[Federal Register Volume 65, Number 113 (Monday, June 12, 2000)]
[Notices]
[Pages 36859-36860]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-14727]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42886; File No. SR-CHX-99-28]


Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; 
Order Approving Proposed Rule Change To Delete Certain Provisions of 
Article VIII, Exchange Rule 9, Prohibiting Off-Floor Transactions by 
Exchange Members

June 1, 2000.

I. Introduction

    On December 27, 1999, the Chicago Stock Exchange, Inc. (``CHX'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``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 rescind certain provisions of 
Article VIII, Exchange Rule 9, the Exchange's off-board trading rules. 
The proposed rule change was published for comment in the Federal 
Register on March 3, 2000.\3\ Proposed rule changes filed by the 
American Stock Exchange and the Philadelphia Stock Exchange to rescind 
their off-board trading rules were published on the same date as the 
CHX proposing release.\4\ Shortly thereafter, the Boston Stock Exchange 
and the Pacific Exchange filed similar proposed rule changes.\5\ The 
Commission received no comments on any of these proposals. Today, in 
separate orders, the Commission is approving the proposed rule changes 
to rescind off-board trading rules filed by the exchanges noted above.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 42459 (February 25, 
2000), 65 FR 11619.
    \4\ Securities Exchange Act Release No. 42460 (February 25, 
2000), 65 FR 11618 (March 3, 2000) (File No. SR-Amex-00-05); 
Securities Exchange Act Release No. 42458 (February 25, 2000), 65 FR 
11628 (March 3, 2000) (File No. SR-Phlx-00-12).
    \5\ Securities Exchange Act Release No. 42461 (April 10, 2000), 
65 FR 20497 (April 17, 2000) (File No. SR-BSE-00-02); Securities 
Exchange Act Release No. 42660 (April 10, 2000), 65 FR 21052 (April 
19, 2000) (File No. SR-PCX-00-11).
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II. Description of the Proposal

    Certain provision of Article VIII, Exchange Rule 9 restricts a 
member's ability to effect transactions in Exchange-listed securities 
off a national securities exchange. In the proposing release, the 
Exchange noted that the New York Stock Exchange, along with other 
exchanges, had submitted similar proposals to rescind their off-board 
trading rules,\6\ and that the Commission had recently adopted 
amendments to the Intermarket Trading System Plan (``ITS'') to expand 
the ITS linkage with the National Association of Securities Dealers' 
Computer Assisted Execution System. Thus, ``to confirm the Exchange's 
commitment to the competitive ideals on which those actions are 
based,'' the Exchange proposed to rescind certain provisions of its 
off-board trading rule, Article VIII, Exchange Rule 9.
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    \6\ Referring to Securities Exchange Act Release No. 42450 
(February 23, 2000), 65 FR 10577 (February 28, 2000) (``NYSE 
Release'').
    On May 5, 2000, the Commission approved the New York Stock 
Exchange's proposed rule change rescinding its off-board trading 
rule, Rule 390. Securities Exchange Act Release No. 34-42758 (May 5, 
2000), 65 FR 30175 (May 10, 2000) (``NYSE Approval Order'').
    In the NYSE Release, the Commission also solicited the public's 
views on a broad range of issues related to market fragmentation--
the trading of orders in multiple locations without interaction of 
those orders. The period for public comment on market fragmentation 
expired on May 12, 2000. The Commission currently is reviewing the 
comments submitted in response to the NYSE Release.
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III. Discussion

    The Commission finds 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. In particular, 
the Commission finds the proposed rule change is consistent with 
Section 6(b)(5) of the

[[Page 36860]]

Act \7\ which requires, among other things, that the rules of an 
exchange be designed 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, and Section 6(b)(8), which requires 
that the rules of an exchange not impose any burden on competition not 
necessary or appropriate in furtherance of the Act. The rescission of 
the Exchange's off-board trading restrictions is also consistent with 
Section 11A of the Act \8\ which sets forth the findings and objectives 
that are to guide the Commission in its oversight of the national 
market system. Specifically, rescinding the off-board trading 
restrictions will help further the national market system objective in 
Section 11A(a)(1)(C)(i) to assure the economically efficient execution 
of securities transactions, and in Section 11A(a)(1)(C)(ii) to assure 
fair competition between exchange markets and markets other than 
exchange markets.\9\
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    \7\ 15 U.S.C. 78f(b)(5).
    \8\ 15 U.S.C. 78k-1.
    \9\ In approving this proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
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    As discussed more fully in the NYSE Approval Order, the existence 
of off-board trading restrictions can no longer be justified in an age 
when advancing technology and expanding trading volume are introducing 
new competitive challenges for the U.S. securities markets, both at 
home and abroad. Off-board trading rules such as Articles VIII, 
Exchange Rule 9 directly restrict a certain type of market center 
competition--competition between exchange markets and markets other 
than exchange markets. Their rescission today eliminates an 
inappropriate regulatory burden on competition that runs contrary to 
the objectives set forth in the Act.
    Off-board trading restrictions have been justified on the basis 
that they promote the interaction of investors' orders without 
participation by a dealer--indeed an objective set forth in the 
Act.\10\ The Commission believes, however, that whatever beneficial 
effect off-board trading restrictions such as Article VIII, Exchange 
Rule 9 may have in enhancing the interaction of investors orders can no 
longer justify their anticompetitive nature. To the extent off-board 
trading rules enhance order interaction, they do so in an undesirable 
way--by attempting a direct restriction on competition. Such attempts 
are never wholly successful and typically only distort, rather than 
eliminate, competition and introduce unnecessary costs ultimately borne 
by investors.
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    \10\ Section 11A(a)(1)(C)(v) of the Act.
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    The outcome of competition between market centers should depend on 
which market centers are most able to serve investors interests by 
providing the highest quality trading services at the lowest possible 
prices; the Commission's regulatory task is removing unwarranted 
regulatory barriers to competition between market centers. As stated in 
the NYSE Approval Order, the rescission of off-board trading rules is 
``intended solely to free the forces of competition and allow investors 
interest to control the success or failure of individual market 
centers.'' \11\ The same rationale and motivation support the 
Commission's action today.
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    \11\ NYSE Approval Order at 30179.
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\12\ that the proposed rule change (SR-CHX-99-28) is approved.
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    \12\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation, pursuant to 
delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-14727 Filed 6-9-00; 8:45 am]
BILLING CODE 8010-01-M