[Federal Register Volume 67, Number 250 (Monday, December 30, 2002)]
[Notices]
[Pages 79671-79673]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-32916]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47068; File No. SR-CHX-2002-37]


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 Primary 
Market Block-Size Trade-Through

December 20, 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 December 11, 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 prepared by the 
Exchange. The Exchange filed the proposal pursuant to Section 
19(b)(3)(A) of the Act,\3\ and Rule 19b-4(f)(6) \4\ thereunder,

[[Page 79672]]

which renders the proposal effective upon filing with the Commission. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

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(a)(3), 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 add a provision that 
would permit, but not require, a CHX specialist to enable a 
functionality that would automatically execute designated limit orders 
represented in the specialist's quotation, following a ``block size'' 
\5\ trade-through in the primary market, at the block price instead of 
the limit price. The text of the proposed rule change is available at 
the Commission and at the CHX.
---------------------------------------------------------------------------

    \5\ A ``block size trade'' means a trade that involves 10,000 or 
more shares of a Dual Trading System (i.e., listed) issue, or having 
a market value of $200,000 or more.
---------------------------------------------------------------------------

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
    The proposed rule change would permit a CHX specialist to enable a 
functionality that would automatically execute designated limit orders 
represented in the specialist's quotation, following a ``block size'' 
trade-through in the primary market, at the block price instead of the 
limit price.
    Under existing Exchange rules relating to listed securities, 
whenever a block trade in the primary market trades through a 
specialist's quote, the specialist must execute all limit orders in the 
book (that are priced at the block price or better) at the better block 
price, rather than at their less-favorable limit prices.\6\ This 
requirement protects resting customer limit orders against large trade-
throughs in the primary market.
---------------------------------------------------------------------------

    \6\ See CHX Article XX, Rule 7.06.
---------------------------------------------------------------------------

    At the time a trade-through occurs, however, it is impossible to 
determine whether it qualifies as a ``block trade.''\7\ For that 
reason, the Exchange's systems have been designed to automatically 
execute resting customer limit orders at their limit prices; CHX 
specialists must later correct those prices to the better block price, 
if they have determined that a block trade occurred.
---------------------------------------------------------------------------

    \7\ A block trade is a trade that involves (a) a trade of 
``block size'' (10,000 shares or more, or with a market value of 
$200,000 or more); and (b) either (i) a cross of block size (where a 
single firm represents all of one side of the transaction and all or 
a portion of the other side) or (ii) any other transaction where a 
single firm represents an order of block size on only one side of 
the transaction, so long as the transaction does not occur at the 
Exchange's current bid or offer. At the time a transaction occurs on 
another market, the CHX can determine whether it is a block size 
trade; the CHX does not yet know, however, which firms were on which 
sides of the transaction and therefore cannot determine whether it 
meets the other requirements of a block trade.
---------------------------------------------------------------------------

    This practice of correcting execution prices, even when it results 
in a better execution for the customer, is a large inconvenience to 
some key CHX order-sending firms. These electronically sophisticated 
firms must send out two trade confirmations to each customer--one that 
is generated as soon as the trade occurs and a second to reflect the 
corrected execution price.
    To accommodate CHX order-sending firms, the proposed rule change 
would permit, but not require, a CHX specialist to enable a 
functionality that would automatically execute designated limit orders 
when a block-size trade-through occurs in the primary market at the 
block price. We anticipate that the use of this functionality will 
result in a dramatic reduction of price corrections and, thus, will 
provide better customer service to some of the Exchange's key order-
sending firms.
    In addition to adding the optional functionality detailed above, 
the proposed rule change would relocate the existing provision 
currently located in Article XX, Rule 7.06 to Article XX, Rule 37(a)(3) 
of the CHX Rules, which governs execution of limit orders in a CHX 
specialist's book when certain conditions occur in the primary market. 
It is important to note that the proposed rule change does not seek to 
modify a CHX specialist's execution obligations whatsoever. Rather, it 
represents the Exchange's attempt to address the concerns of its order-
sending firms by providing CHX specialists with a functionality that 
they can utilize to meet their obligations automatically, instead of by 
means of the manual price correction procedure currently used. 
Moreover, the proposed functionality would only permit a CHX specialist 
to designate an order for automatic execution based on objective 
criteria such as the size of the order. For this reason, as set forth 
below, the Exchange believes that immediate effectiveness of the rule 
change is amply warranted.
    The Exchange intends to allow its specialists to begin using this 
new functionality floor-wide on January 2, 2003; a pilot version of the 
functionality likely will be tested in a limited number of issues 
beginning the week of December 16, 2002.
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).\8\ The CHX believes the proposal is 
consistent with Section 6(b)(5) of the Act \9\ 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.
---------------------------------------------------------------------------

    \8\ 15 U.S.C. 78(f)(b).
    \9\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

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

    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 \10\ and Rule 19b-4(f)(6)\11\ 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

[[Page 79673]]

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.
---------------------------------------------------------------------------

    \10\ 15 U.S.C. 78s(b)(3)(A).
    \11\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

    The Exchange has requested that the Commission accelerate the 
operative date. The Commission believes waiving the 30-day operative 
delay is consistent with the protection of investors and the public 
interest.\12\ The Commission believes that acceleration of the 
operative date will allow the Exchange to implement this new automatic 
functionality floor-wide on January 2, 2002 and to permit a pilot 
version of the functionality to be tested beginning the week of 
December 16, 2002. For these reasons, the Commission designates this 
proposal as both effective and operative upon filing with the 
Commission.
---------------------------------------------------------------------------

    \12\ 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).
---------------------------------------------------------------------------

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-2002-37 and should be 
submitted by January 21, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
---------------------------------------------------------------------------

    \13\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-32916 Filed 12-27-02; 8:45 am]
BILLING CODE 8010-01-P