[Federal Register Volume 67, Number 199 (Tuesday, October 15, 2002)]
[Notices]
[Pages 63719-63720]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-26152]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46616; File No. SR-CHX-2002-33]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by The Chicago Stock Exchange, 
Incorporated Relating to Execution of Limit Orders Following Exempted 
ITS Trade-Through

October 8, 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 October 3, 2002, the Chicago Stock Exchange, Incorporated 
(``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 
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 extend, for a period of 30 days, an 
existing pilot rule change that amends 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, which would be in effect for a pilot period 
of 30 days, is available at the Commission and at the CHX.

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.\3\ The Exemption was 
proposed by Commission staff to permit rapid execution of orders in 
certain 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 following the Exempted Trade-Through.\4\
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    \3\ 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 is effective as of September 4, 2002.
    \4\ 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, provide 
for execution

[[Page 63720]]

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 Exempt 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 proposed rule change 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.
    On September 4, 2002, the CHX filed an identical proposed rule 
change with the Commission; the rule change was effective upon filing, 
for a period of 30 days.\5\ The CHX also filed the rule change seeking 
permanent approval thereof following notice and comment pursuant to 
Section 19(b)(2) of the Act, but the comment period following 
publication of the proposal in the Federal Register has not yet 
expired.\6\ Accordingly, the CHX is filing this submission to extend 
the existing pilot for an additional period of 30 days, until November 
3, 2002, during which time the CHX hopes to obtain the Commission's 
permanent approval of the proposed rule change.
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    \5\ See Securities Exchange Act Release No. 46557 (September 26, 
2002), 67 FR 61941 (October 2, 2002).
    \6\ See Securities Exchange Act Release No. 46556 (September 26, 
2002), 67 FR 61940 (October 2, 2002).
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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).\7\ The CHX believes the proposal is 
consistent with Section 6(b)(5) of the Act \8\ 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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    \7\ 15 U.S.C. 78(f)(b).
    \8\ 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

    The foregoing rule change constitutes a stated policy, practice or 
interpretation with respect to the meaning, administration, or 
enforcement of an existing rule of the Exchange and therefore, has 
become effective pursuant to Section 19(b)(3)(A)(i) of the Act \9\ and 
subparagraph (f)(1) of Rule 19b-4 thereunder.\10\
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    \9\ 15 U.S.C. 78s(b)(3)(A)(i).
    \10\ 17 CFR 240.19b-4(f)(1).
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    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.

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-2002-33 and should be 
submitted by November 5, 2002.

    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. 02-26152 Filed 10-11-02; 8:45 am]
BILLING CODE 8010-01-P