[Federal Register Volume 66, Number 72 (Friday, April 13, 2001)]
[Notices]
[Pages 19263-19265]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-9169]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44164; File No. SR-CHX-2001-07]


Self-Regulatory Organizations: Notice of Filing and Order 
Granting Accelerated Approval of a Proposed Rule Change by the Chicago 
Stock Exchange, Inc. Relating to the Precedence of Customer Limit 
Orders on the Book

April 6, 2001.
    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 April 6, 2001, the Chicago Stock Exchange, Inc. (``CHX'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') the proposed rule changes as described in 
Items I and II below, which Items have been prepared by the Exchange. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons. As discussed below, the 
Commission is granting accelerated approval of the proposed rule change 
for a pilot period until July 9, 2001.
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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 amend CHX Article XXX, Rule 2 (Precedence 
to Orders in Book), which prohibits specialists from trading ahead of 
customer orders, by adding Interpretation and Policy .06 to the rule. 
The new interpretation will require a CHX specialist (including market 
makers who hold customer limit orders) to better the price of a 
customer limit order in his book which is priced at the national best 
bid or offer (``NBBO'') by at least one penny if the specialist 
determines to trade with an incoming market or marketable limit order. 
This proposal is filed in conjunction with the Exchange's request for 
exemptive relief pursuant to Rules 11Ac1-1(e),\3\ 11Ac1-2(g) \4\ and 
11Ac1-4(d) \5\ under the Act, to allow for trading in Nasdaq/National 
Market (``Nasdaq/NM'') securities in subpenny increments and to permit 
subpenny quotes to be rounded down (buy orders) and rounded up (sell 
orders) to the nearest penny for quote dissemination.\6\ The Exchange 
is requesting approval of the proposed rule change on a pilot basis, 
through July 9, 2001. The text of the proposed rule change is set forth 
below. New text is italicized.
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    \3\ 17 CFR 240.11Ac1-1(e).
    \4\ 17 CFR 240.11Ac1-2(g).
    \5\ 17 CFR 240.11Ac1-4(d).
    \6\ See letter from Paul B. O'Kelly, CHX, to Robert Colby, 
Division of Market Regulation, dated April 6, 2001 (``Exemptive 
Request'').
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Article XXX, Rule 2
(Precedence to Orders in Book)
    Rule 2. No change.
    Interpretations and Policies:
    .01-.05  No change.
    .06 Trading in Nasdaq/NM Securities in Subpenny Increments
    A specialist (including a market maker who holds customer limit 
orders) shall be deemed to have violated Article XXX, Rule 2 if, while 
holding a customer limit order (as rounded to a penny increment) 
representing the NBBO, the specialist, for his own account, trades with 
an incoming market or marketable limit order at a

[[Page 19264]]

price which is less than one penny better than such customer limit 
order in his book.

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 Exchange included statements 
concerning the purpose of, and basis for, the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange 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 Article XXX, Rule 2 (Precedence 
to Orders in Book), which prohibits specialists from trading ahead of 
customer orders, by adding a new interpretation to the rule, relating 
to trading in subpenny increments in Nasdaq/NM securities, which will 
require a CHX specialist (including market makers who hold customer 
limit orders) to better the price of a customer limit order in his book 
which is at the NBBO by at least one penny if the specialist determines 
to trade with an incoming market or marketable limit order.\7\
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    \7\ In the Exemptive Request, the Exchange represents that it 
will round subpenny sell orders up to the nearest penny increment 
and will round subpenny buy orders down to the nearest penny 
increment when quoting subpenny limit orders. The rounded price will 
determine whether the quote is at the NBBO. The Exchange represents, 
for example, that customer orders to buy for $10.011, $10.012 and 
$10.013 will each be reflected as a quote of $10.01. If the NBBO is, 
or as a result of the quoting of these orders becomes, $10.01, the 
customer limit order price is at the NBBO and the specialist must 
buy at a price of $10.023 or better to avoid violating the rule. See 
Exemptive Request, supra note 6.
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    The purpose for the new interpretation is to prevent specialists 
(and market makers who hold customer limit orders) from taking unfair 
advantage of a customer limit order in their book at the NBBO by 
trading ahead of such orders with incoming market or marketable limit 
orders in increments of less than one penny. Notwithstanding the fact 
that a specialist may give a price superior to that of the customer 
limit order, a customer at the NBBO has a reasonable expectation to be 
filled at his limit price, unless other customers place better-priced 
limit orders or his limit price is meaningfully improved by his agent. 
However, the prohibition will not apply to specialists when they hold 
no customer orders at the NBBO, but are required to fill incoming 
market and marketable limit orders at the NBBO pursuant to the 
Exchange's BEST Rule (CHX Article XX, Rule 37).
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b) of the Act \8\ in general and furthers the objectives 
of Section 6(b)(5) \9\ in particular in that the proposed rule change 
is designed to prevent fraudulent and manipulative acts and practices, 
to promote just and equitable principles of trade, to remove 
impediments to and perfect the mechanism for a free and open market and 
a national market system, and, in general, to protect investors and the 
public interest. The Exchange requests that this rule be approved on a 
pilot basis, to be co-extensive with its request for exemptive relief 
to trade (but not quote) Nasdaq/NM securities in subpennies, for a 
period of 90 days until July 9, 2001, and to give the Exchange the 
opportunity to evaluate trading patterns in Nasdaq/NM securities during 
the pilot period.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes that the proposed rule changes will impose no 
burden on competition.

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

    No written comments were solicited or received with respect to the 
proposed rule change.

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

    Within 35 days of the 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 self-regulatory organizations consent, the Commission will:
    A. By order approve such proposed rule change, or
    B. Institute proceedings to determine whether the proposed rule 
change should be disapproved.
    The Exchange has requested accelerated approval of the proposed 
rule change pursuant to Section 19(b)(2) of the Act,\10\ submitting 
that accelerated effectiveness of the proposed rule change would permit 
the Exchange to accept and execute subpenny orders for Nasdaq/NM 
securities, avoiding a significant competitive disadvantage to the 
Exchange on April 9, 2001, when the completion of Nasdaq's decimal 
transition will enable Nasdaq market makers and electronic 
communication networks (``ECNs'') to accept and execute subpenny orders 
in those securities. The Exchange notes that this proposed rule change 
was submitted in connection with the Exchange's request for exemptive 
relief to permit the Exchange to accept and execute subpenny orders for 
Nasdaq/NM securities by displaying the orders at prices rounded to the 
penny increment. The Exchange believes that this proposed rule change 
will give customers who send subpenny limit orders that create the NBBO 
or increase the quantity at the NBBO access to market liquidity ahead 
of a specialist, unless the specialist materially improves upon the 
customer's limit order price (rather than the customer's quoted price).
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    \10\ 15 U.S.C. 78s(b)(2).
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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 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 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 
Exchange. All submissions should refer to the File No. SR-CHX-2001-07 
and should be submitted by May 4, 2001.

[[Page 19265]]

V. Commission Findings and Order Granting Partial Accelerated 
Approval of the Proposed Rule Change for a Pilot Period

    The Commission finds that the proposed rule change is consistent 
with the Act and the rules and regulations thereunder applicable to a 
national securities exchange,\11\ and, in particular, Section 6(b)(5) 
of the Act.\12\ Simultaneous with the filing of this proposal, the 
Commission received a request for exemptive relief submitted by the 
Exchange that would allow the Exchange, Exchange members, and vendors 
that disseminate Exchange quote information, to display and disseminate 
their quotes for Nasdaq/NM securities in penny increments, while 
trading in sub-penny increments.\13\ By letter dated April 6, 2001, the 
Division of Market Regulation (``Division''), pursuant to delegated 
authority under Rules 11Ac1-1(e),\14\ 11Ac1-2(g) \15\ and 11Ac1-4(d) 
\16\ under the Act, granted a conditional temporary exemption to CHX, 
CHX members, and vendors that disseminate CHX quote information to 
permit them to display and disseminate their quotes for Nasdaq/NM 
securities in rounded, penny increments without a rounding 
identifier.\17\ The exemption expires on July 9, 2001. The Commission 
notes that the completion of Nasdaq's decimal transition will enable 
Nasdaq market makers and ECNs to accept and execute subpenny orders on 
April 9, 2001 and that the Exchange anticipates implementing subpenny 
trading in Nasdaq/NM securities at that time. The Commission believes 
that the proposed rule change should provide protection to customer 
limit orders in a subpenny trading environment by ensuring that such 
orders will continue to have access to market liquidity ahead of 
Exchange specialists in appropriate circumstances.
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    \11\ In granting accelerated approval of the proposal, the 
Commission has considered the proposal's impact on efficiency, 
competition, and capital formation. 15 U.S.C. 78c(f).
    \12\ 15 U.S.C. 78f(b)(5).
    \13\ See Exemptive Request, supra note 6.
    \14\ 17 CFR 240.11Ac1-1(e).
    \15\ 17 CFR 240.11Ac1-2(g).
    \16\ 17 CFR 240.11Ac1-4(d).
    \17\ See letter from Annette L. Nazareth, Director, Division, 
Commission, to Paul O'Kelly, CHX, dated April 6, 2001. The letter 
outlines several other conditions to trading in subpenny increments. 
The Commission will examine data provided by the CHX as specified in 
this letter, and information provided by all self-regulatory 
organizations (``SROs'') as required by the Commission's order, 
dated June 8, 2000, concerning decimals implementation. See 
Securities Exchange Act Release No. 42914 (June 8, 2000). The 
Commission intends to reconsider the position expressed in its 
letter dated April 6, 2001 before the expiration of the exemption.
    In the June, 2000 order relating to decimals, the Commission 
directed the SROs to submit (individually or jointly) a study to the 
Commission regarding the impact of decimal pricing on systems 
capacity, liquidity, and trading behavior, including an analysis of 
whether there should be a uniform minimum increment for a security. 
The order sated that, if an SRO wishes to move to quoting in an 
increment of less than one cent, the SRO should include a full 
analysis of the potential impact of such trading on the SRO's market 
and the markets as a whole.
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    The Commission finds good cause for granting the Exchange's request 
for approval of the proposed rule change on a pilot basis prior to the 
thirtieth day after the day of publication of notice of filing thereof 
in the Federal Register. The Commission notes that the Exchange 
anticipates that it will begin to accept and execute orders in subpenny 
increments for Nasdaq/NM securities on April 9, 2001, when the Nasdaq 
Stock Market fully converts to decimals. The Commission believes that 
granting accelerated approval to the proposed rule change will allow 
the Exchange to continue to provide protection to customer limit orders 
in subpenny increments for Nasdaq/NM securities.
    It Is Therefore Ordered, pursuant to Section 19(b)(2) of the 
Act,\18\ that the proposed rule change (File No. SR-CHX-2001-07) is 
approved on a pilot basis until July 9, 2001.
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    \18\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-9169 Filed 4-12-01; 8:45 am]
BILLING CODE 8010-01-M