[Federal Register Volume 63, Number 91 (Tuesday, May 12, 1998)]
[Notices]
[Pages 26233-26235]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-12558]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39956; File No. SR-CHX-98-01]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 by the Chicago Stock Exchange, Incorporated 
Relating to the Stopping of Market and Marketable Limit Orders

May 5, 1998.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on January 16, 1998, the 
Chicago Stock Exchange, Incorporated (``CHX'' or ``Exchange'') filed 
with the Securities and Exchange Commission (``Commission'') a proposed 
rule change relating to the stopping of market and marketable limit 
orders. On February 12, 1998, the Exchange filed amendment No. 1 with 
the Commission.\2\ The proposed rule change, as amended, is 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. 78s(b)(1).
    \2\ See letter from David T. Rusoff, Foley & Lardner, to Gail A. 
Marshall, Division of Market Regulation, Commission, dated February 
12, 1998.
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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) relating to 
the stopping of market orders and marketable limit orders in the 
Midwest Automated Execution System (``MAX System''). Below is the next 
of the proposed rule change. Proposed new language is italicized; 
proposed deletions are in brackets.
    Article XX, Rule 37. Guaranteed Execution System and Midwest 
Automated Execution System (b) Automated Executions. The Exchange's 
Midwest Automated Execution System (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 Article XX, Rule 37(a) 
(``BEST Rule'') and certain other orders. In the event that an order 
that is subject to the BEST Rule is sent through MAX, it shall be 
executed in accordance with the parameters of the BEST Rule and the 
following. In the event that an order that is not subject to the BEST 
Rule is sent through MAX, it shall be executed in accordance with the 
parameters of the following:
    (1)-(9) No change in text.
    (10) All market orders received through the MAX System that would 
result in an out of range execution shall be deemed to be received with 
a request to STOP. Additionally, specialists may stop limit orders that 
are marketable when entered into the MAX System. Subject to 
Interpretations and Policies .03 under [paragraph (a) under] this Rule 
37, a specialist may execute a stopped order out of the primary market 
range, at no worse than the stopped price, provided the specialist 
receives approval to do so from two floor officials. All agency and 
professional market orders received through the MAX System that are 
from 100 shares up to and including 599 shares (or such greater amount 
designated by a specialist on a stock-by-stock basis) (the stop volume 
threshold), that are not automatically executed pursuant to subsections 
(6) and (7) hereof shall be designated as ``pending auto-stop'' orders. 
A pending auto-stop order shall be automatically stopped thirty seconds 
after entry into the MAX System unless the order has been canceled, 
executed, manually stopped, or put on hold during such thirty second 
period. The pending auto-stop feature shall operate from 8:45 a.m. 
until 2:57 p.m. Notwithstanding the foregoing all or none orders, fill 
or kill orders, immediate or cancel orders and orders that have been 
stopped under the Enhanced SuperMAX program are not eligible to be 
``pending auto-stop'' orders.
    (11)-(12) No change in text.

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 ``stopped'' orders \3\ in the 
MAX System \4\ (i) to permit specialists to stop a marketable limit 
order \5\ if the order is not immediately executed, and (ii) to 
automate the stopping of certain market orders that are not 
automatically executed.
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    \3\ See CHX Manual, Art. XX, Rule 28 regarding member liability 
for stopped orders.
    \4\ The MAX System provides an automated delivery and, in 
certain cases, execution facility for orders that are eligible for 
execution under Article XX, Rule 37(a), and in certain other orders. 
See CHX Manual, Art. XX, Rule 37(b).
    \5\ For purposes of this filing, a marketable limit order is a 
limit order that is marketable when entered into the MAX System, 
i.e., the limit price of the order is at or past (higher for a buy 
order or lower for a sell order) the relevant side of the ITS BBO at 
the time the order is received in the MAX System. If the ITS BBO 
subsequently moves away from the limit price (i.e., if the limit 
price is lower than the ITS best offer for a buy order or higher 
than the ITS best bid for a sell order) after receipt of the order 
but before execution of the order, the order will still be 
considered a marketable limit order for purposes of pending auto-
stop. Conversely, if a limit order is not marketable when received 
by the MAX System, the order will not be considered a marketable 
limit order for purposes of pending auto-stop, even if the ITS BBO 
subsequently becomes equal to or past the limit price of the order.
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    Under the Exchange's BEST Rule, Exchange specialists are required 
to guarantee executions of all agency \6\ market and limit orders for 
Dual Trading System issues \7\ from 100 shares up to and including 2099 
shares. Subject to the requirements of the short sale rule, market 
orders must be executed at a price equal to or better than the 
Intermarket Trading System (``ITS'') best bid or offer (``BBO''), up to 
the size associated with the ITS 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

[[Page 26234]]

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.\8\
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    \6\ 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.
    \7\ 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.
    \8\ It is the responsibility of the specialist to be able to 
demonstrate that the order would not have been executed had it been 
routed to the other market. This is often accomplished by sending a 
``marker'' order to the primary market.
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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.\9\
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    \9\ A MAX order that fits under the BEST parameters must be 
executed pursuant to BEST Rules via the MAX System. (See Art. XX, 
Rule 37(a) for BEST Rules) While the BEST Rules do not apply if the 
order is outside the BEST parameters, MAX System handling rules are 
still applicable. (See Art. XX, Rule 37(b) for MAX System handling 
rules)
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    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 the MAX System that is greater than the specialist's auto-
acceptance threshold, a specialist may cancel the order within one 
minute of it being entered into the MAX System.\10\ If the order is not 
canceled by the specialist, the order is designated as an open 
order.\11\ If the order-entry firm sends an order through the MAX 
System 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. If the order-entry firm sends an order through the 
MAX System that is less than or equal to the auto-execution threshold, 
the order is executed automatically, unless an exception applies. The 
MAX Rules currently provide several exceptions to automatic execution, 
even for orders that are less than or equal to the auto-execution 
threshold. First, unless a professional order is received with a ``Z'' 
designator, it is not automatically executed, regardless of size. 
Second, all market orders for Dual Trading System issues received 
through the MAX System that would result in an out of range \12\ 
execution are deemed to be received with a request to ``stop.'' \13\ 
Stopped orders are not automatically executed in the usual course 
(i.e., pursuant to Rule 37(b)(6)). Instead, they are placed in the open 
order file.\14\ The order sending firm then receives a ``UR Stopped'' 
message. The specialist is then required to include the order in its 
quote by bidding (if it is an order to buy) or offering (if it is an 
order to sell) the shares at one minimum variation better than the 
current market, in an effort to obtain price improvement for the order.
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    \10\ While the rule currently permits cancellation within three 
minutes, the Exchange has proposed a rule change (CHX-97-32 
published in the Federal Register on February 11, 1998) to reduce 
the time to one minute. (See Securities Exchange Act Release No. 
39615 (February 3, 1998), 63 FR 7020 (February 11, 1998).
    \11\ If an oversized market or limit order is received by the 
specialist, he will either reject the order immediately or display 
it immediately, in accordance with CHX Article XX, Rule 7 and the 
SEC's recently adopted 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 will check with 
the order entry broker to determine the validity of the oversized 
order. During the one 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.
    \12\ ``Out of range'' means either higher or lower than the 
range in which the security has traded on the primary market during 
a particular trading day.
    \13\ See CHX Manual, Art. XX, Rule 37(b)(11).
    \14\ See CHX Manual, Art. XX, Rule 37(b)(2).
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    Third, the MAX System will not automatically execute a market order 
or marketable limit order if the size associated with the ITS BBO is 
less than the size of the market or marketable limit order.\15\
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    \15\ See CHX Manual, Art, XX, Rule 37(b)(12).
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    Currently, the MAX System has no functionality to automatically 
``stop'' marketable limit orders; only market orders are stopped, and 
even then, only if they would result in out of range executions or the 
size of the order is greater than the size associated with ITS BBO.\16\ 
Consequently, if a marketable limit order is not immediately executed 
(e.g., it is out of range, the order is greater than the size 
associated with the ITS BBO, etc.), it is merely added to the open 
order book. No message is sent to the order sending firm until the 
order is executed. The same is true for market orders that are not 
automatically stopped and are not automatically executed.
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    \16\ CHX Manual, Art, XX, Rule 37(b)(10) and (11), While market 
orders may also be stopped under the Exchange's Enhanced SuperMAX 
program, these orders are not subject to this filing.
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    Because no message is sent to the order sending firm, the firm is 
uncertain as to the current status of its order. As a result, as stated 
above, the purpose of the proposed rule change is (i) to permit 
specialists to stop a marketable limit orders, and (ii) to automate the 
stopping of certain market orders. Once stopped, the order sending firm 
will then receive a stopped message, rather than being unsure as to the 
current status of the order, as is currently the case.
    Specifically, the CHX is proposing to amend Article XX, Rule 
37(b)(10) to provide that all MAX market orders that are from 100 up to 
and including 599 shares (or such higher amount determined by a 
specialist on a stock by stock basis) that are not automatically 
executed in the normal course pursuant to Rule 37(b)(6) (i.e., because 
there is insufficient size associated with the ITS BBO, because the 
order would result in an out of range execution, because the order is a 
professional order and the specialist has not yet decided whether to 
accept the order, or because of any other reason permitted under CHX 
rules) will be identified as a ``pending auto stop'' order.\17\
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    \17\ While both agency and professional orders will be eligible 
to be ``pending auto-stop'' orders, all or none orders, odd-lot 
orders, fill or kill orders, immediate or cancel orders, orders that 
re or will be stopped under the Enhanced SuperMAX program, and other 
orders that cannot be entered into the MAX System (i.e., not held 
orders, sell short exempt orders and special settlement orders) will 
not be eligible to be ``pending auto stop'' orders.
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    These orders will retain their ``pending auto-stop'' status for 30 
seconds. At the end of this 30 second period, the MAX System will 
automatically stop the order and send a ``UR Stopped'' message to the 
order sending firm, unless, before the end of the 30 second period, the 
order is executed, canceled, manually stopped by the specialist or 
``put on hold.'' If any of these events occur, the ``pending auto-
stop'' status will be removed from the order and the order will not 
automatically be stopped.\18\ If an order is ``put on hold,'' the CHX's 
existing rules for the order will apply. If the order is stopped, the 
stop price will be the ITS BBO at the time the order is received in the 
MAX System. Furthermore, if the order is stopped after the ``pending 
auto-stop'' period, the entire order will be stopped.
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    \18\ As is the case for all features of the MAX System, in 
unusual trading conditions, this feature of MAX can be de-activated 
(in its entirety or on an issue by issue basis) with the approval of 
two members of the Exchange's Committee on Floor Procedure or a 
designated member of the Exchange staff who would have authority to 
set execution prices. See CHX Article XX, Rule 37(b)(8).
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    The change to Rule 37(b)(10) to stop the entire order will result 
in better guarantees for the order than are required by existing CHX 
Rules. For example, professional orders are currently not guaranteed an 
execution under the BEST Rule. Under this change, eligible professional 
market orders will now be guaranteed an

[[Page 26235]]

execution at the stopped price. Additionally, pursuant to Article XX, 
Rule 28, a stopped order constitutes a guarantee that the order will be 
executed at the stopped price or better. However, under existing rules, 
if the size of the order is greater than the size of the ITS BBO in 
existence when the order is received, there is merely no automatic 
execution of the order, the order does not have to be ``stopped.'' 
Moreover, even if the order is ``stopped'' under Rule 28 only that 
portion of the order that is less than or equal to the size of the ITS 
BBO is stopped. The portion of the order that exceeds the ITS BBO is 
not stopped. As proposed, the entire size of the order (up to 599 
shares) would be automatically stopped after the 30 second delay unless 
an exception applies.
    This better guarantee can be illustrated by an example. Suppose the 
ITS BBO is $20 bid, $20\1/4\ offered, 400 shares  x  10,000 shares. 
Suppose further that a 500 share agency market order to sell is entered 
into the MAX System. Under current CHX rules, the order would not be 
automatically executed. The specialist would be required to manually 
execute 400 shares at $20. The remaining 100 shares would have to be 
executed at the next best prevailing price. If $20 were out of range, 
there would also be no automatic execution. If the customer requested a 
stop, then a specialist would stop 400 shares of the order at $20, 
i.e., offer 400 shares at $20\1/16\ and guarantee an execution at no 
worse than $20. The remaining 100 shares would be guaranteed an 
execution (pursuant to the BEST Rule), but not necessarily an execution 
at $20. Under Rule 37(b)(10), as proposed to be amended, if the 
specialist did nothing, after 30 seconds, all 500 shares of the order 
would be stopped. Thus, the customer would be guaranteed an execution 
of no worse than $20 for all 500 shares.
    The Exchange believes that the 30 second delay between the time the 
order is entered and the time that the order is stopped is appropriate. 
The 30 seconds will give the specialist an opportunity to review the 
order to determine whether a stop is appropriate under the 
circumstances.
    The ``pending auto-stop'' feature of the MAX System will operate 
from 8:45 a.m. until 2:57 p.m. Thus, only orders entered into the MAX 
System after 8:45 a.m. but before 2:57 p.m. will be eligible to be 
``pending auto-stop'' orders.
    In addition to adding the new ``pending auto stop'' order to the 
MAX System the CHX is proposing changes to the MAX System that would 
permit a specialist to manually ``stop'' a marketable limit order, 
regardless of size.
2. Statutory Basis
    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 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 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

    Intersted 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 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 
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-98-01 and 
should be submitted by June 2, 1998.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-12558 Filed 5-11-98; 8:45 am]
BILLING CODE 8010-01-M