[Federal Register Volume 67, Number 208 (Monday, October 28, 2002)]
[Notices]
[Pages 65813-65815]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-27299]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46697; File No. SR-CHX-2002-15]


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

October 21, 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 September 13, 2002, the Chicago Stock Exchange, Inc. (``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 prepared by the CHX. 
The proposed rule change has been filed by the CHX as a ``non-
controversial'' rule change under Rule 19b-4(f)(6) \3\ under the Act. 
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.
    \3\ 17 CFR 240.19b-4(f)(6).
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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 
to clarify the provisions that govern the approval necessary to switch 
from manual to automatic execution of orders.
    Below is the text of the proposed rule change. Proposed new 
language is italicized. Proposed deletions are in [brackets].

Chicago Stock Exchange Rules

* * * * *

Article XX

* * * * *

Guaranteed Execution System and Midwest Automated Execution System

Rule 37
    (a) No change to text.
    (b) No change to text.
    (1)-(7) No change in text.
    [(8) In unusual trading situations, specialists may switch from 
automatic execution to a manual execution mode at their respective 
posts. With respect to specialists trading Nasdaq issues, ``manual 
execution mode'' shall include any instance in which a specialist

[[Page 65814]]

reduces the auto-execution threshold below the minimum set forth in 
Rule 37(b)(1) of this Article. For purposes of this subsection (8), 
``unusual trading situations'' for NASDAQ/NM issues include the 
existence of large order imbalances and/or significant price 
volatility. If a specialist elects to switch to a manual execution mode 
based on the existence of unusual trading situations, such specialist 
(A) must document the basis for election of a manual execution mode; 
(B) must disclose to its customers the differences in procedures from 
normal market conditions and the circumstances under which the 
specialist generally may activate these procedures; and (C) must seek 
relief from the requirements of MAX from two (2) floor officials or a 
designated member of the Exchange staff who would have authority to set 
execution prices.]
    [(9)](8) No change to text.
    [(10)](9) No change to text.
    [(11)](10) No change to text.
    [(12)](11) No change to text.
* * * * *
    * * * Interpretations and Policies:
    .01-.03 No change to text.
    .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 minutes 
without securing the permission of two (2) floor officials.]
    Reasons for moving to manual execution mode. Specialists trading 
listed securities may use the procedures described below to switch to 
manual execution mode when the primary market quotes are inaccurate due 
to market conditions. For example, this functionality might be used if 
it became apparent that the NYSE invoked its unusual market conditions 
rule (pursuant to SEC Rule 11Ac1-1). This functionality cannot be used 
merely because of a volatile market.
    Specialists trading Nasdaq/NM securities may use the procedures 
described below to switch to manual execution mode in unusual trading 
situations. With respect to specialists trading Nasdaq/NM securities, 
``manual execution mode'' shall include any instance in which a 
specialist reduces the auto-execution threshold below the minimum set 
forth in Rule 37(b)(1) of this Article. For purposes of this paragraph, 
``unusual trading situations'' include the existence of large order 
imbalances and/or significant price volatility.
    Procedures for switching to manual execution mode. [In all other 
instances, w] 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) notify and secure the permission of a 
floor official to remain in manual mode. [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 floor official 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 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 specialist have the 
responsibility, and are required, to immediately reinstate MAX's 
automatic execution functionality when [the primary market quotes 
accurately reflect market conditions] market conditions no longer 
support the decision to move to manual execution mode. 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 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 on 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
    In October, 2001, the Exchange's Board of Governors approved 
changes to the procedures that a specialist must follow when switching 
from automatic to manual execution mode, intending that the changes 
would apply to specialists trading both listed and OTC securities. 
Among other things, these changes required the floor supervisor of a 
specialist firm to approve any switch to manual execution mode before 
it occurred and to promptly seek floor official approval of that 
change. Additionally, the amended language made it clear that the 
firm's floor supervisor was responsible for filing documentation with 
the Market Regulation Department about each change. Finally, the 
modified text confirmed that floor official permission to operate in 
manual execution mode expired after a limited time period; after five 
minutes, the specialist firm and its floor supervisor were again 
required to seek permission to remain in manual execution mode. The CHX 
filed this proposed rule change with the Commission on November 14, 
2001; the

[[Page 65815]]

Commission approved the proposed rule change on April 17, 2002.\4\
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    \4\ See Securities Exchange Act Release No. 45770 (April 17, 
2002), 67 FR 19784 (April 23, 2002) (SR-CHX-2001-26).
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    Because of a staff oversight, however, the changes made by the 
Exchange's earlier proposal only impacted listed specialists. This 
submission would extend the same requirements to specialists trading 
over-the-counter (``OTC'') securities and consolidate the rule 
provisions relating to this issue for easier reference.\5\
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    \5\ The proposal deletes language from the rule that allows a 
listed specialist to switch to manual execution mode when a 
``certain analyst/reporter's report is broadcast on cable TV.'' That 
rule provision has become obsolete and no longer provides a reason 
for which a specialist can switch to manual execution mode.
    Additionally, the Exchange has not included, in its proposal, a 
requirement that a specialist firm that changes its auto-execution 
status must notify order-sending firms of that change. The Exchange 
reports that in recent months, order-sending firms appear, more and 
more, to base their order-routing decisions on the execution quality 
statistics of various market centers. The Exchange believes that, if 
orders are given quick executions at appropriate prices, order-
sending firms may not be interested in whether the execution was 
automatically or manually given. Nevertheless, the Exchange plans to 
continue the practice of providing automated notices to order-
sending firms that request them with respect to trading in OTC 
issues and will consider whether a similar practice is appropriate 
for firms that send orders in listed securities.
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    As with the Exchange's earlier filing, the Exchange anticipates 
that these rule changes will promote greater accountability and 
preclude reliance on manual execution mode in a manner that is 
potentially violative of CHX rules. They also will assist the Market 
Regulation Department in determining more easily whether violations of 
the Exchange's rules regarding manual execution mode have occurred.
2. Statutory Basis
    The Exchange 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).\6\ In particular, 
the Exchange believes that the proposed rule change 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 on Burden on Competition

    The CHX 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

    Because the foregoing proposed rule change: (1) Does not 
significantly affect the protection of investors or the public 
interest; (2) does not impose any significant burden on competition; 
and (3) does not become operative for 30 days after the date of filing, 
or such shorter time as the Commission may designate if consistent with 
the protection of investors and the public interest; provided that the 
self-regulatory organization has given the Commission written notice of 
its intent to file the proposed rule change, along with a brief 
description and text of the proposed rule change, at least five 
business days prior to the date of filing of the proposed rule change, 
or such shorter time as designated by the Commission, the proposed rule 
change \8\ has become effective pursuant to section 19(b)(3)(A) of the 
Act \9\ and Rule 19b-4(f)(6)\10\ thereunder.
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    \8\ As required under Rule 19b-4(f)(6)(iii), the Exchange 
provided the Commission with written notice of its intent to file 
the proposed rule change at least five business days prior to the 
filing date or such shorter period as designated by the Commission. 
See Prefiling Notice of Proposed Rule Change (SR-CHX-2002-15), dated 
May 22, 2002.
    \9\ 15 U.S.C. 78s(b)(3)(A).
    \10\ 17 CFR 240.19b-4(f)(6).
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    A proposed rule change filed under Rule 19b-4(f)(6) normally does 
not become operative prior to 30 days after the date of filing. 
However, Rule 19b-4(f)(6)(iii) permits the Commission to designate a 
shorter time if such action is consistent with the protection of 
investors and the public interest. The CHX seeks to have the proposed 
rule change become operative upon filing in order to more quickly 
implement these procedures and thus require all of its specialists--
those trading both OTC and listed securities--to use identical 
procedures when changing from automatic execution mode to manual 
execution mode.
    The Commission, consistent with the protection of investors and the 
public interest, designates the proposal to be operative as of 
September 13, 2002.\11\ Acceleration of the operative date of the 
proposed rule change will allow the CHX to quickly harmonize the 
procedures the specialist follows when switching from automatic 
execution mode to manual execution mode for listed and Nasdaq 
securities.
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    \11\ For purposes only of accelerating the operative date of 
this proposal, the Commission has considered the proposed rule's 
impact on efficiency, competition, and capital formation. 15 U.S.C. 
78c(f).
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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.\12\
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    \12\ See Section 19(b)(3)(C) of the Act, 15 U.S.C. 78(b)(3)(C).
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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 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-2002-15 and should 
be submitted by November 18, 2002.

    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. 02-27299 Filed 10-25-02; 8:45 am]
BILLING CODE 8010-01-P