[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]


-----------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \6\ See Securities Exchange Act Release No. 39512 (December 31, 
1997), 63 FR 1517 (January 9, 1998).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \13\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \14\ See January 1997 Order, supra note 4.
---------------------------------------------------------------------------

    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).
---------------------------------------------------------------------------

    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. 99-592 Filed 1-11-99; 8:45 am]
BILLING CODE 8010-01-M