[Federal Register Volume 65, Number 39 (Monday, February 28, 2000)]
[Notices]
[Pages 10575-10576]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-4557]


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SECURIIES AND EXCHANGE COMMISSION

[Release No. 34-42442; File No. SR-CHX-99-24]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Stock Exchange, Inc. Relating to Price 
Improvement for Securities That Trade in Minimum Variations of \1/64\th 
of $1.00

February 18, 2000.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''), \1\ and Rule 19b-4 thereunder,\2\ notice hereby is given 
that on October 20, 1999, the Chicago Stock Exchange, Inc. (``CHX'' or 
``Exchange'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I, II, 
and III 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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19-4.
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I. Self-Regulatory Organization's Statement of the Items of 
Substance of the Proposed Rule Change

    The Exchange proposes to amend CHX Rule 37, Article XX, governing 
price improvement, to add an algorithm providing for price improvement 
in the case of issues trading in minimum variations of \1/64\th of 
$1.00. Specifically, the Exchange proposes to amend Article XX, Rule 
37, adding section 37(g). The text of the proposed rule change is as 
follows: Additions are italicized.
ARTICLE XX
Regular Trading Sessions
* * * * *
Guaranteed Execution System and Midwest Automated Execution System
Rule 37.
    (g) Derivative SuperMAX
    Derivative SuperMAX shall be a voluntary automatic execution 
program within the MAX System. Derivative SuperMAX shall be available 
for securities that trade on the Exchange in minimum price variations 
of \1/64\th of $1.00. A specialist may choose to enable this voluntary 
program within the MAX system on a security-by-security basis. If 
Derivative SuperMAX has been enabled for a particular security and the 
maximum order has been set at an amount that is less than or equal to 
599 shares (or such greater amount designated by the specialist and 
approved by the Exchange), Derivative SuperMAX shall be automatically 
enabled. If the security is eligible for Derivative SuperMAX and the 
specialist in such security has chosen to engage Derivative SuperMAX 
for such security, all small agency market orders in that security will 
automatically be executed in accordance with the Derivative SuperMAX 
algorithm set forth below. For purposes of this subsection (g), the 
term ``small agency market order'' small mean an agency order from 100 
shares up to and including 599 shares (or such greater amount 
designated by the specialist and approved by the Exchange).
    (1) Pricing.
    (a) If a small agency market order to buy or sell is received in a 
security in which Derivative SuperMAX is enabled, such order shall be 
executed at the ITS Best Offer (for a buy order) or the ITS Best Bid 
(for a sell order) if (i) the spread between the ITS Best Bid and the 
ITS Best Offer in such security at the time the order is received is 
less than \1/64\th of a point, or (ii) the order does not meet the 
criteria set forth in (b) below.
    (b) If a small agency market order to buy or sell is received in a 
security in which Derivative SuperMAX has been enabled, and the spread 
between the ITS Best Bid and the ITS Best Offer in such security at the 
time the order is received is greater than or equal to \1/16\th of a 
point, such order shall be executed at \1/64\th of a point lower than 
the ITS Best Offer (for a buy order) or \1/64\th of a point higher than 
the ITS Best Bid (for a sell order).
    (2) Operating Time.
    Derivative SuperMAX will operate each day that the Exchange is open 
for trading from 8:45 a.m. (Central Time) until the close of a Primary 
Trading Session. A specialist may enable or remove Derivative SuperMAX 
for a particular security only on one given day each month, as 
determined by the Exchange from time to time. Notwithstanding the 
previous sentence, during unusual market conditions, individual 
securities or all securities may be removed from Derivative SuperMAX 
with the approval of two members of the Committee on Floor Procedure.
    (3) Timing.
    Orders entered into Derivative SuperMAX shall be immediately 
executed (i.e., without any delay) upon completion of the algorithm.
    (4) Other.
    Any eligible order in a security included in Derivative SuperMAX, 
which is manually presented at the specialist post by a floor broker 
must also be guaranteed an execution by the specialist pursuant to the 
criteria set forth in (1) above. In the event that a contra side order 
which would better a Derivative SuperMAX execution is presented at the 
post, the incoming order which is executed pursuant to the Derivative 
SuperMAX criteria must be adjusted to the better price.

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 regarding the proposed rule change. 
The text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set

[[Page 10576]]

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 primary purpose of the proposed rule change is to afford 
specialists a viable means of offering customers price improvement for 
securities that trade in minimum variations of \1/64\.
    A. Background. On May 22, 1995, the Commission approved a proposed 
rule change to adopt CHX Rule 37(d), Article XX, to allow Exchange 
specialists, 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 
CHX would file with the Commission specific modifications to the 
parameters of MAX that are required to implement various options under 
the rule.
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    \3\ See Securities Exchange Act Release No. 35753 (May 22, 
1995), 60 FR 28007 (May 26, 1995)(order granting approval to File 
No. SR-CHX-95-08).
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    Presently, three existing CHX programs within the MAX system, 
SuperMAX, Enhanced SuperMAX and Super MAX Plus, use computerized 
algorithms to provide automated price improvement. The Commission 
approved each of these price improvement programs on a permanent 
basis.\4\ These programs were created for securities that trade in 
minimum variations of \1/16\ to provide for price improvement of \1/16\ 
of a point when the spread is \1/8\ or greater.
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    \4\ See Securities Exchange Act Release Nos. 40017 (May 20, 
1998), 63 FR 29277 (May 28, 1998) and 40235 (July 17, 1998), 63 FR 
40147 (July 27, 1998) (File No. SR-CHX-98-9) (orders approving 
revised SuperMAX and Enhanced SuperMAX algorithms); 41480 (June 4, 
1999), 64 FR 32570 (June 17, 1999) (order approving revised SuperMAX 
Plus algorithm).
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    Under this proposal, the CHX would add a new program, Derivative 
SuperMAX, as a fourth program within the MAX system, to provide for 
price improvement for securities trading in minimum variations of \1/
64\. The Exchange believes that it is important to remain competitive 
in an increasingly technologically advanced marketplace with an influx 
of new products trading in minimum variations of \1/64\. In order to do 
so, the Exchange is proposing Derivative SuperMAX, a new price 
improvement algorithm that will afford CHX specialists the opportunity 
to offer customers price improvement for all securities at the minimum 
increment, even those securities that trade in \1/64\ increments.
    B. Proposal. As stated above, the Exchange proposes to create a new 
price improvement algorithm, to be called Derivative SuperMAX. 
Derivative SuperMAX will become part of the existing voluntary price 
improvement programs in which specialists may choose to participate. 
Participation will be on a security-by-security basis and will be 
limited to securities that trade in minimum variations of \1/64\ of 
$1.00.
    Under Derivative SuperMAX, which would be available only for those 
securities trading in minimum variations of \1/64\ of $1.00, small 
agency market orders (i.e., orders from 100 shares up to and including 
599 shares (or such greater amount designated 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 \1/16\ of a 
point or greater. The new algorithm would provide \1/64\ of a point 
price improvement from the ITS BBO. However, under the proposal, if a 
superior priced order was manually presented at the specialist's post, 
the incoming order to be executed pursuant to Derivative SuperMax would 
have to be executed at the superior price.
    C. Timing of Effectiveness of System Changes. The addition of 
Derivative SuperMAX would become operative shortly after approval of 
this proposed rule change, on a date to be determined by the Exchange. 
The Exchange will announce this date in a Notice to Members issued 
within 30 days of the date of Commission approval of the proposed rule 
change.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b)(5) of the Act \5\ 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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    \5\ 15 U.S.C. 78f(b)(5).
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(B) Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any inappropriate 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 either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) by order approve the proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. 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 filings sill also be 
available for inspection and copying at the principal office of the 
Exchange. All submissions should refer to File No. SR-CHX-99-24 and 
should be submitted by March 20, 2000.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority. \6\
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    \6\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-4557 Filed 2-25-00; 8:45 am]
BILLING CODE 8010-01-M