[Federal Register Volume 66, Number 217 (Thursday, November 8, 2001)]
[Notices]
[Pages 56585-56587]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-28081]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-45010; File No. SR-CHX-2001-22]
Self-Regulatory Organizations; Notice of Filing and Immediate
Effectiveness of Proposed Rule Change by the Chicago Stock Exchange,
Inc.; Extending the Pilot Relating to Trading of Nasdaq/National Market
Securities on the Exchange
November 1, 2001.
Pursuant to section 19(b)(1) of the Securities Exchange Act
(``Act'' or ``Exchange Act''),\1\ and Rule 19-4 thereunder,\2\ notice
is hereby given that on October 30, 2001, the Chicago Stock Exchange,
Inc. (``CHX'' or ``Exchange'') filed with the Securities and Exchange
Commission (``SEC'' or ``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 19-4(f)(6) \4\ thereunder, 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-(f)(6)
\5\ The Exchange has asked the Commission to waive the 5-day
pre-filing requirement and the 30-day operative delay to allow the
proposal to be effective upon filing with the Commission. The
Commission has agreed to do both. See 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 Proposed Rule Change
The Exchange has requested a one-year extension of the pilot
program relating to the trading of Nasdaq/National Market (``Nasdaq/
NM'') securities on the Exchange. Specifically, the pilot program
amended Article XX, Rule 37 and Article XX, Rule 43 of the Exchange's
rules. The pilot program currently is due to expire on November 1,
2001. The Exchange proposes that the pilot remain in effect on a pilot
basis through November 1, 2002. The text of the proposed rule change is
available at the principal offices of the CHX and at the Commission.
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 the basis for the proposed rule change
and discussed any comments it received on 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 has requested a one-year extension of the pilot
program relating to the trading of Nasdaq/NM securities on the
Exchange. Specifically, the pilot program amends Article XX, Rule 37
and Article Exchange Exchange XX, Rule 37 and Article XX, Rule 43 of
the Exchange's Rules. The pilot program currently is due to expire on
November 1, 2001; the Exchange proposes that the amendments remain in
effect on a pilot basis through November 1, 2002.
On May 4, 1987, the commission approved certain Exchange rules and
procedures relating to the trading of Nasdaq/NM securities on the
Exchange.\6\ Among other things, these
[[Page 56586]]
rules rendered the Exchange's BEST Rule guarantee (Article XX, Rule
37(a)) applicable to Nasdaq/NM securities and made Nasdaq/NM securities
eligible for the automatic execution feature of the Exchange's Midwest
Automated Execution System (the ``MAX'' system).\7\
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\6\ See Securities Exchange Act Release No. 24424 (May 4, 1987),
52 FR 17868 (May 12, 1987) (order approving File No. SR-MSE-87-2);
see also, Securities Exchange Act Release Nos. 28146( June 26,
1990), 55 FR 27917 (July 6, 1990) (order expanding the number of
eligible securities to 100); 36102 (August 14, 1995), 60 FR 43626
(August 22, 1995) (order expanding the number of eligible securities
to 500), 41392 (May 12, 1999), 64 FR 27839 (May 21, 1999) (order
expanding the number of eligible securities to 1000).
\7\ The MAX system may be used to provide an automated delivery
and execution facility for orders that are eligible for execution
under the Exchange's BEST Rule and certain other orders. See CHX
Rules, Art. XX, Rule 37(b). A MAX order that fits within the BEST
parameters is executed pursuant to the BEST Rule via the MAX system.
If an order is outside the BEST parameters, the BEST rule does not
apply, but MAX system handling rules remain applicable.
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On January 3, 1997, the Commission approved,\8\ on a one year pilot
basis, a program that eliminated the requirement that CHX specialists
automatically execute orders for Nasdaq/NM securities when the
specialist is not quoting at the national best bid or best offer
disseminated pursuant to SEC Rule 11Ac1-1 \9\ (The ``NBBO''). When the
Commission approved the program on a pilot basis, it requested that the
Exchange submit a report to the Commission describing the Exchange's
experience with the pilot program. The Commission stated that the
report should include at least six months of trading data. Due to
programming issues, the pilot program was not implemented until April,
1997. Six months of trading data did not become available until
November, 1997. As a result, the Exchange requested an additional
three-month extension to collect the data and prepare the report for
the Commission.
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\8\ See Securities Exchange Act Release No. 38119, 62 FR 1788
(January 13, 1997).
\9\ 17 CFR 240.11Ac1-1.
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On December 31, 1997, the Commission extended the pilot program for
an additional three months, until March 31, 1998, to give the Exchange
additional time to prepare and submit the report and to give the
Commission adequate time to review the report prior to approving the
pilot on a permanent basis.\10\ The Exchange submitted the report to
the Commission on January 30, 1998. Subsequently, the Exchange
requested another three-month extension, in order to give the
Commission adequate time to approve the pilot program on a permanent
basis. On March 31, 1998, the Commission approved the pilot for an
additional three-month period, until June 30, 1998.\11\ On July 1,
1998, the Commission approved the pilot for an additional six-month
period, until December 31, 1998.\12\ On December 31, 1998, the
Commission approved the pilot for an additional six-month period, until
June 30, 1999.\13\ On June 30, 1999, Commission approved the pilot for
an additional seven-month period, until January 31, 2000.\14\ On
January 31, 2000, the Commission approved the pilot for an additional
three-month period, until May 1, 2000.\15\ On May 1, 2000, the
Commission approved the pilot for an additional six-month period, until
November 1, 2000.\16\ On November 15, 2000, the Commission approved the
pilot for an additional one-year period, until November 1, 2001.\17\ In
light of the evolving nature of the Nasdaq market and unlisted trading
of Nasdaq/NM securities, the exchange now requests another extension of
the current pilot program, through November 1, 2002. The Exchange is
not requesting approval of any changes to the pilot program in this
submission.
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\10\ See Securities Exchange Act Release No. 39512, 62 FR 1517
(January 9, 1998).
\11\ See Securities Exchange Act Release No. 39823, 63 FR 17246
(April 8, 1998).
\12\ See Securities Exchange Act Release No. 40150, 63 FR 36983
(July 8, 1998).
\13\ See Securities Exchange Act Release No. 40868, 64 FR1845
(January 12, 1999).
\14\ See Securities Exchange Act Release No. 41586, 64 FR 36938
(July 8, 1999).
\15\ See Securities Exchange Act Release No. 42372, 65 FR 6425
(February 9, 2000).
\16\ See Securities Exchange Act Release No. 42740, 65 FR 26649
(May 8, 2000).
\17\ See Securities Exchange Act Release No. 43565, 65 FR 71166
(November 29, 2000).
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Under the pilot program, specialists must continue to accept agency
\18\ market orders or marketable limit orders, but only for orders of
100 to 1000 shares in Nasdaq/NM securities rather than the 2099 share
limit previously in place. This threshold order acceptance requirement
is referred to as the ``auto acceptance threshold.'' Specialists,
however, must accept all agency limit orders in Nasdaq/NM securities
from 100 up to and including 10,000 shares for placement in the limit
order book. Specialists are required to automatically execute Nasdaq/NM
orders in accordance with certain amendments to the pilot program that
recently were approved by the Commission.\19\
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\18\ The term ``agency order'' means an order for the account of
a customer, but does not include professional orders, as defined in
CHX Rules, Art. XXX, Rule 2, Interp. and Policy .04. The rule
defines a ``professional order'' as any order for the account of a
broker-dealer, the account of an associated person of a broker-
dealer, or any account in which a broker-dealer or an associated
person of a broker-dealer has any direct or indirect interest.
\19\ See Securities Exchange Act Release No. 44778, 66 FR 48074
(September 17, 2001).
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The pilot program requires the specialist to set the MAX auto-
execution threshold at 300 shares or greater for Nasdaq/NM securities.
When a CHX specialist is quoting at the NBBO, orders for a number of
shares less than or equal to the size of the specialist's quote are
executed automatically (in an amount up to the size of the specialist's
quote). Orders of a size greater than the specialist's quote are
automatically executed up to the size of the specialist's quote, with
the balance of the order designated as an open order in the
specialist's book, to be filled in accordance with the Exchange's rules
for manual execution of orders for Nasdaq/NM securities. Such rules
dictate that the specialist must either manually execute the order at
the NBBO or a better price or act as agent for the order in seeking to
obtain the best available price for the order on a marketplace other
than the Exchange. If the specialist decides to act as agent for the
order, the pilot program requires the specialist to use order-routing
systems to obtain an execution where appropriate. Orders for securities
quoted with a spread greater than the minimum variation are executed
automatically after a fifteen second delay from the time the order is
entered into MAX. The size of the specialist's bid or offer is then
automatically decremented by the size of the execution. When the
specialist's quote is exhausted, the system generates an autoquote at
an increment away from the NBBO, as determined by the specialist from
time to time, for either 100 or 1000 shares, depending on the
issue.\20\
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\20\ Specifically, the autoquote is currently for one normal
unit of trading (usually 100 shares) for issues that became subject
to mandatory compliance with SEC Rule 11Ac1-4 on or prior to
February 24, 1997 and 1000 shares for other issues.
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When the specialist is not quoting a Nasdaq/NM security at the
NBBO, an order that is of a size less than or equal to the auto
execution threshold designated by the specialist will execute
automatically at the NBBO price up to the size of the auto execution
threshold. Orders of a size greater than the auto execution threshold
will be designated as open orders in the specialist's book and manually
executed, unless the order-sending firm previously has advised the
specialist that it elects partial automatic execution, in which event
the order will be executed automatically up to the size of the auto
execution threshold, with the balance of the order to be designated as
an open order in the specialist's book.
Whether the specialist is quoting at the NBBO or not, ``oversized''
orders, i.e., orders that are of a size greater than the auto
acceptance threshold of 1000 shares (as designated by the specialist),
are not subject to the foregoing
[[Page 56587]]
requirements, and may be canceled within one minute of being entered
into MAX or designated as an open order.
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, and, in
particular, with the requirements of section 6(b) of the Act.\21\ The
CHX believes the proposal is consistent with section 6(b)(5) of the Act
\22\ in that it is designed to promote just and equitable principles of
trade, to remove impediments to and 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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\21\ 15 U.S.C. 78f(b).
\22\ 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
result in any burden on competition that is not necessary or
appropriate in furtherance of the purposes of the Act, as amended.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing
for Commission Action
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 from the date on which it was
filed, or such shorter time as the Commission may designate.\23\
Because the Exchange has requested that the Commission accelerate the
operative date, and the Commission has approved acceleration of the
operative date, the proposed rule change has become effective pursuant
to section 19(b)(3)(A) of the Act \24\ and Rule 19b-4(f)(6)
thereunder.\25\ At any time within 60 days of the filing 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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\23\ As required under Rule 19b-4(f)(6)(iii), the Exchange
provided the Commission with written notice of its intent to file
the proposed rule change at least five business days prior to the
filing date or such shorter time as designated by the Commission.
\24\ 15 U.S.C. 78s(b)(3)(A).
\25\ 17 CFR 240.19b-4(f)(6).
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As noted above, the Exchange has requested that the Commission
accelerate the operative date. The Commission finds good cause to
designate the proposal to become operative immediately through November
1, 2002 because such designation is consistent with the protection of
investors and the public interest. Specifically, acceleration of the
operative date will allow the pilot that permits trading of Nasdaq/NM
securities on the CHX to continue uninterrupted. Further, the
Commission notes that the Exchange is not changing any portion of its
current pilot with the exception of extending the pilot for an
additional year. For these reasons the Commission finds good cause to
designate that the proposal is operative immediately through November
1, 2002.\26\
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\26\ 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 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
CHX. All submissions should refer to File No. SR-CHX-2001-22 and should
be submitted by November 29, 2001.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\27\
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\27\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-28081 Filed 11-7-01; 8:45 am]
BILLING CODE 8010-01-M