[Federal Register Volume 66, Number 23 (Friday, February 2, 2001)]
[Notices]
[Pages 8819-8821]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-2818]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43882; File No. SR-CHX-00-27]


Self-Regulatory Organizations; Notice of Filing of Proposed 
Change by the Chicago Stock Exchange, Incorporated and Amendment No. 1 
Relating to Participation in Crossing Transactions Effected on the 
Exchange Floor

January 24, 2001.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and rule 19b-4 therefunder,\2\ notice is hereby given 
that on September 14, 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 CHX. 
The CHX amended the proposal on January 18, 2001.\3\ The Commission is 
publishing this notice to solicit comments on the proposed rule change, 
as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Letter dated January 16, 2001, from Kathleen M. Boege, 
Associate General Counsel, CHX, to Alton S. Harvey, Office Head, 
Division of Market Regulation, Commission (``Amendment No. 1''). 
Amendment No. 1 requests pilot approval of the proposed rule change 
through July 9, 2001.
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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 Article XX, rule 23 of the 
Exchange's rules relating to 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 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.

[[Page 8820]]

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 Article XX, rule 23 of the 
Exchange's rules relating to participation in crossing transactions in 
Nasdaq/National Market (``NM'') securities effected on the floor of the 
Exchange. This proposal is currently operating, on a pilot basis 
through February 28, 2001, for Dual Trading System issues traded on the 
Exchange.\4\ This pilot was approved in connection with the securities 
industry's move to a decimal pricing environment. The proposed rule 
change would extend the pilot to cover crossing transactions in Nasdaq/
NM securities.
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    \4\ Dual Trading System issues are issues that are listed on 
either the New York Stock Exchange or the American Stock Exchange. 
See Securities Exchange Act Release No. 43203 (August 24, 2000), 65 
FR 53067 (August 31, 2000) (approving SR-CHX-00-13 on a pilot basis 
through February 28, 2001). The proposed rule change deletes the 
provisions of Article XX, Rule 23 that govern cross transactions in 
Nasdaq/NM issues and, thus, has the effect of also extending the 
pilot program in Dual Trading System issues until July 9, 2001.
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    Article XX, rule 23 of the Exchange's rules governs crossing 
transactions, which represent a significant component of Exchange 
volume.\5\ under the current rule, if a floor broker presents a 
crossing transaction involving Nasdaq/NM issues, another member may 
participate, or ``break up,'' the transaction, by offering (after 
presentation of the proposed crossing transaction) to better 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(s).\6\ 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 stock in Nasdaq/
NM issues which trade in minimum price variations of \1/64\.
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    \5\ For example, in June, July and August of 2000, share volume 
from brokered cross trades was approximately 21% of total share 
volume traded on the Exchange.
    \6\ 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 breakup 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.
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    Given the number of products that will begin trading in penny 
increments once the securities industry completes the transaction to a 
decimal pricing environment, 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 in the manner 
described above. Accordingly, the 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 pilot program, a floor broker will be permitted 
to consummate cross transactions in Nasdaq/NM issues, as well as Dual 
Trading System issues, involving 5,000 shares or more, 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 is intending 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 its quote, but will preclude them from breaking up a 
cross transaction after the cross transaction is presented. The 
proposed rule change will operate on a pilot basis through July 9, 
2001.
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    \7\ These updated quotes will not be directed solely to the 
floor broker. Anyone at the post may respond to the updated quotes.
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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 change 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.

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. 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 longer 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.
    The CHX has requested accelerated approval of the proposed rule 
change. While the Commission is not prepared to grant accelerated 
approval at this time, the Commission will consider granting 
accelerated approval of the proposal at the close of an abbreviated 
comment period of 15 days from the date of publication of the proposal 
in the Federal Register.

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. 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-00-27 and 
should be submitted by February 20, 2001.


[[Page 8821]]


    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-2818 Filed 2-1-01; 8:45 am]
BILLING CODE 8010-01-M