[Federal Register Volume 65, Number 169 (Wednesday, August 30, 2000)]
[Notices]
[Pages 52802-52803]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-22170]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43199; File No. SR-CHX-00-20]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Stock Exchange, Incorporated Relating to 
Automatic Execution of Orders for Nasdaq/NM Securities and Amendment 
No. 1 Thereto

August 23, 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 June 9, 2000, the Chicago Stock Exchange, Incorporated (``CHX'' 
or ``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II 
and III below, which Items have been prepared by the Exchange. On 
August 16, 2000, the Exchange filed Amendment No. 1 to the proposal.\3\ 
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 240.19n-4.
    \3\ See Letter from Paul O'Kelly, Executive Vice President, CHX, 
to Katherine England, Assistant Director, Division of Market 
Regulation, Commission, dated August 15, 2000. (``Amendment No. 
1''). In Amendment No. 1, the Exchange clarified how specialists 
would utilize the proposed enhanced liquidity function, and deleted 
a portion of the proposed rule text that would have permitted a 
specialist to switch to manual execution mode in unusual trading 
situations after, among other things, seeking relief from a member 
of the Exchange. Under the amended version of the rule, a specialist 
must seek relief from two floor officials.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the proposed Rule Change

    The Exchange proposes to amend the CHX rules governing automatic 
execution sequences and algorithms relating to the trading of Nasdaq/NM 
Securities on the Exchange. Specifically, the Exchange proposes to 
amend portions of Article XX, Rule 37. The text of the proposed rule 
change is available at the Exchange and at the Commission.

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 specifies in 
Item IV below. The Exchange has prepared summaries, set forth in 
Section A, B and C below, of the most significant aspects of such 
statements.

2. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to amend the CHX rules governing automatic 
execution sequences and algorithms relating to the trading of Nasdaq/NM 
Securities. Specifically, the Exchange proposes to amend portions of 
Article XX, Rule 37. The proposed amendments are intended to bring the 
Exchange's rules in line with the patterns and practices that currently 
exist in other markets with respect to the trading of Nasdaq/NM 
Securities.\4\
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    \4\ See NASD Notices to Members 99-11 and 99-12 (February, 1999) 
(discussing NASD member firm order execution practices, particularly 
during periods of significant market volatility).
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    Article XX, Rule 37, describes among other things, the 
circumstances under which orders must be accepted and guaranteed an 
execution at the national best or offer (the ``BEST Rule''). Rule 37 
also describes a specialist's ability to set a parameter (the auto-
execution threshold) that identifies which of the orders guaranteed a 
fill under the BEST Rule will be automatically, not manually, executed. 
The proposed rule change would allow specialists to reduce the minimum 
auto-execution threshold from 1000 shares to 300 shares, but would not 
change specialists' obligations under the Best Rule.\5\ In other words, 
specialists could choose to automatically execute only those orders of 
300 shares or less, but would still be required to guarantee executions 
at the national best bid or offer (``NBBO'') for orders up to an 
including 1,000 shares. The amended rule also would permit specialists 
to choose to provide an enhanced execution guarantee to orders above 
3000 shares by setting a new parameter called an ``enhanced liquidity 
quantity.'' Orders then would be automatically filled up to this 
enhanced liquidity quantity.\6\
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    \5\ The CHX represents that reduction of the minimum auto-
execution threshold is intended to limit the exposure of Nasdaq/NM 
specialists in the case of Nasdaq/NM Securities. The Exchange 
anticipates, however, that for the majority of Nasdaq/NM Securities, 
specialists will voluntarily remain at the 1000-share auto-execution 
threshold.
    \6\ See Amendment No. 1, supra note 3.
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    The rule change also would provide new guidelines for Nasdaq/NM 
specialists seeking to switch from

[[Page 52803]]

automatic execution mode to a manual execution mode in the event of 
unusual trading situations. The amended rule, which mirrors guidelines 
issued recently by the NASD to its members, would provide that in the 
case of Nasdaq/NM Securities, that term ``unusual trading conditions'' 
includes the existence of large order imbalances and/or significant 
price volatility.\7\ The rule would required that upon switching to 
manual execution mode based on the existence of unusual trading 
conditions, the specialist must: (1) Document the basis for election of 
manual execution mode; (2) disclose to its customers the differences in 
procedures from normal market conditions and the circumstances under 
which the specialist generally may activate manual execution mode; and 
(3) seek permission to switch to manual execution mode from two floor 
officials.\8\
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    \7\ See NASD Notice to Members 99-12, p. 2.
    \8\ See Amendment No. 1, supra note 3.
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    The foregoing changes are intended to place the Exchange's rules in 
line with existing market pattern and practice relating to the trading 
of Nasdaq/NM Securities. The rule change thus necessarily contemplates 
certain distinctions between transactions in Dual Trading System issues 
and Nasdaq/NM issues. All such distinctions were approved by the 
Exchange's Rules Committee and its Committee on Floor Procedure, both 
of which are populated by specialists. Both committees concur that the 
proposed changes do not place specialists on unequal footing based on 
the type of issue traded, but rather merely reflect the distinctions 
between the markets for Dual Trading System issues and Nasdaq/NM 
issues.
2. Statutory Basis
    The Exchange believes that the proposed rule is consistent with the 
requirements of the Act and the rules and regulations thereunder that 
are applicable to a national securities exchange, and, in particular, 
with the requirements of section 6(b).\9\ In particular, the proposed 
rule is consistent with section 6(b)(5) \10\ of the Act 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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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement of 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 Regarding the 
Proposed Rule Change Received From Members, Participants or Others

    Written comments were neither solicited nor 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 other 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 Exchange 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 in Washington, D.C. Copies of such 
filing will also be available for inspection and copying at the 
principal office of the Exchange. All submissions should refer to File 
No. SR-CHX-00-20 and should be submitted by September 20, 2000.

    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. 00-22170 Filed 8-29-00; 8:45 am]
BILLING CODE 8010-01-M