactivate Auto-Ex regularly by: (1) Only permitting a 
specialist to deactivate Auto-Ex on a certain day each month and (2) 
requiring that issues remain on Auto-Ex for a minimum of five 
trading days.
    \9\ Telephone conversation between Craig Long, Foley & Lardner, 
and Glen Barrentine and Jennifer Choi, SEC, on May 3, 1995.
    \10\ Under CHX Rule 37(b)(7), specialists generally are required 
to automatically execute nonmarketable agency limit orders at the 
limit price when there is a price penetration of the limit price in 
the primary market.
    \11\ A limit order is called ``marketable'' when the prevailing 
best offer (bid) is equal to or less (greater) than the limit buy 
(sell) order price. CHX Rule 37(b)(7) provides for the automatic 
execution at the BBO or better of all limit orders that are 
marketable when entered into the Exchange's automated execution 
system (``MAX'') provided that such orders are of a certain size and 
are eligible for execution under CHX rule 37(a).
---------------------------------------------------------------------------

Article XX

Rule 37(b)

(12) Automatic Execution of Limit Orders.
    A Specialist may voluntarily choose to activate a feature of MAX 
that automatically executes limit orders on a specialist's book at 
the limit price after both of the following conditions are met: (1) 
the issue is trading at the limit price in the primary market, and 
(2) enough transactions in the issue are executed in the primary 
market at prices which are equal to the limit price of the order 
such that the size associated with such transactions are, in 
aggregate, equal to or greater than the sum of (a) the size 
displayed at the limit price in the primary market when the limit 
order was entered on the specialist's book, plus (b) the size of the 
limit order. This feature can be activated on a stock-by-stock basis 
only. Once activated, it must remain activated for a minimum of five 
trading days and can only be deactivated on a certain day (to be 
determined by the Exchange from time to time) each month.

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 Sections A, B, and C below, of the 
most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the proposed rule change is to reactivate the CHX's 
Auto-Ex feature for limit orders in order to further automate the CHX's 
trading floor functions and in order to improve the CHX's performance 
in filling limit orders.
    By providing for automatic execution of limit orders in accordance 
with existing Exchange rules, the CHX is eliminating the need for the 
manual operation required of specialists in determining when and to 
what extent limit orders are due fills based on primary market prints. 
The manual effort expended by specialists in filling limit orders that 
are entitled to primary market protection is often time-consuming and 
can result in errors, particularly when there is heavy trading volume. 
The present proposal will, therefore, directly benefit customers 
because it will result in more timely fills while eliminating errors 
resulting from manual execution
    The Auto-Ex feature will not change or amend any CHX trading rules, 
nor will it cause or allow limit orders to be filled under different 
parameters than under existing rules. Auto-Ex will only automate the 
manner in which limit orders are filled. The CHX will continue to 
monitor specialist execution of limit orders through the Market 
Regulation/Surveillance Department. In addition, CHX specialists will 
continue to be responsible for their books to the same degree as they 
are now under the manual execution system for limit orders.
2. Statutory Basis
    The proposed rule change is consistent with Section 6(b)(5) of the 
Act in that it is designed to prevent fraudulent and manipulative acts 
and practices and to perfect the mechanism of a free and open market.

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

    The Exchange does not believe that the proposed rule change will 
impose any inappropriate burden on competition.

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

    No written comments were either solicited or 
received. [[Page 27360]] 

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the publication of this notice in the Federal 
Register or within such other 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, N.W., Washington, D.C. 20549. 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for inspection and copying at the 
Commission's Public Reference Section, 450 Fifth Street, N.W., 
Washington, D.C. 20549. Copies of such filing will also be available 
for inspection and copying at the principal office of the Exchange. All 
submissions should refer to File No. SR-CHX-92-11 and should be 
submitted by June 13, 1995.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 95-12519 Filed 5-22-95; 8:45 am]

BILLING CODE 8010-01-M