[Federal Register Volume 61, Number 226 (Thursday, November 21, 1996)]
[Notices]
[Pages 59263-59265]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-29718]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37946; File No. SR-CHX-96-27]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Stock Exchange, Incorporated Relating to 
Permanent Approval of Its Pilot Program for Automatic Execution of 
Limit Orders

November 13, 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 October 
15, 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

[[Page 59264]]

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 requests permanent approval of its system enhancement 
relating to the automatic execution of non-marketable limit orders.
    On July 12, 1995, the Commission approved this system enhancement 
on a pilot basis, expiring on July 31, 1996.\1\ The pilot program was 
extended in a subsequent Commission approval order and is currently 
scheduled to expire on December 31, 1996.\2\ In the Pilot Approval 
Order, as amended by the Pilot Extension Order, the Commission 
requested that the CHX provide a report to the Commission, by August 
31, 1996, describing its experience with the pilot program. This report 
has been submitted to the Commission.
---------------------------------------------------------------------------

    \1\ See Securities Exchange Act Release No. 35962 (July 12, 
1995) (File No. SR-CHX-95-11) (``Pilot Approval Order'').
    \2\ See Securities Exchange Act Release No. 37442 (July 16, 
1995) (File No. SR-CHX-96-18) (``Pilot Extension Order'').
---------------------------------------------------------------------------

    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 execute automatically non-
marketable limit orders \3\ on the 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.\4\ Thereafter, the Auto-Ex system will keep 
track of all prints in the primary market and will automatically 
execute the limit order once the required size prints in the primary 
market.\5\ 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.
---------------------------------------------------------------------------

    \3\ 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. 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.
    \4\ 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 by 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.
    \5\ 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\ or better 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.
---------------------------------------------------------------------------

    The Auto-Ex feature will execute limit orders in accordance with 
existing CHX rules.\6\ 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. The text of the proposed rule change 
is available at the CHX and the Commission.
---------------------------------------------------------------------------

    \6\ Further, the Exchange has stated that the recent adoption of 
the Order Execution Obligations (Securities Exchange Act Release No. 
37619 (August 29, 1996), 61 FR 48290 (September 12, 1996)) will have 
no impact or effect on the proposed rule change. See Letter from J. 
Craig Long, Foley & Lardner to Janice Mitnick, Attorney, Office of 
Market Supervision, Division of Market Regulation, Commission, dated 
November 8, 1996.
    \7\ The CHX will limit a specialist's ability to activate and 
then deactivate Auto-Ex regularly by: (1) only permitting as 
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.
---------------------------------------------------------------------------

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 request permanent 
approval of the Auto-Ex System. The Auto-Ex System further automates 
the CHX's trading floor functions in order to improve the CHX's 
performance in filling limited 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 Exchange believes 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 
mechanisms 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 Exchange believes 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

[[Page 59265]]

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. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of 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 such 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. 552, will be available for inspection and copying at the 
Commission's Public 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-96-27 and should be 
submitted by December 12, 1996.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\
---------------------------------------------------------------------------

    \8\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-29718 Filed 11-20-96; 8:45 am]
BILLING CODE 8010-01-M