[Federal Register Volume 67, Number 191 (Wednesday, October 2, 2002)]
[Notices]
[Pages 61940-61941]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-25007]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46556; File No. SR-CHX-2002-31]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Stock Exchange, Incorporated Relating To 
Execution of Limit Orders Following Exempted ITS Trade-Through

September 26, 2002.
    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 given 
that on September 20, 2002, the Chicago Stock Exchange, Incorporated 
(``CHX'' or ``Exchange'') filed with the Securities and Exchange 
Commission (the ``Commission'') the proposed rule change as described 
in Items I, II and III below, which Items have been substantively 
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 certain provisions of CHX Article 
XX, Rule 37, which governs, among other things, execution of limit 
orders in a CHX specialist's book following a trade-through in the 
primary market. Specifically, the CHX seeks to render voluntary a CHX 
specialist's obligation to fill limit orders in the specialist's book 
following a primary market trade-through, if such trade-through 
constitutes an Exempted Trade-Through (as defined below). The text of 
the proposed rule change is available at the Commission and at the 
CHX.\3\
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    \3\ In this submission, the CHX seeks permanent approval of a 
rule currently in effect on a 30-day pilot basis. See SR-CHX-2002-
29.
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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 proposal. 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
    On August 28, 2002, the Commission issued an order granting a de 
minimis exemption (the ``Exemption'') for transactions in certain 
exchange-traded funds (``ETFs'') from the trade-through provisions of 
the Intermarket Trading System (``ITS'') Plan.\4\ The Exemption was 
proposed by Commission staff to permit rapid execution of orders in 
ETFs at prices that may trade through the quotations of other markets, 
including the NBBO price. Because Exempted Trade-Throughs will, by 
definition, be exempt from ITS restrictions, a market participant that 
reports execution of an Exempted Trade-Through will not be required to 
satisfy an administrative request from any ITS participant for 
satisfaction

[[Page 61941]]

following the Exempted Trade-Through.\5\
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    \4\ See Securities Exchange Act Release No. 46428, 67 FR 56607 
(September 4, 2002). At present, the exemption extends to 
transactions in three designated ETFs--the Nasdaq-100 Index 
(``QQQ''), the Dow Jones Industrial Average (``DIAMONDs'') and the 
Standard & Poor's 500 Index (``SPDRs'')--when the transactions are 
``executed at a price that is no more than three cents lower than 
the highest bid displayed in CQS and no more than three cents higher 
than the lowest offer displayed in CQS'' (each, an ``Exempted Trade-
Through''). The exemption was effective as of September 4, 2002.
    \5\ Under current ITS rules and practice, if an ITS participant 
trades through the quotation of another ITS participant, thereby 
violating the ITS trade-through prohibition, the non-violating 
participant is entitled to send an administrative message noting the 
trade-through and the violating participant is required to respond 
with a commitment to trade at the price and size quoted by the non-
violating participant.
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    Article XX, Rules 37(a)(3) and 37(b)(6) of the CHX Rules, which 
govern execution of limit orders in a CHX specialist's book, provides 
for execution of such orders at the limit price when certain conditions 
occur in the primary market. Specifically, these provisions obligate a 
CHX specialist to fill limit orders in his book if there is a trade-
through of the limit price in the primary market. These rule provisions 
were enacted as a means of attracting order flow to the CHX, by 
guaranteeing that a limit order resident in a CHX specialist's book 
would receive a fill if the primary market traded through the limit 
price. The CHX specialist is willing to provide this ``trade-through 
protection'' to its customer limit orders because the CHX specialist 
can seek relief via ITS in the event of a trade-through.
    Now that the Exemption has become effective, however, certain 
primary market trade-throughs in ETFs that will trigger a CHX 
specialist's obligation to provide trade-through protection will now 
constitute Exempted Trade-Throughs, and will leave the CHX specialist 
without recourse to seek satisfaction from the primary market. While 
the CHX believes that certain CHX specialists may still wish to provide 
trade-through protection to their limit orders for business and 
marketing reasons, the CHX believes that trade-through protection 
should no longer be mandated in the case of Exempted Trade-Throughs. 
The attached rule would permit, but would not require, a CHX specialist 
firm to fill limit orders in his book when an Exempted Trade-Through 
occurs in the primary market.
2. Statutory Basis
    The CHX believes the proposal 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).\6\ The CHX believes the proposal is 
consistent with Section 6(b)(5) of the Act \7\ in that it is designed 
to promote just and equitable principles of trade, to remove 
impediments, 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. 78(f)(b).
    \7\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement of 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 Regarding 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 other 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 proposal 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-2002-31 and should be 
submitted by October 23, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-25007 Filed 10-1-02; 8:45 am]
BILLING CODE 8010-01-P