[Federal Register Volume 64, Number 7 (Tuesday, January 12, 1999)]
[Notices]
[Pages 1845-1847]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-592]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34- 40868; File No. SR-CHX-98-33]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval of Proposed Rule Change by the Chicago
Stock Exchange, Incorporated Relating to the Trading of Nasdaq/NM
Securities on the CHX
December 31, 1998.
On December 21, 1998 the Chicago Stock Exchange Incorporated
(``CHX'' or ``Exchange'') filed with the Securities and Exchange
Commission (``Commission'' or ``SEC''), pursuant to section 19(b)(1) of
the Securities Exchange Act of 1934 (``Act''),\1\ the proposed rule
change as described in Items I and II 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 and to grant accelerated approval of the
proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
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I. Self-Regulatory Organizations Statement of the Terms of
Substance of the Proposed Rule Change
The Exchange hereby requests a six month extension of the pilot
program relating to the trading of Nasdaq/NM Securities on the Exchange
that is currently due to expire on December 31, 1998. Specifically, the
pilot program amended Article XX, Rule 37 and Article XX, Rule 43 of
the Exchange's Rules and the Exchange proposes that the amendments
remain in effect on a pilot basis through June 30, 1999.
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 III 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
On May 4, 1987, the Commission approved certain Exchange rules and
procedures relating to the trading of Nasdaq/NM securities on the
Exchange.\2\ Among other things, these rules made the Exchange's BEST
Rule guarantee (Article XX, Rule 37(a)) applicable to Nasdaq/NM
securities and made Nasdaq/NM securities eligible for the automatic
execution feature of the Exchange's Midwest Automated Execution System
(``MAX system'').\3\
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\2\ See Securities Exchange Act Release No. 24424 (May 4, 1987),
52 FR 17868 (May 12, 1987) (order approving File No. SR-MSE-87-2).
See also Securities Exchange Act Release Nos. 28146 (June 26, 1990),
55 FR 27917 (July 6, 1990) (order expanding the number of eligible
securities to 100); and 36102 (August 14, 1995), 60 FR 43626 (August
22, 1995) (order expanding the number of eligible securities to
500). The Commission notes that the CHX commented on the July 1998
extension order of the OTC-UTP Plan (Securities Exchange Act Release
No. 40151 (July 1, 1998) 63 FR 36979 (July 8, 1998)) requesting an
expansion of the number of Nasdaq/NM securities eligible to be
traded on an unlisted basis on an exchange, from 500 to 1000,
pursuant to the Plan. See Letter from George T. Simon, Foley &
Lardner, to Robert L.D. Colby, Deputy Director, Division of Market
Regulation (``Division''), SEC, dated November 6, 1998. The CHX
believes that investors are directly benefited from trading Nasdaq/
NM securities on the CHX floor because it provides investors with
auction-based trading, including unified opening transactions, in
Nasdaq/NM securities. In addition, the CHX represents that it has
assigned virtually all of its current allocation of 500 Nasdaq/NM
securities. The Commission solicited comments on the CHX request in
the December 1998 extension order of the OTC-UTP Plan (Securities
Exchange Act Release No. 40869 (December 31, 1998)).
\3\ 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 BEST Rule and certain other orders. See CHX,
Art. XX, Rule 37(b). A MAX order that fits under the BEST parameters
is executed pursuant to the BEST Rule via the MAX system. If an
order is outside the BEST parameters, the BEST Rule does not apply,
but MAX system handling rules do apply.
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On January 3, 1997, the Commission approved,\4\ on a one year pilot
basis, a program that eliminated the requirement that CHX specialists
automatically execute orders in Nasdaq/NM securities when the
specialist is not quoting at the national best bid or best offer
(``NBBO'').\5\ When the Commission approved the program on a pilot
basis, it stated that the arrangement in place for Exchange Specialists
to access over-the-counter (``OTC'') market makers was not an ideal
linkage between the markets on a permanent basis and that the Exchange
should work with Nasdaq to establish a more effective linkage. In
addition, the Commission requested that the Exchange submit a report to
the Commission describing the Exchange's experience with the pilot
program. The Commission stated that the report should include at least
six months worth of trading data. Due to programming issues, the pilot
program was not implemented until April, 1997.
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\4\ See Securities Exchange Act Release No. 38119 (January 3,
1997) 62 FR 1788 (January 13, 1997) (``January 1997 Order'').
\5\ The NBBO is the best bid or offer disseminated pursuant to
Rule 11Ac1-1 under the Act.
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Six months of trading data did not become available until November,
1997. As a result, the Exchange requested an additional three month
extension to collect the data and prepare the report for the
Commission. On December 31, 1997, the Commission extended the pilot
program for an additional three months, until March 31, 1998, to give
the Exchange additional time to prepare and submit the report and to
give the Commission adequate time to review the report prior to
approving the pilot on a permanent basis.\6\ The Exchange submitted the
report to the Commission on January 30, 1998.
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\6\ See Securities Exchange Act Release No. 39512 (December 31,
1997), 63 FR 1517 (January 9, 1998).
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The Exchange, prior to the pilot expiring, requested another three
month extension. On March 31, 1998, the Commission approved the pilot
for an
[[Page 1846]]
additional three month period, until June 30, 1998.\7\ On July 1, 1998
the Commission approved the pilot for an additional six month period,
until December 31, 1998.\8\ The Exchange now requests another extension
of the current pilot program, through June 30, 1999.
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\7\ See Securities Exchange Act Release No. 39823 (March 31,
1998) 63 FR 17246 (April 8, 1998).
\8\ See Securities Exchange Act Release No. 40150 (July 1, 1998)
63 FR 36983 (July 8, 1998).
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Under the pilot program, specialists must continue to accept agency
\9\ market orders or marketable limit orders, but only for orders of
100 to 1000 shares in Nasdaq/NM securities rather than the 2099 share
limit previously in place.\10\ Specialists, however, must accept all
agency limit orders in Nasdaq/NM securities from 100 up to and
including 10,000 shares for placement in the limit order book. As
described below, however, specialists are required to automatically
execute Nasdaq/NM orders only if they are quoting at the NBBO when the
order was received.
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\9\ The term ``agency order'' means an order for the account of
a customer, but shall not include professional orders as defined in
CHX, Article XXX, Rule 2, interpretation and policy .04. The Rule
defines a ``professional order'' as any order for the account of a
broker-dealer, the account of an associated person 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.
\10\ The 100 to 2099 share auto-acceptance threshold previously
in place continues to apply to Dually Listed securities (those
issues that are traded on the CHX and are listed on either the New
York Stock Exchange or the American Stock Exchange).
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The pilot program requires the specialist to set the MAX auto-
execution threshold at 1000 shares or greater for Nasdaq/NM securities.
When a CHX specialist is quoting at the NBBO, orders for a number of
shares less than or equal to the auto-execution threshold set by the
specialist will be automatically executed (in an amount up to the size
of the specialist's quote). Orders in securities quoted with a spread
greater than the minimum variation are executed automatically after a
fifteen second delay from the time the order is entered into MAX. The
size of the specialist's bid or offer is then automatically decremented
by the size of the execution. When the specialist's quote is exhausted,
the system will generate an autoquote at an increment away from the
NBBO, as determined by the specialist from time to time, for either 100
or 1000 shares, depending on the issue.\11\
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\11\ Specifically, the autoquote is currently for one normal
unit of trading (usually 100 shares) in issues that became subject
to mandatory compliance with Rule 11Ac1-4 under the Act on or prior
to February 24, 1997, and for 1000 shares in other issues.
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When the specialist is not quoting a Nasdaq/NM security at the
NBBO, it can elect, on an order-by-order basis, to manually execute
orders in that security. If the specialist does not elect manual
execution, MAX market and marketable limit orders in that security that
are of a size equal to or less than the auto-execution threshold will
automatically be executed at the NBBO after a twenty second delay,
provided that the auto-execution threshold is less than or equal to the
NBBO.\12\ If the specialist elects manual execution, the specialist
must either manually execute the order at the NBBO or a better price or
act as agent for the order in seeking to obtain the best available
price for the order on a marketplace other than the Exchange. If the
specialist decides to act as agent for the order, the pilot program
requires the specialist to use order-routing systems to obtain an
execution where appropriate. Market and marketable limit orders that
are for a number of shares greater than the auto-execution threshold
are not subject to these requirements, and may be canceled within one
minute of being entered into MAX or designated as an open order.
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\12\ The twenty second delay is designed, in part, to provide an
opportunity for the order to receive price improvement from the
specialist's displayed quote.
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2. Statutory Basis
The proposed rule change is consistent with the requirements of the
Act and the rules and regulations thereunder applicable to a national
securities exchange, and, in particular, with the requirements of
section 6(b). In particular, the proposal is consistent with the
requirements of section 6(b)(5) \13\ of the Act which requires that the
rules of an exchange be designed 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 proposal
is also consistent with sections 11A(a)(1)(C) and 11A(a)(1)(D) of the
Act.
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\13\ 15 U.S.C. 78f(b)(5).
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The CHX's proposal to not require automatic execution for Nasdaq/NM
securities when the specialist is not quoting at the NBBO, and to allow
the specialist to execute the order as agent, is intended to conform
CHX specialist obligations to those applicable to OTC market makers in
Nasdaq/NM securities, while recognizing that the CHX provides a
separate, competitive market for Nasdaq/NM securities. The rules
establish execution procedures and guarantees that attempt to provide
an execution reflective of the best quotes among OTC market makers and
specialists in Nasdaq/NM securities without subjecting CHX specialists
to execution guarantees that are substantially greater than those
imposed on their competitors.
a. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose a burden on competition.
b. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
No comments were 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, 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 in the
Commission's Public Reference Room, 450 Fifth Street, NW, Washington,
DC 20549. Copies of such filing also will be available for inspection
and copying at the Exchange. All submissions should refer to file
number SR-CHX-98-33 and should be submitted by February 2, 1999.
IV. Commission's Findings and Order Granting Accelerated Approval
of Proposed Rule Change
The Commission finds that the Exchange's proposal 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, which requires that an Exchange have rules
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, to remove impediments
to and perfect the mechanism of a free and open market and a national
market system, and, in
[[Page 1847]]
general, to protect investors and the public interest, The Commission
also believes that the proposal is consistent with section 11A(a)(1)(C)
and 11A(a)(1)(D) of the Act because the Exchange's proposal conforms
CHX specialist obligations to those applicable to OTC market makers in
Nasdaq/NM securities, while CHX provides a separate, competitive market
for Nasdaq/NM securities.
The Commission notes, however, that while the Exchange has been
working towards establishing a linkage, specialists and OTC market
makers do not yet have an effective method of routing orders to each
other. The Commission expects the Exchange to continue to work towards
establishing a linkage with the Nasdaq systems as requested in the
January 1997 Order.\14\ The Commission is approving the extension of
the pilot so that the rules of the Exchange will operate without
interruption.
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\14\ See January 1997 Order, supra note 4.
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The Commission, therefore, finds good cause for approving the
proposed rule change prior to 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) \15\ of the
Act that the proposed rule change (SR-CHX-98-33) be, and hereby is,
approved through June 30, 1999.
\15\ 15 U.S.C. 78s(b)(2).
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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. 99-592 Filed 1-11-99; 8:45 am]
BILLING CODE 8010-01-M