[Federal Register Volume 60, Number 203 (Friday, October 20, 1995)]
[Notices]
[Pages 54268-54269]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-26001]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36373; File No. SR-CHX-95-18]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Stock Exchange, Incorporated Relating to Priority 
and Precedence of Agency and Professional Orders

October 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 July 14, 
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 26, 1995, the Exchange submitted to the 
Commission 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, Division of Market Regulation, SEC, 
dated July 26, 1995. In Amendment No. 1, the Exchange notifies the 
Commission that the proposed rule change was approved by the 
Exchange's Executive Committee on July 20, 1995. The Amendment No. 1 
also makes the appropriate changes to Item 6 and consents to an 
extension of the period of time specified in Section 19(b)(2) of the 
Act until thirty-five days after the submission of Amendment No. 1.
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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 interpretation and policy .05 to Rule 
2 of Article XXX of the Exchange's Rules. The text of the proposed rule 
change is as follows [new text is italicized]

Article XXX--Precedence to Orders in Book

    Rule 2. No change in text.
    * * * interpretations and policies.
    .05 Interaction between professional limit orders and agency 
limit orders that are not professional orders (``Agency Orders'').
    In the event that a professional order ``has the post,'' i.e., 
is the highest priority order in the specialist's book at a given 
price, the professional order is not required to yield precedence to 
an Agency Order at the same price that has not established time 
priority over the professional order. Notwithstanding anything in 
the previous sentence to the contrary, in the event that such Agency 
Order is due a fill under the Exchange's Best Rule, that Agency 
Order shall be filled even though the professional order which had a 
higher priority on the book is not filled.
    In the event that a specialist's own order ``has the post,'' 
i.e., an order which originates with the specialist as dealer is the 
highest priority order in the specialist's book at a given price, 
and a professional order and an Agency Order are subsequently 
entered in the book at the same price, the professional order must 
yield precedence to the Agency Order if the specialist's own order 
yields precedence to the Agency Order.
    Example 1:
    CHX Specialist's Book in XYZ stock.

------------------------------------------------------------------------
 Entry                                                                  
 time                             Order entered                         
------------------------------------------------------------------------
9:00..  Buy 1,000 shares XYZ @ 20\1/4\ (Professional Order).            
9:05..  Buy 1,000 shares XYZ @ 20\1/4\ (Agency Order).                  
------------------------------------------------------------------------

Primary Market Quote in XYZ: 20\1/4\-20\1/2\; 50  x  50

1. If the primary market prints 6,000 shares of XYZ at 20\1/4\, the 
entire CHX Agency Order will be filled at 20\1/4\ with the 
professional order remaining unfilled.
2. If a 1,000 share sell order at 20\1/4\ (or market order to sell) 
is offered at the specialist's post, it will be matched with the 
professional order at 20\1/4\ with the agency order remaining 
unfilled.
    Example 2:
    CHX Specialist's Book in XYZ stock.

------------------------------------------------------------------------
 Entry                                                                  
 time                          Order/quote entered                      
------------------------------------------------------------------------
9:00..  Buy 1,000 shares XYZ @ 20\1/4\ (specialist bid).                
9:05..  Buy 1,000 shares XYZ @ 20\1/4\ (Professional Order).            
9:10..  Buy 1,000 shares XYZ @ 20\1/4\ (Agency Order).                  
------------------------------------------------------------------------

    Primary Market Quote in XYZ stock: 20\1/4\-20\1/2\; 50  x  50 
The book is effectively realigned to show the Agency Order first, 
the specialist bid second, and the professional order third.
    1. If the primary market prints 6,000 shares of XYZ at 20\1/4\, 
the entire Agency Order will be filled at 20\1/4\ with the 
specialist bid and Professional Order remaining unfilled.
    2. If a 1,000 share sell order at 20\1/4\ (or market order to 
sell) is offered at the specialist's post, it will be matched 
against the Agency Order with the specialist bid and professional 
order remaining unfilled.
    3. If a 2,000 share sell order at 20\1/4\ (or market order to 
sell) is offered at the specialist's post, it will be matched 
against both the Agency Order (1,000 shares) and the specialist bid 
(1,000 shares) with the professional order remaining unfilled.

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
    Under current Exchange Rules, agency orders do not have priority 
over professional orders, and professional orders that have established 
time priority do not have to give precedence (i.e., yield) to agency 
orders.\2\ However, while specialists must always give precedence to 
agency orders, they may retain priority over professional orders 
provided certain conditions are met (``Specialist Priority Rule'').\3\ 
Finally, the Exchange's Best Rule requires specialists to give primary 
market protection to agency orders.\4\ This Rule does not, however, 
apply to professional orders. Professional orders receive post 
protection only.

    \2\ See CHX Article XX, Rules 15 (Precedence of Bids); 16 
(Precedence of Bids at Same Price); 17 (Precedence of Offers); 18 
(Precedence of Offers at Same Price); 19 (Precedence of Offers to 
Buy ``Seller's Option''); and 20 (Claim of Prior or Better Bid).
    \3\ See CHX Article XXX, Rule 2.
    \4\ See CHX Article XX, Rule 37.
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    The interplay between the Specialist Priority Rule and the 
Exchange's Best Rule often results in the unintended anomaly of giving 
the professional order the benefit of the Best Rule. For example, 
assume the specialist accepts a professional order for his book and 
thereafter, an agency order is entered on the book at the same price. 
Under current rules, if that agency is due a fill because of prints in 
the primary market (i.e., due a fill under the Best Rule), the 
professional order must also be filled because it has a higher priority 
in the book. Due to this anomaly, specialists are hesitant to accept 
professional orders. (Specialists are not required to accept 
professional orders for the 

[[Page 54269]]
book.) \5\ As a result, the purpose of the proposed rule change is to 
give specialists an incentive to accept professional orders for 
inclusion in the book.

    \5\ See CHX Article XXX, Rule 2.
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    Under proposed interpretation and policy .05 to Rule 2 of Article 
XXX, when a professional order ``has the post,'' it will not be 
displaced by a subsequent agency order. For example, an incoming MAX 
order \6\ will be filled against the professional order and not 
subsequent agency orders that have not established time priority. 
However, because the professional order will only have post protection 
(and not primary market protection), agency orders will still get the 
benefit of the full panoply of protections afforded by the Best Rule 
without the need to fill the professional order.

    \6\ Midwest Automated Execution System (``MAX``) is the 
Exchange's automated routing and execution system. See Article XX, 
Rule 37(b) of the CHX's rules for a complete description of the MAX 
system.
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    In addition, under the proposed interpretation and policy, when a 
specialist's own dealer order ``has the post,'' professional orders 
that have time priority will be displaced by subsequent agency orders 
if the agency order displaces the specialist's order. This will allow 
the agency order to displace the specialist's order, while at the same 
time allow the specialist's order to retain priority over the 
professional order in accordance with the Specialist Priority Rule.
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 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 application 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

    Upon an initial review of the proposed rule change, it 
preliminarily appears to the Commission that the Exchange proposes to 
significantly modify the time priority of professional orders and 
public agency orders in a such manner that professional orders would 
not realize certain benefits associated with the Exchange's Best Rule, 
and would allow specialists' bids to retain priority over professional 
orders under certain circumstances. Therefore, the Commission 
specifically requests comment on whether the proposed rule change, 
which distinguishes broker-dealer orders from public customer orders 
for purposes of priority of executions, is consistent with Section 
6(b)(5) of the Act. In assessing the proposed rule change commenters 
may wish to consider what impact, if any, the Commission's recently 
proposed rules on order execution obligations may have on the operation 
of the CHX's proposed rule change.\7\

    \7\ See Securities Exchange Act Release No. 36310 (Sept. 29, 
1995).
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    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-95-18 and should be submitted by November 13, 1995.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-26001 Filed 10-19-95; 8:45 am]
BILLING CODE 8010-01-M