[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