[Federal Register Volume 63, Number 131 (Thursday, July 9, 1998)]
[Notices]
[Pages 37157-37159]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-18149]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40144; File No. SR-CHX-98-17]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of a Proposed Rule Change by the Chicago 
Stock Exchange, Inc., to Extend the Exchange's Clearing the Post Policy 
for Cabinet Securities

June 30, 1998.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on June 18, 1998, the Chicago Stock Exchange, Inc. (``CHX'' or the 
``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 CHX. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons and to grant accelerated 
approval to the proposal.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange proposes to extend the current pilot program that 
amends interpretation and policy .02 of CHX Rule 10 of Article XX and 
amends CHX Rule 11 of Article XX relating to clearing the post for 
cabinet securities on an interim basis until December 6, 1998, or until 
the Commission approves SR-CHX-98-13,\3\ whichever occurs first. The 
initial six-month pilot program was approved by the Commission on 
January 6, 1998, and expires on July 6, 1998.\4\ The text of the 
proposed rule change is as follows:
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    \3\ Proposed rule change SR-CHX-98-13, which was filed with the 
Commission on June 10, 1998, (i) requests permanent approval of the 
policy that permits market makers to clear the cabinet post by 
phone, and (ii) proposes to expand this policy to include all 
securities traded on the trading floor.
    \4\ Securities Exchange Act Release No. 39519 (January 6, 1998), 
63 FR 1985 (January 13, 1998).
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    Additions are italicized; deletions are bracketed.

ARTICLE XX

    Rule 10. Manner of Bidding and Offering.
    No change in text.
. . . Interpretations and Policies
    .02  Clearing the Post.
    Policy. All orders received by floor brokers or originated by 
market makers on the floor of the Exchange must effectively clear the 
post before the orders may be routed to another market, either via the 
ITS System or through the use of alternative means.
    Floor brokers who receive an order on the floor have a fiduciary 
responsibility to seek a best price execution for such order. This 
responsibility includes clearing of the Exchange's post prior to 
routing an order to another market so that other buying and selling 
interest at the post can be checked for a potential execution that may 
be as good as or better than the execution available in another market.
    Market makers are required to provide depth and liquidity to the 
Exchange market, among other things. Exchange Rules require that all 
market maker transactions constitute a course of dealings reasonably 
calculated to contribute to the maintenance of a fair and orderly 
market. In so doing, market makers must adhere to traditional agency/
auction market principles on the floor. Transactions by Exchange market 
makers on other exchanges which fail to clear the Exchange post do not 
constitute such a course of dealings.
    Notwithstanding the above, it is understood that on occasion a 
customer will insist on special handling for a particular order that 
would preclude it from clearing the post on the Exchange floor. For 
example, a customer might request that a specific order be given a 
primary market execution. These situations must be documented and 
reported to the Exchange. Customer directives for special handling of 
all orders in a particular stock or all stocks, however, will not be 
considered as exceptions to the clearing the post policy.
    All executions resulting from bids and offers reflected on Instinet 
terminals resident on the Exchange floor constitute ``orders'' which 
are ``communicated'' to the Exchange floor. Therefore, all orders 
resulting from interest reflected on Instinet terminals

[[Page 37158]]

on the Exchange floor must be handled as any other order communicated 
to the floor. All such orders must be presented to the post during 
normal trading hours. All trades between Instinet and Exchange floor 
members are Exchange trades and must be executed on the Exchange.
    Method of Clearing the Post. Subject to Article XX, Rule 11 
relating to cabinet securities. [T]the Exchange's clearing the post 
policy requires the floor broker or market maker to be physically 
present at the post. A market maker, after requesting the specialist's 
market quote, must bid or offer the price and size of his intended 
interest at the post. A floor broker must clear the post by requesting 
a market quote from the specialist. If the specialist or any other 
member who has the post indicates an interest to trade at the price 
that was bid or offered by the market maker or the price of the floor 
broker's order (even though that order has not yet been bid or 
offered), then the trade may be consummated with the specialist (or 
whomever has the post) in accordance with existing Exchange priority, 
parity and precedence rules. If the specialist (or any other member who 
has the post) indicates interest to trade at that price but the member 
communicating the intended interest, including Instinet interest, 
determines not to consummate the trade with the specialist or such 
member, then, to preserve the Exchange's existing priority, parity and 
precedence rules, the trade may not be done with any other Exchange 
floor member. (See Article XXX, Rule 2). If the trade is consummated 
with the specialist or other member who has the post, the specialist 
(or any customer represented by the specialist) is not required to pay 
any fees to the broker or market maker in connection with the execution 
of the order, unless such fee is expressly authorized by an Exchange 
Rule. If the specialist does not indicate an interest to trade, then 
the trade may be consummated with another Exchange floor member on the 
Exchange floor with a resultant Exchange print.
    Failure to clear the post may result in a `'trade-through'' or 
``trading ahead'' of other floor interest. In addition, failure to 
properly clear the post may result in a violation of the Exchange's 
Just and Equitable Trade Principles Rule (Article VIII, Rule 7) and a 
market maker rule that requires all market maker transactions to 
constitute a course of dealing reasonably calculated to contribute to 
the maintenance of a fair and orderly market (Article XXXIV, Rule 1). 
Failure to properly clear the post may also subject the violator to a 
minor rule violation under the Exchange's Minor Rule Violation Plan.
    Rule 11. Cabinet Securities
    Stocks having no designated specialist unit of trading shall be 
assigned for dealings by use of cabinets and shall be dealt in at a 
location designated for that purpose.
    The Exchange may also designate bonds which are to be dealt in by 
use of cabinets.
    Bids and offers in securities dealt in by use of cabinets shall be 
written on cards, which shall be filed in the cabinets in the following 
sequence:
    1. According to price, and
    2. According to the time received at the cabinet.
    Orders in such securities shall be filed according to the bids and 
offers filed in the cabinets, in the sequence indicated above, except 
that oral bids and offers in such securities may be made if not in 
conflict with bids and offers in the cabinets. Oral bids and offers may 
be made by clearing the cabinet post by phone provided that such bids 
and offers are audibly announced at the cabinet post through a speaker 
system maintained by the Exchange.
    Every card placed in the cabinets shall bear a definite price and 
number of shares and no mark or identification shall be placed thereon 
to indicate it is other than a limited order at the price.

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 CHX 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 III below. The CHX 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
    The purpose of the proposed rule change is to extend the Exchange's 
existing pilot program that permits market makers and floor brokers to 
clear the cabinet post by phone until the earlier of the two following 
occurrences; (i) December 6, 1998, or (ii) the Commission's approval of 
SR-CHX-98-13, whichever occurs first. The initial six-month pilot 
program was approved by the Commission on January 6, 1998 and is 
scheduled to expire on July 6, 1998.\5\ In approving the original pilot 
program, the Commission requested that the Exchange file a report 
describing its experience with the program. On June 5, 1998, the 
Exchange filed such a report with the Commission. The purpose of this 
proposed rule change is to permit the current pilot to continue without 
interruption while the Commission considers the Exchange's proposal to 
expand the policy on a permanent basis to all securities traded on the 
Exchange.
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    \5\ Id.
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    In general, the clearing the post policy requires a floor broker or 
market maker to clear the post by his or her physical presence at the 
post. The purpose of this proposed rule change is to permit a floor 
broker or market maker to clear the post in cabinet securities by 
phone. The bids and offers made to clear the post by phone will be 
audibly announced at the cabinet post through a speaker system 
maintained by the Exchange.
2. Statutory Basis
    The proposed rule change is consistent with Section 6(b)(5) of the 
Act \6\ in that it is designed to prevent fraudulent and manipulative 
acts and practices and to perfect the mechanism of a free and open 
market.
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    \6\ 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. 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 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

[[Page 37159]]

those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. Sec. 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-98-17 and should be submitted by July 30, 1998.

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

    After careful review, the Commission finds that the proposed rule 
change is consistent with the Act and the rules and regulations under 
the Act applicable to a national securities exchange. In particular, 
the proposal is consistent with Section 6(b)(5) of the Act \7\ in that 
it is designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, and to 
remove impediments to and perfect the mechanism of a free and open 
market. The Commission believes that allowing floor brokers or market 
makers to clear the post for cabinet securities while remaining at 
their respective posts will ensure that these floor brokers or market 
makers will be at their posts when they need to respond to orders in 
more liquid securities at a much faster pace.
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    \7\ Id.
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    The Commission finds good cause for approving the proposed rule 
change prior to the thirtieth day after the date of publication of 
notice of the proposal in the Federal Register because the extension 
will permit the current pilot to continue without interruption while 
the Commission considers the Exchange's proposal to expand the policy 
on a permanent basis to all securities traded on the Exchange. The 
extension is only for five months (or until the Commission approves SR-
CHX-98-13, if it decides to do so, whichever occurs first), and will 
merely preserve the status quo. Moreover, the original pilot was 
noticed for the full 21-day comment period and the Commission received 
no comments on the proposal.\8\ The Commission's approval of the 
proposal to extend the pilot for five months has no bearing on, and 
should not be interpreted to suggest that the Commission ultimately 
will approve SR-CHX-98-13.
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    \8\ See Securities Exchange Act Release No. 39519, n.4 above.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\9\ that the proposed rule change (File No. SR-CHX-98-17) be, and 
hereby is, approved on an accelerated basis through December 6, 1998, 
or until the Commission approves SR-CHX-98-13, whichever occurs first.

    \9\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-18149 Filed 7-8-98; 8:45 am]
BILLING CODE 8010-01-M