[Federal Register Volume 68, Number 11 (Thursday, January 16, 2003)]
[Notices]
[Pages 2380-2381]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-951]



[[Page 2380]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47152; File No. SR-CHX-2001-33]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment Nos. 1 and 2 by The Chicago Stock Exchange, Inc., 
Relating to Cancellation of Orders Otherwise Eligible for Automatic 
Execution

January 10, 2003.
    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 December 26, 2001, 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. On 
August 15, 2002, the CHX amended the proposal.\3\ On January 9, 2003, 
the CHX again amended the proposed rule change.\4\ The Commission is 
publishing this notice to solicit comments on the proposed rule change, 
as amended, from interested persons.

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend CHX Article XX, Rule 37, which 
governs, among other things, cancellation of market and marketable 
limit orders that otherwise are eligible for automatic execution. The 
text of the proposed rule change is below. Additions are in italics.

Article XX

Guaranteed Execution System and Midwest Automated Execution System Rule 
37
* * * * *
    (b) Automated Executions. The Exchange's Midwest Automated 
Execution System (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 (Article XX, Rule 37(a)) and 
certain other orders. In the event that an order that is subject to the 
BEST Rule is sent through MAX, it shall be executed in accordance with 
the parameters of the BEST Rule and the following. In the event that an 
order that is not subject to the BEST Rule is sent through MAX, it 
shall be executed in accordance with the parameters of the following:
    (1)-(3) No change in text.
    (4) Cancels. MAX will automatically cancel an unexecuted order in 
the file in the event an order sending firm inputs the proper 
cancellation instruction (and not less than five (5) seconds has 
expired since receipt of the order), except for an order on hold, a 
professional order or an oversized order. These orders must be canceled 
manually. For purposes of this subsection (4), oversized order means an 
order greater than the auto-execution threshold.
* * * * *
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See August 13, 2002 letter from Kathleen M. Boege, Associate 
General Counsel, CHX, to Nancy J. Sanow, Assistant Director, 
Division of Market Regulation (``Division''), Commission, and 
attachments (``Amendment No. 1''). In Amendment No. 1, the CHX 
reduced the proposed minimum order life from 15 seconds to five 
seconds. Amendment No. 1 completely replaces and supersedes the 
original filing.
    \4\ See January 8, 2003 letter from to Kathleen M. Boege, 
Associate General Counsel, CHX, to Nancy J. Sanow, Assistant 
Director, Division, Commission, and attachments (``Amendment No. 
2''). In Amendment No. 2, the CHX provided a new Exhibit A to the 
proposed rule change that properly underscores language that is 
being added.
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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 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 Exchange 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 XX, Rule 37 of the CHX 
Rules, which governs, among other things, automatic execution of market 
and marketable limit orders that otherwise would be eligible for 
automatic execution. The proposed rule change is intended to provide 
CHX specialists and order-sending firms with further clarity regarding 
cancellation of orders.\5\
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    \5\ The CHX initially filed this proposed rule change on 
December 26, 2001. After discussions with Commission staff, the CHX 
submitted Amendment No. 1, which replaces the original submission in 
its entirety. The only change is a reduction of the proposed minimum 
order life from 15 seconds to five seconds. The submission also 
further details (a) the protections still afforded order-sending 
firms with legitimate cancellation needs, and (b) the initiatives by 
other exchanges to deter abuses of the order cancellation process, 
which have been approved by the Commission in recent months.
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    Under the current rule, if an order-sending firm does not receive 
an immediate execution, the order-sending firm may cancel the order, 
even though the order is not erroneous in any respect. In the interim 
between receipt and cancellation, however, the specialist may be 
actively managing the order and seeking liquidity to fill the order. 
This can lead to unintended (and unfair) results, including the 
possibility that the CHX specialist has made an ITS commitment to 
procure liquidity, which the order-sending firm no longer wants.
    By implementing the proposed rule change, which would require that 
an order reside at the CHX for 5 seconds before a cancellation request 
will become effective (unless the specialist manually intervenes to 
cancel the order sooner), CHX specialists would be protected from the 
foregoing scenario. Significantly, order-sending firms that have 
entered an order that is truly erroneous may still cancel and resend 
such orders, using the ``cancel/error'' function. Accordingly, order-
sending firms remain protected from adverse consequences in the case of 
truly erroneous orders.
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. In 
particular, the Exchange believes the proposed rule change is 
consistent with Section 6(b) of the Act.\6\ The CHX believes the 
proposal 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.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any inappropriate burden on competition.

[[Page 2381]]

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.
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    \6\ 15 U.S.C. 78f(b).
    \7\ 15 U.S.C. 78f(b)(5).
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III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the CHX consents, the Commission will:
    A. By order approve such proposed rule change, or
    B. Institute proceedings to determine whether the proposed rule 
change should be disapproved.

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-2001-33 and should 
be submitted by February 6, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-951 Filed 1-15-03; 8:45 am]
BILLING CODE 8010-01-U