[Federal Register Volume 60, Number 145 (Friday, July 28, 1995)]
[Notices]
[Pages 38874-38875]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-18605]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36011; File No. SR-CHX-95-17]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by the Chicago 
Stock Exchange, Incorporated Relating to an Extension of the Pilot 
Program for Stopped Orders in Minimum Variation Markets

July 21, 1995.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''), 15 U.S.C. Sec. 78s(b)(1), notice is hereby given that on 
July 7, 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 proposes to extend the pilot program for stopped 
orders in minimum variation markets for an additional three (3) month 
period.\1\ The pilot program is set to expire on July 21, 1995.

    \1\ The Exchange originally received approval of the pilot 
program in Securities Exchange Act Release No. 30189 (Jan. 14, 
1992), 57 FR 2621 (Jan. 22, 1992) (File No. SR-MSE-91-10) (``1992 
Approval Order''). The Commission subsequently extended the 
Exchange's pilot program in Securities Exchange Act Release Nos. 
31975 (Mar. 10, 1993), 58 FR 14230 (Mar. 16, 1993) (File No. SR-MSE-
93-04) (``March 1993 Approval Order''); 32457 (June 11, 1993), 58 FR 
33681 (June 18, 1993) (File No. SR-MSE-93-14) (``June 1993 Approval 
Order''); 33790 (Mar. 21, 1994), 59 FR 14434 (Mar. 28, 1994) (File 
No. SR-MSE-93-30) (``1994 Approval Order''); 35431 (Mar. 1, 1995, 60 
FR 12796 (Mar. 8, 1995) (File No. SR-CHX-95-04) (``March 1995 
Approval Order'').
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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 III 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 extend 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 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.\2\ 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.\3\ 
While 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.

    \2\ See 1992 Approval Order, supra, note 1.
    \3\ 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 orders 
even if those orders are not otherwise entitled to be filled.\4\

    \4\ 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 would 
trigger 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 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).
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    The Exchange's proposed policy would prevent unintended results by 
continuing a pilot program, established in 1992, for stopped market 
orders in minimum variation markets.\5\ Specifically, the pilot program 
would require 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.\6\ In the Exchange's view, 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.

    \5\ See 1992 Approval Order, supra, note 1.
    \6\ 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 

[[Page 38875]]
    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 proposed rule change will impose no 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 solicited or received with respect to the 
proposed rule change.

III. 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, 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. Sec. 552, will be available for inspection and copying at 
the Commission's Public Reference Section, 450 Fifth Street, NW., 
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-95-17 and should be 
submitted by August 18, 1995.

IV. Commission's Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange and, in 
particular, with section 6(b)(5) \7\ and Section 11(b) \8\ of the Act. 
The Commission believes that proposed interpretation and policy .03 to 
Rule 37 should further the objectives of Section 6(b)(5) and Section 
11(b) through pilot program procedures designed to allow stops, in 
minimum variation markets, under limited circumstances that offer 
primary market price protection for customers whose orders are granted 
stops, while still adhering to traditional auction market rules of 
priority and precedence.

    \7\ 15 U.S.C. 78f (1988 & Supp. V 1993).
    \8\ 15 U.S.C. 78k (1988).
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    In the orders approving the pilot procedures,\9\ the Commission 
asked the CHX to study the effects of stopping stock in a minimum 
variation market. The Exchange has submitted to the Commission several 
monitoring reports regarding its pilot program. The Commission believes 
that the monitoring reports, especially the latest report, provide 
useful information regarding the effectiveness of the program during 
the pilot period. The Commission, however, finds that additional time 
is necessary to evaluate carefully and comprehensively the information 
provided by the Exchange and the CHX's use of its pilot procedures. 
Accordingly, the Commission believes that it is reasonable to extend 
the pilot program until October 21, 1995, to avoid compromising the 
benefit that investors might receive under Rule 37, as amended, while 
the Commission is deciding whether to grant permanent approval of the 
pilot program.\10\

    \9\ See supra, note 1.
    \10\ See Securities Exchange Act Release No. 35910 (June 28, 
1995), 60 FR 34563 (July 3, 1995) (notice of filing of proposed rule 
change relating to permanent approval of CHX's pilot program for 
stopping stock in minimum variation markets).
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    The Commission finds good cause for approving the proposed rule 
change prior to the thirtieth day after the date of publication of the 
notice of filing thereof. This will permit the pilot program to 
continue on an uninterrupted basis. In addition, the procedures the 
Exchange proposes to continue using are the identical procedures that 
were published in the Federal Register for the full comment period and 
were approved by the Commission. No comments were received at that 
time.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\11\ that the proposed rule change (SR-CHX-95-17) is hereby 
approved on a pilot basis until October 21, 1995.

    \11\ 16 U.S.C. 78s(b)(2) (1988).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\

    \12\ 17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-18605 Filed 7-27-95; 8:45 am]
BILLING CODE 8010-01-M