[Federal Register Volume 64, Number 130 (Thursday, July 8, 1999)]
[Notices]
[Pages 36938-36940]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-17353]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41586; File No. SR-CHX-99-07]


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

June 30, 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 June 24, 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 CHX. On 
June 25, 1999 the CHX submitted to the Commission Amendment No. 1 to 
the proposed rule change.\3\ 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).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1 the CHX requested that the Commission 
approve extension of the pilot program through January 31, 2000. See 
letter from Kathleen M. Boege, Associate General Counsel, CHX, to 
John C. Roeser, Attorney, Division of Market Regulation, Commission, 
dated June 25, 1999.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange hereby requests a seven month extension of the pilot 
program relating to the trading of Nasdaq/NM Securities on the Exchange 
that is currently due to expire on June 30, 1999. 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 January 31, 2000.

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.\4\ 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'').\5\
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    \4\ 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 Securities Exchange Act Release Nos. 28146 (June 26, 1990), 55 
FR 27917 (July 6, 1990) (order expanding the number of eligible 
securities to 100); 36102 (August 14, 1995), 60 FR 43626 (August 22, 
1995) (order expanding the number of eligible securities to 500); 
41392 (May 12, 1999), 64 FR 27839 (May 21, 1999) (order expanding 
the number of eligible securities to 1000).
    \5\ 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,\6\ 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'').\7\ When the Commission approved the program on a pilot 
basis, it 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.\8\ Due to programming issues, the pilot program 
was not implemented until April, 1997. 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.
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    \6\ See Securities Exchange Act Release No. 38119 (January 3, 
1997), 62 FR 1788 (January 13, 1997) (``January 1997 Order'').
    \7\ The NBBO is the best bid or offer disseminated pursuant to 
SEC Rule 11Ac1-1.
    \8\ In connection with approval of the CHX's current proposal, 
the Commission has requested supplemental trading data.
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    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.\9\ The Exchange submitted the report to the 
Commission on January 30, 1998 (``January 1998 Report''). Subsequently, 
the Exchange requested another three month extension, in order to give 
the Commission adequate time to approve the pilot program on a 
permanent basis.
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    \9\ See Securities Exchange Act Release No. 39512 (December 31, 
1997), 62 FR 1517 (January 9, 1998).
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    On March 31, 1998, the Commission approved the pilot for an 
additional three month period, until June 30,

[[Page 36939]]

1998.\10\ On July 1, 1998 the Commission approved the pilot for an 
additional six month period, until December 31, 1998.\11\ On December 
31, 1998, the Commission approved the pilot for an additional six month 
period, until June 30, 1999.\12\ The Exchange now requests another 
extension of the current pilot program, through January 31, 2000.
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    \10\ See Securities Exchange Act Release No. 39823 (March 31, 
1998), 63 FR 17246 (April 8, 1998).
    \11\ See Securities Exchange Act Release No. 40150 (July 1, 
1998), 63 FR 36983 (July 8, 1998).
    \12\ See Securities Exchange Act Release No. 40868 (December 31, 
1998), 64 FR 1845 (January 12, 1999).
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    Under the pilot program, specialists must continue to accept agency 
\13\ 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.\14\ 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 were quoting at the NBBO when the 
order was received.
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    \13\ 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.
    \14\ The auto-acceptance threshold in place for Dually Traded 
securities (those issues that are traded on the CHX and are listed 
on either the New York Stock Exchange or American Stock Exchange) 
was recently increased from 2099 to 5099 shares.
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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.\15\
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    \15\ Specifically, the autoquote is currently for one normal 
unit of trading (usually 100 shares) in issues that became subject 
to mandatory compliance with SEC Rule 11Ac1-4 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.\16\ 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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    \16\ 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 CHX believes that 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) 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 Section 11A(a)(1)(D) and 11A(a)(1)(C) of the Act.
    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.

B. Self-Regulatory Organization's Statement on Burden on Competition

    CHX 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

    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, N.W., Washington, D.C. 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 in 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-99-07 and should 
be submitted by July 29, 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. Specially, the 
Commission finds that the proposed rule change is consistent with 
Section 6(b)(5) \17\ of the Act, which requires that an Exchange have 
rules designed to prevent fraudulent and manipulative practices,

[[Page 36940]]

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 Commission also believes that the proposal is 
consistent with Section 11A(a)(1)(C) \18\ and 11A(a)(1)(D) \19\ of the 
Act because the Exchange's proposal conforms CHX specialist obligations 
to those applicable to OTC market markers in Nasdaq/NM securities, 
while CHX provides a separate, competitive market for Nasdaq/NM 
securities.
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    \17\ 15 U.S.C. 78(b)(5).
    \18\ 15 U.S.C. 78k-1(a)(1)(C).
    \19\ 15 U.S.C. 78k-1(a)(1)(D).
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    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.\20\ In connection with this effort, the Commission 
requests an update on the information provided in the January 1998 
Report, to supplement the available trading data and thus facilitate 
consideration of the underlying issues. The Commission's approval of 
the pilot extension is thus two fold: to allow the Exchange to operate 
without interruption, and to allow a period for compilation of the 
additional data.
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    \20\ See January 1997 Order, supra note 6.
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    The Commission, therefore, finds good cause for 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) \21\ of the 
Act that the proposed rule change (SR-CHX-99-07) be, and hereby is, 
approved through January 31, 2000.
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    \21\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-17353 Filed 7-7-99; 8:45 am]
BILLING CODE 8010-01-M