[Federal Register Volume 67, Number 236 (Monday, December 9, 2002)]
[Notices]
[Pages 72990-72993]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-30964]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46932; File No. SR-CHX-2002-34]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Chicago Stock Exchange, 
Inc. Relating to the Trading of Nasdaq/NM Securities

November 29, 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 October 25, 2002, the Chicago Stock Exchange, Inc. (``CHX'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been 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 has requested a one-year extension of the pilot 
program relating to the trading of Nasdaq/NM securities on the 
Exchange. Specifically, the pilot program amended Article XX, Rule 37 
and Article XX, Rule 43 of the Exchange's rules. The current pilot 
expired on November 1, 2002. The Exchange proposes that the pilot 
remain in effect on a pilot basis through November 1, 2003. The text of 
the proposed rule change is available at the

[[Page 72991]]

principal offices of the CHX and at the Commission. This proposed 
extension of the pilot does not alter the text of the pilot language, 
but simply extends the expiration date of the pilot through November 1, 
2003.

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 Exchange included statements 
concerning the purpose of, and the 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. 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 has requested a one-year extension of the pilot 
program relating to the trading of Nasdaq/NM securities on the 
Exchange. Specifically, the pilot program amends Article XX, Rule 37 
and Article XX, Rule 43 of the Exchange's Rules. The pilot program 
currently is due to expire on November 1, 2002; the Exchange proposes 
that the pilot remain in effect through November 1, 2003.
    On May 4, 1987, the Commission approved certain Exchange rules and 
procedures relating to the trading of Nasdaq/NM securities on the 
Exchange.\3\ Among other things, these rules rendered the Exchange's 
BEST Rule guarantee (Article XX, Rule 37(a)) applicable to Nasdaq/NM 
securities and made Nasdaq/NM securities eligible for the automatic 
execution feature of the Exchange's Midwest Automated Execution System 
(the ``MAX'' system).\4\
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    \3\ See Securities Exchange Act Release No. 24424 (May 4, 1987), 
52 FR 17868 (May 12, 1987) (order approving File No. SR-MSER-87-2); 
see also, Securities Exchange Act Release Nos. 8146 (June 26, 1990), 
55 FR 27917 (July 6, 1990) (order expending the number of eligible 
securities to 100); 36102 (August 14, 1995), 60 FR 43626 (August 14, 
1995), 60 FR 43626 (August 22, 1995) (order expanding the number of 
eligible securities to 500); 64 FR 27839 (May 21, 1999) (order 
expanding the number of eligible securities to 1000).
    \4\ The MAX system may be used to provide an automated delivery 
and execution facility for orders that are eligible for execution 
under the Exchange's BEST Rule and certain other orders. See CHX 
Rules, Article XX, Rule 37(b). A MAX order that fits within the BEST 
parameters is executed pursuant to the BEST Rule via the MAX system. 
If an order is outside the BEST parameters, the BEST rule does not 
apply, but MAX system handling rules remain applicable.
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    On January 3, 1997, the Commission approved, on a one year pilot 
basis, a program that eliminated the requirement that CHX specialists 
automatically execute orders for Nasdaq/NM securities when the 
specialist is not quoting at the national best bid or best offer 
disseminated pursuant to SEC Rule 11Ac1-1 (the ``NBBO'').\5\ When the 
Commission approved the program on a pilot basis, it requested that the 
Exchange submit a report to the Commission describing the Exchange's 
experience with the pilot program. The Commission stated that the 
report should include at least six months of trading data. Due to 
programming issues, the pilot program was not implemented until April 
1997. Six months of trading data did not become available until 
November 1997. As a result, the Exchange requested an additional three-
month extension to collect the data and prepare the report for the 
Commission.
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    \5\ See Securities Exchange Act Release No. 38119 (January 3, 
1997), 62 FR 1788 (January 13, 1997).
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    On December 31, 1997, the Commission extended the pilot program for 
an additional three months, until March 31, 1998, to give the Exchange 
additional time to prepare and submit the report and to give the 
Commission adequate time to review the report prior to approving the 
pilot on a permanent basis.\6\ The Exchange submitted the report to the 
Commission on January 30, 1998. Subsequently, the Exchange requested 
another three-month extension, in order to give the Commission adequate 
time to approve the pilot program on a permanent basis. On March 31, 
1998, the Commission approved the pilot for an additional three-month 
period, until June 30, 1998.\7\ On July 1, 1998, the Commission 
approved the pilot for an additional six-month period, until December 
31, 1998.\8\ On December 31, 1998, the Commission approved the pilot 
for an additional six-month period, until June 30, 1999.\9\ On June 30, 
1999, the Commission approved the pilot for an additional seven-month 
period, until January 31, 2000.\10\ On January 31, 2000, the Commission 
approved the pilot for an additional three-month period, until May 1, 
2000.\11\ On May 1, 2000, the Commission approved the pilot for an 
additional six-month period, until November 1, 2000.\12\ On November 
15, 2000, the Commission approved the pilot for an additional one-year 
period, until November 1, 2001.\13\ On November 1, 2001, the pilot was 
extended for an additional one-year period, until November 1, 2002.\14\ 
In light of the evolving nature of the Nasdaq market and unlisted 
trading of Nasdaq/NM securities, the Exchange now requests another 
extension of the current pilot program, through November 1, 2003. The 
Exchange is not requesting approval of any changes to the pilot program 
in this submission.
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    \6\ See Securities Exchange Act Release No. 39512 (December 31, 
1997), 62 FR 1517 (January 9, 1998).
    \7\ See Securities Exchange Act Release No. 39823 (March 31, 
1998), 63 FR 17246 (April 8, 1998).
    \8\ See Securities Exchange Act Release No. 40150 (July 1, 
1998), 63 FR 36983 (July 8, 1998).
    \9\ See Securities Exchange Act Release No. 40868 (December 31, 
1998), 64 FR 1845 (January 12, 1999).
    \10\ See Securities Exchange Act Release No. 41586 (June 30, 
1999), 64 FR 36938 (July 8, 1999) (the Commission notes that it 
requested additional data regarding the CHX's pilot in connection 
with this Release).
    \11\ See Securities Exchange Act Release No. 42372 (January 31, 
2000), 65 FR 6425 (February 9, 2000) (the Commission notes that it 
requested additional data regarding the CHX's experience with the 
pilot in connection with this Release).
    \12\ See Securities Exchange Act Release No. 42740 (May 1, 2000) 
65 FR 26649 (May 8, 2000) (the Commission notes that it requested 
additional data regarding the CHX's experience with the pilot in 
connection with this Release).
    \13\ See Securities Exchange Act Release No. 43565 (November 15, 
2000), 65 FR 71166 (November 29, 2000) (the Commission notes that it 
requested additional data regarding the CHX's experience with the 
pilot in connection with this Release).
    \14\ See Securities Exchange Act Release No. 45010 (November 1, 
2001), 66 FR 56585 (November 8, 2001).
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    Under the pilot program, specialists must continue to accept agency 
market orders \15\ or marketable limit orders, but only for orders of 
100 to 5099 shares in Nasdaq/NM securities. This threshold order 
acceptance requirement is referred to as the ``auto acceptance 
threshold.'' Specialists, however, must accept all agency limit orders 
in Nasdaq/NM securities from 100 up to and including 10,000 shares for 
placement in the limit order book. Specialists are required to 
automatically execute Nasdaq/NM orders in accordance with certain 
amendments to the pilot program that were approved by the 
Commission.\16\
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    \15\ The term ``agency order'' means an order for the account of 
a customer, but does not include professional orders, as defined in 
CHX Rules, Article XXX, Rule 2, Interpretation and Policy .04. The 
rule defines a ``professional order'' as any order for the account 
of a broker-dealer, the account of an associated person of a broker-
dealer, or any account in which a broker-dealer or an associated 
person of a broker-dealer has any direct or indirect interest.
    \16\ See Securities Exchange Act Release No. 44778 (September 7, 
2001), 66 FR 48075 (September 17, 2001) (SR-CHX-2001-11).
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    The pilot program requires the specialist to set the MAX auto-
execution threshold at 100 shares or greater for Nasdaq/NM securities. 
When a CHX specialist is quoting at the NBBO, orders for a number of 
shares less than or equal to the size of the specialist's quote are

[[Page 72992]]

executed automatically (in an amount up to the size of the specialist's 
quote). Orders of a size greater than the specialist's quote are 
automatically executed up to the size of the specialist's quote, with 
the balance of the order designated as an open order in the 
specialist's book, to be filled in accordance with the Exchange's rules 
for manual execution of orders for Nasdaq/NM securities. Such rules 
dictate that the specialist must either manually execute the order at 
the NBBO or a better price or act as agent for the order in seeking to 
obtain the best available price for the order on a marketplace other 
than the Exchange. If the specialist decides to act as agent for the 
order, the pilot program requires the specialist to use order-routing 
systems to obtain an execution where appropriate. Orders for securities 
quoted with a spread greater than the minimum variation are executed 
automatically after a fifteen second delay from the time the order is 
entered into MAX. The size of the specialist's bid or offer is then 
automatically decremented by the size of the execution. When the 
specialist's quote is exhausted, the system generates an autoquote at 
an increment away from the NBBO for 100 shares.
    When the specialist is not quoting a Nasdaq/NM security at the 
NBBO, an order that is of a size less than or equal to the auto 
execution threshold designated by the specialist will execute 
automatically at the NBBO price up to the size of the auto execution 
threshold. Orders of a size greater than the auto execution threshold 
will be designated as open orders in the specialist's book and manually 
executed, unless the order-sending firm previously has advised the 
specialist that it elects partial automatic execution, in which event 
the order will be executed automatically up to the size of the auto 
execution threshold, with the balance of the order to be designated as 
an open order in the specialist's book.
    Whether the specialist is quoting at the NBBO or not, ``oversized'' 
orders, i.e., orders that are of a size greater than the auto 
acceptance threshold of 5099 shares (as designated by the specialist), 
are not subject to the foregoing requirements, and may be canceled 
within one minute of being entered into MAX or designated as an open 
order.
2. Statutory Basis
    The CHX believes that the proposed rule change is consistent with 
Section 6(b) of the Act,\17\ generally, and Section 6(b)(5) of the Act 
\18\ 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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    \17\ 15 U.S.C. 78f(b).
    \18\ 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 result 
in any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act \19\ and Rule 19b-4(f)(6)\20\ thereunder because 
the proposal: (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 
from 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 Exchange has given the Commission written 
notice of its intent to file the proposed rule change at least five 
business days prior to the filing date of the proposed rule change. At 
any time within 60 days of the filing of such 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.
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    \19\ 15 U.S.C. 78s(b)(3)(A).
    \20\ 17 CFR 240.19b-4(f)(6).
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    The CHX has requested that the Commission waive the 5-day pre-
filing notification requirement and the 30-day operative delay. The 
Commission believes waiving the 5-day pre-filing notification 
requirement and the 30-day operative delay is consistent with the 
protection of investors and the public interest.\21\ The Commission 
notes that waiver of the 5-day pre-filing requirement and acceleration 
of the operative date will prevent the Exchange's pilot program 
relating to the trading of Nasdaq/NM securities from lapsing.
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    \21\ 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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    The Commission notes that in approving prior extensions of this 
pilot program, it has found that the Exchange's program is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange.\22\ 
Specifically, the Commission has found that the proposed rule change is 
consistent with Section 6(b)(5) \23\ of the Act, which requires that an 
Exchange have rules designed to prevent fraudulent and manipulative 
acts and practices, to promote just and equitable principles of trade, 
to remove impediments to and perfect the mechanism of a free and open 
market and a national market system, and, in general, to protect 
investors and the public interest. The Commission has also stated its 
belief that the proposal is consistent with Section 11A(a)(1)(C) \24\ 
and 11A(a)(1)(D) \25\ of the Act. The Commission has found that the 
proposal is consistent with Section 11A(a)(1)(C) in that it seeks to 
ensure economically efficient execution of securities transactions, and 
with Section 11A(a)(1)(D) in that it attempts to foster the linking of 
markets for qualified securities through communication and data 
processing facilities.
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    \22\ See Securities Exchange Act Release Nos. 42372 (January 31, 
2000), 65 FR 6425 (February 9, 2000)(SR-CHX-99-27) and 42740 (May 1, 
2000) 65 FR 26649 (May 8, 2000)(SR-CHX-00-11).
    \23\ 15 U.S.C. 78f(b)(5).
    \24\ 15 U.S.C. 78k-1(a)(1)(C).
    \25\ 15 U.S.C. 78k-1(a)(1)(D).
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    The Commission notes, however, that while the Exchange has been 
working toward establishing a linkage, specialists and OTC market 
makers do not yet have an effective method of routing orders to each 
other. The Commission expects the Exchange to continue to work towards 
establishing a linkage with the Nasdaq systems as requested in the 
January 1997 Order.\26\ In connection with this effort, the Commission 
requests an update on the information provided in the December 21, 1999 
report using the Exchange's surveillance system. The Commission 
requests that the Exchange supplement the available trading data so 
that it can consider issues concerning the pilot program, including the 
circumstances involving orders that are not

[[Page 72993]]

automatically executed through MAX, whether orders are given the NBBO 
shown at the time the order is received or the NBBO posted at the time 
the order is executed, and what explanations are available for price 
disimprovement. The Commission is extending the pilot program for one 
year so that the Exchange may continue to compile this data for the 
Commission's review.
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    \26\ See January 1997 Order, supra note 7.
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    The Commission also requests that the Exchange continue its effort 
to rewrite Article XX, Rule 37 and Article XX, Rule 43 of the 
Exchange's rules so these rules clearly explain the difference between 
how listed (or dually traded) securities and over-the-counter (or 
Nasdaq/NM) securities are routed and executed by the Exchange, and 
submit the new proposed language to the Commission for review and 
approval. Additionally, the Commission requests that the Exchange 
include in its rules an explanation of how the provisions of the 
Exchange's Best Rule interact with the Exchange's Rules governing 
automatic execution of orders.
    The Commission does not want to interrupt the current operations of 
the Exchange while the above-described issues are being addressed. 
Therefore, the Commission finds that it is appropriate to accelerate 
the operative date of the proposed rule change.

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-2002-34 and should 
be submitted by December 30, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\27\
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    \27\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-30964 Filed 12-6-02; 8:45 am]
BILLING CODE 8010-01-P