[Federal Register Volume 65, Number 51 (Wednesday, March 15, 2000)]
[Notices]
[Pages 14002-14003]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-6367]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42503; File No. SR-CHX-99-11]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change by the Chicago Stock Exchange, Incorporated Relating to 
Specialist Retention Periods for Nasdaq National Market Securities 
Traded on the Exchange Pursuant to Unlisted Trading Privileges

March 8, 2000.

I. Introduction

    On August 19, 1999, the Chicago Stock Exchange, Incorporated 
(``CHX'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to modify co-specialist retention 
periods for securities listed on the Exchange and to eliminate co-
specialist retention periods for Nasdaq National Market (``Nasdaq/NM'') 
securities traded on the Exchange pursuant to unlisted trading 
privileges.\3\ The Federal Register published the proposed rule change 
for comment on October 12, 1999, and the portion related to listed 
securities was approved, on an accelerated basis, at that time.\4\ The 
Commission received no comments on the proposal. This order approves 
the proposal.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 41922 (Sept. 26, 1999), 
64 FR 55324 (Oct. 12, 1999).
    \4\ Id. The order permanently approved a pilot program relating 
to the time periods for which a co-specialist must trade a security 
listed on the Exchange prior to deregistering as the specialist for 
that security as set forth in CHX Rules, Article XXX, Rule 1, 
Interpretation and Policy .01.
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II. Description of Proposal

    The Exchange proposes eliminating retention periods for co-
specialists in Nasdaq/NM securities provided that at least five 
calendar days notice is given to order sending firms. Because the 
number of Nasdaq/NM securities that the Exchange can trade pursuant to 
unlisted trading privileges (``UTP'') is limited,\5\ stock allocation 
issues relating to Nasdaq/NM securities that are distinct from 
allocation issues relating to other securities traded on the Exchange 
have developed. Specifically, because the existing 1,000 security limit 
on the total number of Nasdaq/NM securities that can be traded UTP on 
an Exchange-wide basis has been largely filled, co-specialists in 
Nasdaq/NM securities cannot acquire a new Nasdaq/NM issue until they 
deregister in an issue they currently trade and that security is 
removed from the list of Nasdaq/NM securities traded on the Exchange. 
The current specialist deregistration rules, however, do not provide 
the flexibility to quickly complete this procedure.\6\ In addition, the 
current rules do not provide Nasdaq/NM specialist firms sufficient 
flexibility to reallocate stocks awarded in competition between co-
specialists within the same specialist unit when a co-specialist's 
stocks become active and volatile.\7\
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    \5\ Securities Exchange Act Rel. No. 41392 (May 12, 1999), 64 FR 
27839 (May 21, 1999).
    \6\ Interpretation and Policy .01 to Article XXX, Rule 1 of the 
CHX Rules requires two years to elapse before an intra-firm transfer 
of an issue awarded in competition (i.e., transfer of the issue to 
another co-specialist within the same specialist unit) is permitted 
without posting. No time period is required before an intra-firm 
transfer of an issue awarded without competition is allowed. Before 
a co-specialist is able to deregister in a security if no other 
specialist would be assigned to the security after posting and 
deregistration, a co-specialist was required to trade the security 
for three months for securities awarded without competition, and one 
year for securities awarded in competition.
    \7\ In such a situation, a specialist unit might deem it to be 
in the best interests of customers and the Exchange to transfer the 
stock to another co-specialist within the same specialist unit that 
is assigned to a fewer number of issues or is more experienced.
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    To address these concerns, the Exchange is proposing to eliminate 
the retention restrictions on co-specialists for Nasdaq/NM securities 
governed by Interpretation and Policy .01 to Rule 1. The amended 
interpretation will permit co-specialists in Nasdaq/NM issues to 
deregister in an issue more quickly, to allow them to respond to market 
developments. In addition, and, subject to the continuing authority of 
the Exchange's Committee on Specialist Assignments and Evaluation, the 
proposal permits co-specialists in Nasdaq/NM securities to deregister 
at any time after providing at least five calendar days notice to order 
sending firms, and allows intra-firm transfers of Nasdaq/NM securities 
awarded in competition without a mandatory retention period.\8\
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    \8\ There is currently no minimum retention period for intra-
firm transfers of securities awarded without competition. See 
Article XXX, Rule 1, Interpretation and Policy .01.
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    The Exchange will ensure that there will be no disruption to the 
marketplace as a result of relaxed stock retention requirements.\9\ The 
Exchange believes

[[Page 14003]]

that the $2,000 fee it charges for such transfers will prevent 
disruptive serial transfers and deregistrations that have not been 
carefully contemplated by the specialist.\10\
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    \9\ The Exchange represents that the proposed rule change will 
have no ramifications on the UTP Plan governing the collection, 
consolidation and dissemination of quotation and transaction 
information for NASDAQ/NM securities. Telephone call between Paul 
O'Kelly, Executive Vice President, CHX, and Sonia Patton, Attorney, 
Division, Commission, on March 8, 2000.
    \10\ See Securities Exchange Act Release No. 41569 (June 28, 
1999), 64 FR 36726 (July 7, 1999).
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    The proposed amendments relating to Nasdaq/NM securities will only 
be effective for as long as the number of Nasdaq/NM issues that can be 
traded UTP on the Exchange is limited. If the Commission eliminates 
this limitation, Nasdaq/NM issues and the co-specialist maintaining 
Nasdaq/NM issues will be subject to the regular retention periods 
applicable to all other issues traded on the Exchange.

III. Discussion

    The Commission finds that the proposed rule change is consistent 
with Section 6 of the Act \11\ and the rules and regulations thereunder 
\12\ applicable to a national securities exchange. Section 6(b) of the 
Act \13\ states that the rules of an exchange must be designed to 
facilitate securities transactions and to remove impediments to and 
perfect the mechanism of a free and open market. The Commission 
believes that eliminating retention periods for co-specialists in 
Nasdaq/NM securities will enable the Exchange and specialist firms to 
more quickly respond to market developments. The Commission believes 
the proposed rule change will serve the public interest by allowing the 
transfer of a security to a co-specialist that is more experienced or 
is assigned to a fewer number of issues if trading in one or more of 
the securities handled by another co-specialist becomes unusually high 
or volatile. Finally, in approving the proposed rule change, the 
Commission notes that the Exchange, through its Committee on Specialist 
Assignments and Evaluation, will monitor the turnover of co-specialist 
assignments to avoid possible abuses.
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    \11\ 15 U.S.C. 78f.
    \12\ In approving this rule change, the Commission has 
considered the proposal's impact on efficiency, competition, and 
capital formation, consistent with Section 3 of the Act. 15 U.S.C. 
78c(f).
    \13\ 15 U.S.C. 78f(b).
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IV. Conclusion

    It Is Therefore Ordered, pursuant to Section 19(b)(2) of the 
Act,\14\ that the portion of the proposed rule change relating to 
specialist retention periods for Nasdaq/NM securities (File No. SR-CHX-
99-11) is approved.
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    \14\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-6367 Filed 3-14-00; 8:45 am]
BILLING CODE 8010-01-M