[Federal Register Volume 60, Number 148 (Wednesday, August 2, 1995)]
[Notices]
[Pages 39465-39469]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-18960]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36027; File No. SR-CHX-95-15]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval of Proposed Rule Change by the Chicago
Stock Exchange, Incorporated Relating to the Implementation of Modified
Versions of the SuperMAX System on a Pilot Basis
July 27, 1995.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
[[Page 39466]]
(``Act''), 15 U.S.C. Sec. 78s(b)(1), notice is hereby given that on
June 29, 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. On July 21, 1995, the Exchange submitted Amendment No. 1
to the proposed rule change.\1\ The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons.
\1\ See letter from David Rusoff, Foley & Lardner, to Glen
Barrentine, Senior Counsel, SEC, dated July 21, 1995. In Amendment
No. 1, the Exchange requests that the proposed rule change be
considered under 19(b)(2) on one-year pilot basis rather than under
19(b)(3)(A) and makes certain clarifying changes to the text of Item
I.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to add subsection (e) and subsection (f) to
Rule 37 of Article XX relating to the CHX's MAX System. The text of the
proposed rule is as follows [new text is italicized]:
Article XX
Rule 37
(e) The Exchange's Enhanced SuperMAX program shall be an
automatic execution program within MAX in which a Specialist may
voluntarily choose to participate on a stock-by-stock basis. A
Specialist shall decide if his or her stock will be eligible for
Enhanced SuperMAX treatment. In the event that a stock is eligible
for Enhanced SuperMAX treatment (pursuant to paragraph (e) of this
Rule) and SuperMAX treatment (pursuant to paragraph (c) of this
Rule) at the same time, the size of the order will determine which
program will be followed for execution. An order of 599 shares or
less will execute according to the SuperMAX program and an order
greater than 599 shares will execute according to the Enhanced
SuperMAX program. In the event that a Specialist determines that his
stock is eligible for Enhanced SuperMAX and voluntarily chooses to
participate in Enhanced SuperMAX, agency market orders up to and
including 1099 shares (or such greater size specified by a
specialist and approved by the Exchange) in that stock may
automatically be stopped and executed in MAX, through the Enhanced
SuperMAX program, without any specialist intervention based on the
following criteria:
(1) Stopping. If an agency market order eligible for Enhanced
SuperMAX would create either a double up tick (buy order) or double
down tick (sell order) if the order was executed at the consolidated
best bid or offer (``NBBO'') the Enhanced SuperMAX program will
``stop'' the order. Once stopped, the order will not receive an
execution that is worse than the stop price. Notwithstanding
anything in the previous sentence to the contrary, agency market
orders in markets quoted with a minimum variation (usually \1/8\
spread) will not be stopped. Orders not stopped will be immediately
executed based upon the NBBO as the case may be.
(2) Pricing. Buy Orders stopped under (1) above will be executed
as follows:
(i) If the next primary market sale is equal to or less than the
last sale then the stopped order will be executed at such last sale
price (subject, however, to the Exchange's block protection policy
as set forth in interpretation and policy .06 of Rule 7 of this
Article).
(ii) If the next primary market sale is greater than the last
sale then the stopped order will be executed at such next primary
market sale price. However, if the next primary market sale is
greater than the stop price then the stopped order will be filled at
the stopped price (i.e. at the offer).
Sell orders stopped under (1) above will be executed as follows:
(iii) If the next primary market sale is equal to or greater
than the last sale then the stopped order will be executed at such
last sale price (subject, however, to the Exchange's block
protection policy as set forth in interpretation and policy .06 of
Rule 7 of this Article).
(iv) If the next primary market sale is less than the last sale
then the stopped order will be executed at such primary market sale
price. However, if the next primary market sale is less than the
stop price then the stopped order will be filled at the stopped
price (i.e. at the bid).
(3) Operating Time. Enhanced SuperMAX will operate each day that
the Exchange is open for trading from 8:45 a.m. (C.T.) until the
close. In unusual trading situations, individual stocks or all
stocks may be removed from Enhanced SuperMAX with the approval of
two members of the Committee on Floor Procedure.
(4) Timing. Orders entered into Enhanced SuperMAX shall, when
due a fill under the Enhanced SuperMAX program, be immediately
executed without any delay (i.e. 0 seconds).
(5) Applicability to Odd-Lots. Although an order generated by
the Odd-Lot Execution Service (``OLES'') is a professional order
(because it is deemed to be for the account of a broker-dealer), it
is nonetheless eligible for Enhanced SuperMAX execution if: (i) the
issue is on Enhanced SuperMAX, (ii) it is an order for 200 shares or
less, and (iii) it is an OLES passively driven, system-generated
market order (and not an actively managed order).
(6) Out of Range. Notwithstanding anything in this paragraph (e)
to the contrary, Enhanced SuperMAX will not execute an order at the
NBBO if such execution would result in an out of range execution.
(7) Other. Any eligible order in a stock included in Enhanced
SuperMAX which is manually presented at the Specialist post by a
floor broker must also be guaranteed an execution by the Specialist
pursuant to the criteria set forth in this paragraph (e). In the
event that a contra side order which would better an Enhanced
SuperMAX execution is presented at the post, the incoming order
which is executed pursuant to the Enhanced SuperMAX criteria must be
adjusted to the better price.
(f) The Exchange's Timed Enhanced SuperMAX program shall be an
automatic execution program within MAX in which a Specialist may
voluntarily choose to participate on the stock-by-stock basis. A
Specialist shall decide if his or her stock will be eligible for
Timed Enhanced SuperMAX treatment. In the event that a Specialist
determines that his or her stock is eligible for Timed Enhanced
SuperMAX and voluntarily chooses to participate in Timed Enhanced
SuperMAX, agency market orders up to and including 1099 shares (or
such greater size as specified by the Specialist and approved by the
Exchange) will automatically be executed in MAX, through the Timed
Enhanced SuperMAX program, without any Specialist intervention, in
accordance with the Enhanced SuperMAX program and rules (as
specified in paragraph (e) of this Rule and subparagraphs (1)
through (7) thereunder) with the following modification:
(1) Timer. In the event that an order is stopped pursuant to the
criteria described in paragraph (e)(1) of this Rule, such order
shall be executed at the stopped price if there are no executions in
the primary market at the end of the applicable Time Out Period (as
defined below). For purposes of this paragraph (f), the Time Out
Period shall be the time specified by the specialist on stock-by-
stock basis based on the size of the order. Such Time Out Period
shall be preselected by a specialist, may be changed by a specialist
no more frequently than once a month and may be no less than 30
seconds.
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
On May 22, 1995, the Commission approved a proposed rule change of
CHX that allows specialists on the Exchange, through the Exchange's MAX
system, to provide order execution guarantees that are more favorable
than those required under CHX Rule 37(a), Article XX.\2\ That approval
order
[[Page 39467]]
contemplated that the CHX would file with the Commission specific
modifications to the parameters of MAX that are required to implement
various options available under this new rule.
\2\ See Securities Exchange Act Release No. 325753 (May 22,
1995), 60 FR 28007 (May 26, 1995) (File No. SR-CHX-95-08).
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The purpose of the proposed rule change is to set forth two options
available under this new rule. One option is merely a reactivation of
the Exchange's Enhanced SuperMAX program, a program originally approved
by the Commission on a pilot basis in 1991.\3\ Unlike the old pilot
program, however, the new Enhanced SuperMAX program will be available
starting at 8:45 a.m. instead of 9:00 a.m. This program differs from
the Exchange's SuperMAX program is that under this program, certain
orders are ``stopped'' at the NBBO \4\ and are executed with reference
to the next primary market sale instead of the previous primary market
sale.
\3\ See Securities Exchange Act Release No. 30058 (Dec. 10,
1991), 56 FR 65765 (Dec. 18, 1991) (order approving SR-MSE-91-12).
The pilot program was subsequently extended in Securities Exchange
Act Release Nos. 30701 (May 14, 1992), 57 FR 21683 (May 21, 1992)
(File No. SR-MSE-92-06); 310238 (Aug. 13, 1992), 57 FR 37856 (Aug.
20, 1992) (File No. SR-MSE-92-09); and 31857 (Feb. 12, 1993) 58 FR
9227 (Feb. 19, 1993) (File No. SR-MSE-01).
\4\ The term national best bid or best offer is defined under
SEC Rule 11Ac1-2 as the highest bid or lowest offer for a reported
security made available by any reporting market center pursuant to
Rule 11Ac1-1 or the highest bid or lowest offer for a security other
than a reported security disseminated by an over-the-counter market
maker in Level 2 or 3 of Nasdaq.
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The other option is a slight variation on the Enhanced SuperMAX
program. This other option, the Timed Enhanced SuperMAX program, will
execute orders in the same manner as the Enhanced SuperMAX program
except that if there are no executions in the primary market after the
order has been stopped for a designated time period, the order will be
executed at the stopped price at the end of such period. Such period,
known as a time out period, will be pre-selected by a specialist on a
stock-by-stock basis based on the size of the order, may be changed by
a specialist no more frequently than once a month, and may be no less
than 30 seconds.
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, to remove impediments and to perfect the mechanism of a free and
open market and a national market system, and, in general, to protect
investors and the public interest.
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, 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. Sec. 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-95-15 and should be
submitted by August 23, 1995.
IV. Commission's Findings and Order Granting Accelerated Approval of
Proposed Rule Change
The Commission has reviewed carefully CHX's proposed rule change
and concludes 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) of the Act.\5\
\5\ 15 U.S.C. 78f(b)(5) (1988 & Supp. V. 1993).
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The proposed rule change provides for modified versions of the
SuperMAX system \6\ (Enhanced SuperMAX and Timed Enhanced SuperMAX).
These modified versions will operate as separate systems and will be
available to CHX specialists as additions or alternatives to
SuperMAX.\7\ Participation in Enhanced SuperMAX and Timed Enhanced
SuperMAX will be voluntary for specialists and will apply on a stock-
by-stock basis for agency market orders of 1,099 shares or fewer in
Dual Trading Systems issued.\8\
\6\ SuperMAX is a system that automatically improves executions
of small agency market orders from the consolidated best bid or
offer according to certain predefined criteria. In 1990, the
Commission first approved SuperMAX on a pilot basis. See Securities
Exchange Act Release No. 28014 (May 14, 1990), 55 FR 20880 (May 21,
1990) (File No. SR-MSE-90-05). In 1993, the Commission approved
SuperMAX on a permanent basis. For more detail regarding SuperMAX,
see infra note 12 and the accompanying text.
\7\ The Exchange will file an amendment to the proposed rule
change in the near future to codify the procedures with respect to a
specialist's ability to make a security eligible for Enhanced
SuperMAX and Time Enhanced SuperMAX. A specialist will be permitted
to engage and disengage Enhanced SuperMAX and Timed Enhanced
SuperMAX for a given stock only once a month. See letter from David
Rusoff, Foley & Lardner, to Glen Barretine, Senior Counsel, SEC,
dated July 21, 1995.
\8\ The Dual Trading System of the Exchange allows the execution
of both round-lot and odd-lot orders in certain issues assigned to
specialists on the Exchange and listed on either the New York Stock
Exchange or the American Stock Exchange.
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Under the proposed rule change, Enhanced SuperMAX and Timed
Enhanced SuperMAX would automatically stop a market order if its
execution at the consolidated best bid or offer (``BBO'') would create
either a double up tick or double down tick. If the execution at the
BBO would not result in a double up tick or double down tick, then
Enhanced SuperMAX and Timed Enhanced SuperMAX would execute the order
at the BBO. Once a security chosen by a specialist for Enhanced
SuperMAX and Timed Enhanced SuperMAX is stopped, a buy (sell) order is
guaranteed at least the offer (bid) price prevailing at the time of the
stop (``stop price'').
The stopped Enhanced SuperMAX and Timed Enhanced SuperMAX eligible
order would be executed based upon the next sale in the primary market
according to the execution criteria. The Enhanced SuperMAX and Timed
Enhanced SuperMAX algorithm compares the previous last sale price to
the next sale price, and considers the direction of the market by those
sales prices, to determine the price at which the stopped market order
will be filled. The procedures under Enhanced SuperMAX and Timed
Enhanced SuperMAX are identical except the stopped order in Timed
Enhanced SuperMAX will be executed at the expiration of a specified
time period as designated by a specialist.
Under the proposal, Enhanced SuperMAX and Timed Enhanced SuperMAX
would not execute an order at the BBO if such execution would
[[Page 39468]]
result in an out-of-range execution.\9\ If a specialist chooses the
Enhanced SuperMAX and Timed Enhanced SuperMAX, the criteria for the
systems must be followed for all eligible stocks. If a specialist
chooses to have Enhanced SuperMAX and Timed Enhanced SuperMAX run
concurrently with SuperMAX, then the size of the agency market order
would determine which method of execution will be followed. An order of
599 shares or fewer will be executed according to SuperMAX rules; an
order of 600 shares to 1,099 shares will be executed according to
Enhanced SuperMAX and Timed Enhanced SuperMAX rules. An order will
never be subject to execution under the rules of both SuperMAX and
Enhanced SuperMAX (or Timed Enhanced SuperMAX).
\9\ 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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Any eligible order in a stock included in Enhanced SuperMAX or
Timed Enhanced SuperMAX that is manually presented at the specialist
post by a floor broker also must be guaranteed an execution by the
specialist pursuant to the appropriate system criteria. In the unlikely
event that a contra side order that would better the Enhanced SuperMAX
and Timed Enhanced SuperMAX execution is presented at the post, the
specialist must adjust the incoming order that was executed pursuant to
the Enhanced SuperMAX or Timed Enhanced SuperMAX criteria. During
volatile periods, individual stocks or all stocks may be removed from
Enhanced SuperMAX or Timed Enhanced SuperMAX with the approval of two
members of the Committee on Floor Procedure.\10\
\10\ When stocks are removed from Enhanced SuperMAX or Timed
Enhanced SuperMAX, CHX would broadcast a message through the MAX
system indicating that the affected stocks are off Enhanced SuperMAX
or Timed Enhanced SuperMAX. Telephone conversation between David
Rusoff, Foley & Lardner, and Jennifer Choi, Attorney, Division of
Market Regulation, SEC. on July 21, 1995.
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The Exchange represented that as a result of testing extensively
both versions of Enhanced SuperMAX, the Exchange concludes that
Enhanced SuperMAX and Timed Enhanced SuperMAX will not have any
significant impact upon CHX's systems capacity.\11\
\11\ See letter from David Rusoff, Foley & Lardner, to Glen
Barrentine, Senior Counsel, SEC, dated July 21, 1995.
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In 1991, the Commission approved on a pilot basis Enhanced SuperMAX
to run concurrently with SuperMAX, which was on a pilot at that
time.\12\ In the initial Enhanced SuperMAX pilot program approval
order, the Commission expressed concerns about the possible adverse
effects on execution quality of a lack of order exposure.\13\ The
Commission also acknowledged, however, that increased order exposure
may impose certain economic costs in terms of execution delay and
interjection of manual processing. Moreover, the Commission recognized
that most of the Exchange's automatic execution systems in effect (at
this time) provided executions at the quote only.
\12\ The Exchange sought approval of the Enhanced SuperMAX
program to evaluate both Enhanced SuperMAX and SuperMAX systems and
determine which system it wanted to implement. In 1993, the Exchange
chose to implement SuperMAX rather than Enhanced SuperMAX and sought
approval of SuperMAX on a permanent basis. The Commission
permanently approved SuperMAX believing that the automated execution
feature of SuperMAX would provide a more efficient means of
bettering the execution price on a large volume of electronically
delivered market orders than through manual processing. The Enhanced
SuperMAX pilot expired in 1993 without the Exchange requesting an
extension or permanent approval. See Securities Exchange Act Release
No. 32631 (July 14, 1993), 58 FR 30969 (July 21, 1993) (File No. SR-
MSE-93-10) (approving permanently SuperMAX).
\13\ See Secutiries Exchange Act Release No, 30058 (Dec. 10,
1991), 56 FR 65765 (Dec. 18, 1991) (order approving SR-MSE-91-12).
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In approving the Enhanced SuperMAX feature on a pilot basis, the
Commission believed that this proposal was less ideal than SuperMAX,
but that the Commission would revisit its concerns in the event that
the CHX requested permanent approval. In this regard, the Commission
stated that any request for permanent approval must be accompanied by a
report containing certain data on the Enhanced SuperMAX system.\14\
\14\ In the initial 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 a report because specialists on
the Exchange made little or no use of the pilot program. Telephone
conversation between David Rusoff, Foley & Lardner, and Glen
Barrentine and Jennifer Choi, SEC. on July 18, 1995.
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The Commission believes that pricing and execution procedures of
Enhanced SuperMAX and Timed Enhanced SuperMAX are consistent with the
maintenance of fair and orderly auction markets on national securities
exchanges. Moreover, the Commission believes that the execution
criteria of Enhanced SuperMAX and Timed Enhanced SuperMAX should
contribute to an orderly market because they help to reduce variations
from trade to trade on low volume. Finally, although the proposals will
not automatically provide price improvement, they will provide some
opportunity for customers to receive a better price. The Enhanced
SuperMAX being proposed in this filing is identical to the previous
pilot program except that the start up time will be 8:45 a.m. (C.T.).
The Timed Enhanced SuperMAX procedures are identical to those of
Enhanced SuperMAX except that the stopped order will be executed at the
top price after a period of time that has been designated by the
specialist but may not be shorter than 30 seconds has expired. This
additional feature is intended to allow orders in inactive stocks to be
provided with an opportunity for price improvement but to be executed
without unduly delay. Therefore, the Commission finds that 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, perfect
the mechanisms of a free and open market, and in general to protect
investors and the public interest.
The Commission believes that it would be appropriate to allow the
Exchange to implement Enhanced SuperMAX and Timed Enhanced SuperMAX for
a one-year period to afford the Exchange and the Commission an
opportunity to monitor the operation of the systems and determine their
effectiveness. The Exchange should monitor the use of the systems
during the one-year pilot period and assure the Commission that there
are no adverse effects on the quality of customer order executions.
Moreover, the Exchange should examine the use of the systems during the
pilot period to determine whether specialists are choosing the
appropriate system for each of their stocks.
The Commission, therefore, requests that the Exchange submit a
report to the Commission by May 31, 1996, describing its experience
with the pilot program. At a minimum, this report should contain the
following data gathered during the first 9-month period after the
start-up date for Enhanced SuperMAX and Timed Enhanced SuperMAX: (1)
The number of orders executed in SuperMAX, Enhanced SuperMAX, and Timed
Enhanced SuperMAX; (2) share and dollar volume for all three systems;
(3) comparisons of orders executed under SuperMAX, Enhanced SuperMAX,
and Timed Enhanced SuperMAX, indicating where orders executed under one
system would have received a more favorable execution under another
system; (4) the number of specialists using each system, and the number
of stocks included in each; (5) the average length of time between
receipt of an order and execution under each system; (6) the types of
securities being chosen for each system (if a pattern is discernable);
(7) a break down of each issue chosen for
[[Page 39469]]
each system during the pilot period, including each date the issue was
placed on each system and removed; and (8) whether any distinguishable
market condition existed when an issue was placed on or taken off each
system. Any requests to modify this pilot program, to extend its
effectiveness, or to seek permanent approval for the pilot program also
should be submitted to the Commission by May 31, 1996, as a proposed
rule change pursuant to Section 19(b) of the Act.
The Commission finds good cause for approving the proposed rule
change prior to the thirtieth day after the date of publication of
notice thereof in the Federal Register. The Commission believes that it
is appropriate to approve the proposed rule change on an accelerated
basis so that the Exchange can enable public customers to receive the
benefits of Enhanced SuperMAX and Timed Enhanced SuperMAX without
delay. Moreover, the Enhanced SuperMAX feature previously has been on a
pilot program from December 1991 through April 1993, and the Commission
is approving CHX's Enhanced SuperMAX and Timed Enhanced SuperMAX only
for a one-year pilot period.\15\ During that time, the Commission and
the Exchange will be able to examine whether these programs are
successful at providing for automatic execution of orders at prices
consistent with the maintenance of fair and orderly markets and can
determine whether to extend the pilots for a further period or make the
programs permanent. The Commission, therefore, believes that granting
accelerated approval of the proposed rule change is appropriate and
consistent with Section 6 of the Act.\16\
\15\ The Enhanced SuperMAX system has been published for comment
in the Federal Register previously, and there have been no adverse
comments on it.
\16\ 15 U.S.C. 78f (1988 & Supp. V 1993).
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It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\17\ that the proposed rule change (SR-CHX-95-15) is approved on a
pilot basis until July 31, 1996.
\17\ 15 U.S.C. 78s(b)(2) (1988).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\18\
\18\ 17 CFR 200.30-3a(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-18960 Filed 8-1-95; 8:45 am]
BILLING CODE 8010-01-M