[Federal Register Volume 67, Number 30 (Wednesday, February 13, 2002)]
[Notices]
[Pages 6774-6776]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-3447]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45410; File No. SR-CHX-2001-26]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Stock Exchange, Incorporated Relating to 
Automatic and Manual Execution Procedures

February 6, 2002.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 \2\ thereunder, notice is hereby given 
that on November 14, 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, II and III 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.
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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 Article XX, Rule 37 of the CHX 
Rules, which governs, among other things, automatic execution of market 
and marketable limit orders. Below is the text of the proposed rule 
change. Proposed new language is italicized; proposed deletions are 
[bracketed].
* * * * *

Chicago Stock Exchange Rules, Article XX

Guaranteed Execution System and Midwest Automated Execution System

    RULE 37. (a) Guaranteed Executions. The Exchange's Guaranteed 
Execution System (the BEST System) shall be available, during the 
Primary Trading Session and the Post Primary Trading Session, to 
Exchange member firms and, where applicable, to members of a 
participating exchange who send orders to the Floor through a linkage 
pursuant to Rule 39 of this Article, in all issues in the specialist 
system which are traded in the Dual Trading System and NASDAQ/NM 
Securities. System orders shall be executed pursuant to the following 
requirements:
    1-7. No change.
    (b) Automated Executions. The Exchange's Midwest Automated 
Execution System (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 (Article XX, Rule 37(a)) and 
certain other orders. In the event that an order that is subject to the 
BEST Rule is sent through MAX, it shall be executed in accordance with 
the parameters of the BEST Rule and the following. In the event that an 
order that is not subject to the BEST Rule is sent through MAX, it 
shall be executed in accordance with the parameters of the following:
    (1) Size. The MAX System has two size parameters which must be 
designated by the specialist on a stock-by-stock basis. These 
parameters are the auto-execution threshold and the auto-acceptance 
threshold. For both Dual Trading System issues and NASDAQ/NM 
Securities, the auto-execution threshold must be set at 100 [300] 
shares or greater and the auto-acceptance threshold must be set at 1000 
shares or greater. In no event may the auto-acceptance threshold be 
less than the auto-execution threshold. If the order sending firm sends 
an agency market order in a Dual Trading System issue through MAX, such 
order will be executed in accordance with paragraph (b)(6) of this 
Rule. If the order sending firm sends an agency market order in a 
Nasdaq/NM Security through MAX, such order shall be executed in 
accordance with paragraph (b)(7) of this Rule.
* * * * *

Interpretations and Policies:

* * * * *
    04. Ability to Switch MAX to Manual Execution. Effective April 4, 
1994. Specialists have the ability to switch their MAX terminals off 
automatic execution at their respective posts. This new functionality 
is being implemented to allow specialists to timely switch to a manual 
execution mode when a certain analyst/reporter's report is broadcast on 
cable T.V., if market conditions in a particular stock warrant it. 
Specialists should switch to manual mode only when absolutely necessary 
and are required to return to the automatic execution functionality 
immediately when the primary market quotes accurately reflect market 
conditions. A specialist cannot remain in manual mode, under this 
paragraph, for more than five [10] minutes without securing the 
permission of two (2) floor officials.
    In all other instances, when a specialist believes it is necessary 
to be in a manual execution mode, he or she must secure the permission 
of his/her firm's floor supervisor (who, under normal circumstances 
should be located on the trading floor) before switching to manual, and 
the firm supervisor must immediately (but in no event more than three 
minutes after switching to manual mode) [always] notify and secure 
[seek] the permission of a [two (2)] floor official[s] to remain in 
manual mode [before switching to manual]. This new functionality cannot 
be used merely because of a volatile market, but shall only be 
permitted when the primary market quotes are inaccurate due to market 
conditions. For example, this new functionality might be used if it 
became apparent that the NYSE invoked its unusual market conditions 
rule (pursuant to SEC Rule 11Ac1-1). The f[F]loor official[s] must be 
satisfied that the conditions which permit putting an issue on manual 
mode are present before granting a specialist's request to switch to 
the manual mode and such permission shall only be in effect for five 
minutes. A firm's floor supervisor shall monitor the conditions which 
formed the basis for the[ir] decision to ensure that specialists['] 
return to the auto-execution feature when such conditions are no longer 
present. Both the firm's floor supervisor and the [S]specialist[s also] 
have the responsibility, and are required, to immediately reinstate 
MAX's automatic execution functionality when the primary market quotes 
accurately reflect market conditions. If the specialist and the firm's 
floor supervisor believe it is necessary to continue in manual mode for 
longer than five minutes, then the firm supervisor must again secure 
the permission of the floor official who granted the initial 
permission, and if such floor official is not available, then from 
another floor official. Reasons for going to manual mode, the time 
spent in manual mode, the name of the firm supervisor who permitted the 
specialist to switch to manual mode and the name of the floor official 
who granted permission to go to manual mode must be documented and 
filed with the market regulation department before the next business 
day's opening.
    When operating in the manual mode. Specialists still have the 
responsibility to fill customer orders according to CHX Rules--
including the BEST Rule. All

[[Page 6775]]

pricing executions will be reviewed for accuracy. This capability 
should only be utilized on an infrequent basis and only in unusual 
circumstances.
* * * * *

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
    The Exchange proposes to amend Article XX, Rule 37 of the CHX 
Rules, which governs, among other things, automatic execution of market 
and marketable limit orders. The proposed rule change is intended to 
clarify a specialist's obligations relating to the automatic execution 
of orders and to provide CHX specialists and floor officials with 
additional guidance regarding the ability of a CHX specialist to switch 
to manual execution mode. The two rule changes are summarized below.
a. Reduction of Minimum Auto Execution Threshold
    The proposed change to Article XX, Rule 37(b), which governs 
automatic execution of eligible orders, would reduce the minimum auto 
execution threshold from 300 shares to 100 shares. This change is 
intended to reconcile a specialist's automatic execution obligation 
with the post-decimalization trading environment. The Exchange 
represents that, given the scattering of liquidity over multiple price 
points and resulting reduction in Best Bid or Offer (``BBO'') size,\3\ 
many specialists desire to reduce their automatic execution exposure 
for certain issues to levels that are commensurate with reduced BBO 
size. In order to preserve consistency and avoid customer confusion, 
the proposed rule change would apply to both Dual Trading System and 
Nasdaq/NM issues. Specialists would remain free to increase their auto 
execution thresholds to larger sizes if they believe that business/
marketing considerations so demand; in fact, the Exchange represents 
that a number of CHX specialists have indicated that they would reduce 
their auto execution threshold to 100 shares only in very limited 
instances.
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    \3\ The Exchange represents that average size at BBO price 
points has declined significantly following the transition to 
decimal pricing, with approximate size reductions of 67% in the case 
of Tape A issues (securities listed on the NYSE), 37% for Tape B 
issues (securities listed on the AMEX) and 44% for Tape O issues 
(securities listed on Nasdaq).
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b. Procedures for Floor Official Approval of Manual Execution Mode
    The Exchange also proposes to amend Article XX, Rule 37, 
Interpretation and Policy .04, which governs the procedures by which 
specialists are to obtain permission to switch from automatic execution 
mode to manual execution mode.
    The proposed amendment to the interpretation/policy would give 
greater responsibility to the specialist firm seeking to shift to 
manual execution mode. Specifically, the specialist firm's floor 
supervisor would be required to seek floor official approval and would 
be responsible for the documentation that must be filed with the Market 
Regulation Department following a shift to manual execution mode. 
Additionally, the amended language makes clear that floor official 
permission to operate in manual execution mode expires after a limited 
time period; after five minutes, the specialist firm and its floor 
supervisor must again seek permission to remain in manual execution 
mode. Finally, the proposed rule change would reduce from ten minutes 
to five minutes the maximum period in which the specialist may remain 
in manual mode when a certain analyst/reporter's report is broadcast on 
cable television, pursuant to the terms and conditions of 
Interpretation .04.
    The Exchange anticipates that this proposed rule change will 
promote greater accountability and preclude reliance on manual 
execution mode in a manner that is potentially violative of CHX rules. 
The Exchange also believes that the proposed rule change will assist 
the Market Regulation Department in determining whether violations of 
the Exchange's rules regarding manual execution mode have occurred.
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. In 
particular, the Exchange believes that the proposed rule change is 
consistent with Section 6(b)(5) of the Act 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.

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

    No written comments were either solicited or 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 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.

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

[[Page 6776]]

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-2001-26 and should be submitted by March 6, 
2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\4\
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    \4\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-3447 Filed 2-12-02; 8:45 am]
BILLING CODE 8010-01-P