[Federal Register Volume 65, Number 151 (Friday, August 4, 2000)]
[Notices]
[Pages 48035-48036]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-19737]



[[Page 48035]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43083; File No. SR-CHX-99-31]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change and Notice of Filing and Order Granting Accelerated Approval of 
Amendment No. 1 to the Proposed Rule Change by the Chicago Stock 
Exchange, Inc. Relating to the Definition of Pre-opening Orders in Dual 
Trading System Issues

July 28, 2000.

I. Introduction

    On January 3, 2000, the Chicago Stock Exchange, Inc. (``CHX'' or 
``Exchange'') submitted to the Securities and Exchange Commission 
(``SEC'' or ``Commission'') pursuant to Section 19(b)(1) \1\ of the 
Securities Exchange Act of 1934 (``Act'') and Rule 19b-4 \2\ 
thereunder, a proposed rule change relating to the definition of 
preopening orders in Dual Trading System Issues. The proposed rule 
change was published for comment in the Federal Register on March 29, 
2000.\3\ The Commission received no comments on the proposal. On July 
19, 2000, the Exchange submitted Amendment No. 1 to the proposed rule 
change.\4\ This order approves the proposal. The Commission is also 
soliciting comment on Amendment No. 1 to the proposed rule change from 
interested persons, and has approved the amendment on an accelerated 
basis, as discussed below.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Exchange Act Release No. 42566 (March 22, 2000), 65 FR 
16677.
    \4\ Letter from Daniel J. Liberti, Vice President and Chief 
Enforcement Counsel, CHX, to Kelly Riley, Attorney, Division of 
Market Regulation, SEC, dated July 17, 2000 (``Amendment No. 1''). 
In Amendment No. 1, the Exchange replaced the originally proposed 
language defining a preopening order. As amended, CHX Rule 37(a)(4) 
will read: ``[f]or purposes of this rule, preopening orders in Dual 
Trading System Issues are orders that are received before a primary 
market opens a subject security based on a print or based on a 
quote.''
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II. Description of the Proposal

    The Exchange has proposed to amend its Article XX, Rule 37(a)(4), 
which governs guaranteed executions of preopening orders, to define 
what constitutes a pre-opening order in Dual Trading System Issues. A 
Dual Trading System Issue is an issue that is traded on the CHX, either 
through listing on the CHX or pursuant to unlisted trading privileges, 
and that is also traded on either the New York Stock Exchange or 
American Stock Exchange.
    Currently, CHX Rule 37(a)(4) requires that a preopening order be 
accepted and filled at the primary market opening trade price. Pursuant 
to this language, orders received at the CHX before the primary market 
publishes its first print \5\ are customarily filled at the first print 
price. According to the CHX, it has applied the rule in this manner 
because prints are the most common way of effecting an opening in a 
security. Nevertheless, on occasion a primary market may open a 
security by disseminating a quote without a corresponding print. Thus, 
when a security is opened by the primary market with a published quote, 
orders received by the CHX after such quote has been published are not 
considered preopening orders.
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    \5\ A print is defined as an executed trade
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    According to the Exchange, the lack of a specific definition of 
what is a preopening order has caused confusion and led to unintended 
execution guarantees. Specifically, the Exchange stated that there has 
been confusion about the status of orders received on the CHX after a 
primary market has published a quote but before a primary market has 
published a print. Therefore, the Exchange's proposal would clarify 
that orders received after a primary market opens a security with a 
published quote are not preopening orders for the purposes of CHX Rule 
37(a)(4). Specifically, the Exchange proposed to define a preopening 
order as an order received prior to a primary market's opening of a 
subject security, which can occur either with a trade or a quote. Thus, 
an order received on the CHX after the primary maket publishes a quote 
but before the primary market has published a print will not be 
considered a preopening order for the purposes of CHX Rule 37(a)(4) and 
therefore not entitled to be filled at a subsequent primary market 
print.

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.\6\ 
Specifically, the Commission finds that the proposed rule change is 
consistent with Section 6(b)(5),\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.
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    \6\ In approving this proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
    \7\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that the proposed definition helps to 
clarify the Exchange's rules regarding execution guarantees for Dual 
Trading System Issues. According to the Exchange, the lack of a 
specific definition regarding which type of orders will be executed at 
the primary market's opening trade price has caused confusion among 
investors. By providing a specific definition of a preopening order, 
the Exchange should be able to reduce confusion on this issue among 
investors and Exchange specialists and provide more certainty to 
investors on the execution price their orders are entitled to receive. 
The Commission believes that eliminating this confusion about how an 
order will be handled should enhance the efficiency of order executions 
on the CHX. Moreover, investors should be able to make informed 
decisions on where to route their orders for execution because they 
should have a clearer understanding about how their order will be 
handled and executed.
    The Commission understands that the CHX's definition is consistent 
with the definition of preopening orders on other markets. Further, the 
Commission notes that there should not be confusion as to whether a 
primary market opens a security with a quote as opposed to a trade 
because, according to information provided by the CHX, information on 
how a stock opens (i.e., whether it opens by a quote or a trade) is 
widely disseminated by market data vendors. Therefore, the Commission 
believes that the proposal should foster just and equitable principles 
of trade by specifically defining which orders are designated 
preopening orders and thus entitled to be executed at the primary 
market's opening trade price.
    The Commission finds that good cause exists for approving Amendment 
No. 1 to the proposed rule change prior to the thirtieth day after the 
date of publication of notice thereof in the Federal Register. In 
Amendment No. 1, the CHX amended the language of the definition of 
preopening order to better reflect its intent that preopening orders 
are orders received by the CHX before a primary market opens a subject 
security, which can occur by either a quote or a trade. The Commission 
finds that the language proposed in Amendment No. 1 further clarifies 
the CHX's definition of preopening orders. Therefore, because the 
Commission finds that Amendment No. 1 does not substantively change the 
meaning or

[[Page 48036]]

intent of the proposed rule, the Commission believes that good cause 
exists, consistent with Sections 6(b)(5) \8\ and 19(b) \9\ of the Act, 
to approve Amendment No. 1 on an accelerated basis.
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    \8\ 15 U.S.C. 78f(b)(5).
    \9\ 15 U.S.C. 78f(b).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning 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 N.W., Washington, D.C. 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 in 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-99-31 and should 
be submitted by August 25, 2000.

V. Conclusion

    It Is Therefore Ordered, pursuant to Section 19(b)(2) of the 
Act,\10\ that the amended proposed rule change (SR-CHX-99-31) be and 
hereby is approved.
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    \10\ 15 U.S.C. 78s(b)(2)

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-19737 Filed 8-3-00; 8:45 am]
BILLING CODE 8010-01-M