[Federal Register Volume 64, Number 202 (Wednesday, October 20, 1999)]
[Notices]
[Pages 56548-56553]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-27307]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42004; File No. SR-CHX-99-16]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment Nos. 1 and 2 and Order Granting Accelerated 
Approval of Proposed Rules Change and Amendment Nos. 1 and 2 by the 
Chicago Stock Exchange Relating to the Implementation of an Extended 
Hours Trading Session

October 13, 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 September 14, 1999, the Chicago Stock Exchange, Incorporated 
(``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 October 7, 1999, the CHX submitted Amendment No. 1 to the 
proposed rule change.\3\ On October 8, 1999, the CHX filed Amendment 
No. 2 to the proposed rule change.\4\ The

[[Page 56549]]

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 and Amendment Nos. 1 and 2 on a 
pilot basis through March 1, 2000.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Letter to Katherine A. England, Assistant Director, Division 
of Market Regulation (``Division''), Commission, from Paul B. 
O'Kelly, Executive Vice President, Market Regulation and Legal, CHX, 
dated October 5, 1999 (``Amendment No. 1''). In Amendment No. 1, the 
CHX proposes to amend the initial filing to request that the 
Commission approve its proposed extended hours trading session on a 
pilot basis through March 1, 2000.
    \4\ Letter to Katherine A. England, Assistant Director, 
Division, Commission, from Paul B. O'Kelly, Executive Vice 
President, Market Regulation and Legal, CHX, dated October 7, 1999 
(``Amendment No. 2''). In Amendment No. 2, the CHX proposes that, 
although effective upon Commission approval, its proposed extended 
trading session will not be operational until October 29, 1999.
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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 new Article XXA to the Exchange's 
Rules to implement an extended hours trading session (the ``E-
SessionTM'') on a pilot basis through March 1, 2000. The 
Exchange also proposes to amend the following rules to reflect changes 
to trading times and to various procedures that arise because of the E-
Session: Article IX, Rule 10(b); Article XX, Rules 1, 2 and 37; Article 
XXI, Rule 1; Article XXXI, Rules 6 and 9; and Article XXXIV. Below is 
the text of the proposed rule change. Proposed new language is 
italicized; proposed deletions are in brackets;

Article XXA--Trading Rules and Procedures Applicable To Equity Trading 
During the Extended Trading Session

Introduction

    The trading rules and procedures in this Article shall apply to 
trading conducted on the Exchange during the Extended Trading Session 
(the ``E-Session''). Unless otherwise defined in this Article, 
capitalized terms used in this Article shall have the same meanings 
given them elsewhere in the Rules. Except where the context requires 
otherwise, the provisions of the Constitution and all other Rules and 
policies of the Board of Governors, including those that apply to 
trading conducted during the Primary Trading Session (the ``PTS''), 
shall continue to be applicable to trading during the E-Session. If any 
rule in this Article is inconsistent with any other provisions of the 
Rules, the provisions of this Article shall control and shall be deemed 
to supplement or amend the inconsistent provisions.

Hours of Trading

    Rule 1. The E-Session shall be conducted on the Floor of the 
Exchange, commencing immediately following the close of the Post 
Primary Trading Session (the ``PPTS'') and ending at 5:30 P.M. Central 
time, Monday through Friday; provided, however, that no E-Session will 
be conducted, or a shortened E-Session will be conducted, on those days 
identified by the Board of Governors, in its discretion, from time to 
time. So long as the rules in this Article remain in effect, the 
Secondary Trading Session shall be discontinued.

Eligible Securities

    Rule 2. Securities eligible for trading during the E-Session (``E-
Session Eligible Securities'') shall be selected, from time to time, by 
the Committee on Floor Procedure from the securities eligible for 
trading during the PTS.

E-Orders

    Rule 3. Orders eligible to be entered in the E-Session on a given 
day (``E-Orders'') shall consist of those orders received by the 
Exchange on that day that are designated as E-Orders in the manner 
specified by the Exchange. All E-Orders transmitted via MAX shall 
include the account type designators in Article XX, Rule 37(b)(9).

Unexecuted Orders

    Rule 4. All E-Orders for E-Session Eligible Securities remaining 
unexecuted at the end of an E-Session shall automatically be canceled.

Specialist Firms

    Rule 5. The specialist firm for a security traded in the E-Session 
shall be the specialist firm assigned to that same security in the PTS, 
unless that specialist firm, with the approval of the Committee on 
Specialist Assignment and Evaluation, has transferred the assignment to 
another specialist firm for purposes of the E-Session only. A 
specialist firm assigned to one or more securities in the E-Session may 
cease acting in that capacity only with the permission of the Committee 
on Specialist Assignment and Evaluation.

Co-Specialists

    Rule 6. A specialist firm may designate any qualified co-
specialists in its assigned securities for the E-Session, whether or 
not they are co-specialists for those same securities during the PTS. A 
co-specialist must maintain a continuous, two-sided market in each 
assigned security.

Preopening Orders

    Rule 7. Preopening orders in all E-Session Eligible Securities will 
be eligible for a single price opening.

Manner of Making Bids and Offers

    Rule 8. The only orders eligible to be entered during the E-Session 
are unconditional limit orders for E-Session Eligible Securities. These 
orders shall be electronically and directly transmitted, via MAX, to 
the specialist's limit order book; except that Floor Brokers (1) may 
route limit orders via MAX to the specialist's limit order book or, 
where permissible, transmit them to another market; or (2) may, after 
receiving a limit order to buy and a limit order to sell an equivalent 
amount of the same security (a) execute the orders at the specialist's 
post pursuant to Article XX, Rule 23 or (b) route the orders via MAX to 
the specialist's limit order book. NASDAQ System market makers, acting 
in their capacities as market makers, shall have direct telephone 
access to the specialist post in each NASDAQ/NM Security in which that 
market maker is registered as market maker to transmit orders for 
execution on the Exchange.

Specialist's Books

    Rule 9. The book of limit orders entered for execution in the E-
Session shall be maintained by the specialist in the E-Session and 
shall be separate from the specialist's books of limit orders 
maintained for that same security in the PTS and the PPTS.

Trading Halts Due to Extraordinary Market Volatility

    Rule 10. If trading in all securities on the Exchange is halted 
during the PTS pursuant to Article IX, Rule 10A, and such halt is still 
in effect at the close of the PTS, the Exchange shall cancel the E-
Session scheduled for that day. Two floor officials may halt trading in 
any or all securities during an E-Session if they determine that such 
action is necessary to preserve a fair and orderly market. Once trading 
in a given security is halted, two floor officials may reopen trading 
in the halted security if they determine that a fair and orderly market 
shall ensue from such action.

Intermarket Trading System

    Rule 11. The Intermarket Trading System (``ITS'') shall be in 
operation any time during the E-Session when another participant market 
is open for trading.

Customer Disclosure

    Rule 12. No member or member organization may accept an order from 
a non-member for execution in the E-Session without first disclosing to 
that non-member that: (1) orders for E-Session Eligible Securities are 
eligible only for a single E-Session and, if not executed during that 
E-Session, shall automatically be canceled; (2) unconditional limit 
orders are the only orders that are eligible for execution in the E-
Session; (3) there is likely to be less liquidity during trading that 
occurs once normal trading hours have ended and, as a consequence, 
there may be

[[Page 56550]]

greater fluctuations in securities prices; and (4) distinct systems and 
facilities trade securities after normal trading hours have ended and, 
as a consequence, at any particular time, quotations and transaction 
prices for a security may vary among those systems.

Article IX--Trading Rules

* * * * *
Business Days and Hours of Trading
* * * * *
    Rule 10(b)  The Exchange will be open for business for three 
trading sessions during each business day.
    The first trading session (the ``Primary Trading Session'') will be 
conducted on the floor of the Exchange (i) during the same hours the 
security is traded on its primary market, if the Exchange is not the 
primary market for such security, provided, however, if the primary 
market for such security is the Pacific Stock Exchange, the Primary 
Trading Session for that security shall end no later than 3 P.M. [p.m.] 
Central time, or (ii) from 8:30 A.M. to 3 P.M. Central time, Monday 
through Friday, if the Exchange is the primary market for such 
security. Notwithstanding the foregoing, trading in the Chicago Basket 
shall be conducted on the floor of the Exchange from 8:30 A.M. to 3:15 
P.M., Central time, Monday through Friday.
    The next trading session (the ``Post Primary Trading Session'') 
will be conducted on the floor of the Exchange for orders and 
securities designated as eligible for the Post Primary Trading Session, 
pursuant to Article XX, Rule 37. The Post Primary Trading Session shall 
be one-half hour after the close of regular trading on the primary 
market. In the event that trading on the Exchange is halted during the 
Primary Trading Session pursuant to Article XX, Rule 10A, and such halt 
is still in effect at the close of a Primary Trading Session, the 
Exchange will cancel the Post Primary Trading Session scheduled for 
that day.
    The last session the ``E-Session'') shall be conducted on the floor 
of the Exchange, commencing immediately following the close of the Post 
Primary Trading Session and ending at 5:30 P.M., Central time, Monday 
through Friday; provided, however, that no E-Session will be conducted, 
or a shortened E-Session will be conducted, on those days identified by 
the Board of Governors, in its discretion, from time to time.
    So long as the E-Session is being held, [(]the [``]Secondary 
Trading Session,['')] which was [will be] conducted through the 
Portfolio Trading System, pursuant to the provisions of Article XXXV 
from 3:30 P.M. to 5 P.M., Central time, Monday through Friday, will be 
discontinued. [The Floor of the Exchange shall be closed during the 
Secondary Trading Session.]
    In the event of a crisis, the chairman or the vice-chairman of the 
Board of Governors or the president may, with the prior approval of a 
governor from a member firm and a governor from the floor, suspend 
trading at any time during a session.

Article XX--Regular Trading Sessions Application

    Rule 1.  These Rules shall apply to all Exchange Contracts made on 
the Exchange during the Primary Trading Session, [and] the Post Primary 
Trading Session and the E-Session and, to the extent determined by the 
Exchange to be applicable, to Exchange Contracts not made on the 
Exchange.
* * * * *
Hours of Floor Dealings
    Rule 2.  Except as provided in Article XX, no member or member 
organization shall make any bid, offer or transaction upon the Floor of 
the Exchange, issue a commitment to trade through ITS from the Floor, 
or send an order in a Nasdaq/NM Security for execution via telephone to 
a NASDAQ System market maker other than during the Primary Trading 
Session, [or] the Post Primary Trading Session or the E-Session, except 
that a specialist may issue and receive pre-opening notifications and 
pre-opening responses, pursuant to the provisions of the Plan relating 
to the Pre-Opening Application of the System, before the official 
opening of business of the Exchange and loans of money or securities 
may be made after those hours.
* * * * *
Guaranteed Execution System and Midwest Automated Execution System
    Rule 37.(a)  Guaranteed Executions. The Exchange's Guaranteed 
Execution System (the BEST System) shall be available, during the 
Primary Trading Session and the Post Primary Trading Session, to 
Exchange member firms and, where applicable, to members of a 
participating exchange who send orders to the Floor through a linkage 
pursuant to Rule 39 of this Article, in all issues in the specialist 
system which are traded in the Dual Trading System and NASDAQ/NM 
Securities.
* * * * *

Article XXI--Exchange of Contracts, Tickets and Comparisons 
Reporting of Transactions

    Rule 1. The Exchange shall report all transactions executed on the 
Floor during the Primary Trading Session, Post Primary Trading Session, 
the E-Session or , when it is in operation, through the Portfolio 
Trading System. It shall be the duty of every member to advise the 
Exchange of each of his transactions as promptly as possible.

Article XXXI--Odd Lots and Odd-Lot Dealers, Dual System

* * * * *
Dealer Required To Purchase All Odd Lots Offered
    Rule 6. In any security in which he or it is registered as such, an 
odd-lot dealer shall be required, during the Primary Trading Session 
and the Post Primary Trading Session, to purchase all odd lots offered 
him or it by any member or member organization of the Exchange and he 
or it shall be required to sell to any member or member organization of 
the Exchange any odd lots bid for by such member or member 
organization.
Execution of Odd-Lot Orders During the Primary Trading Session
    Rule 9.(a) Exclusive Issues. * * *
* * * * *

Execution of Odd-Lot Orders During the E-Session

    Rule 9a. During the E-Session, odd lot orders shall be handled 
according to the requirements of Article XXA, Rule 8.

Article XXXIV--Registered Market Makers--Equity Floor

    Rule 1. A registered market maker shall only participate in 
transactions, while on the trading floor, during the Primary Trading 
Session and Post Primary Trading Session. A registered market maker 
shall effect all of his transactions in securities traded on the 
Exchange so that they constitute a course of dealings reasonably 
calculated to contribute to the maintenance of a fair and orderly 
market. No registered market maker shall enter into transactions or 
make bids or offers that are inconsistent with such a course of 
dealings.
* * * * *

II. Self-Regulatory Organizations's Statement of the Purpose of, 
and Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the CHX included statements 
concerning the purpose of and basis for the

[[Page 56551]]

proposed rule change and discussed any comments it received regarding 
the proposed rule change. The text of these statements may be examined 
at the places specified in Item III below. The CHX 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
    The Exchange is proposing to add new Article XXA and to amend 
several related rules, as detailed above, to implement an extended 
hours trading session. According to the Exchange, market participants 
and CHX members are demanding that the Exchange begin trading in hours 
that extend beyond the current trading day. The Exchange believes that 
after-hours trading may well become a permanent feature of the U.S. 
securities market and believes that investors will be best served if 
exchanges are participants in that market.
    The operation of the E-Session. The E-Session extended trading 
hours session will be held from 3:30 p.m. (immediately following the 
close of the CHX's post primary trading session) to 5:30 p.m., Central 
time, Monday through Friday.\5\
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    \5\ See proposed amendments to Article IX, Rule 10(b) (Business 
Days and Hours of Trading) and Article XX, Rule 2 (Hours of Floor 
Dealing).
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    Trading during the E-Session will be conducted, in some respects, 
as it is during the CHX's primary trading session; however, the 
Exchange has added new features to more fully automate the transmission 
of orders and to provide additional protections to investors who trade 
during the E-Session. Only unconditional limit orders will be eligible 
for execution in the E-Session and each limit order must be 
appropriately designated for trading in the E-Session. Any orders 
remaining unexecuted at the end of the E-Session will be automatically 
canceled and will not carry over to any other trading session. 
Specialist firms will continue to make two-sided, continuous markets in 
the stocks assigned to them during the existing trading sessions at 
their posts on the floor of the CHS, unless a specialist firm has 
transferred its assignment, for the E-Session only, to another 
specialist firm with the approval of the CHX's Committee on Specialist 
Assignment and Evaluation (``CSAE'').
    During the E-Session, in most cases, limit orders must be 
electronically and directly transmitted, via the MAXTM 
electronic order routing system, to the specialist's limit order 
book.\6\ Floor brokers may route limit orders to the specialist's limit 
order book via MAX or may transmit the orders to another market. In 
addition, a floor broker may route orders to buy and sell equivalent 
quantities of the same security eligible to be executed at the same 
price through MAX to the specialist's limit order book or may execute 
those orders as a crossing transaction at the specialist's post in 
accordance with existing Exchange rules.
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    \6\ Preopening orders in all E-Session Eligible Securities will 
be eligible for a single price opening. See proposed Article XXA, 
Rule 7. The single price to be applied to preopening orders will be 
determined based on the preopening limit orders represented on the 
limit order book at that time. In the event that there are no 
preopening limit orders represented on the limit order book at that 
time. In the event that there are no preopening limit orders on the 
book, the specialist will determine the opening price based on the 
closing price of the primary trading session. Telephone conversation 
between Paul O'Kelly, Executive Vice President, Market Regulation 
and Legal, CHX, and Deborah Flynn, Special Counsel, Division, 
Commission, on October 13, 1999.
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    Expect as described in Article XXA or in the rules amended as part 
of this submission, execution, reporting, and clearance and settlement 
of transactions that occur during the E-Session will follow the 
procedures currently in place for those activities in the Exchange's 
primary trading session.\7\ Among other things, the National Securities 
Clearing Corporation (``NSCC'') will clear the transaction that take 
place during this session \8\ and the Securities Industry Automation 
Corporation (``SIAC'') and Nasdaq, Inc. will disseminate CHX quotations 
and trade data.
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    \7\ See proposed amendments to Article XX, Rule 1 (Application) 
and Article XXI, Rule 1 (Reporting of Transaction).
    \8\ Transactions that take place during the E-Session will be 
reported to NSCC as part of the same end-of-day transmissions used 
for transactions conducted during the regular trading session. As a 
result, these transactions will be reported as same-day trades and 
will be subject to the normal three-day (``T+3'') settlement cycle.
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    The Exchange, however, proposes three changes to existing rules 
that arise from either the Exchange's desire to more fully automate the 
E-Session or from the fact that no primary market will be immediately 
available during the E-Session. First, the CHX's Guaranteed Execution 
System (the ``Best System'') and the automatic execution features of 
the Midwest Automated Execution System will not operate during the E-
Session. In general, the Best System requires specialists to accept and 
execute orders at prices keyed to the primary market in each security. 
The primary market likely will not be immediately available during the 
E-Session. The second change required by the E-Session relates to the 
execution of odd-lot orders. Current CHX rules require odd-lot dealers 
to execute all odd-lot orders from members and member organizations and 
require executive of all odd-lot orders (from members and others) at 
certain prices keyed to transactions on the primary market. Like the 
rules relating to the Best System, these rules will apply during the E-
Session because of the likely absence of a primary market similar to 
the one that exists during normal trading hours. Finally, current 
Exchange rules permit market makers to operate during the primary 
trading session. Because market makers will not have access to MAX 
terminals, and therefore cannot route order to the specialists' limit 
order books during the E-Session, market makers will not participate in 
the E-Session from other trading floor. The amendments to Article XX, 
Rule 37 (relating to the Best System), Article XXXI, Rules 6 and 9 
(Relating to odd-lot order execution) and Article XXXIV (relating to 
market makers) reflect these changes.
    Securities eligible for trading during the E-Session. The CHX's 
Committee on Floor Procedure will identify, from time to time, the 
securities eligible for trading during the E-Session. At its meeting on 
September 21, 1999, the Committee on Floor Procedure adopted the list 
of potentially eligible securities recommended to it by the Exchange's 
New Product Development Committee. The 311 securities approved by the 
Committee on Floor Procedure include the securities listed on the 
Standard & Poor's (``S&P'') 100 Stock Index TM (``OEX'') as 
of August 30, 1999, the securities listed on the Nasdaq-100 Index 
 (``NDX'') as August 30, 1999, and any other securities 
that ranked among the 100 most active listed and 100 most active New 
York Stock Exchange (``NYSE'') or Nasdaq/NMS securities, and certain 
S&P Midcap and S&P 9 Select SPDRs securities as of the end of the 
second quarter of 1999.\9\
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    \9\ Telephone conversation between Paul O'Kelly, Executive Vice 
President, Market Regulation and Legal, CHX, and Deborah Flynn, 
Special Counsel, Division, Commission, on October 7, 1999.
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    Members eligible to participate in the E-Sesson. All CHX members 
will access to the E-Session, in accordance with applicable CHX 
rules.\10\
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    \10\ Under a rule recently proposed by the CHX, if approved by 
the Commission, CHX members would be able to lease certain E-Session 
trading privileges to others, so long as the lessees are approved as 
members of the Exchange and meet other requirements. See Securities 
Exchange At Release No. 41968 (September 30, 1999), 64 FR 54701 
(October 7, 1999) (noticing File No. SR-CHX-99-08).

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[[Page 56552]]

    Trading halts due to extraordinary market volatility. If trading in 
all securities on the CHX is halted during the primary trading session 
and the halt remains in effect at the close of that session, the 
Exchange will cancel the E-Session for that day. Two CHX floor 
officials can halt trading in any or all securities during and E-
Session if they determine that such action is necessary to preserve a 
fair and orderly market, and two floor officials may reopen trading in 
any halted security on the same basis.
    Mandatory disclosures to non-members. Because the E-Session 
operates in a manner, and at a time, that is different from the CHX's 
primary trading session, the proposal requires members to provide 
specific disclosures to non-members before accepting orders for 
execution in the E-Session. Specifically, a member cannot accept an 
order from a non-member before first disclosing that: (1) Orders for E-
Session Eligible securities are eligible only for a single E-Session 
and, if not executed during that E-Session, shall automatically be 
canceled; (2) unconditional limit orders are the only orders that are 
eligible for execution in the E-Session; (3) there is likely to be less 
liquidity during trading that occurs once normal trading hours have 
ended and, as a consequence, there may be greater fluctuations in 
securities prices; and (4) distinct systems and facilities trade 
securities after normal trading hours have ended and, as a consequence, 
at any particular time, quotations and transaction prices for a 
security may vary among those systems. These disclosures are designed 
to ensure that participants in the after-hours market understand the 
potential risks of that participation.
    Surveillance and oversight. The Exchange will surveil E-Session 
trading using enhanced surveillance programs.\11\ E-Session order 
delivery, quoting and matching will be almost entirely controlled by 
the Exchange's electronic systems. These systems should reduce the 
possibility for intentional or inadvertent mishandling of orders and 
will enhance the effectiveness of the surveillance programs.
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    \11\ Letters to Belinda Blaine, Associate Director, Division, 
Commission, from Paul B. O'Kelly, Executive Vice President, Market 
Regulation and Legal, CHX, dated October 6, 1999 and October 7, 
1999.
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    Procedures for reviewing capacity, security and contingency 
planning. The CHX plans to use many of the same review procedures for 
systems security, capacity management, and recovery and contingency 
planning that it employs for the systems that support the primary 
trading session.
2. Statutory Basis
    The CHX believes that the proposed rule change is consistent with 
Section 6(b)(5) of the Act \12\ in that it is designed to promote just 
and equitable principles of trade, to remove impediments and to perfect 
the 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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    \12\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement of Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any inappropriate burden on competition. Indeed, the Exchange 
believes that the proposed rule change will foster competition in the 
after-hours market.

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

    No written comments were either 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, as amended, 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 submissions, 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 
filings will also be available for inspection and copying at the 
principal office of the CHX. All submissions should refer to File No. 
SR-CHR-99-16 and should be submitted by November 10, 1999.

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

    The Commission has reviewed carefully the CHX's proposed rule 
change and believes, 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.\14\ Specifically, the Commission believes that, by 
providing retail investors with an additional means to trade after 
regular trading hours, the proposal is consistent with Section 6(b)(5) 
of the Act \15\ in that it is designed to remove impediments to, and to 
perfect the mechanism of, a free and open market. The implementation of 
the CHX's E-Session should enhance competition in the after-hours 
market. Currently, several electronic trading systems provide retail 
investors the opportunity to trade after-hours. The presence of a 
national securities exchange in the after-hours market should provide 
retail investors with an alternative forum through which to conduct 
after-hours transactions.
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    \13\ 15 U.S.C. 78f.
    \14\ In approving this rule, the Commission has considered the 
proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \15\ 15 U.S.C. 78f(b)(5).
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    The Commission also believes that the rules and regulations 
applicable to Exchange members should enhance the transparency and 
integrity of the after-hours market and promote the goals of the 
national market system. Specifically, the Commission finds that the 
proposed rule change is consistent with Section 11A(a)(1)(C) of the 
Act.\16\ Congress found in those provisions that it is in the public 
interest and appropriate for the protection of investors and the 
maintenance of fair and orderly markets to assure the availability to 
brokers, dealers, and investors of information with respect to 
quotations for and transactions in securities, and to assure the 
practicability of brokers executing investors' orders in the best 
market.\17\ The proposed rule change accomplishes the objectives of the 
Act by ensuring that Nasdaq and SIAC systems, which are used by market 
participants to communicate quotations and transactions, will be 
available to investors outside of traditional market hours, thereby 
providing for greater transparency in the after-hours market.
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    \16\ 15 U.S.C. 78k-1(a)(1)(C).
    \17\ Id.
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    In addition, the Commission notes that the CHX has added new 
features to

[[Page 56553]]

more fully automate the transmission of orders and to provide 
additional protections to investors who trade during the E-Session. For 
example, only unconditional limit orders will be eligible for execution 
in the proposed E-Session and all such orders must be specifically 
designated as E-Session orders. E-Session orders that are not executed 
during the E-Session will be automatically canceled and are not carried 
over to the next-day primary session. The Commission further notes that 
the CHX proposes to require its members to provide certain disclosures 
to non-members about the proposed E-Session. The Commission believes 
that the CHX's proposed mandatory disclosures to non-members should 
ensure that customers are reasonably informed about the specific risks 
associated with participation in the after-hours market before their 
orders are accepted by a CHX member. These requirements are designed to 
limit, to the extent possible, the likelihood of investor confusion 
regarding the significant differences between the E-Session and the 
existing trading sessions. Moreover, the proposed requirement that 
specialist firms continue to make two-sided, continuous markets in the 
securities assigned to them for the existing trading sessions may 
provide further liquidity for investor orders.
    In the Commission's view, the CHX's proposal to require its members 
to follow the rules and procedures currently in place for the existing 
trading session, with certain exceptions, is reasonable. The Commission 
notes that proposed exceptions result from the CHX's desire to more 
fully automate its E-Session and the fact that no primary markets are 
expected to be operating in the after-hours market at the time the 
CHX's E-Session is implemented. Although the Commission believes that 
the proposed exceptions are reasonable at this time, the Commission 
expects that the CHX's Best System and its existing rules governing 
odd-lot orders would be applied by the CHX to the E-Session as soon as 
the primary markets initiate trading in the after-hours market.\18\
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    \18\ These changes would require the CHX to submit a rule filing 
with the Commission pursuant to Section 19(b) of the Act. 15 U.S.C. 
78s(b).
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    The Commission further notes that the CHX has represented that it 
intends to implement enhanced surveillance procedure with respect to 
the proposed E-Session.\19\ The enhanced surveillance capabilities 
should assist the CHX in satisfying the requirements of Section 6(b)(5) 
of the Act \20\ that Exchange proposals be designed to promote just and 
equitable principles of trade.
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    \19\ See supra note 11.
    \20\ 15 U.S.C. 78f(b)(5).
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    Finally, the CHX has requested that the Commission find good cause 
pursuant to Section 19(b)(2) of the Act \21\ for approving the proposed 
rule change prior to the 30th day after publication in the Federal 
Register. The Commission finds good cause for approving the proposed 
rule change prior to the 30th day after the date of publication of 
notice of filing thereof in the Federal Register because accelerated 
approval will benefit investors by providing retail investors with 
another venue, in this case, a national securities exchange, for 
executing transactions after regular trading hours. Moreover, the rules 
and regulations applicable to Exchange members should increase 
competition in, and enhance the transparency of, the after-hours 
market. In particular, SIAC and Nasdaq will disseminate CHX quotations 
and trade data on a real-time basis over the consolidated tape.
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    \21\ 15 U.S.C. 78s(b)(2).
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    The Commission further believes that good cause exists for 
approving Amendment No. 1 to the proposed rule change prior to the 
thirtieth day after the date of publication in the Federal Register. 
The Commission notes that Amendment No. 1 merely establishes the 
extended hours trading session as a pilot program, scheduled to expire 
on March 1, 2000. The Commission believes that designation the E-
Session as a pilot program will provide the Commission and the CHX with 
additional time to evaluate the issues implicated by after-hours 
trading. In addition, a pilot program should provide the Commission and 
the CHX with greater flexibility to modify the program to ensure 
consistency across markets when the primary markets extend their 
trading hours.
    The Commission believes that good cause also exists to accelerate 
approval of Amendment No. 2 to the proposed rule change. Amendment No. 
2 delays the date on which the proposal becomes operative to October 
29, 1999 to provide the Exchange additional time to ensure that its 
systems are ready. The Commission believes that it is prudent for the 
CHX to take the requisite time to ensure that its systems are fully 
prepared prior to implementing its proposed E-Session. The Commission 
finds, therefore, that granting accelerated approval of the proposed 
rule change, including Amendment Nos. 1 and 2, is appropriate and 
consistent with Section 6 of the Act.\22\
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    \22\ 15 U.S.C. 78f.
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\23\ that the proposed rule change (SR-CHX-99-16), as amended, is 
hereby approved on an accelerated basis as a pilot program, through 
March 1, 2000.

    \23\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\24\
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    \24\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-27307 Filed 10-19-99; 8:45 am]
BILLING CODE 8010-01-M