[Federal Register Volume 67, Number 78 (Tuesday, April 23, 2002)]
[Notices]
[Pages 19784-19786]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-9882]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45770; File No. SR-CHX-2001-26]


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

April 17, 2002.

I. Introduction

    On November 14, 2001, the Chicago Stock Exchange, Incorporated 
(``CHX'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'' or ``SEC''), pursuant to section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act''), \1\ and Rule 19b-4 
thereunder, \2\ a proposed rule change to amend its rules to clarify a 
specialist's obligations relating to the automatic execution of orders 
and provide guidance regarding a specialist's ability to switch from 
automatic to manual execution mode. Notice of the proposed rule change 
was published for comment in the Federal Register on February 13, 2002. 
\3\ The Commission received no comments with respect to the proposal. 
This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1)
    \2\ 17 CFR 240.19b-4
    \3\ Securities Exchange Act Release No. 45410 (February 6, 
2002), 67 FR 6774.

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[[Page 19785]]

II. Description of the Proposal

    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, \4\ 
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. The Exchange represents that, in 
fact, 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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    \4\ 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) abd 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 places greater 
responsibility on the specialist firm seeking to shift to manual 
execution mode. Under current Interpretation .04, a specialist firm 
seeking to switch from automatic execution mode to manual execution 
mode must seek the permission of two floor officials before switching 
to manual mode; once in manual mode, the specialist firm must return to 
automatic execution functionality when the conditions that caused the 
switch to manual mode are no longer present. Specialists also must 
immediately reinstate the automatic execution functionality when the 
primary market quotes accurately reflect market conditions.
    By contrast, under the proposed amendment to Interpretation .04, 
the specialist firm is required to secure the permission of its floor 
supervisor to switch to manual mode. To permit the specialist to remain 
in manual execution mode, the floor supervisor must immediately notify 
and secure the approval of one floor official. The permission granted 
by the floor official to operate in manual execution mode shall be in 
effect for a period of five minutes only. After that five minute 
period, the specialist firm's floor 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) to allow the specialist firm to remain in manual execution 
mode. Documentation regarding the switch to manual mode must be filed 
with the CHX Market Regulation Department before the next business 
day's opening.
    Finally, the proposed rule change reduces the time period in which 
a specialist firm may remain in manual execution mode when a certain 
analyst/reporter's report is broadcast on cable television, pursuant to 
the terms and conditions of Interpretation .04. Under current 
Interpretation .04, in the case of such a cable television broadcast, a 
specialist may switch from automatic to manual mode without floor 
official approval, and may remain in manual mode for no more than ten 
minutes. The proposed rule change reduces outside limit from ten to 
five minutes.
    The Exchange represents that it anticipates that the proposed rule 
change will promote greater accountability and preclude reliance on 
manual execution mode in a manner that is potentially violative of CHX 
rules. Specifically, the Exchange believes that reducing the automatic 
execution threshold from 300 to 100 shares will reduce the likelihood 
of a specialist firm switching from automatic to manual mode without 
satisfying the criteria in Interpretation .04.\5\ 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.
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    \5\ Telephone conversation between Kathleen M. Boege, Associate 
General Counsel, CHX and Gordon Fuller, Counsel to the Assistant 
Director, Division of Market Regulation (``Division''), Commission 
(March 22, 2002).
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III. Discussion

    After careful review, the Commission finds that the proposed rule 
change is consistent with the Act and the rules and regulations 
promulgated thereunder applicable to a national securities exchange 
and, in particular, with the requirements of Section 6(b). \6\ 
Specifically, the Commission finds that approval of the proposed rule 
change is consistent with Section 6(b)(5)\7\ 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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    \6\ 15 U.S.C. 78f(b). In approving this proposal, the Commission 
has considered the proposed rule's impact on efficiency, competition 
and capital formation. 15 U.S.C. 78c(f).
    \7\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that reducing the size threshold for 
automatic execution from 300 to 100 shares will likely encourage CHX 
specialists to remain in the automatic execution mode for longer 
periods of time by decreasing their risk of exposure to larger sized 
orders. This in turn should enable investors to take greater advantage 
of the benefits of automatic execution with respect to speed and price 
of execution. \8\ The Commission notes that, under the proposed rule 
change, specialists retain the ability to increase their automatic 
execution thresholds to a larger size if they choose to do so.
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    \8\ In the MAX System, the largest universe of orders that are 
eligible for price improvement are orders subject to automatic 
execution. For example, CHX Rule 37(h) sets forth price guarantees 
applicable to CHX's SuperMax 2000 system, a voluntary automatic 
execution program within the MAX System. SuperMax 2000 must be 
enabled on an issue-by-issue basis by the specialist, and these 
price guarantees apply only when the specialist is in automatic 
execution mode. Telephone conversation between Kathleen M. Boege, 
Associate General Counsel, CHX and Gordon Fuller, Counsel to the 
Assistant Director, Division, Commission (March 22, 2002).
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    In addition, the Commission finds that new Interpretation .04 
promotes investor protection and the public interest by imposing new 
requirements on specialists seeking to switch from

[[Page 19786]]

automatic execution to manual mode. The Commission notes that, in cases 
of breaking news stories broadcast on cable television, the specialist 
may switch to manual mode without floor official approval as under the 
previous language of the Interpretation; however, the maximum period of 
time in which the specialist may remain in manual mode without floor 
official approval has been reduced from ten minutes to five minutes. 
The Commission also notes that, in instances other than a cable news 
broadcast, the specialist must secure the permission of its floor 
supervisor to switch to manual mode; the floor supervisor in turn must 
obtain approval from one floor official to permit the specialist to 
remain in manual mode. It is significant that the specialist may remain 
in manual mode for only five minutes without the floor supervisor 
renewing the approval of the same floor official (or obtaining approval 
of another floor official if the first official is not available). 
Finally, the Commission notes that new Interpretation .04 requires that 
documentation regarding the switch be filed with the Market Regulation 
Department before the next business day's opening. The Commission 
believes that these safeguards will provide greater accountability on 
the part of specialists when they switch from automatic execution mode 
to manual execution mode.

IV. Conclusion

    For the foregoing reasons, 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, and, in 
particular, with section 6(b)(5) of the Act.\9\
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    \9\ 15 U.S.C. 78f(b)(5).
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    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\10\ that the proposed rule change (SR-CHX-2001-26) is approved.
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    \10\ 15 U.S.C. 78s(b)(2).

    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. 02-9882 Filed 4-22-02; 8:45 am]
BILLING CODE 8010-01-P