[Federal Register Volume 63, Number 6 (Friday, January 9, 1998)]
[Notices]
[Pages 1517-1519]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-538]


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SECURITIES AND EXCHANGE COMMISSION

(Release No. 34-39512; File No. SR-CHX-97-34]


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

December 31, 1997.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on December 11, 1997, 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.
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    \1\ 15 U.S.C. Sec. 78s(b)(1).
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I. Self-Regulatory Organizations Statement of the Terms of Substance of 
the Proposed Rule Change

    The Exchange requests a three month extension of the pilot program 
relating to the trading of Nasdaq/NM securities on the Exchange that is 
currently due to expire at the end of December, 1997. Specifically, the 
pilot program amended Article XX, Rule 37 and Article XX, Rule 43 of 
the Exchange's Rules and the Exchange proposes that the amendments 
remain in effect on a pilot basis through March 31, 1998.

[[Page 1518]]

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 Exchange included statements 
concerning the purpose of, and statutory 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 4, 1987, the Commission approved certain CHX rules and 
procedures relating to the trading of Nasdaq/NM securities on the 
CHX.\2\ Among other things, these rules made the Exchange's Article XX, 
Rule 37(a) (``BEST Rule'') applicable to Nasdaq/NM securities and made 
Nasdaq/NM securities eligible for the automatic execution feature of 
the Exchange's Midwest Automated Execution System (``MAX system'').\3\
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    \2\ See Securities Exchange Act Release No. 24424 (May 4, 1987), 
52 FR 17868 (May 12, 1987) (order approving File No. SR-MSR-87-2). 
See also Securities Exchange Act Release Nos. 28146 (June 26, 1990) 
(order expanding the number of eligible Nasdaq/NM securities to 
100); and 36102 (August 14, 1995) (order expanding the number of 
eligible Nasdaq/NM securities to 500).
    \3\ The MAX system may be used to provide an automated delivery 
and execution facility for orders that are eligible for execution 
under the Exchange's BEST Rule and certain other orders. See CHX, 
Article XX, Rule 37(b). A MAX order that fits under the BEST 
parameters is executed pursuant to the BEST Rule via the MAX system. 
If an order is outside the BEST parameters, the BEST Rule does not 
apply, but MAX system handling rules do apply.
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    On January 3, 1997, the Commission approved,\4\ on a one year pilot 
basis, a program that eliminated the requirement that CHX specialists 
automatically execute orders in Nasdaq/NM securities when the 
specialist is not quoting at the national best bid or best offer 
(``NBBO'').\5\
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    \4\ See Securities Exchange Act Release No. 38119.
    \5\ The NBBO is the best bid or offer disseminated pursuant to 
SEC Rule 11Ac1-1.
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    Under the pilot program, specialists must continue to accept agency 
\6\ market orders or marketable limit orders in Nasdaq/NM securities, 
but only for orders of 100 to 1,000 shares rather than the 2,099 share 
limit previously in place.\7\ Specialists, however, must accept all 
agency limit orders in Nasdaq/NM securities from 100 up to and 
including 10,000 shares for placement in the limit order book. As 
described below, however, specialists are required to automatically 
execute Nasdaq/NM orders only if they are quoting at the NBBO when the 
order was received.
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    \6\ The term ``agency order'' means an order for the account of 
a customer, but shall not include professional orders as defined in 
CHX, Article XXX, Rule 2, interpretation and policy .04. A 
``professional order'' is defined as any order for the account of a 
broker-dealer, the account of an associated person of a broker-
dealer, or any account in which a broker-dealer or an associated 
person of a broker-dealer has any direct or indirect interest.
    \7\ The 100 to 2,099 share auto-acceptance threshold previously 
in place continues to apply to Dually Listed securities (those 
issues that are traded on the CHX and are listed on either the New 
York Stock Exchange or American Stock Exchange).
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    The current pilot program requires the specialist to set the MAX 
auto-execution threshold at 1,000 shares or greater for Nasdaq/NM 
securities. Orders for a number of shares less than or equal to the 
auto-execution threshold will be automatically executed (in an amount 
up to the size of the specialist's quote) if the CHX specialist is 
quoting at the NBBO. Orders in securities quoted with a spread greater 
than the minimum variation are executed automatically after a fifteen 
second delay from the time the order is entered into MAX. The size of 
the specialist's bid or offer is then automatically decremented by the 
size of the execution. When the specialist's quote is exhausted, the 
system will generate an autoquote at an increment away from the 
NBBO,\8\ as determined by the specialist from time to time, for either 
100 or 1,000 shares, depending on the Nasdaq/NM security.\9\
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    \8\ Such increment is determined by the specialist from time to 
time. See Securities Exchange Act Release No. 38989 (August 28, 
1977).
    \9\ Specifically, the autoquote will be for one normal unit of 
trading (usually 100 shares) in Nasdaq/NM securities that became 
subject to mandatory compliance with SEC Rule 11Ac1-4 on to January 
20, 1997, and for 1,000 shares in other issues.
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    When the specialist is not quoting a Nasdaq/NM security at the 
NBBO, it can elect, on an order-by-order basis, to manually execute 
orders in that security. If the specialist does not elect manual 
execution, market and marketable limit 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 in MAX after a twenty second 
delay.\10\
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    \10\ The twenty second delay is designed, in part, to provide an 
opportunity for the order to receive price improvement from the 
specialist's displayed quote.
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    Under the current pilot program, if the specialist elects manual 
execution, the specialist must either manually execute the order at the 
NBBO price or better, or act as an agent for the order in seeking to 
obtain the best available price for the order on a marketplace other 
than the Exchange. If the specialist decides to act as agent for the 
order, the current pilot requires the specialist to use order-routing 
systems to obtain an execution where appropriate. Market and marketable 
limit orders that are for a number of shares greater than the auto-
execution threshold (``oversized'') are not subject to these 
requirements, and may be canceled within three minutes of being entered 
into MAX or designated as an open order.\11\
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    \11\ If an oversized market or limit order is received by the 
specialist, he either rejects the order immediately or displays it. 
If the order is displayed, the specialist checks with the order 
entry broker to determine the validity of the oversized order. 
During the three minute period, the specialist can cancel the order 
and return it to the order entry firm, but until it is canceled the 
displayed order is eligible for execution. The Exchange has proposed 
to reduce the acceptance time frame from three minutes to one minute 
for oversized orders. See File No. SR-CHX-97-32.
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    When the Commission approved the current program on a pilot basis, 
the Commission requested that, prior to requesting permanent approval, 
the Exchange submit a report to the Commission describing the 
Exchange's experience with the program. The Commission stated that the 
report should include at least six months worth of trading data. Due to 
programming issues, the pilot program was not implemented until April, 
1997, and, consequently, six months of trading data did not become 
available until November, 1997. As a result, the Exchange is still 
processing the data necessary to compile the requested report. The 
Exchange believes that the data and report will be ready for submission 
to the Commission no later than January 31, 1998. In order to give the 
Commission adequate time to review the report prior to approving the 
pilot on a permanent basis, the Exchange is requesting the pilot be 
extended until March 31, 1998. The Exchange expects to submit a request 
for permanent approval simultaneously with the submission of the report 
to the Commission.
2. Statutory Basis
    The basis under the Act for the proposed rule change is the 
requirement under Section 6(b)(5) that an exchange have rules that are 
designed to promote just and equitable principles of trade, to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system and, in general, to protect investors and the 
public interest.

[[Page 1519]]

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose a burden on competition.

C. Self-Regulatory Organization's Statement of Comments on the Proposed 
Rule Change Received from Members, Participants or Others

    No comments were solicited or received.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing. Persons making written submission 
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 in the 
Commission's Public Reference Room, 450 Fifth Street, N.W., Washington, 
D.C. 20549. Copies of such filing also will be available for inspection 
and copying at the Exchange. All submissions should refer to file 
number SR-CHX-97-34 and should be submitted by January 30, 1998.

IV. Commission's Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    The Commission finds that the Exchange's proposal is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange. Specifically, 
the Commission finds that the proposed rule change is consistent with 
Section 6(b)(5) of the Act,\12\ which requires that an exchange have 
rules designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, and, in general, to protect investors and the 
public interest. The Commission also believes that the proposal is 
consistent with Section 11A(1)(D) and 11A(a)(1)(C) of the Act.
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    \12\ 15 U.S.C. 78f(b)(5).
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    The CHX rules establish execution procedures and guarantees that 
attempt to provide an execution reflective of the best quotes among OTC 
market makers and specialists in Nasdaq/NM securities without 
subjecting CHX specialists to execution guarantees that are 
substantially greater than those imposed on their competitors. The 
Commission believes the pilot to not require automatic execution for 
Nasdaq/NM securities when the specialist is not quoting at the NBBO, 
and to allow the specialist to execute the order as agent, is intended 
to conform CHX specialist obligations to those applicable to OTC market 
makers in Nasdaq/NM securities, while recognizing that the CHX provides 
a separate, competitive market for Nasdaq/NM securities. The Commission 
finds that the pilot should continue until March 31, 1998, to provide 
the Commission adequate time to assess the requisite data from the 
Exchange and determine if approval on a permanent basis is warranted. 
In addition, the Commission is extending, until March 27, 1998, the 
pilot permitting CHX specialists to maintain a minimum quotation size 
of 100 shares for fifty Nasdaq/NM securities.\13\ The Commission 
believes that extending these pilots preserves conformity between that 
which is required of a CHX specialists in a Nasdaq/NM security and that 
which is required of a Nasdaq market maker in the same security.
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    \13\ See Securities Exchange Act Release No. 38156 (January 10, 
1998), 62 FR 2415 (January 16, 1997), order approving reduction in 
the minimum quotation size for Nasdaq market makers in fifty Nasdaq/
NM securities. A list of the 50 Nasdaq/NM securities is located on 
the Nasdaq website (www.nasdaq.com).
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    The Commission therefore finds good cause for approving the 
proposed rule change (SR-CHX-97-34) prior to the thirtieth day after 
the date of publication of notice of filing thereof in the Federal 
Register.
    It is therefore ordered, pursuant to Section 19(b)(2),\14\ that the 
proposed rule change be, and hereby is, approved.

    \14\ 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.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-538 Filed 1-8-98; 8:45 am]
BILLING CODE 8010-01-M