[Federal Register Volume 61, Number 143 (Wednesday, July 24, 1996)]
[Notices]
[Pages 38491-38493]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-18720]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37442; File No. SR-CHX-96-18]


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 Its Pilot 
Program for Automatic Execution of Limit Orders

July 16, 1996.
    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 2, 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 and to 
grant accelerated approval of the proposed rule change.

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

    The Exchange proposes to extend, until December 31, 1996, its 
system enhancement relating to the automatic execution of non-
marketable limit orders,\1\ and extend, until August 31, 1996, the 
deadline for filing a report to the Commission describing the 
Exchange's experience with the program. This system enhancement is the 
subject of a current Commission approval order, which is scheduled to 
expire on July 31, 1996,\2\ The related report was due by May 31, 1996. 
A slightly modified version of this enhancement was originally approved 
by the Commission as a one year pilot program.\3\ The original one-year 
pilot program lapsed on April 13, 1994 without the Exchange filing for 
an extension or a permanent approval request.
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    \1\ A limit order is an order to buy or sell a stated amount of 
a security at a specified price or at a better price.
    \2\ See Securities Exchange Act Release No. 35962 (July 12, 
1995) (File No. SR-CHX-95-11).
    \3\ See Securities Exchange Act Release No. 32124 (April 13, 
1993), 58 FR 21325 (approving File No. SR-MSE-92-03).
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    The proposed system enhancement (``Auto-Ex'') is a feature of the 
Exchange's automated execution system (``MAX'') that CHX specialists 
may voluntarily choose to activate to automatically execute non-
marketable limit orders \4\ on a specialist's book. Auto-Ex will 
operate by comparing the size of the CHX-entered limit order against 
the amount of stock ahead of that order in the primary market when the 
issue is trading in the primary market at the limit price. The Auto-Ex 
System will begin comparing CHX-entered limit orders when the limit 
price equals the bid or offer quoted in the primary market (as the case 
may be) for the first time.\5\ Thereafter, the Auto-Ex system will keep 
track of all prints in the primary market and will automatically 
execute the limit order once sufficient size prints in the primary 
market.\6\ As additional limit orders at the same price are received by 
the specialist, comparisons will be made and entered based upon the 
shares ahead of those limit orders at the time of receipt, including 
shares ahead on the CHX. The Auto-Ex feature will not permit a limit 
order to be filled out of sequence.
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    \4\ A limit order is called ``marketable'' when the prevailing 
best offer (bid) is equal to or less (greater) than the limit buy 
(sell) order price. CHX Rule 37(b)(7) provides for the automatic 
execution at the best bid or best offer disseminated pursuant to 
Rule 11Ac1-2 (``BBO'') or better of all limit orders that are 
marketable when entered into the MAX system provided that such 
orders are of a certain size and otherwise are eligible for 
execution under a CHX Rule 37(a).
    \5\ For example, if the primary market quotation is \1/4\ bid, 
\1/2\ offered, 4,000 shares bid and 4,000 shares offered, and a CHX 
specialist receives a limit order to buy 2,000 shares for \1/8\, 
that limit order will not be compared against the amount of stock 
ahead of the order in the primary market until such time as the \1/
4\ bid is exhausted and the \1/8\ bid becomes the best bid. At that 
time, the size which is disseminated with the \1/8\ bid is the size 
against which the limit order is compared for Auto-Ex purposes.
    \6\ For example, assume a CHX specialist receives an agency 
limit order to buy 2,000 shares of ABC at \1/2\. The primary market 
quotation is \1/2\ bid, \3/4\ offered, 5,000 shares bid and 5,000 
shares offered, meaning there are 5,000 shares ahead of the CHX 
order. The Auto-Ex system will automatically execute the entire CHX 
limit order after 7,000 shares print at \1/2\ in the primary market. 
However, when more than 5,000 but less than 7,000 shares print at 
\1/2\ in the primary market, the order will be flagged with a 
flashing prompt to alert the specialist that the order may be due at 
least a partial fill. See CHX Article XX, Rule 37(a) governing 
primary market protection of certain limit orders.
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    The Auto-Ex feature will execute limit orders in accordance with 
existing CHX rules. Auto-Ex will be available for all dually traded 
issues; however, specialists will be permitted to choose Auto-Ex on an 
issue by issue basis.\7\ Generally, however, Auto-Ex will be used for 
issues which, based on experience, have demonstrated reliable and 
accurate quotes in the primary market. Limit orders not subject to 
Auto-Ex will be ``flagged'' with a prompt to alert the specialist that 
a fill may be due. The proposal to establish an Auto-Ex feature applies 
only to non-marketable limit orders. It is not applicable to marketable 
limit orders or to market orders.
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    \7\ The CHX will limit a specialist's ability to activate and 
then deactivate Auto-Ex regularly by: (1) only permitting a 
specialist to deactivate Auto-Ex on a certain day each month and (2) 
requiring that issues remain on Auto-Ex for a minimum of five 
trading days.
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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

[[Page 38492]]

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 Auto-Ex 
System for six months, until December 31, 1996, and extend, until 
August 31, 1996, the deadline for providing the Commission with the 
related report. The extension of the pilot program is requested in 
order to provide the Exchange with additional time to prepare the 
report to the Commission. The extension of the deadline for the report 
is requested because specialists only began using the Auto-Ex System in 
April 1996. Without an extension, the Exchange would not have 
meaningful data for its report to the Commission.
    The Auto-Ex System further automates the CHX's trading floor 
functions in order to improve the CHX's performance in filling limit 
orders. By providing for automatic execution of limit orders in 
accordance with existing Exchange rules, the CHX is eliminating the 
need for the manual operation required of specialists in determining 
when and to what extent limit orders are due fills based on primary 
market prints. The manual effort expended by specialists in filling 
limit orders that are entitled to primary market protection is often 
time-consuming and can result in errors, particularly when there is 
heavy trading volume. The present proposal, therefore, directly 
benefits customers because it results in more timely fills while 
eliminating errors resulting from manual execution.
    The Auto-Ex feature does not change or amend any CHX trading rules, 
nor does it cause or allow limit orders to be filled under different 
parameters than under existing rules. Auto-Ex only automates the manner 
in which limit orders are filled. The CHX will continue to monitor 
specialist execution of limit orders through the Market Regulation/
Surveillance Department. In addition, CHX specialists will continue to 
be responsible for their books to the same degree as they are now under 
the manual execution system for limit orders.
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. In this regard, Auto-Ex should help 
to speed execution of non-marketable limit orders on the CHX and may 
reduce the possibility of missed orders during periods of heavy trading 
volume.
    The proposed rule change is consistent with the requirements of 
Section 11A(a)(1)(C) of the Act in that the proposal is designed to 
contribute to the best execution of investors' orders while assuring 
the economically efficient execution of transactions, which in turn 
protects the public interest and promotes fair and orderly markets. In 
this regard, incoming orders subject to Auto-Ex, just as any other CHX 
order entitled to primary market protection, should receive the best 
execution available because a print on the primary market at the limit 
price triggers execution on the CHX. In addition, the Exchange's 
implementation of Auto-Ex should assure fair competition among exchange 
markets, which benefits public investors.

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 files 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-96-18 and should be 
submitted by August 14, 1996.

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 the requirements of Section 6(b) of the Act. 
Specifically, the Commission believes that the proposal is consistent 
with the Section 6(b)(5) requirements that the rules of an exchange be 
designed to promote just and equitable principles of trade, to prevent 
fraudulent and manipulative acts, and, in general, to protect investors 
and the public interest. The Commission believes that the proposed rule 
change to provide for the automatic execution of non-marketable limit 
orders should result in prompt execution of such orders on the Exchange 
and reduce errors caused by manual execution of limit orders that are 
entitled to primary market protection, especially during periods of 
heavy trading volume.
    In the order approving the pilot procedures,\8\ the Commission 
expressed concern about the Exchange specialists' discretion with 
respect to which stocks will be executed automatically through Auto-Ex, 
and whether manually-executed orders and Auto-Ex orders would receive 
differential treatment. Therefore, the Commission asked the Exchange to 
study the effects of the pilot and address the above-stated concerns, 
as well as other points specified in the Commission's order.\9\ At this 
time, the Exchange requests that the point be extended beyond its 
expiration date of July 31, 1996 so that the Exchange may gather 
meaningful data for its report to the Commission. The Exchange states 
that the delay in producing the report is due in part to the fact that 
the specialists only began to use the Auto-Ex System in April 1996. The 
Commission finds that it would be reasonable to allow the Exchange to 
have additional time to gather the data requested and produce the 
report to the Commission. Accordingly, the Commission will extend the 
deadline for providing the Commission with the report to August 31, 
1996. Moreover, the Commission believes it would be appropriate to

[[Page 38493]]

extend the pilot program until December 31, 1996 so that investors may 
continue to receive the benefit of automatic execution of non-
marketable limit orders from Auto-Ex while the Commission evaluates 
carefully the information provided by the Exchange and considers 
whether to approve the pilot program permanently.
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    \8\ See Securities Exchange Act Release No. 35962, supra note 2.
    \9\ Id.
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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 Exchange proposes 
to continue using the identical procedures of the pilot program that 
were published in the Federal Register for the full comment period and 
were approved by the Commission. Any requests to modify this pilot 
program, to extend its effectiveness, or to seek permanent approval for 
the pilot also should be submitted to the Commission by October 15, 
1996 as a proposed rule change pursuant to Section 19(b) of the Act.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\10\ that the proposed rule change (SR-CHX-96-18) is hereby 
approved on a pilot basis until December 31, 1996.

    \10\ 15 U.S.C. Sec. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-18720 Filed 7-23-96; 8:45 am]
BILLING CODE 8010-01-M