[Federal Register Volume 63, Number 143 (Monday, July 27, 1998)]
[Notices]
[Pages 40147-40148]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-19986]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40235; File No. SR-CHX-98-09]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change by The Chicago Stock Exchange, Incorporated Amending the 
SuperMax and Enhanced SuperMax Algorithms

July 17, 1998.

I. Background

    On April 20, 1998, noticed is hereby given that on April 20, 1998, 
the Chicago Stock Exchange, Incorporated (``CHX'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission'') the 
proposed rule change pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'').\1\ The proposed rule change was 
published for comment in the Federal Register.\2\ The Commission 
granted accelerated approval to part of the proposal, the new SuperMAX 
algorithm, on a temporary basis until August 20, 1998. No comment 
letters were received. For the reasons discussed below, the Commission 
is approving the proposed rule change on a permanent basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ Securities Exchange Act Release No. 40017 (May 20, 1998), 63 
FR 29277 (May 28, 1998).
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II. Description of the Proposal

    The Exchange proposes to amend its SuperMax and Enhanced SuperMAX 
programs, located in subsections (c) and (e) of Rule 37 of Article XX. 
Specifically, the Exchange is proposing new algorithms to provide 
automated price improvement under SuperMax and Enhanced SuperMAX in \1/
16\th point markets.\3\
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    \3\ Both the SuperMAX and Enhanced SuperMAX programs have been 
approved by the Commission on a permanent basis. See Securities 
Exchange Act Release No. 32631 (July 14, 1993), 58 FR 39069 (July 
21, 1993) (File No. SR-MSE-93-10) (Order approving SuperMax on a 
permanent basis), Securities Exchange Act Release No. 38338 
(February 26, 1997), 62 FR 10102 (March 5, 1997) (File No. SR-CHX-
97-02) (Order approving Exchange SuperMax on a permanent basis).
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    In 1997, virtually every registered national securities exchange 
and national securities association changed their minimum trading 
variation to one sixteenth of a point or smaller. Although the CHX made 
some technical changes to its SuperMax and Enhanced SuperMax programs 
at that time in light of assumptions as to the smallest minimum 
variation that were contained in the text of the SuperMax and Enhanced 
SuperMax rules, the CHX did not change the algorithms to reflect the 
additional price improvement opportunities that are available because 
of trading in sixteenths.\4\ The purpose of the proposed rule change is 
to amend the existing programs to both simplify the price improvement 
algorithms and increase the number of orders that are eligible for 
price improvement due to the smaller minimum trading variation.\5\
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    \4\ See Securities Exchange Act Release No. 38816 (July 3, 
1997), 62 FR 37325 (July 11, 1997) (File No. SR-CHX-97-18).
    \5\ Rather than amending the existing text of the SuperMax and 
Exchange SuperMax rules, the text of the existing rule has been 
deleted and replaced with new language. This was done to permit the 
Exchange to re-write the rule, with non-substantive changes, to 
clarify some language in the old rule that may have been ambiguous.
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    Under the new simplified algorithm for SuperMax, small agency 
market orders \6\ would now be eligible for price improvement if the 
market for the security is quoted with a spread of \1/8\ of a point or 
greater (rather than the \1/4\ point spread that is required under the 
existing rule). In addition, the double-up/double-down concept has been 
eliminated. The simplified algorithm will now provide \1/16\th of a 
point price improvement from the Intermarket Trading System (``ITS'') 
best bid or offer (``BBO'') if an execution at the ITS BBO would be at 
least \1/8\th point higher than (for a buy order) or lower than (for a 
sell order) the last primary market sale. Basically price improvement 
is given under certain circumstances when the security is trading 
between the spread. All other aspects of the existing algorithm, 
including operating time, timing of execution, applicability to odd-
lots, and out of range situations, remain the same.
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    \6\ Under the proposal, small agency market orders for SuperMax 
would be orders from 100 shares to 499 shares (or a greater amount 
chosen by the specialist).
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    With respect to Enhanced SuperMax, the Exchange proposes to make 
this program an add-on feature for securities for which the SuperMax 
program has already been activated, rather than a stand-alone program. 
As stated in the Exchange's Report on the operation of the Enhanced 
SuperMax program that was provided to the Commission in advance of the 
Commission's permanent approval of Enhanced SuperMax program, taken as 
a whole, the existing SuperMax program provides more price improvement 
than the existing Enhanced SuperMax program. The Exchange believes that 
interconnecting the two programs will encourage more specialists to 
enable the SuperMax program, with greater resulting price improvement, 
since the Enhanced SuperMax program will only be available when 
SuperMax is enable.

[[Page 40148]]

Currently, some specialists have only turned on the Exchange Super Max 
program without enabling the SuperMax program.
    Under the new simplified algorithm for Enhanced SuperMax, small 
agency market orders \7\ would be eligible for price improvement if the 
market for the security is quoted with a spread of \3/16\ of a point 
(rather than the \1/4\ point spread that is required under the existing 
rule). In addition, the double-up/double down concept currently in 
place to determine whether an order is stopped has been eliminated. The 
simplified algorithm will now ``stop'' an eligible order at the ITS BBO 
if an execution at the ITS BBO would be at least \1/8\ point higher 
than (for a buy order) or lower than (for a sell order) the last 
primary market sale. (This stopping algorithm is identical to the new 
algorithm above for SuperMax.) Once stopped, an order would receive \1/
16\ price improvement over the stopped price if the next primary market 
sale occurs before the end of the Time Out Period and the sale is at 
least \1/8\ of a point lower than (for a buy order) or higher than (for 
a sell order) the stopped price. As is the case for SuperMax, all other 
aspects of the existing algorithm, including operating time, timing of 
execution, applicability to odd-lots, and out of range situations, 
remain the same.
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    \7\ Under the proposal, small agency market orders for Enhanced 
SuperMax would be orders from 500 shares to 2099 shares (or a 
greater amount chosen by the specialist). Notwithstanding the 500 
share minimum order size contained in the rule, the smallest size 
order eligible for Enhanced SuperMax must always be at least one 
share greater than the largest size order in such security that is 
eligible for SuperMax. In other words, if a specialist voluntarily 
increases the maximum order size for SuperMax, the minimum order 
size for Enhanced SuperMax must be increased accordingly.
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III. Discussion

    The Commission finds that the proposed rule change 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 \8\ which requires that the rules of an 
exchange be designed, among other things, to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in regulating, clearing, settling, processing 
information with respect to, and facilitating transactions in 
securities, 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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    On May 22, 1995, the Commission approved a proposed rule change of 
the CHX that allows specialists on the Exchange, through the Exchange's 
MAX system, to provide order execution guarantees that are more 
favorable than those required under CHX Rule 37(a), Article XX.\9\ That 
approval order contemplated that the CHX would file with the Commission 
specific modifications to the parameters of MAX that are required to 
implement various options available under this new rule.
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    \9\ See Securities Exchange Act Release No. 35753 (May 22, 
1995), 60 FR 28007 (May 26, 1995) (File No. SR-CHX-95-08).
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    The Commission believes, in light of the industry's move to trading 
in finer increments last year, that CHX's modification to price 
improvement algorithms will provide investors a meaningful opportunity 
for price improvement when securities trading in \1/16\'s have a spread 
of \1/8\ point or greater. In addition, the Commission finds that the 
new SuperMAX and Enhanced SuperMAX rules provide greater price 
improvement opportunities for investors because the criteria for when 
such opportunities are available has been simplified.\10\ The 
Commission believes that, because the opportunity for price improvement 
is automatic and without any specialist intervention, SuperMAX and 
Enhanced SuperMAX facilitate order interaction and enhance customer 
orders consistent with Section 6(b)(5) of the Act. The Commission notes 
that while SuperMAX and Enhanced SuperMAX are voluntary programs that 
specialists choose to participate in for Dual Trading System 
issues,\11\ providing a greater number of investors an opportunity to 
achieve price improvement is compatible with the views on best 
execution expressed in the Order Handling release.\12\
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    \10\ The Exchange has compared the proposed changes to SuperMax 
with the existing SuperMax algorithm and believes that the new 
algorithm will provide price improvement to a greater number of 
trades. using data for January 1998, the Exchange determined that 
the proposed changes to the algorithm would have resulted in over 
32,000 trades receiving price improvement (for a total savings of 
$329,000 to customers), as opposed to the 5800 trades that received 
price improvement (for a total savings of $126,000 to customers) 
under the existing SuperMax program. This means that the changes to 
SuperMax would have resulted in customers receiving $203,000 
additional dollars of price improvement over the Exchange's existing 
SuperMax algorithm.
    \11\ Dual Trading issues are issues 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 the American Stock Exchange.
    \12\ See Securities Exchange Act Release No. 37619A (September 
6, 1996), 61 FR 48290 (September 12, 1996).
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IV. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change, SR-CHX-98-09, is consistent with the Act and the rules and 
regulations thereunder applicable to a national securities exchange. In 
addition, in approving this rule, the Commission notes that it has also 
considered the proposed rule's impact on efficiency, competition, and 
capital formation.
    It is therefore ordered, pursuant to Section 19(b)(2), of the 
Act,\13\ that the proposed rule change be, and hereby is, approved.
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    \13\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 98-19986 Filed 7-24-98; 8:45 am]
BILLING CODE 8010-01-M