[Federal Register Volume 65, Number 187 (Tuesday, September 26, 2000)]
[Notices]
[Pages 57850-57852]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-24641]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43304; File No. SR-CHX-00-26]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Chicago Stock Exchange, 
Incorporated to Make Its After-Hours Trading ``E-Session'' a Permanent 
Part of its Operations

September 19, 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 September 12, 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. The Exchange filed the proposal pursuant to Section 
19(b)(3)(A) of the Act,\3\ and Rule 19b-4(f)(6) thereunder,\4\ which 
renders the proposal effective upon filing with the Commission.\5\ 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 240.19b-4.
    \3\15 U.S.C. 78s(b)(3)(A).
    \4\17 CFR 240.19b-4(f)(6).
    \5\The Exchange provided the Commission with written notice of 
its intent to file the proposal on September 6, 2000, pursuant to 
Rule 19b-4(f)(6). 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposal

    On October 13, 1999, the Securities and Exchange Commission 
approved, on a pilot basis through March 1, 2000, a new Article XXA and 
amendments to existing rules that allowed the Exchange to implement a 
new extended trading hours session (the ``E-Session'').\6\ On February 
28, 2000, the CHX extended the operation of the E-Session through 
October 1, 2000.\7\ The CHX now proposes to make the operation of the 
E-Session permanent.
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    \6\See Securities Exchange Act Release No. 42004 (October 13, 
1999), 64 FR 56548 (October 20, 1999) (SR-CHX-99-16).
    \7\See Securities Exchange Act Release No. 42463 (February 28, 
2000), 65 FR 11817 (March 6, 2000) (SR-CHX-00-02).
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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 its proposal and discussed any 
comments it received regarding the proposal. 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
    In September 1999, the Exchange proposed new Article XXA and 
several related rule changes to implement the E-Session. The E-Session 
was designed to meet the needs of market participants and CHX members 
who had demanded that the Exchange begin trading in hours that extend 
beyond the then-current trading day. The Exchange continues to believe 
that investors are best served if registered securities exchanges are 
participants in the burgeoning after-hours trading market and submits 
this proposal to make the operation of the E-Session permanent. The 
Exchange does not propose to make any additional changes to the E-
Session at this time; this proposal seeks only to make the E-

[[Page 57851]]

Session a permanent part of the CHX's current operations.
    The operation of the E-Session. The E-Session began operating on 
October 29, 1999. It currently operates from 3:30 p.m. (immediately 
following the close of the CHX's post primary trading session) to 5:30 
p.m., Central Time, Monday through Friday.\8\
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    \8\The amendments to Article IX, Rule 10(b) (Business Days and 
Hours of Trading) and Article XX, Rule 2 (Hours of Floor Dealing) 
confirm the existence of this new trading session.
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    Trading during the E-Session is conducted, in some respects, as it 
is during the CHX's primary trading session; however, new features more 
fully automate the transmission of orders and provide additional 
protections to investors who trade during the session. Only 
unconditional limit orders and immediate or cancel limit orders are 
eligible for execution in the E-Session, and each limit order must be 
appropriately designated for trading in the E-Session.\9\ Any orders 
remaining unexecuted at the end of the session are automatically 
canceled and do not carry over to any other trading session. Specialist 
firms continue to make two-sided, continuous markets in E-Session 
eligible stocks, generally the more active stocks assigned to them 
during the existing trading sessions, at their posts on the floor of 
the CHX (unless a specialist firm has transferred its assignment, for 
the E-Session only, to another specialist firm with the approval of the 
Committee on Specialist Assignment and Evaluation).
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    \9\The CHX proposed a rule change to allow its members to accept 
immediate or cancel limit orders during the E-Session so that the 
Exchange could participate in an anticipated linkage with a group of 
electronic communications networks who accept this type of order. 
Although the Commission has approved the rule change needed to allow 
the CHX to accept these orders (See Securities Exchange Act Release 
No. 42916 (June 9, 2000), 65 FR 38015 (June 19, 2000)(SSR-CHX-00-
17)), the CHX is still working to develop the linkages with other 
market centers through which those orders will be transmitted.
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    During the E-Session, in most cases (subject to an exception 
described below), limit orders must be electronically and directly 
transmitted, via the MAXTM electronic order routing system, 
to the specialist's limit order book. Floor brokers may route limit 
orders to the specialist's limit order book via MAX or may transmit the 
orders to another market. In addition, a floor broker may route orders 
to buy and sell equivalent quantities of the same security eligible to 
be executed at the same price through MAX to the specialist's limit 
order book or may execute those orders as a crossing transaction at the 
specialist's post in accordance with existing Exchange rules.
    Except as described in Article XXA or in other E-Session rule 
amendments, execution, reporting, clearance and settlement of 
transactions that occur during the E-Session follow the procedures 
currently in place for those activities in the Exchange's primarily 
trading session.\10\ Among other things, this general principle means 
that the National Securities Clearing Corporation clears the 
transactions that take place during this session, and the Securities 
Industry Automation Corporation and Nasdaq, Inc. disseminate CHX 
quotations and trade data. Three exceptions to this general rule arise 
from either the Exchange's desire to more fully automate the E-Session, 
or from the fact that no primary market of the kind that operates under 
the same terms and conditions during traditional trading hours is 
available during the E-Session.\11\
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    \10\The amendments to Article XX, Rule 1 (Application [of 
Article] and Article XXI, Rule 1 (Reporting of Transaction) confirm 
that these rules encompass transactions that occur during the E-
Session.
    \11\The amendments to Article XX, Rule 37 (confirming that the 
Best System and the automatic execution features of the Midwest 
Automated Execution System do not operate during the E-Session), 
Article XXXI, rules 6 and 9 (confirming that odd-lot order execution 
occurs differently than during the primary trading session) and 
Article XXXIV (confirming that market makers do not participate in 
the E-Session) reflect these exceptions.
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    Securities eligible for trading during the E-Session. The CHX's 
Committee on Floor Procedure identifies, from time to time, the 
securities eligible for trading during the E-Session. In general, the 
securities listed on the Standard & Poor's 100 Stock IndexTM 
(OEX) and on the Nasdaq-100 Index (NDX), as well as other 
securities that rank among the 100 most active listed and 100 most 
active Nasdaq/NM securities at the end of each quarter trade during the 
E-Session. Currently, 303 securities are eligible for trading during 
the E-Session.
    Members eligible to participate in the E-Sessioin. All CHX members 
have access to the E-Session, in accordance with applicable CHX rules.
    Mandatory disclosures to non-members. Because the E-Session 
operates in a manner, and at a time, that is different from the CHX's 
primary trading session, members must provide specific disclosures to 
non-members before accepting orders for execution in the E-Session. 
These disclosures are designed to ensure that participants in the 
after-hours market understand the potential risks of that 
participation.
    Surveillance and oversight. the Exchange conducts surveillance of 
E-Session trading using many of he same surveillance programs it uses 
to monitor trading during the primary trading session. E-Session order 
delivery, quoting and matching is almost entirely controlled by the 
Exchange's electronic systems. These systems reduce the possibility for 
intentional or inadvertent mishandling of orders and enhance the 
effectiveness of the surveillance programs. The CHX believes that E-
Session surveillance has operated effectively during the first ten 
months of after-hours trading.
    Procedures for reviewing capacity, security and contingency 
planning. the CHX uses many of the same review procedures for systems 
security, capacity management, and recovery and contingency planning 
that it employs for the systems that support the primary trading 
session.
2. Statutory Basis
    The CHX believes the proposal is consistent with Section 6(b)(5) of 
the Act\12\ 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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    \12\U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement of Burden on Competition

    The Exchange believes that no burden will be placed on competition 
as a result of its proposal to make the E-Session a permanent part of 
the Exchange's current operations.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received from Members, Participants or Others

    No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule change and Timing 
for Commission Action

    Because the foregoing proposed rule change does not:
    (i) significantly affect the protection of investors or the public 
interest;
    (ii) impose any significant burden on competition; and
    (iii) become operative for 30 days form the date on which it was 
filed, or such shorter time as the Commission may designate, it has 
become effective pursuant to Section 19(b)(3)(A) of the Act\13\ and 
Rule 19b-4(f)(6) thereunder.\14\ At any time within 60 days of the 
filing

[[Page 57852]]

of the proposed rule change, the Commission may summarily abrogate such 
rule change if it appears to the Commission that such action is 
necessary or appropriate in the public interest, for the protection of 
investors, or otherwise in furtherance of the purposes of the Act.
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    \13\15 U.S.C. 78s(b)(3)(A).
    \14\17 CFR 240.19b-4(f)(6).
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    The Exchange has requested that the Commission accelerate the 
operative date. The Commission finds good cause to designate the 
proposal to become operative immediately because such designation is 
consistent with the protection of investors and the public interest. 
The Commission believes that the E-Session provides retail investors 
with an additional means to trade after traditional trading hours, and 
that the operation of the E-Session is consistent with Section 6(b)(5) 
of the Act\15\ in that it is designed to remove impediments to, and to 
perfect the mechanism of, a free and open market. The Commission 
believes the availability of the E-Session may enhance competition in 
the after-hours market. Currently, electronic trading systems provide 
retail investors the opportunity to trade after-hours. The continued 
presence of a national securities exchange in the after-hours market 
will provide retail investors with an alternative forum through which 
to conduct after-hours transactions. The CHX has been operating the E-
Session on a pilot basis. The Commission believes there is no 
particular benefit to investors if the CHX is required to wait 30 days 
before its proposal to make the E-Session a permanent part of its 
operations becomes operative. For these reasons, the Commission finds 
good cause to designate that the proposal is both effective and 
operative upon filing with the Commission.\16\
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    \15\15 U.S.C. 78f(b)(5).
    \16\For purposes only of accelerating the operative date of this 
proposal, the Commission has considered the proposed rule's impact 
on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposal 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, 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 number SR-CHX-00-26 and 
should be submitted by October 17, 2000.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\
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    \17\17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-24641 Filed 9-25-00; 8:45 am]
BILLING CODE 8010-01-M