[Federal Register Volume 63, Number 228 (Friday, November 27, 1998)]
[Notices]
[Pages 65623-65625]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-31584]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40687; File No. SR-CHX-98-21]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Partial Accelerated Approval of Proposed Rule Change by the
Chicago Stock Exchange, Inc. Relating to the Automatic Stopping of
Market Orders
November 18, 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 August 31, 1998, the Chicago Stock Exchange, Inc. (``CHX'' or
``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 Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons and to grant partial
accelerated approval of the proposed rule change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
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 Exchange's ``pending auto stop'' program that automatically stops
market orders under certain circumstances. The text of the proposed
rule change is available at the Office of the Secretary, the CHX, and
at the Commission.
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 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 Exchange 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 July 13, 1998, the Commission approved a rule change that: (i)
Automates the stopping of certain market orders, and (ii) permits
specialists to manually stop marketable limit orders received through
the Midwest Automated Execution System (``MAX System'').\3\ This
program for automated stopping of market orders is known as the
``pending auto stop'' program.
---------------------------------------------------------------------------
\3\ Securities Exchange Act Release No. 41096 (July 13, 1998),
63 FR 38866 (July 20, 1998).
---------------------------------------------------------------------------
Under the pending auto stop program, all MAX System market orders
that are between 100 and 599 shares (or a higher amount chosen by a
specialist on a stock by stock basis) and that are not automatically
executed in the normal course of operations (i.e., because there is
insufficient size associated with the Intermarket Trading System
(``ITS'') best bid or offer (``BBO''), because the order would result
in an out of range execution,\4\ or because the order is a professional
order\5\ and the specialist has not yet decided whether to accept the
order, etc.) are identified as ``pending auto stop'' orders.\6\
---------------------------------------------------------------------------
\4\ An out of range execution is an execution that results in a
new high or a new low for the day.
\5\ The term ``professional order'' is defined 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. See CHX, Art. XXX, Rule 2, interpretation and
policy .04. The term ``agency order'' means an order for the account
of a customer, but does not include professional orders.
\6\ Both agency and professional orders are currently eligible
for the ``pending auto-stop'' feature of MAX; however, all or none
orders, odd-lot orders, fill or kill orders, immediate or cancel
orders, orders that are 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.
---------------------------------------------------------------------------
[[Page 65624]]
These orders retain their ``pending auto-stop'' status for 30
seconds. At the end of this 30 second period, the MAX System
automatically stops the order and sends a ``UR Stopped'' message to the
firm that sent the order, unless, before the end of the 30 second
period, the specialist manually executes, cancels or stops the entire
order or the specialist puts the order ``on hold.'' If any of these
events occurs, the ``pending auto-stop'' status is removed from the
order and the order is not automatically stopped. If an order is ``put
on hold,'' the CHX's existing rules for order handling apply.\7\ If the
order is automatically stopped, the stop price currently is the ITS BBO
at the time the order is received in the MAX System. Furthermore, if
the order is automatically stopped, the entire order is stopped. The
``pending auto-stop'' feature of the MAX System currently operates from
8:45 a.m. until 2:57 p.m.
---------------------------------------------------------------------------
\7\ See CHX, Article XX, Rules 28 and 37(a).
---------------------------------------------------------------------------
Although the Exchange has only limited experience operating under
the pending auto stop program, the Exchange believes that it is
appropriate to amend certain aspects of the program. In general, the
proposed rule change limits the operation of the program under certain
circumstances. The proposed rule change would: (1) Eliminate securities
trading at or above $100 at the time the order is received from being
eligible for the program; (2) change the hours of the program so that
it will operate from 9 a.m. until 2:30 p.m., Central Time; (3)
eliminate professional orders from being eligible for the program; and
(4) change the stop price from the ITS BBO to the primary market price
when the size associated with the relevant side of the ITS BBO is 100
shares.
The Exchange believes that it is appropriate to limit the operation
of the pending auto stop program to a typical trading environment. Each
of the above cases involve unique situations. In addition, under the
current program, specialists have the ability to manually override the
pending auto stop feature. The Exchange believes limiting the pending
auto stop program to a typical trading environment alleviates the
burden placed on the specialist to continuously monitor orders in the
above cases, and if necessary, place the orders on ``hold.'' Each of
the proposed changes is discussed in turn.
a. Securities Trading at or Above $100
The Exchange proposes to exclude securities trading at or above
$100 at the time the order is received from the pending auto stop
program. The CHX states that highly priced securities trade in a manner
and in an environment that is different from other lower priced
securities. In addition, these securities are geared more toward the
institutional market and often are traded with wider spreads, among
other things, making them inappropriate for a program that
automatically stops the order.
b. Change in Hours of Operation of the Program
Currently, the pending auto stop program operates from 8:45 a.m. to
2:57 p.m., Central Time. As proposed, the pending auto stop program
would operate from 9 a.m. to 2:30 p.m., Central Time. The Exchange
believes that the periods surrounding the opening and closing are both
the most busy and, often, the most volatile periods of the day that
require the most amount of specialist attention and action. Having an
automatic program that requires the specialist to review these orders
and, if necessary, put orders on hold, within 30 seconds during this
time period puts undue strain on the specialist's resources by
diverting the specialist from his or her core job function of
maintaining a fair and orderly market at a time when this function is
most critical.
c. Professional Orders
The vast majority of orders received on the Exchange floor through
the MAX system are retail sized agency orders.\8\ Giving these customer
orders executions that are quicker and better than other market centers
is an important priority for the Exchange. The pending auto stop
program is targeted specifically at these types of orders. Although
trading conditions change throughout the day, the Exchange believes
that implementing the pending auto stop program in a manner that
requires the least amount of specialist intervention will result in the
greatest use of the program and, as a result, the greatest benefit to
customers. If specialists believe that the program is sufficiently
limited to those orders for which the pending auto stop program is most
appropriate, they will be less likely to put orders on hold to evaluate
and examine the orders in more detail. Given this philosophy, the
Exchange believes that it is appropriate to remove professional orders
from the program. Professional orders are not subject to the Exchange's
Article XX, Rule 37(a) (``BEST Rule''),\9\ or any similar guarantee, if
stopped. The Exchange no longer believes that it is appropriate, at
this time, to give these orders a better guarantee merely because they
are stopped under the pending auto stop program.
---------------------------------------------------------------------------
\8\ The term ``agency order'' means an order for the account of
a customer, but does not include professional orders defined in CHX,
Art. XXX, Rule 2, interpretation and policy .04.
\9\ Under the Exchange's BEST Rule, Exchange specialists are
required to guarantee executions of all agency market and limit
orders for Dual Trading Systems issues (issues traded on the CHX,
through listing on the CHX or unlisted trading privileges and also
listed on either the New York Stock Exchange or the American Stock
Exchange) from 100 shares up to and including 2099 shares.
---------------------------------------------------------------------------
d. Use of Primary Market as Stopped Price
Currently, when an order is stopped under the pending auto stop
program, the order is stopped at the relevant side of the ITS BBO in
existence at the time the order is first received. Under the existing
pending auto stop program, an entire order is stopped regardless of the
size associated with the ITS BBO. Thus, a 599 share order that is
eligible for the pending auto stop program is stopped for 599 shares,
even if the ITS BBO is only for 100 or 200 shares. As stated above,
this results in better guarantees for the order than are required under
the BEST Rule.
The Exchange proposes to change the stop price for an order under
the pending auto stop program from the ITS BBO to the primary market
quote when the size associated with the relevant side of the ITS BBO is
100 shares. In all other cases, the stop price will remain the ITS BBO.
Because the guarantee under the pending auto stop program does not
depend on the size of the ITS BBO, the Exchange believes that it is
appropriate to exclude 100 share markets for purposes of determining
the stop price. In most instances, 100 share markets are not an
appropriate indicator of where to stop orders under the pending auto
stop program, especially when the execution guarantee is for the full
size of the order, notwithstanding the 100 share market being
displayed. Thus, in instances where the size of the ITS BBO is 100
shares, the Exchange believes that the most appropriate indicator of
the price at which to stop the entire order is the primary market bid
and offer.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with section 6(b)(5) of the Act \10\ in that it is designed to promote
just and equitable principles of trade, to remove impediments to and to
perfect the
[[Page 65625]]
mechanism of a free and open market and a national market system, and,
in general, to protect investors and the public interest.
---------------------------------------------------------------------------
\10\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
(B) Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition.
(C) Self-Regulatory Organization's Statement on Comments on the
Proposed Rule Change Received from Members, Participants or Others
The Exchange has neither solicited nor received written comments on
the proposed rule change.
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 Exchange consents, the Commission will:
(A) By order approve such 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 foregoing is
consistent with the Act. Persons making written submissions should file
six copies thereof with the Secretary, Securities and Exchange
Commission, 450 Fifth Street, NW, Washington, DC 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 CHX. All
submissions should refer to File No. SR-CHX-98-21 and should be
submitted by [insert date 21 days from the date of publication].
V. Commission's Findings and Order Granting Partial Accelerated
Approval of the Proposed Rule Change
After careful review, the Commission finds that the proposed rule
change, as it pertains to: (1) Excluding securities at or above $100 at
the time of the trade from the pending auto program; (2) changing the
time of operation of the pending auto stop program; and (3) excluding
professional orders from the pending auto stop program, is consistent
with the requirements of the Act.\11\ and the rules and regulations
thereunder applicable to a national securities exchange.\12\ In
particular, the Commission believes that these three aspects of the
proposed rule change are consistent with section 6(b)(5) of the Act
\13\ requiring that the rules of an exchange be designated to promote
just and equitable principles of trade, to prevent fraudulent and
manipulative acts, and, in general, to protect investors and the public
interest. The Commission believes that approving a portion of the
proposed rule change should streamline the operation of the pending
auto stop program and increase the efficiency and productivity of
specialists operating within the program. The Commission believes it is
appropriate to exclude securities that are at or above $100 at the time
of the trade from the program because of the CHX's representation that
such securities tend to trade in an environment different from lower
priced securities. Higher priced securities are generally traded by
institutional investors with wider spreads. According to the Exchange,
wider spreads may deplete a stock's liquidity and require a specialist
to risk larger amounts of capital. The Exchange represents that these
factors could divert specialist attention away from smaller public
customer orders, defeating a primary goal of the pending auto program.
Thus, the Commission believes that excluding securities that are at or
above $100 at the time of trade should streamline the program and
enhance efficiency.\14\
---------------------------------------------------------------------------
\11\ In approving this rule change, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. 15 U.S.C. 78c(f).
\12\ The portion of the proposed rule change relating to the use
of the primary market as the stopped price will be subject to the
full notice and comment period described in Item IV.
\13\ Id.
\14\ The Exchange represents that very few of the securities in
the pending auto stop program are at or above $100 at the time of
trade. Telephone conversation between David Rusoff, Counsel, Foley &
Lardner, and Marc McKayle, Attorney, Division of Market Regulation,
Commission (October 30, 1998).
---------------------------------------------------------------------------
The Commission also believes that changing the hours of operation
for the pending auto stop program from 8:45 a.m. to 2:57 p.m. to 9 a.m.
to 2:30 p.m. should allow specialists to focus on their primary duties
at the opening and closing of the business day when trading is often
most busy and most volatile. The Commission believes that changing the
pending auto stop program's hours of operation to alleviate the
specialists' duties during the increased activity often associated with
the opening and closing of the business day should contribute to the
maintenance of a fair and orderly market.
The Commission also believes that eliminating professional orders
from the pending auto stop program should benefit the individual and
retail investors who are the focus of the program. Professional orders
are not subject to the BEST Rule, and have a direct or indirect broker-
dealer interest. The Commission believes that the exclusion of
professional orders should appropriately streamline the program and
help maintain a focus on agency orders which are subject to the BEST
Rule. Thus, the Commission believes that eliminating professional
orders from the program should enhance the Exchange's ability to meet
its stated goal of achieving superior customer executions. Accordingly,
the Commission finds good cause for partially approving the proposed
rule change 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) of the
Act,\15\ that the proposed rule change (SR-CHX-98-21) as it pertains
to: (1) Excluding securities at or above $100 at the time of the trade
from the pending auto program; (2) changing the time of operation of
the pending auto stop program; and (3) excluding professional orders
from the pending auto stop program is hereby approved on a accelerated
basis.
\15\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\16\
---------------------------------------------------------------------------
\16\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-31584 Filed 11-25-98; 8:45 am]
BILLING CODE 8010-01-M