[Federal Register Volume 65, Number 170 (Thursday, August 31, 2000)]
[Notices]
[Pages 53067-53069]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-22274]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43203; File No. SR-CHX-00-13]


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 
Participation in Crossing Transactions Effected on the Exchange Floor

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 May 3, 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 23, 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.
---------------------------------------------------------------------------

    \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. Amendment No. 1 also extends the provisions of Rule 23 to 
Nasdaq National Market securities. 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 the portion of Amendment No. 1 that 
extends Rule 23 to Nasdaq National Market securities.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange proposes to amend Article XX, Rule 23 of the 
Exchange's rules governing participation in crossing transactions 
effected on the Exchange floor. 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

[[Page 53068]]

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 CHX Rule 23 governing participation 
in crossing transactions effected on the floor of the Exchange, which 
represent a significant component of Exchange volume.\4\ Under current 
Rule 23, if a floor broker presents a crossing transaction, another 
member may participate, or ``break up,'' the transaction, by offering 
(after presentation of the proposed crossing transaction) to improve 
one side of the transaction by the minimum price variation. The floor 
broker is then effectively prevented from consummating the transaction 
as a ``clean cross,'' which may be to the detriment of the floor 
broker's customer.\5\ In instances where the minimum price variation is 
relatively small, it is very inexpensive for a member to break up 
crossing transactions in this manner. Floor brokers are currently 
experiencing difficulty, for example, cleanly crossing transactions in 
stocks which trade in minimum price variations of \1/64\th.
---------------------------------------------------------------------------

    \4\ In February and March of 2000, for example, share volume 
from brokered crossing transactions constituted approximately 13% of 
total share volume traded on the Exchange.
    \5\ Some institutional customers prefer executing large crossing 
transactions at a single price and are willing to forego the 
opportunity to achieve the piecemeal price improvement that might 
result from the break up of the cross transaction by another 
Exchange member. Of course, the floor broker will still retain the 
ability to present both sides of the order at the post if the 
customers so desire.
---------------------------------------------------------------------------

    Given the number of products that are commencing trading in very 
small minimum price increments, as well as the certainty of small price 
increments once the securities industry makes the transition to decimal 
pricing, the floor broker community, and other CHX members, are 
concerned that much of the crossing business and corresponding Exchange 
volume could evaporate if the current rules are not amended to preclude 
breaking up crossing transactions. Accordingly, the Exchange's 
Decimalization Subcommittee and Floor Broker Tech Subcommittee have 
worked to achieve consensus on the proposed rule change, which would 
strike a balance of interests of those members who are impacted by 
crossing transactions.
    Under the proposed rule change, a floor broker would be permitted 
to consummate crossing transactions involving 5,000 shares or more \6\ 
without interference by any specialist or market maker if, prior to 
presenting the cross transaction, the floor broker first requests a 
quote for the subject security.\7\ These requests will place the 
specialist and other market makers on notice that the floor broker 
intends to cross within the bid-offer spread. This arrangement will 
ensure that a specialist or market maker retains the opportunity to 
better the cross price by updating their quote, but will preclude them 
from breaking up a cross transaction after the cross transaction is 
presented. The proposed rule change will be implemented on a pilot 
basis through February 28, 2001.
---------------------------------------------------------------------------

    \6\ According to the Exchange, specialists and market makers 
rarely participate with respect to transactions involving less than 
5,000 shares. Telephone conversation between Kathleen Boege, 
Associate General Counsel, CHX, and Sonia Patton, Attorney, 
Division, Commission (August 23, 2000).
    \7\ These updated quotes will not be directed solely to the 
floor broker. Anyone at the post may respond to the updated quotes.
---------------------------------------------------------------------------

2. Statutory Basis
    The CHX believes that the proposed rule change 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) \8\ 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.
---------------------------------------------------------------------------

    \8\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

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.\9\ Specifically, the 
Commission finds that the proposed rule change is consistent with the 
section 6(b)(5) \10\ requirements that the rules of an exchange be 
designed to promote just and equitable principles of trade, to prevent 
fraudulent and manipulative acts and, in general, to protect investors 
and the public interest.\11\
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
    \11\ In approving this rule change, the Commission has 
considered its impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    The Commission believes that the proposed rule change strikes a 
reasonable balance between the ability of floor brokers on the Exchange 
to execute crossing transactions and the ability of specialists and 
market makers to provide price improvement. In addition, the Commission 
believes that requiring floor brokers to request a quote in a 
particular security before presenting the transaction to be crossed 
will provide specialists and market makers both sufficient notice that 
the cross is about to occur between the bid and offer spread and an 
opportunity to improve their quote. The Commission notes that floor 
brokers would still retain the ability to present both sides of the 
order at the post if the customers so desire.
    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 minimize possible negative effects 
on crossing transactions of 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,

[[Page 53069]]

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, 
N.W., Washington D.C. 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-00-13 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-00-13), as amended, is approved 
through February 28, 2001.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
---------------------------------------------------------------------------

    \12\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-22274 Filed 8-30-00; 8:45 am]
BILLING CODE 8010-01-M