[Federal Register Volume 63, Number 28 (Wednesday, February 11, 1998)]
[Notices]
[Pages 7020-7022]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-3370]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39615; File No. SR-CHX-97-32]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 by The Chicago Stock Exchange, Incorporated 
Relating to Oversized MAX Orders

February 3, 1998.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on December 9, 1997, the 
Chicago Stock Exchange, Incorporated (``CHX'' or ``Exchange'') filed 
with the Securities and Exchange Commission (``Commission'') a proposed 
rule change. On January 9, 1998, the Exchange submitted to the 
Commission Amendment No. 1 to the proposal. The proposed rule change, 
as amended, is described in Items I, II, and III below, which Items 
have been prepared by the Exchange. 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 Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange proposes to amend Article XX, Rule 37(b)(1) and 
proposes to add interpretation and policy .06 thereunder relating to 
the entry and acceptance of oversized orders in the Exchange's Midwest 
Automated Execution System (``MAX System'').\2\ Below is the text of 
the proposed rule change. Proposed new language is italicized; 
deletions are in brackets.
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    \2\ The MAX System provides an automated delivery and, in 
certain cases, execution facility for orders that are eligible for 
execution under the Exchange's BEST Rule, Art. XX, Rule 37(a), and 
certain other orders. See CHX Manual, Art. XX, Rule 37(b).
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Article XX Rule 37

    (b)(1) Size. The MAX System has two size parameters which must be 
designated by the specialist on a stock-by-stock basis. The first 
parameter, the auto-execution threshold, must be set at 1099 shares 
(the default size) or greater for Dual Trading System issues. The 
second parameter, the auto-acceptance threshold, must be set at 2099 
shares (the system default) or greater for Dual

[[Page 7021]]

Trading System issues. In NASDAQ/NM Securities, the auto-execution and 
auto-acceptance parameters must be set at 1000 shares or greater. In no 
event may the auto-acceptance threshold be less than the auto-execution 
threshold. If the order sending firm sends an agency market order 
through MAX that is greater than the Specialist's auto-acceptance 
threshold, a Specialist may cancel the order within [three minutes] one 
minute of its being entered into MAX. If not canceled by the 
Specialist, the order will be designated as an open order. If the order 
sending firm sends an agency market order through MAX that is less than 
the auto-acceptance threshold but greater than the auto-execution 
threshold, the order will not be available for automatic execution but 
will be designated in the open order book. A specialist may manually 
execute any portion of such order and the difference shall remain as an 
open order. If the order sending firm sends an agency market order 
through MAX that is less than or equal to the auto-execution threshold, 
such order will be automatically executed in accordance with paragraph 
(b)(6) and (7) of this Rule.

* * * Interpretations and Policies

.06  Oversized MAX Orders.

    As stated in paragraph (b)(1) of this Rule, if an agency order is 
sent through MAX that is greater than the specialist's auto-acceptance 
threshold, the specialist shall follow the procedures set out below in 
a timely manner, but in no event great than one minute, until the order 
has either been definitively accepted or canceled:
    1. If the oversized order is a limit order and the limit price is 
equal to or better than the specialist's quote, the order must be 
immediately reflected in the specialist's quote in accordance with Rule 
7 of this Article XX.
    2. The oversized order must receive post protection until its final 
status is determined.
    3. A specialist must notify the order sending firm's MAX floor 
broker representative if the specialist determines to cancel the order.

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
    As described more fully below, the purpose of the proposed rule 
change is to amend CHX rules relating to the entry and acceptance of 
oversized orders received through the MAX System. Under the Exchange's 
BEST Rule, Exchange specialists are required to guarantee executions of 
all agency \3\ market and limit orders for Dual Trading System issues 
\4\ from 100 shares up to and including 2099 shares. Subject to the 
requirements of the short sale rule, market orders must be executed on 
the basis of the Intermarket Trading System's (``ITS'') best bid or 
offer (``BBO''). Limit orders must be executed at their limit price or 
better when: (1) The ITS BBO at the limit price has been exhausted in 
the primary market; (2) there has been a price penetration of the limit 
in the primary market (generally known as a trade-through of a CHX 
limit order); or (3) the issue is trading at the limit price on the 
primary market unless it can be demonstrated that the order would not 
have been executed if it had been transmitted to the primary market or 
the broker and specialist agree to a specific volume related to, or 
other criteria for, requiring an execution.
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    \3\ The term ``agency order'' means an order for the account of 
a customer, but does not include professional orders as defined in 
CHX, Art. XXX, Rule 2, interpretation and policy .04. That Rule 
defines a ``professional order'' as any order for the account 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. Id.
    \4\ Dual Trading System Issues are issues that are traded on the 
CHX, either through listing on the CHX or pursuant to unlisted 
trading privileges, and are also listed on either the New York Stock 
Exchange or American Stock Exchange.
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    As stated above, the Exchange's MAX System provides for the 
automatic execution of orders that are eligible for execution under the 
Exchange's BEST Rule and certain other orders.\5\ The MAX System has 
two size parameters which must be designated by the specialist on a 
stock-by-stock basis. For Dual Trading System issues, the specialist 
must set the auto-execution threshold at 1099 shares or greater and the 
auto-acceptance threshold at 2099 shares or greater. In no event may 
the auto-acceptance threshold be less than the auto-execution 
threshold. If the order-entry firm sends an order through MAX that is 
less than or equal to the auto-execution threshold, the order is 
executed automatically, unless an exception applies. If the order-entry 
firm sends an order through MAX that is less than the auto-acceptance 
threshold but greater than the auto-execution threshold, the order is 
not available for automatic execution but is designated in the open 
order book. A specialist may manually execute any portion of the order; 
the difference must remain as an open order. Under the current MAX 
rules, if the order-entry firm sends an order through the MAX System 
that is greater than the specialist's auto-acceptance threshold, a 
specialist may cancel the order within three minutes of it being 
entered into MAX. If not canceled by the specialist, the order is 
designated as an open order.\6\
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    \5\ A MAX order that fits under the BEST parameters must be 
executed pursuant to BEST Rules via the MAX system. If the order is 
outside the BEST parameters, the BEST Rules do not apply, but MAX 
system handling rules do apply.
    \6\ Under current rules, if an oversized market or limit order 
is received by the specialist, he must either reject the order 
immediately or immediately display it in accordance with CHX rules 
and the Commission's Order Execution Rules (Securities Exchange Act 
Release No. 37619A (Sept. 6, 1996), 61 FR 48290 (Sept. 12, 1996)). 
If the order is displayed, the specialist must check 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.
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    The Exchange proposes to change the way that these oversized orders 
are handled. First, the Exchange proposes to amend Rule 37(b)(1) of 
Article XX to change the amount of time in which the specialist can 
cancel the oversized order. Rather than the current three minute 
window, the Exchange proposes to reduce this time period to one minute. 
If the specialist has not canceled the order in the one minute period, 
the order will be designated as an open order.
    Second, the Exchange proposes to add interpretation and policy .06 
to Rule 37 to specifically describe how oversized orders are to be 
handled during the one minute period in which the specialist can cancel 
the order. The interpretation will provide that if the oversized order 
is an agency limit order, the order must immediately be reflected in 
the specialist's quote in accordance with CHX rules.\7\ Additionally, 
during the one minute window, the order must receive post protection. 
This means that while the BEST Rule will not apply

[[Page 7022]]

during this period, the specialist must allow the order to interact 
with other orders received by the specialist at the post, using the 
same priority and precedence rules that apply to other orders received 
at the post.
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    \7\ Article XX, Rule 7 of the CHX rules requires every limit 
order that is priced at or better than the specialist's quote to be 
included in the specialist's quote, subject to certain exceptions.
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    Finally, during the one minute window, the specialist must notify 
the order sending firm's MAX floor broker representative if the 
specialist determines to cancel the order. The reduction of the three 
minute window to one minute is appropriate because it will reduce the 
time period in which the order sending firm will be uncertain as to the 
ultimate status of the order. The imposition of specific duties on the 
specialist during the one minute window is appropriate in order to both 
make sure that the order is not disadvantaged during the one minute 
period and to give the specialist an opportunity to verify with the MAX 
floor broker representative that the order is accurate and correct.
2. Statutory Basis
    The proposed rule change is consistent with Section 6(b)(5) of the 
Act \8\ 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.
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    \8\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange 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 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 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, including whether the proposed rule 
change is consistent with the Act. 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 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-97-32 and 
should be submitted by March 4, 1998.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-3370 Filed 2-10-98; 8:45 am]
BILLING CODE 8010-01-M