[Federal Register Volume 67, Number 203 (Monday, October 21, 2002)]
[Notices]
[Pages 64679-64681]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-26690]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46657; File No. SR-CHX-2002-18]


Self-Regulatory Organizations; The Chicago Stock Exchange, Inc.; 
Notice of Filing and Order Granting Accelerated Approval of Proposed 
Rule Change Relating to Execution Price for Odd-Lot Orders Executed on 
the Chicago Stock Exchange

October 11, 2002.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on June 20, 2002, the Chicago Stock Exchange, Inc. (``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 prepared by the CHX.\3\ CHX filed 
Amendment No. 1 to the proposed rule change on September 23, 2002.\4\ 
The Commission is publishing this notice, as amended, to solicit 
comments on the proposed rule change from interested persons, and order 
accelerated approval of the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ This submission is virtually identical to SR-CHX-2001-29, 
which was filed with the Commission on November 23, 2001, but was 
erroneously given a pre-existing file number by the CHX.
    \4\ See letter from Kathleen M. Boege, Associate General 
Counsel, CHX, to Nancy J. Sanow, Assistant Director, Division of 
Market Regulation, Commission (September 20, 2002) (``Amendment No. 
1''). In Amendment No. 1, CHX made clarifying and technical changes 
to the rule text of the proposed rule change.
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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 XXXI, Rule 9 of the CHX 
Rules, which governs, among other things, execution prices for odd-lot 
orders. The text of the proposed rule follows:
    Additions are italicized; deletions are [bracketed].

Chicago Stock Exchange Rules

Article XXXI

Odd-Lots and Odd-Lot Dealers, Dual System
* * * * *
Execution of Odd-Lot Orders During the Primary Trading Session
Rule 9.
* * * * *
    (b) Nasdaq/NM Securities and Dually Traded Issues. As to Nasdaq/NM 
Securities [and to certain stocks dually traded on this Exchange and on 
another national securities exchange and which stocks have been 
designated as being in the dual trading system], market orders will be 
accepted for execution as an odd-lot based on the best bid disseminated 
pursuant to SEC Rule 11 Ac1-1 on a sell order or the best offer 
disseminated pursuant to SEC Rule 11 Ac 1-1 on a buy order in effect at 
the time the order is presented at the specialist post, provided the 
order is for a number of shares less than the full lot in said stock. 
Any market order to purchase or sell a Dual Trading System issue in an 
odd-lot amount, which is transmitted for execution to an odd-lot dealer 
or its agent shall be executed, unless otherwise provided herein, at 
the price of the adjusted ITS bid (in the case of an order to sell) or 
adjusted ITS offer (in the case of an order to purchase) in the 
security at the time the order is received by the Exchange system 
designated to process odd-lot orders (the ``odd-lot system'').
* * * * *
    (b) General. [An odd-lot market order shall be executed at the 
proper full lot bid or ask price.]
* * * * *
    (vi) In instances in which quotation information is not available, 
e.g., the quotation collection or dissemination facilities are 
inoperable, or the primary market in the security has been determined 
to be in non-firm mode (as referenced in Interpretation and Policy 
.01), standard, regular way odd-lot market orders shall be executed 
based on the next primary market round lot sale or shall be executed by 
the member organization designated by the Exchange as the odd-lot 
dealer for the issue, at a price deemed appropriate under prevailing 
market conditions.
* * * * *

Interpretations and Policies:

    .01 Adjusted Best Bid or Offer. For purposes of paragraph (b) of 
this Rule, the terms ``adjusted ITS best bid'' and ``adjusted ITS best 
offer'' for a security shall mean the highest bid and lowest

[[Page 64680]]

offer, respectively, disseminated by (i) the Exchange or (ii) a market 
center participating in the Intermarket Trading System; provided, 
however, that the bid and offer in another ITS market center will be 
considered in determining the adjusted ITS best bid or adjusted ITS 
best offer in a security only if (a) the security is included in ITS in 
that market center; (b) the size of the quotation is greater than 100 
shares; (c) the bid or offer is no more than $.25 away from the bid or 
offer disseminated by the primary market; (d) the quotation conforms to 
Exchange requirements regarding minimum trading variations; (e) the 
quotation does not result in a locked market; (f) the market center is 
not experiencing operational or system problems with respect to the 
dissemination of quotation information; and (g) the bid or offer is 
``firm,'' that is, members of the market center disseminating the bid 
or offer are not relieved of their obligations with respect to such bid 
or offer under paragraph (c)(2) of Rule 11Ac1-1 pursuant to the 
``unusual market'' exception of paragraph (b)(3) of Rule 11Ac1-1.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, 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 III 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 XXXI, Rule 9 of the CHX 
Rules, which governs, among other things, execution prices for odd-lot 
orders. According to the Exchange, the proposed rule change is 
substantially similar to a proposed rule change approved by the 
Commission with respect to Rule 124(A) of the New York Stock Exchange 
(``NYSE''), which governs execution prices for odd-lot orders on the 
floor of the NYSE.\5\
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    \5\ See Securities Exchange Act Release No. 38874 (July 25, 
1997), 62 FR 41456 (August 1, 1997).
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    Under the proposed rule change, odd-lot orders for Dual Trading 
System issues will be executed at the adjusted Intermarket Trading 
System (``ITS'') Best Bid or Offer (``BBO''). The ITS BBO is defined in 
proposed Interpretation and Policy .01 for Article XXXI, Rule 9 as the 
highest bid or lowest offer disseminated by the Exchange or a market 
center participating in ITS. Under the proposed Interpretation, the bid 
or offer of another market center would be used in determining the ITS 
BBO if: (1) The security is included in ITS in that market center, (2) 
the size of the quotation is greater than 100 shares, (3) the bid or 
offer is no more than $0.25 away from the bid or offer disseminated by 
the primary market, (4) the quotation conforms to Exchange requirements 
regarding minimum trading variations, and (5) the quotation does not 
result in a locked market. The Exchange believes that these provisions 
should help ensure that the odd-lot execution price for ITS securities 
is not established utilizing erroneous quotation information from other 
market centers. Similarly, proposed Article XXXI, Rule 9(c)(vi) would 
govern odd-lot executions for ITS securities in instances where 
quotation information is unavailable due to unusual market conditions. 
In particular, if unusual market conditions existed (i.e., inoperable 
quotation collection or dissemination facilities, or the primary market 
in the security has been determined to be in non-firm mode (as 
referenced in proposed Interpretation and Policy .01)), standard, 
regular way odd-lot market orders would be executed based on the next 
primary market round lot sale or shall be executed by the member 
organization designated by the Exchange as the odd-lot dealer for the 
issue, at a price deemed appropriate under prevailing market 
conditions.
    The Exchange believes that the proposed rule change is appropriate 
because the rule amendments are virtually identical to the analogous 
NYSE rule. Moreover, the Exchange believes that the proposed rule 
change is to the ultimate benefit of investors, to the extent that 
calculation of the adjusted ITS BBO excludes erroneous quotation 
information.
2. Statutory Basis
    The proposed rule 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\ In particular, the proposed rule 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. 78f(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, as 
amended, 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. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, 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. 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-2002-18 and should be submitted by November 12, 2002.

IV. Commission's Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    The Commission finds that the proposed rule change, as amended, is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities exchange 
and, in particular, with the requirements of Section 6(b).\8\ 
Specifically, the Commission believes the proposal is consistent with 
the

[[Page 64681]]

Section 6(b)(5) \9\ requirements that the rules of an exchange be 
designed to remove impediments to and perfect the mechanism of a free 
and open market, to facilitate transactions in securities and, in 
general, to protect investors and the public interest.\10\
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    \8\ 15 U.S.C. 78f(b)
    \9\ 15 U.S.C. 78f(b)(5).
    \10\ In approving this rule, the Commission notes that it has 
considered the proposal's impact on efficiency, competition, and 
capital formation, consistent with section 3 of the Act. 15 U.S.C. 
78c(f).
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    The Commission finds good cause for approving the proposed rule 
change prior to the thirtieth day after the date of publication of 
notice thereof in the Federal Register. The Commission notes that the 
instant proposed rule change, as amended, is substantively similar to 
NYSE Rule 124, which has been reviewed and approved by the 
Commission.\11\ Thus, this proposal does not raise any new regulatory 
issues or concerns. For instance, like NYSE Rule 124, the proposed rule 
change would amend Article XXXI, Rule 9 to base odd-lots prices on the 
adjusted ITS BBO if: (1) The security is included in ITS in the 
relevant market center, (2) the size of the quotation is greater than 
100 shares, (3) the bid or offer is no more than $0.25 away from the 
bid or offer disseminated by the primary market, (4) the quotation 
conforms to Exchange requirements regarding minimum trading variations, 
and (5) the quotation does not result in a locked market. Article XXXI, 
Rule 9 is also similar to NYSE Rule 124 in that when the adjusted ITS 
BBO is unavailable due to unusual market conditions the odd-lot market 
for an ITS security would be determined by the next round-lot sale on 
the Exchange.
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    \11\ See supra note 5.
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    The Commission believes that generally pricing odd-lots for listed 
securities based on the ITS BBO should improve the execution quality 
for odd-lot orders. Further, the Commission believes that the proposal 
should help to ensure that odd-lot executions are based on market 
activity that is relevant and reliable. The Commission believes that 
the proposed rule change, as amended, should provide small investors, 
who may find it difficult to trade orders in round-lot increments, with 
better executions and should enhance the integrity of the market.

V. Conclusion

    For the foregoing reasons, the Commission finds that the proposal, 
as amended, is consistent with the requirements of the Act and rules 
and regulations thereunder.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\12\ that the proposed rule change (SR-CHX-2002-18), as amended, is 
approved.
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    \12\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-26690 Filed 10-18-02; 8:45 am]
BILLING CODE 8010-01-P