[Federal Register Volume 63, Number 67 (Wednesday, April 8, 1998)]
[Notices]
[Pages 17246-17247]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-9127]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39823; File No. SR-CHX-98-03]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change and Amendment No. 
1 by the Chicago Stock Exchange, Incorporated Relating to the Trading 
of Nasdaq/NM Securities on the CHX

March 31, 1998.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on February 3, 1998, the 
Chicago Stock Exchange, Incorporated (``CHX'' or ``Exchange'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change. The Exchange filed Amendment No. 1 to the 
proposal on March 25, 1998. The proposal, as amended, is described in 
Items I and II 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.
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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 on March 31, 1998. 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 June 30, 1998.

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 Exchange rules and 
procedures relating to the trading of Nasdaq/NM securities on the 
Exchange.\2\ Among other things, these rules made the Exchange's BEST 
Rule guarantee (Article XX, Rule 37(a)) 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-MSE-87-2). 
See Securities Exchange Act Release Nos. 28146 (June 26, 1990), 55 
FR 27917 (July 6, 1990) (order expanding the number of eligible 
securities to 100); 36102 (August 14, 1995), 60 FR 43626 (August 22, 
1995) (order expanding the number of eligible 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, 
Art. 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\ When the Commission approved the program on a pilot 
basis, it noted that during the pilot program it was expected that the 
Exchange would effectuate a linkage between the CHX systems and Nasdaq 
systems in order to permit market makers in each market to route orders 
to the other market center.
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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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    The Commission also requested that the Exchange submit a report to 
the Commission describing the Exchange's experience with the pilot 
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. Six months of trading 
data did not become available until November, 1997. As a result, the 
Exchange requested an additional three month extension to collect the 
data and prepare the report for the Commission.
    On December 31, 1998, the Commission extended the pilot program for 
an additional three months to give the Exchange additional time to 
prepare and submit the report and to give the Commission adequate time 
to review the report prior to approving the pilot on a permanent 
basis.\6\ The Exchange submitted the report to the Commission on 
January 30, 1998.
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    \6\See Securities Exchange Act Release No. 39512 (December 31, 
1997), 62 FR 1517 (January 9, 1998).
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    The current proposal, filed February 3, 1998 and amended March 24, 
1998,\7\ is for a continuation of the current pilot program through 
June 30, 1998.
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    \7\See Letter from David T. Rusoff, Foley & Lardner, to Gail A. 
Marshall, Division of Market Regulation, dated March 24, 1998.
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    Under the pilot program, specialists must continue to accept agency 
\8\ market order or marketable limit orders, but only for orders of 100 
to 1000 shares in Nasdaq/NM securities rather than the

[[Page 17247]]

2099 share limit previously in place.\9\ Specialists, however, must 
accept all agency limit order 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 order only if they are quoting at the NBBO when the 
order was received.
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    \8\ 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. The Rule 
defines a ``professional order'' 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.
    \9\ The 100 to 2099 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 pilot program requires the specialist to set the MAX auto-
execution threshold at 1000 shares of greater for Nasdaq/NM securities. 
When a CHX specialist is quoting at the NBBO, orders for a number of 
shares less than or equal to the auto-execution threshold set by the 
specialist will be automatically executed (in an amount up to the size 
of the specialist's quote). 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, as determined by the specialist from time to time, for either 100 
or 1000 shares, depending on the issue.\10\
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    \10\ Specifically, the autoquote is currently for one normal 
unit of trading (usually 100 shares) in issues that became subject 
to mandatory compliance with SEC Rule 11Ac1-4 on or prior to 
February 24, 1997, and for 1000 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, MAX 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 after a twenty second delay.\11\ 
If the specialist elects manual execution, the specialist must either 
manually execute the order at the NBBO or a better price or act as 
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 pilot program 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 are not subject to 
these requirements, and may be canceled within one minute of being 
entered into MAX or designated as an open order.
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    \11\ 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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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.

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 on 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, including whether the proposed rule 
change is consistent with the Act. 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 submissions, 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 
than 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-98-03 and should be submitted by April 29, 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(a)(1)(C) and 11A(a)(1)(D) of the Act 
because the Exchange's proposal conforms CHX specialist obligations to 
those applicable to OTC market makers in Nasdaq/NM securities, while 
CHX provides a separate, competitive market for Nasdaq/NM securities.
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    \12\ 15 U.S.C. Sec. 78f(b)(5).
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    The Commission notes however, that, while the Exchange has been 
working towards establishing a linkage, specialists and OTC market 
makers do not yet have an effective method of routing orders to each 
other. The Commission expects the Exchange to continue to work towards 
establishing a linkage with the Nasdaq systems as requested in the 
January 3, 1997 order.\13\ The Commission is approving the extension of 
the pilot so that the rules of the exchange will operate without 
interruption.
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    \13\ See Securities Exchange Act Release No. 38119 (January 3, 
1997), 62 FR 1788 (January 13, 1997).
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    The Commission therefore finds good cause for approving the 
proposed rule change (SR-CHX-98-03) 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 through June 30, 1998.

    \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. 98-9127 Filed 4-7-98; 8:45 am]
BILLING CODE 8010-01-M