[Federal Register Volume 61, Number 128 (Tuesday, July 2, 1996)]
[Notices]
[Pages 34462-34463]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-16772]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37369; File No. SR-CHX-96-16]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Stock Exchange, Incorporated Relating to the 
Trading of Nasdaq/NM Securities on the CHX

June 25, 1996.
    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 June 14, 
1996, 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 amend Article XX, Rule 37 and Article XX, 
Rule 43 relating to the trading of Nasdaq National Market (``Nasdaq/
NM'') securities (previously known as NASDAQ/NMS securities)\1\ on the 
Exchange.
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    \1\ The Commission notes that NASDAQ/NMS securities are now 
known as Nasdaq/NM securities and, therefore, requests that the 
Exchange submit a rule proposal that amends all appropriate Exchange 
Rules and Interpretations to reflect this new terminology.
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    The text of the proposed rule change is available at the Office of 
the Secretary, the CHX, and at the Commission.

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
    On May 4, 1987, the Commission approved certain Exchange rules and 
procedures relating to the trading of Nasdaq/NM securities on the 
Exchange.\2\ Among other things, these rules made the Exchange's BEST 
Rule (Article XX, Rule 37(a)) guarantee applicable to Nasdaq/NM 
securities and made Nasdaq/NM securities eligible for the automatic 
execution feature of MAX. Under the BEST Rule, agency market orders in 
Nasdaq/NM securities are guaranteed executions \3\ in substantially the 
same manner as Dual Trading System Issues \4\ and under the MAX rules, 
market orders in Nasdaq/NM securities are automatically executed in 
substantially the same manner as Dual Trading System Issues.
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    \2\ Securities Exchange Act Release No. 24424 (May 4, 1987), 52 
FR 17868 (May 12, 1987) (order approving File No. SR-MSE-87-2 (the 
``NM Order'')).
    \3\ Under the BEST Rule, a CHX specialist is required to 
guarantee the execution of certain agency market orders, up to the 
lesser of the size associated with the national best bid or offer or 
2099 shares, at the national best bid or offer, as the case may be, 
even if the specialist is not quoting at that price.
    \4\ According to the Exchange, Dual Trading System Issues are 
issues that are traded on the CHX and listed on either the New York 
Stock Exchange or American Stock Exchange. Telephone conversation on 
June 5, 1996 between David T. Rusoff, Attorney, Foley & Lardner, and 
George A. Villasana, Attorney, Division of Market Regulation, SEC.
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    As the CHX contemplates expanding its Nasdaq/NM securities program, 
it is apparent that the continuing lack of an appropriate trade-through 
rule and appropriate intermarket linkages in the over-the-counter 
market make it inappropriate at this time for the Exchange to continue 
to require automated execution at the National Best Bid and Offer 
(``NBBO'') for orders where the CHX specialist is not in fact quoting 
at the NBBO.
    The purpose of the proposed rule change is to change the automatic 
execution feature of the Exchange's MAX System (see Article XX, Rule 
37(b)) and to alter the application for the Exchange's BEST Rule 
(Article XX, Rule 37(a)) for Nasdaq/NM securities.

MAX Parameters

    One proposed change to the MAX rules relates to the auto-execution 
and auto-acceptance parameters for Nasdaq/NM securities. Currently, the 
MAX rules

[[Page 34463]]

require the auto-execution parameter to be set at 1099 shares or 
greater and the auto-acceptance parameter to be set at 2099 shares or 
greater. As proposed, the auto-execution and auto-acceptance parameters 
for Nasdaq/NM securities will be set at 1000 shares or greater.

CHX Specialist Quoting at NBBO

    When an Exchange specialist is disseminating the best bid or offer 
in a Nasdaq/NM security, market orders and marketable limit orders in 
that security will be automatically executed up to the size of the 
specialist's disseminated bid or offer, as the case may be, and the 
size of such bid or offer will automatically be decremented by the size 
of the execution. When the specialist's quote is exhausted, the system 
will generate an autoquote at \1/8\ point away from the NBBO for 1000 
shares.

CHX Specialist Not Quoting at NBBO

    In the event that the CHX specialist is not quoting a Nasdaq/NM 
security at the NBBO, all MAX market and marketable limited orders in 
that security that are of a size equal to or less than the auto-
execution threshold will automatically be executed at the NBBO after a 
twenty second delay unless the specialist elects to manually handled 
the order in accordance with the requirements set forth in proposed 
Rule 43 (d) of Article XX. In this regard, proposed Rule 43(d) requires 
a specialist to either manually execute the order at the NBBO or better 
during this twenty second period or to act as a agent for the order in 
seeking to obtain the best available price for the order on a 
marketplace other than the Exchange.\5\ If the specialist decides to 
act as agent for the order, the rule requires the specialist to use 
order routing systems where appropriate. Market and marketable limit 
orders that are greater than the auto-execution threshold will not be 
subject to these requirements.
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    \5\ The Commission notes that, while the present proposal does 
not specify whether the ``NBBO'' for the purposes of this rule is 
the best price at the time the order is enter or at the time it is 
executed, the Exchange plans to amend the proposal to clarify that 
market and marketable limit orders in a Nasdaq/NM security of a size 
equal to or less than the auto-execution threshold are to be priced 
at the NBBO at the time the order is entered into the MAX system, 
and that the order must be executed at that price or better. 
Telephone conversation on June 24, 1996 between David Rusoff, 
Attorney, Foley & Lardner, and George A. Villasana, Attorney, 
Division of Market Regulation, SEC.
    The Commission further expects that these orders will be 
provided an opportunity for price improvement during the period 
between the time that the order is entered and the time it is 
executed which should include, at a minimum, an opportunity to 
receive a better price if the NBBO improves before the order is 
executed.
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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 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 CHX 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 longer 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. Sec. 552, will be available for inspection and copying at 
the Commission's Public Reference Room. 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-96-16 and 
should be submitted July 23, 1996.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-16772 Filed 7-1-96; 8:45 am]
BILLING CODE 8010-01-M