[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]


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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.
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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 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.
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    \3\ Securities Exchange Act Release No. 41096 (July 13, 1998), 
63 FR 38866 (July 20, 1998).
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    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\
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    \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.

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[[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.
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    \7\ See CHX, Article XX, Rules 28 and 37(a).
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    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.
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    \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.
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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.
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    \10\ 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 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\
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    \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).
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    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\
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    \16\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-31584 Filed 11-25-98; 8:45 am]
BILLING CODE 8010-01-M