[Federal Register Volume 60, Number 127 (Monday, July 3, 1995)]
[Notices]
[Pages 34563-34564]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-16400]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35910; File No. SR-CHX-95-10]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Stock Exchange, Incorporated Relating to 
Permanent Approval of the Pilot Program for Stopped Orders in Minimum 
Variations Markets

June 28, 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 
23, 1995, the Chicago Stock Exchange, Incorporated (``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.

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

    The Exchange requests permanent approval of its pilot program for 
stopped orders in minimum variation markets. The pilot was originally 
approved on January 14, 1992.\1\ The first requested extension of the 
pilot was approved by the Commission on March 10, 1993.\2\ The second 
requested extension of the pilot was approved by the Commission on June 
11, 1993.\3\ The third requested extension of the pilot was approved by 
the Commission on March 21, 1994.\4\ The fourth requested extension of 
the pilot was approved by the Commission on March 1, 1995.\5\ The pilot 
program is set to expire on July 21, 1995.

    \1\ See Securities Exchange Act Release No. 30189 (Jan. 14, 
1992), 57 FR 2621 (Jan. 22, 1992) (File No. SR-MSE-91-10) (order 
approving MSE pilot program for stopped orders in minimum variation 
markets) (``1992 Approval Order'').
    \2\ See Securities Exchange Act Release No. 31975 (Mar. 10, 
1993), 58 FR 14230 (Mar. 16, 1993) (File No. SR-MSE-93-04) (order 
granting accelerated approval of extension of pilot program for 
stopped orders in minimum variation markets).
    \3\ See Securities Exchange Act Release No. 32457 (June 11, 
1993), 58 FR 33681 (June 18, 1993) (File No. SR-MSE-93-14) (order 
granting accelerated approval of extension of pilot program).
    \4\ See Securities Exchange Act Release No. 33790 (Mar. 21, 
1994), 59 FR 14434 (Mar. 28, 1994) (File No. SR-MSE-93-30) (order 
granting accelerated approval of extension of pilot program).
    \5\ See Securities Exchange Act Release No. 35431 (Mar. 1, 
1995), 60 FR 12796 (Mar. 8, 1995) (File No. SR-CHX-95-04) (order 
granting accelerated approval of extension of pilot program).
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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 request permanent 
approval of the pilot program implemented to establish a procedure 
regarding the execution of ``stopped'' market orders in minimum 
variation markets (usually an \1/8\th spread market). In 1992, the 

[[Page 34564]]
Exchange adopted interpretation and policy .03 to Rule 37 of Article XX 
on a pilot basis to permit ``stopped'' market orders in minimum 
variation markets.\6\ Prior to the pilot program, no Exchange rule 
required specialists to grant stops in minimum variation markets if an 
out-of-range execution would result.\7\ Although the Exchange has a 
policy regarding the execution of stopped market orders generally, the 
Exchange believes it is necessary to establish a separate policy for 
executing stopped market orders when there is a minimum variation 
market.

    \6\ See 1992 Approval Order, supra, note 1.
    \7\ The term ``out-of-range'' means either higher or lower than 
the price range in which the security traded on the primary market 
during a particular trading day.
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    The Exchange's general policy regarding the execution of stopped 
orders is to execute them based on the next primary market sale. If 
this policy were used in a minimum variation market, it would cause the 
anomalous result of requiring the execution of all pre-existing order 
even if those orders are not otherwise entitled to be filled.\8\

    \8\ For example, assume the market in ABC stock is 20-20\1/8\; 
50 x 50 with \1/8\th being out of range. A customer places an order 
with the Exchange specialist to buy 100 shares of ABC at the market 
and a stop is effected. The order is stopped at 20\1/8\ and the 
Exchange specialist includes the order in his quote by bidding the 
100 shares at 20. If the next sale on the primary market is for 100 
shares at 20, adopting the Exchange's existing general policy to 
minimum variation markets would require the specialist to execute 
the stopped market order at 20. However, because the stopped market 
order does not have time or price priority, its execution triggers 
the requirement for the Exchange specialist to execute all pre-
existing bids (in this case 5,000 shares) based on the Exchange's 
rules of priority and precedence. This is so even though the pre-
existing bids were not otherwise entitled to be filled.
    In the above example, Exchange Rule 37 (Article XX) requires the 
Exchange specialist to fill orders at the limit price only if such 
orders would have been filled had they been transmitted to the 
primary market. Therefore, the 100 share print at 20 in the primary 
market would cause at the most 100 of the 5,000 share limit order to 
be filled on the Exchange. However, the Exchange's general policy 
regarding stopped orders, if applied to minimum variation markets, 
would require the 100 share stopped market order to be filled, and 
as a result, all pre-existing bids at the same price to be filled in 
accordance with Exchange Rule 16 (Article XX) (Precedence of Bids at 
Same Price).
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    The Exchange's proposed policy will prevent unintended results by 
continuing a pilot program for ``stopped'' market orders in minimum 
variation markets.\9\ Specifically, the pilot program requires the 
execution of stopped market orders in minimum variation markets after a 
transaction takes place on the primary market at the stopped price or 
worse (higher for buy orders and lower for sell orders), or after the 
applicable Exchange share volume is exhausted. In no event will a 
stopped order be executed at a price inferior to the stopped price.\10\ 
The Exchange believes that the proposed policy will continue to benefit 
customers because they might receive a better price than the stop 
price, yet it also protects Exchange specialists by eliminating their 
exposure to executing potentially large amounts of pre-existing bids or 
offers when such executions would otherwise not be required under 
Exchange rules.

    \9\ See 1992 Approval Order, supra, note.1.
    \10\ Exchange Rule 28 (Article XX) states:
    An agreement by a member or member organization to ``stop'' 
securities at a specified price shall constitute a guarantee of the 
purchase or sale by him or it of the securities at the price or its 
equivalent in the amount specified.
    If an order is executed at a less favorable price than that 
agreed upon, the member or member organization which agreed to stop 
the securities shall be liable for an adjustment of the difference 
between the two prices.
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2. Statutory Basis
    The proposed rule change is consistent with Section 6(b)(5) of the 
Act in that it is designed to promote just and equitable principles of 
trade.

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.
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, NW., Washington, DC 20549. 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. Sec. 552, will be available for inspection and copying at 
the Commission's Public Reference Section, 450 Fifth Street, NW., 
Washington, DC 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-95-10 and should be 
submitted by July 24, 1995.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-16400 Filed 6-30-95; 8:45 am]
BILLING CODE 8010-01-M