[Federal Register Volume 65, Number 170 (Thursday, August 31, 2000)]
[Notices]
[Pages 53065-53067]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-22273]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43204; File No. SR-CHX-00-22]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of a Proposed Rule Change and Amendment 
Nos. 1 and 2 by The Chicago Stock Exchange, Incorporated Relating to 
the Securities Industry Transition to Decimal Pricing

August 24, 2000.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on July 17, 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 and 
II below, which Items have been prepared by the CHX. The CHX amended 
the proposal on August 22, 2000 and August 24, 2000, respectively.\3\ 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons and to approve the 
proposed rule change, as amended, on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Letter dated August 21, 2000, from Paul B. O'Kelly, 
Executive Vice President, CHX, to Alton S. Harvey, Office Head, 
Division of Market Regulation (``Division''), Commission 
(``Amendment No. 1''). Amendment No. 1 requests accelerated approval 
of the proposed rule change on a pilot basis through February 28, 
2001. See also Letter dated August 22, 2000, from Paul B. O'Kelly, 
Executive Vice President, CHX, to Alton S. Harvey, Office Head, 
Division, Commission (``Amendment No. 2''). Amendment No. 2 
withdraws proposed amendments to Rule 37(b)(6).
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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 certain CHX rules that will be 
impacted by the securities industry transition to decimal pricing. 
Specifically, the Exchange proposes to amend portions of Article XX, 
Rule 37. The text of the proposed rule change is available at the 
Commission and the CHX.

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 CHX 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 specified in 
Item IV below. The CHX has prepared summaries, set forth in sections A, 
B, and C below, of the most significant aspects of such statements.

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

1. Purpose
    The Exchange proposes to amend certain CHX rules that will be 
impacted by the transition to decimal pricing. Specifically, the 
Exchange proposes three groups of changes to Article XX, Rule 37, which 
would (i) revise the Exchange's existing automated price improvement 
algorithms to provide price improvement in decimal increments; (ii) 
remove the ``pending auto-stop'' functionality in the Exchange's 
systems; and (iii) allow a specialist, on an issue by issue basis, to 
establish an auto execution guarantee that is not dependent on the ITS 
Best Bid or Offer (``ITS BBO'') or National Best Bid or Offer 
(``NBBO'') size. The Exchange believes that decimal pricing is likely 
to affect the CHX trading environment, and the interaction between the 
CHX and the national market system, in a manner that necessitates rule 
amendments, such as these, that are designed to minimize the impact of 
decimalization of trading operations. The Exchange will implement the 
proposed rule change on a pilot basis through February 28, 2001.
    Price Improvement Changes. The Exchange proposes to amend Rule 
37(d), (e), (f) and (g), which govern the Exchange's price improvement 
programs, known as SuperMAX Plus, SuperMAX, Enhanced SuperMAX and 
Derivative SuperMAX. Under the amended rules, each price improvement 
program would provide for price improvement of $.01 under the 
circumstances set forth below. If the criteria set forth below are not 
satisfied (or if an issue is trading in a decimal minimum price 
variation other than $.01), the orders would not be eligible for price 
improvement, but would be executed at the ITS BBO (or NBBO in the case 
of Nasdaq National Market (``Nasdaq NM'') issues).
    For orders of 100-199 shares (or more, if specified by the 
specialist and approved by the Exchange) for Dual Trading System issues 
\4\ trading in decimals, SuperMAX Plus would

[[Page 53066]]

provide for automatic execution at $.01 lower than the ITS Best Offer 
(for a buy order) or $.01 higher than the ITS Best Bid (for a sell 
order) if the spread between the ITS Best Bid and the ITS Best Offer is 
at least $.03 and the last primary market sale is at least $.03 lower 
than the ITS Best Offer (for a buy order) or higher than the ITS Best 
Bid (for a sell order).
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    \4\ ``Dual Trading System issues'' are securities that are 
listed and traded on the CHX and either the New York Stock Exchange 
or the American Stock Exchange.
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    For orders of 100-199 shares (or more, if specified by the 
specialist and approved by the Exchange) for Nasdaq NM issues trading 
in decimals, SuperMAX Plus would provide for execution at $.01 lower 
than the National Best Offer (``NBO'') (for a buy order) or $.01 higher 
than the National Best Bid (``NBB'') (for a sell order) if the spread 
between the NBB and the NBO is at lest $.03.\5\
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    \5\ The existing SuperMAX Plus algorithm provides for price 
improvement of \1/16\ th of a point if the ITS BBO spread is \1/8\ 
th of a point or greater and, in the case of Dual Trading System 
issues, the last primary market sale is at least \1/16\ th of a 
point lower than (for a buy order) or higher than (for a sell order) 
the ITS BBO.
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    For orders of 200-499 shares (or more, if specified by the 
specialist and approved by the Exchange) for Dual Trading System issues 
trading in decimal pricing increments, SuperMAX would provide for 
execution at $.01 lower than the ITS Best Offer (for a buy order) or 
$.01 higher than the ITS Best Bid (for a sell order) if the spread 
between the ITS Best Bid and the ITS Best Offer is at least $.05 and 
the last primary market sale is at least $.05 lower than the ITS Best 
Offer (for a buy order) or higher than the ITS Best Bid (for a sell 
order).\6\
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    \6\ The existing SuperMAX algorithm provides for a price 
improvement of \1/16\ th of a point if the ITS BBO spread is \1/8\ 
th of a point or greater and the last primary market sale is at 
least \1/8\ th of a point lower than (for a buy order) or higher 
than (for a sell order) the ITS BBO.
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    For orders exceeding 499 shares for Dual Trading System issues 
trading in decimal pricing increments, Enhanced SuperMAX \7\ would 
provide for execution at $.01 better than the stopped price if the 
first primary market sale during the Time Out Period is at least $.10 
lower than the stopped price (for a buy order) or higher than the 
stopped price (for a sell order).
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    \7\ Enhanced SuperMAX provides that under certain circumstances, 
an eligible order is ``stopped'' for a thirty-second ``Time Out 
Period'' during which a specialist may seek a better price for the 
customer. If an order is stopped pursuant to the Enhanced SuperMAX 
terms, the order is guaranteed no worse than the ITS BBO at the time 
the order was stopped.
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    For order eligible for Derivative SuperMAX (i.e., orders for 
certain issues designated by the Exchange's Board of Governors from 
time to time), in the case of issues trading in decimals, Derivative 
SuperMAX would provide for execution at $.01 lower than the ITS Best 
Offer (for a buy order) or $.01 higher than the ITS Best Bid (for a 
sell order) if the spread between the ITS Best Bid and the ITS Best 
Offer is at lest $.03.\8\
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    \8\ The existing Derivative SuperMAX algorithm provides for 
price improvement of \1/64\ th of a point if the ITS BBO spread is 
\1/16\ th of a point or greater.
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    Removal of the Pending Auto-Stop Functionality. For similar 
reasons, the Exchange proposes to amend Rule 37(b)(10) to eliminate the 
Exchange's ``pending auto-stop'' function. Under the current rule, all 
agency market orders from 100 to 599 shares that are not automatically 
executed because, among other things, the order size exceeds the 
quantity at the ITS BBO, are designated as ``pending auto-stop 
orders.'' Such orders are stopped, and due an execution at the ITS BBO 
thirty seconds after entry into the Exchange's Midwest Automated 
Execution (``MAX'') system, unless the order has been canceled, 
executed, manually stopped, or put on hold during the thirty second 
period. Once an order is stopped, a text message to that effect is 
automatically sent to the order-sending firm.
    The Exchange believes that this feature is not practicable in the 
decimal pricing environment, given the anticipated dramatic increases 
in quote traffic and the systems issues associated with generating 
administrative notifications regrading pending auto-stop. Additionally, 
the Exchange believes that trading in decimals will significantly 
increase stock price points and, as a result, will likely decrease the 
quantities associated with the ITS BBO price point and increase the 
rate of change in the ITS BBO price point. Both of these factors will 
reduce a specialist's ability to offset the pending auto-stop guarantee 
to a degree that the CHX is not now able to quantify. Under these 
circumstances, the Exchange believes that it would be imprudent to 
continue to provide such a guarantee.
    Changes Relating to Relationship Between Automatic Execution 
Guarantee and BBO Size. The rationale set forth above relating to the 
likely decrease in the quantities associated with the BBO price point 
also supports the Exchange's proposed rule change permitting CHX 
specialists to designate automatic execution guarantee levels that are 
not dependent on the BBO. Under the current Rule 37(b)(11), an order is 
not eligible for automatic execution on the Exchange if the order is 
larger than the then-current BBO size. If decimalization results in 
decreased quantities at each price point, this decrease would effect a 
corresponding decrease in the number of orders eligible for automatic 
execution on the Exchange. To accommodate customer demand for automatic 
execution, the Exchange believes that the proposed rule change is 
necessary. As amended, the rule would permit a CNX specialist to 
designate, on an issue-by-issue basis, automatic execution guarantees 
that could exceed the BBO size. Such an election would be strictly 
voluntary and thus would not operate to increase the exposure of any 
specialist who desired to maintain the protections of the existing 
rule.
2. Statutory Basis
    The CHX 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. In particular, the 
CHX believes that the proposed rule is consistent with section 6(b)(5) 
\9\ of the Act in that it is designed to promote just and equitable 
principles of trade, to remove impediments to 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)(5).
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B. Self-Regulatory Organization's Statement on 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 on the Proposed 
Rule Change Received from Members, Participants, or Others

    The Exchange did not solicit or receive written comments on the 
proposed rule change.

III. Commission's Findings and Order Granting Accelerated Approval 
of the Proposed Rule Change

    The Commission finds that the proposed rule change, as amended, is 
consistent with the Act and the rules and regulations under the Act 
applicable to a national securities exchange and, in particular, the 
requirements of section 6(b) of the Act.\10\ Specifically, the 
Commission finds that the proposed rule change is consistent with the 
section 6(b)(5) \11\ requirements that the rules of an exchange be 
designed to promote just and equitable principles of trade, to

[[Page 53067]]

prevent fraudulent and manipulative acts and, in general, to protect 
investors and the public interest.\12\
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    \10\ 15 U.S.C. 78f(b).
    \11\ 15 U.S.C. 78f(b)(5).
    \12\ In approving this rule change, the Commission has 
considered its impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
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    The Commission believes that the proposed rule change may help to 
facilitate a smooth transition to decimal pricing. For example, 
proposed Rules 37(b)(10) and (11) should help to ensure that customer 
demand for automatic execution will continue to be satisfied in a 
decimals environment. Specifically, proposed Rule 37(b)(11) permits 
specialists to guarantee, on an issue-by-issue basis, automatic 
executions of orders that exceed the ITS BBO or NBBO size at the 
specified price. The Commission believes that decimal pricing could 
result in decreased quantities at each price, which would result in a 
corresponding decrease in the number of orders eligible for automatic 
execution on the Exchange. Thus, the proposed rule change benefits 
investors by providing specialists the flexibility to automatically 
execute orders larger than the current ITS BBO or NBBO size.
    In addition, Rule 37(b)(10) currently requires all agency market 
orders from 100 to 599 shares that are not automatically executed 
because, among other things, the order exceeds the ITS BBO quantity, to 
be designated as ``pending auto-stop orders.'' These orders are stopped 
and due an execution at the ITS BBO thirty seconds after entry into the 
Exchange's MAX system. As stated above, the Commission believes that 
decimal pricing may result in decreased quantities at each price, which 
in turn would result in fewer automatic executions. The Commission 
believes that the proposed rule change may help to alleviate this 
concern by eliminating the pending auto-stop function. The Commission 
believes that the removal of this provision will help to ensure demand 
for automatic execution continues to be satisfied.
    Finally, proposed changes to Rule 37(d), (e), (f), and (g) amend 
the Exchange's automated price improvement algorithms to accommodate 
decimal pricing. Specifically, the proposal provides for a $.01 price 
improvement to orders that meet the requirements of the applicable 
provisions of the rule. The Commission believes that the proposal will 
benefit investors and the public interest by continuing to provide an 
opportunity for price improvement for stocks that trade in decimals.
    The Commission believes that it is consistent with the protection 
of investors and the public interest and therefore finds good cause for 
approving the proposed rule change prior to the thirtieth day after the 
date of publication of notice thereof in the Federal Register. The 
proposed rule change is designed to permit a smooth transition to 
decimal pricing, which is scheduled to begin in certain securities on 
August 28, 2000. In addition, the Commission notes that the proposed 
rule change is being approved on a pilot basis only, through February 
28, 2001. In light of these factors, the Commission finds good cause to 
approve the proposed rule change on an accelerated basis.

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 fix six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. 
Copies of the submissions, 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 filings will also be 
available for inspection and copying at the principal office of the 
Exchange. All submissions should refer to the File No. SR-CHX-00-22 and 
should be submitted by September 21, 2000.

V. Conclusion

    It Is Therefore Ordered, pursuant to section 19(b)(2) of the Act, 
that the proposed rule change (SR-CHX-00-22), as amended, is approved 
through February 28, 20001.
    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. 00-22273 Filed 8-30-00; 8:45 am]
BILLING CODE 8010-01-M