[Federal Register Volume 64, Number 116 (Thursday, June 17, 1999)]
[Notices]
[Pages 32570-32572]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-15350]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41480; File No. SR-CHX-99-04]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by the Chicago 
Stock Exchange, Inc., To Add a New Price Improvement Algorithm, 
SuperMax Plus

June 4, 1999.
    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 May 10, 1999, the Chicago Stock Exchange, Inc. (``CHX'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I and II 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 accelerated 
approval to 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 add a new price improvement algorithm, 
SuperMax Plus, to Rule 37 of Article XX of the Exchange's rules. The 
text of the proposed rule change is available at the Office of the 
Secretary, 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 III 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 May 22, 1995, the Commission approved a proposed rule change of 
the

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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.\3\ 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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    \3\ 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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    SuperMax and Enhanced SuperMax are two existing CHX programs within 
the MAX System that use computerized algorithms to provide automated 
price improvement. Both of these programs have been approved by the 
Commission on a permanent basis.\4\ The CHX now proposes to add a new 
program, SuperMax Plus, as a third program within the MAX System. The 
Exchange believes that it is important to remain competitive in an ever 
increasing technologically advanced marketplace. In order to do so, the 
Exchange is proposing SuperMax Plus, a new, more aggressive price 
improvement algorithm that increases the likelihood that small 
investors will receive price improvement for their orders.\5\
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    \4\ See Securities Exchange Act Release Nos. 40017 (May 20, 
1998), 63 FR 29277 (May 28, 1998) (File No. SR-CHX-98-09) and 40235 
(July 17, 1998), 63 FR 40147 (July 27, 1998) (File No. SR-CHX-98-09) 
(approving revised SuperMax and Enhanced SuperMax algorithms).
    \5\ While the Exchange is also proposing conforming changes to 
the existing MAX rules to accommodate the new program, no 
substantive changes are being made to SuperMax and Enhanced 
SuperMax, the existing price improvement algorithms, at this time.
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Background

    The existing SuperMax program is a voluntary program in which a 
specialist may choose to participate. Participation is on a security-
by-security basis and is currently limited to Dual Trading System 
issues (i.e., issues traded on both the CHX and either the New York 
Stock Exchange or American Stock Exchange). A specialist can only 
activate and de-activate the program with respect to a given security 
once a month.
    Under the current SuperMax algorithm, small agency market orders 
(i.e., orders from 100 shares to 499 shares (or a greater amount chosen 
by the specialist)) are eligible for price improvement if the market 
for the security is quoted with a spread of \1/8\ of a point or 
greater. Specifically, the current algorithm provides \1/16\th of a 
point price improvement from the ITS BBO \6\ (the ITS best offer for a 
buy order, and the ITS best bid for a sell order) if an execution at 
the ITS BBO would be at least \1/8\th of a point higher than (for a buy 
order) or lower than (for a sell order) the last primary market sale.
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    \6\ As used in the CHX rules, ITS BBO means the best bid or 
offer among the American, Boston, Cincinnati, Chicago, New York, 
Pacific, and Philadelphia exchanges or the Intermarket Trading 
System/Computer Assisted Execution System quote. See CHX Art. XX, 
Rule 37(a)(2).
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    The Enhanced SuperMax program is an add-on feature for securities 
for which the Exchange's SuperMax program has already been activated. 
Thus, the Enhanced SuperMax program is only available when SuperMax is 
already enabled for that security.
    Under the Enhanced SuperMax algorithm, small agency market orders 
(i.e., orders for 500 to 2099 shares (or a greater amount chosen by the 
specialist)) \7\ are eligible for price improvement if the market for 
the security is quoted with a spread of \3/16\th of a point. 
Specifically, the algorithm ``stops'' an eligible order at the ITS BBO 
if the execution at the ITS BBO would be at least \1/8\th of a point 
higher than (for a buy order) or lower than (for a sell order) the last 
primary market sale. Enhanced SuperMax flags an order stopped under 
this program with a ``U.'' Once stopped, the order receives \1/16\th of 
a point 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\th of a point lower than (for a buy order) or higher 
than (for a sell order) the stopped price.
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    \7\ 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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Proposal

    As stated above, the Exchange proposes to create a new price 
improvement algorithm, to be called SuperMax Plus. SuperMax Plus will 
become part of the existing voluntary price improvement programs in 
which specialists may choose to participate. Participation will 
continue to be on a security-by-security basis and will be limited to 
Dual Trading System issues. A specialist will only be able to activate 
and de-activate the program with respect to a given security once a 
month. The existing SuperMax and Enhanced SuperMax algorithms will then 
both become add-on features for securities for which the Exchange's new 
SuperMax Plus program has already been activated. Thus, the existing 
SuperMax and Enhanced SuperMax programs will only be available when 
SuperMax Plus is activated for a particular security.
    Under the new proposed SuperMax Plus algorithm, small agency market 
orders (i.e., orders from 100 shares to 199 shares--or a greater amount 
chosen by the specialist and approved by the Exchange) would be 
eligible for price improvement if the market for the security is quoted 
with a spread of \1/8\th of a point or greater. The new algorithm would 
provide \1/16\th of a point higher than (for a buy order) or lower than 
(for a sell order) the last primary market sale.\8\
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    \8\ This provides better price improvement than under the 
current SuperMax algorithm where \1/16\th of a point price 
improvement is provided if an ITS BBO execution would be at least 
\1/8\th of a point away from the last sale.
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    The Exchange further proposes revising the existing SuperMax 
algorithm so that it applies to orders between 200 and 499 shares.\9\ 
The existing Enhanced SuperMax algorithm will not change.
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    \9\ Notwithstanding the 200 share minimum order size contained 
in the new proposed rule for SuperMax, the smallest size order 
eligible for SuperMax must always be at least one share greater than 
the earliest size order in such security that is eligible for 
SuperMax Plus. In other words, if a specialist voluntarily increases 
the maximum order size for SuperMax Plus, the minimum order size for 
SuperMax must be increased accordingly.
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    As proposed, specialists that choose to engage one or more price 
improvement algorithms will have to engage the SuperMax Plus for at 
least up to 199 shares. In addition, once a specialist engages SuperMax 
Plus for 199 shares, the specialist must either engage SuperMax for 
orders between 199 shares and 500 \10\ shares or increase the maximum 
size order that is eligible for SuperMax Plus to 499 shares. This 
proposed requirement will ensure that once a specialist decides to 
offer automated price improvement, one or more price improvement 
algorithms will be available for orders of up to at least 499 shares.
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    \10\ The original filing reflected 499 shares but was changed to 
500 as per conversation between Paul O'Kelly, Executive Vice 
President, Legal/Market Regulation, CHX and Heather Traeger, 
Attorney, Division of Market Regulation, SEC, on June 4, 1999.
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    Finally, the proposed rule change deletes a reference contained in 
the Enhanced SuperMax rules to orders for 200 shares or less entered by 
the Odd-Lot Execution Service because Enhanced SuperMax is not eligible 
for orders that are less than 500 shares.

Timing of Effectiveness of System Changes

    The Exchange expects that the addition of SuperMax Plus and the

[[Page 32572]]

corresponding changes to the other price improvement algorithms will 
become operative immediately upon approval of this proposed rule change 
by the Commission; the Exchange expects to implement this change June 
15, 1999.\11\
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    \11\ Conversation between David Rusoff, Foley & Lardner and 
Mandy Cohen, Senior Counsel, Division of Market Regulation, SEC on 
May 28, 1999.
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2. Statutory Basis
    The proposed rule change is consistent with Section 6(b)(5) \12\ of 
the Act in that is it designed 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 general, to 
protect investors and the public interest. The Exchange believes that 
the proposed rule change accomplishes these ends by increasing the 
number of trades that will receive automated price improvement.
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    \12\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange represents that the proposed rule change will impose 
no burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received from Members, Participants or Others

    No written comments were solicited or received with respect to the 
proposed rule change.

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 20549-0609. 
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 coping at the principal office of the 
Exchange. All submissions should refer to File No. SR-CHX-99-04 and be 
submitted by July 8, 1999.

IV. Commission's Findings and Order Granting Accelerated Approval 
of Proposed Rule Change

    The CHX requests accelerated approval of the proposed rule change. 
The Commission has reveiwed the CHX's proposed rule change and finds, 
for the reasons set forth below, that the proposal is consistent with 
the requirements of Section 6 of the Act \13\ and the rules and 
regulations thereunder applicable to a national securities exchange. 
Specifically, the Commission believes the proposal is consistent with 
Section 6(b)(5) of the Act,\14\ which requires that the rules of an 
Exchange be designed 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 trisections in securities, to remove impediments to 
and perfect the mechanism of a free and open market and a national 
market system, and, in general, to protect investors and the public 
interest.\15\ The Commission believes the new price in improvement 
contemplated by the new SuperMax Plus will provide investors with 
enhanced investment opportunities because price improvement from the 
ITS BBO will be available if an execution at the ITS BBO would be at 
least \1/16\th of a point higher than (for a buy order) or lower than 
(for a sell order) the last primary market sale, instead of the \1/8\th 
requirement under SuperMax and Enhanced SuperMax. The Commission notes 
that while SuperMax Plus is a voluntary program that specialists choose 
to participate in for Dual Trading System issues, providing a greater 
number of investors an opportunity to achieve price improvement is 
compatible with the views expressed in the Order Handling release.\16\
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    \13\ 15 U.S.C. 78f.
    \14\ 15 U.S.C. 78f(b)(5).
    \15\ In approving this rule, the Commission notes that it has 
also considered the proposed rule's impact on efficiency, 
competition, and capital formation. 15 U.S.C. 78c)(f).
    \16\ See Securities Exchange Act Release No. 37619A (September 
6, 1996), 61 FR 48290 (September 12, 1996) (File No S7-30-95).
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    Because provision of price improvement should enhance small 
investors participation in the securities market, without sacrificing 
investor protection and the public interest, the Commission therefore 
finds good cause for approving the proposed rule change prior to the 
thirtieth day after the date of publication of notice in the Federal 
Register.
    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\17\ that the proposed rule change (SR-CHX-99-04) is hereby on an 
accelerated basis.

    \17\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.3-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-15350 Filed 6-16-99; 8:45 am]
BILLING CODE 8010-01-M