[Federal Register Volume 66, Number 38 (Monday, February 26, 2001)]
[Notices]
[Pages 11621-11623]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-4596]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43974; File No. SR-CHX-01-03]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of a Proposed Rule Change by the Chicago 
Stock Exchange, Incorporated Extending Pilot Rules Relating to the 
Securities Industry Transition to Decimal Pricing

February 16, 3001.
    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 January 19, 2001, 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 Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons and to approve the proposed rule change on an 
accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange proposes to extend, through July 9, 2001, pilot rule 
changes amending certain CHX rules that have been impacted by the 
securities industry transition to decimal pricing. Specifically, the 
pilot rule changes amend portions of Article XX, Rule 37. The pilot 
currently is due to expire on February 28, 2001. 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
    On August 24, 2000, the Commission approved, on a pilot basis 
through February 28, 2001, rule changes amending certain CHX rules that 
were impacted by the securities industry transition to decimal 
pricing.\3\ The Exchange proposes to extend the current pilot through 
July 9, 2001.\4\
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    \3\ See Securities Exchange Act Release No. 43204 (August 24, 
2000), 65 FR 53065 (August 31, 2000) (SR-CHX-00-22).
    \4\ The Exchange notes that following approval of the pilot rule 
changes, which included changes to the Exchange's then-current price 
improvement programs, the Commission approved the Exchange's 
proposed new price improvement program, called SuperMAX 2000, which 
is a voluntary price improvement program that will govern price 
improvement of all orders for issues trading in decimal price 
increments. See Securities Exchange Act Release No. 43742 (December 
19, 2000) 65 FR 83119 (December 29, 2000) (SR-CHX-00-37). Because 
SuperMAX 2000 is intended to replace the Exchange's previous price 
improvement programs, the Exchange is not requesting an extension of 
the pilot rule changes that dealt with price improvement.
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    The Exchange proposes continued pilot approval of three groups of 
changes to Article XX, Rule 37, which would: (1) Allow specialists to 
elect, on an issue by issue basis, to either manually or automatically 
execute limit orders when a trade-through occurs in the primary market; 
(2) remove the ``pending auto-stop'' functionality in the Exchange's 
systems; and (3) 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 continue to affect the CHX trading environment, and the interaction 
between the CHX and the national market system, in a manner that 
necessitates extension of these pilot rule amendments, which are 
designed to minimize any adverse impacts of decimalization on trading 
operations.\5\
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    \5\ This proposal does not concern ``typographical'' amendments 
to CHX rules, where the sole change that was proposed by the 
Exchange was the substitution of a decimal price increment for the 
fractional price increment set forth in certain CHX rules. Those 
amendments were the subject of a separate submission previously 
approved by the Commission on a permanent basis. See Securities 
Exchange Act Release No. 43256 (September 6, 2000), 65 FR 55659 
(September 14, 2000) (SR-CHX-00-25).
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    Manual or automatic execution of limit orders when a trade-through

[[Page 11622]]

occurs. The existing pilot amended Article XX, Rule 37(b)(6) to allow a 
specialist to elect, on an issue by issue basis, to either manually or 
automatically execute limit orders when a trade-through occurs in the 
primary market. The rule previously provided that agency limit orders 
(that are not marketable when entered into the Exchange's MAX automatic 
execution system) would automatically be filled at the limit price when 
there was a price penetration of the limit price in the primary market 
for the subject security. Under the pilot, automatic execution of these 
limit orders would no longer be mandated. A CHX specialist may elect to 
provide automatic execution of agency limit orders at the limit price 
when there is a price penetration of the limit price in the primary 
market for the subject security. The obligation to fill the order at 
the limit price remains the same under either election. The Exchange 
believes that this pilot amendment reasonably anticipates the impact 
that the decimal pricing environment will have on the national market 
system, where the number of small orders executed at multiple price 
levels may increase the number of inadvertent trade-throughs that could 
lead to unwarranted automated executions of large orders in a CHX 
specialist's limit order book, exposing the specialist to substantially 
increased liability.
    Removal of the pending auto-stop functionality. For similar 
reasons, the pilot amends Article XX, Rule 37(b)(10) to eliminate the 
Exchange's ``pending auto-stop'' function. Under the rule prior to the 
pilot, all agency market orders from 100 to 599 shares that were not 
automatically executed, because, among other things, the order size 
exceeded the quantity at the ITS BBO, were designated as ``pending 
auto-stop orders.'' These orders were stopped, and due an execution at 
the ITS BBO thirty seconds after entry into the Exchange's MAX system, 
unless the order has been canceled, executed, manually stopped, or put 
on hold during the thirty second period. Once an order was stopped, a 
text message to that effect was automatically sent to the order-sending 
firm.
    The Exchange believes that this feature is not practicable in the 
decimal pricing environment, giving the anticipated dramatic increases 
in quote traffic and the systems issued associated with generating 
administrative notifications regarding pending auto-stop. Additionally, 
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 Exchange 
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 Exchange believes that the rationale set 
forth above relating to the likely decrease in the quantities 
associated with the BBO price point also supports the Exchange's pilot 
rule change permitting CHX specialists to designate automatic execution 
guarantee levels that are not dependent on the BBO. Under the previous 
versions of the CHX rule,\6\ an order was not eligible for automatic 
execution on the Exchange if the order was 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 an extension of the pilot rule is necessary. The pilot 
rule permits a CHX specialist to designate, on an issue-by-issue basis, 
automatic execution guarantees that could exceed the BBO size. This 
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.
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    \6\ Art. XX, Rule 37(b)(11).
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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) 
\7\ 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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    \7\ 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 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.\8\ Specifically, the Commission finds that the 
proposed rule change is consistent with the Section 6(b)(5) \9\ 
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.\10\
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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
    \10\ 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 should 
continue 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 and 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, prior to the pilot, Rule 37(b)(10) required all agency 
market orders from 100 to 599 shares that were not automatically 
executed because, among other things, the order exceeded the ITS BBO 
quantity, to be designated as ``pending auto-stop orders.'' These 
orders were 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

[[Page 11623]]

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 that demand for automatic execution continues to be 
satisfied.
    The Commission believes that the proposal 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 the 
Exchange to continue, with a minimum of disruption to trading 
operations, its transition to quoting in decimals, which began in all 
Exchange listed securities on January 29, 2001, and is scheduled to 
begin in certain Nasdaq securities on March 12, 2001. In addition, the 
Commission notes that the proposed rule change is being approved on a 
pilot basis only, through July 9, 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 file 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-01-03 and 
should be submitted by March 19, 2001.

V. Conclusion

    It is Therefore Ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (SR-CHX-01-03) is approved through July 
9, 2001.

    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. 01-4596 Filed 2-23-01; 8:45 am]
BILLING CODE 8010-01-M