[Federal Register Volume 66, Number 234 (Wednesday, December 5, 2001)]
[Notices]
[Pages 63269-63270]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-30140]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45115; File No. SR-CHX-2001-17]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by The Chicago Stock Exchange, Incorporated, Relating to 
Eligibility of Limit Orders for Trade Through Protection

November 28, 2001.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``the Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby is 
given that on August 6, 2001, the Chicago Stock Exchange, Incorporated 
(``CHX'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'' or ``SEC'') the proposed rule change as 
described in Items I, II and III below, which Items have been prepared 
by the self-regulatory organization. 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.
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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 XX, Rule 37(b)(6), which 
governs execution of limit orders in the specialist's book in the event 
of a trade through in the primary market. The proposed rule change 
would require that a limit order be resident in the specialist's book 
for a time period of 0-15 seconds (as designated by the specialist) 
before it would be eligible for limit order protection. The text of the 
proposed rule change is available from the Office of the Secretary, the 
CHX and 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 Exchange 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 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 Article XX, Rule 37(b)(6) of its 
rules, which governs execution of limit orders in the specialist's book 
in the event of a trade through in the primary market. The proposed 
rule change would require that a limit order be resident in the 
specialist's book for a time period of 0-15 seconds (as designated by 
the specialist) before it would be eligible for limit order protection.
    Under current CHX rules, limit orders resting in a specialists's 
book are afforded trade through protection, which requires execution of 
the limit orders in the event of a price penetration in the primary 
market. The limit orders are entitled to price protection in their 
entirety regardless of their size. The Exchange represents that, at 
present, an order sender is able to take advantage of the time latency 
between a primary market execution and the reporting of the execution 
to the tape to gain these liquidity guarantees. The Exchange believes 
that an order sender will do so by placing a large limit order in a CHX 
specialist's book between the time of the primary market execution and 
the tape print. The limit order will typically be priced at a penny or 
two superior to the primary market trade price. According to the 
Exchange, the print of the inferior priced primary market trade will 
cause an automatic execution of the limit order in its entirety on the 
CHX at the limit price, thus giving the order sender inexpensive access 
to large amounts of liquidity.
    In the example above, the Exchange explains that the limit order 
would not be due an execution because it was not ``resting'' on the 
specialist's book at the time the trade through occurred in the primary 
market. Rather, it was resting at the time the trade through execution 
was reported to the tape. The Exchange believes that this practice 
exploits a limitation in the trade reporting system that equates 
``trade time'' with ``report time.'' The Exchange believes that this 
practice has grown more prevalent with

[[Page 63270]]

the transition to a decimal pricing environment because the premium 
needed to secure the increased liquidity (the minimum price variation) 
has been reduced to a penny.
    The proposed rule change would provide that before a limit order in 
the specialist's book is automatically executed following a price 
penetration in the primary market, the limit order must have resided in 
the specialist's book for a time period of 0-15 seconds (as designed by 
the specialist).\3\ This requirement is intended to preclude order-
senders from taking advantage of the time latency between a primary 
market execution and the reporting of the execution to the tape.
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    \3\ A specialist might chose a lesser time as a competitive 
inducement to attract order flow.
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2. Statutory Basis
    The Exchange 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).\4\ In particular, 
the proposed rule is consistent with section 6(b)(5) of the Act \5\ 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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    \4\ 15 U.S.C. 78f(b).
    \5\ 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 my inappropriate burden on competition.

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

    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 self-regulatory organization 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.

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 filing will also be 
available for inspection and copying at the principal office of the 
Exchange. All submissions should refer to File No. SR-CHX-2001-17 and 
should be submitted by December 26, 2001.

    For the Commission, by the Division of Market Regulation, pursuant 
to delegated authority.\6\
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    \6\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-30140 Filed 12-4-01; 8:45 am]
BILLING CODE 8010-01-M