[Federal Register Volume 65, Number 60 (Tuesday, March 28, 2000)]
[Notices]
[Pages 16442-16443]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-7585]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42565; File No. SR-CHX-99-24]


Self-Regulatory Organizations; Order Granting Accelerated 
Approval and Notice of Filing and Order Granting Accelerated Approval 
of Amendment No. 1 to 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

March 22, 2000.

I. Background

    On October 20, 1999, the Chicago Stock Exchange, Inc. (``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 amend Article XX, Rule 37, of the Exchange's 
rules relating to price improvement. The proposed rule change was 
published for comment in the Federal Register on February 28, 2000.\3\ 
On March 21, 2000, the Exchange filed Amendment No. 1 to the 
proposal.\4\ The Commission received no comments on the proposal. This 
order approves the proposal, as amended on an accelerated basis.
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    \1\ 15 U.S.C. 789s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 42442 (February 18, 
2000), 65 FR 10575.
    \4\ See letter from Paul B. O'Kelly, Executive Vice President, 
Market Regulation and Legal, CHX to Katherine A. England, Assistant 
Director, Division of Market Regulation, Commission, dated March 21, 
2000. (``Amendment No. 1``). In Amendment No. 1, the CHX confirmed 
its readiness and intention to activate the price improvement 
algorithm described in this proposal within one day following the 
Commission's approval of this proposed rule change. The CHX also 
indicated that it intended to implement the proposal as soon as 
practicable in order to remain competitive with other market centers 
that trade the securities that trade at the CHX in minimum 
increments of \1/64\th. Finally, the CHX noted that approximately 
88% of the trades in such securities are for 599 shares or less.
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II. Description of the Proposal

    The Exchange proposes to amend Article XX, Rule 37, of the 
Exchange's rules, governing price improvement, to add section 37(g) to 
provide for an algorithm for price improvement for issues trading in 
minimum variations of \1/64\th of $1.00. 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\th.
    Presently, three existing CHX programs within the MAX system, 
SuperMAX, Enhanced SuperMAX and SuperMAX Plus, use computerized 
algorithms to provide automated price improvement. These programs were 
created for securities that trade in minimum variations of \1/16\th to 
provide for price improvement of \1/16\th of a point when the spread is 
\1/8\th or greater. Specialist participation in all three of these 
programs is voluntary. Each of these price improvement programs were 
approved by the Commission on a permanent basis.\5\ Under this 
proposal, the CHX would add a fourth voluntary program, Derivative 
SuperMAX, within the MAX system to provide for price improvement for 
securities trading in minimum variation of \1/64\th.\6\ The addition of 
the proposed price improvement algorithm for Derivative SuperMAX should 
enhance the ability of CHX specialists to offer customers price 
improvement for all securities at the minimum increment, even those 
securities that trade in \1/64\th increments.
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    \5\ 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).
    \6\ Presently, only securities derivative equity products trade 
in a minimum increment of \1/64\th on the Exchange. However, the 
Derivative SuperMAX algorithm is not limited to derivative products, 
thus non-derivative securities traded in \1/64\th increments on the 
Exchange in the future would eligible for price improvement under 
this proposal. Telephone conversation between Paul B. O'Kelly, 
Executive Vice President, Market Regulation and Legal, CHX, and Marc 
McKayle, Attorney, Division, Commission on March 20, 2000.
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    Under Derivative Super MAX, which would be available only for those 
securities trading in minimum variation of \1/64\th of $1.00, small 
agency market order (i.e. orders from 100 shares up to and including 
500 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\th of a 
point or greater. The new algorithm would provide \1/64\th of a point 
price improvement from the ITS BBO. Specialist participation in the 
Derivative SuperMAX would be on a security-by-security basis and would 
be limited to securities that trade in minimum variations of \1/64\th 
of $1.00.
    The addition of Derivative SuperMAX would become operative shortly 
after Commission approval of this proposed rule change, on a date to be 
determined by the Exchange.\7\
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    \7\ See Amendment No. 1, note 4, above.
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III. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments conceding Amendment No. 1, including whether Amendment No. 1 
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 copying at the principal office of the CHX. All 
submissions should refer to File No. SR-CHX-99-24 and should be 
submitted by April 18, 2000.

IV. Commission findings and Order Granting Accelerated Approval of 
the Proposed Rule Change

    After careful review, the Commission finds that the proposed rule 
change is consistent with the Act and the rules and regulations under 
the Act applicable to a national securities exchange.\8\ Specifically, 
the Commission finds that the proposed rule change is consistent with 
Section 6(b)(5) of the Act \9\ which requires that the rules of an 
exchange be designed, among other things, 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 transactions in 
securities, to remove impediment sand to perfect the mechanism of a 
free and open market and a national market

[[Page 16443]]

system, and, in general, to protect investors and the public interest.
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    \8\ In approving this proposed rule change, the Commission notes 
that it has considered the proposed rule's impact on efficiency, 
competition, and capital formation.
    \9\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that the Derivative SuperMAX price 
improvement algorithm should provide investors a meaningful opportunity 
for price improvement when securities trading in \1/64\th increments 
have a spread of \1/16\th point or greater. The Commission believes 
that, because the opportunity for price improvement is automatic and 
without any specialist intervention, Derivative SuperMAX could 
facilitate order interaction and enhance customer orders consistent 
with section 6(b)(5) of the Act.\10\ The Commission notes that while 
Derivative Super MAX is a voluntary program that specialists may choose 
to participate in for Dual Trading System issues,\11\ providing a 
greater number of investors an opportunity to achieve price improvement 
is compatible with the views on best execution expressed in the Order 
Handling release.\12\
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    \10\ 15 U.S.C. 78f(b)(5).
    \11\ Dual Trading issues are issues traded on the CHX, either 
through listing on the CHX or pursuant to unlisted trading 
privileges, and are also listed on either the New York Stock 
Exchange or the American Stock Exchange.
    \12\ See Securities Exchange Act Release No. 37619A (September 
6, 1996), 61 FR 48290 (September 12, 1996).
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    The Commission finds good cause for approving the proposed rule 
change prior to the thirtieth day after the date of publication of 
notice of the proposal in the Federal Register because in Amendment No. 
1 to the proposal the Exchange has asserted that is able to activate 
the price improvement algorithm within one day of Commission approval. 
Further the, Commission believes that the proposal's price improvement 
algorithm should enhance the CHX's ability to compete with other market 
centers that trade the same securities that trade at the Exchange in 
minimum increments of \1/64\th, which in turn should benefit customers. 
Finally, the Commission notes that it expects the Exchange to submit 
proposed rule changes for all four MAX price improvement algorithms, 
pursuant to Section 19(b)(3)(A) of the Act,\13\ to clarify the 
interpretation and operation of the pricing algorithms once securities 
are quoted and traded in decimals.
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    \13\ 15 U.S.C. 78s(b)(3)(A).
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IV. CONCLUSION

    It is Therefore Ordered, pursuant to Section 19(b)(2) of the 
Act,\14\ that the proposed rule change (File No. SR-CHX-24), as 
amended, be approved.
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    \14\ 15 U.S.C. 78s(b)(2).
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    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. 00-7585 Filed 3-27-00; 8:45 am]
BILLING CODE 8010-01-M