[Federal Register Volume 68, Number 49 (Thursday, March 13, 2003)]
[Notices]
[Pages 12113-12115]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-5995]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47443; File No. SR-CHX-2002-40]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Stock Exchange, Inc. Relating to Zero-Second 
Display of Certain Limit Orders

March 4, 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, 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. On 
January 10, 2003, the exchange filed an amendment to the proposed rule 
change.\3\ The Commission is publishing this notice to solicit comments 
on the proposed rule change, as amended, from interested persons.\4\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter, dated January 9, 2003, from Kathleen M. Boege, 
Associate General Counsel, CHX, to Nancy J. Sanow, Assistant 
Director, Division of Market Regulation (``Division''), Commission 
(``Amendment No. 1''). In Amendment No. 1, the CHX provided 
additional clarity as to the full extent of limit order protection 
that would be forfeited by a floor broker that elects ``post 
protection only'' (``PPO'') under the proposed rule change.
    \4\ The CHX requested that the Commission make various non-
substantive typographical corrections to the notice in the rule 
language and purpose section. In addition, the CHX requested that 
the Commission add an additional protection related to block trades 
as described in footnote 7 below. Such protection was added due to 
an intervening CHX rule change that was not in place at the time of 
filing of the instant proposed rule change. Telephone conference 
between Kathleen M. Boege, Associate General Counsel, CHX, and 
Christopher B. Stone, Special Counsel, Division, Commission (March 
3, 2003).
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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, Regular Trading 
Sessions, CHX Rule 7, Recognized Quotations, and CHX Rule 37, 
Guaranteed Execution System and Midwest Automated Execution System, 
which govern, among other things, display of limit orders in a 
specialist's book. The text of the proposed rule change is below. 
Proposed new language is in italics.

Chicago Stock Exchange Rules

Article XX Regular Trading Sessions
* * * * *

Recognized Quotations

RULE 7

    No change to text.

[sbull] [sbull] [sbull] Interpretations and Policies:

    .01-.04 No change to text.
    .05 (a) Quotation sizes, unless otherwise specified, shall be 
assumed to be for 100 shares. With respect to agency limit orders 
received by specialists, each specialist shall publish immediately 
(i.e., as soon as practicable, which under normal circumstances means 
no later than 30 seconds from time of receipt, subject to the 
provisions below relating to agency limit orders designated ``post 
protection only'') a bid or offer that reflects:
    (i) The price and full size of each agency limit order that is at a 
price that would improve the specialist's bid or offer in such 
security; and
    (ii) The full size of each agency limit order that is priced equal 
to the specialist's bid or offer for such security.
    (b) The requirements with respect to specialists' display of limit 
orders shall not apply to any limit order that is:
    (i) Executed upon receipt of the order;
    (ii) Placed by a person or entity who expressly requests, either at 
the time the order is placed or prior thereto pursuant to an 
individually negotiated agreement with respect to such person's orders, 
that the order not be displayed;
    (iii) An odd-lot order;
    (iv) Delivered immediately upon receipt to an exchange or 
association-sponsored system or an electronic communications network 
that complies with the requirements of Securities and Exchange 
Commission Rule 11Ac1-1(c)(5) under the Securities Exchange Act with 
respect to that order;
    (v) Delivered immediately upon receipt to another exchange member 
or over-the-counter market maker that complies with the requirements of 
Securities and Exchange Commission Rule 11Ac1-4 under the Securities 
Exchange Act with respect to that order;
    (vi) An all or none order; or
    (vii) A block size order, unless the customer order is received 
with a request that the order be displayed.
    If a floor broker designates an agency limit order, in a manner 
specified by the Exchange, as ``post protection only,'' and sends that 
order to the specialist via the MAX system, the specialist receiving 
such order shall display the limit order in zero seconds. Such order 
will not be entitled to primary market price protection or other 
protections due limit orders under Article XX, Rule 37(a)(3).
* * * * *
Guaranteed Execution System and Midwest Automated Execution System
* * * * *
RULE 37(a). Guaranteed Executions.
* * * * *
    3. Dual Trading System Agency Limit Orders. Subject to 
Interpretation and Policy .10 (``Exempted Trade-Throughs''), all agency 
limit orders in Dual Trading System issues will be filled under the 
following circumstances:
    (a) Exhaustion of primary market bid or offer. When the bid or 
offering at the limit price has been exhausted in the primary market 
(as defined in the CTA plan), agency limit orders will be executed in 
whole or in part, based on the rules of priority and precedence, on a 
share for share basis with trades executed at the limit price in the 
primary market;
    (b) Price penetration in primary market. When there has been a 
price penetration of the limit in the primary market, agency limit 
orders that have resided in the specialist's book for a period of 0-15 
seconds (as designated by the specialist) prior to the primary market 
print will be filled at the limit price;
    (c) Primary market trading at the limit price. When the issue is 
trading at the limit price on the primary market, agency limit orders 
will be filled at the limit price unless it can be demonstrated that 
such orders would not have been executed if they had been transmitted 
to the primary market or the broker and specialist agree to a specific 
volume related or other criteria for requiring a fill; and
    (d) Block size trade-through in another market. In instances where 
a block trade on the Exchange or other market against which orders are 
being protected takes place outside the current Exchange quotation, all 
effective bids or offers limited to the block price or better will be 
executed at the more favorable block price rather than at the limit 
price of the affected orders. A specialist may elect to provide 
automatic execution of designated limit orders at the block price or 
better when a ``block size'' (as defined in Article XX, Rule 40, 
Interpretation and Policy .05) trade-through is executed on the primary 
market.

[[Page 12114]]

    A specialist may elect automatic execution of such agency limit 
orders on an issue-by-issue basis. The foregoing provisions of this 
Article XX, Rule 37(a)(3) shall not apply to limit orders designated by 
a floor broker as ``post protection only'' in accordance with the 
provisions of Article XX, Rule 7, Interpretation and Policy .05.

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, Rules 7 and 37 of the 
CHX Rules, which govern, among other things, display of limit orders in 
a specialist's book and execution prices due certain limit orders. The 
proposed change would permit a CHX member (including a floor broker) to 
elect zero-second display by a CHX specialist of limit orders 
designated by the member as PPO orders.
    Under Exchange Act Rule 11Ac1-4 \5\ and current Article XX, Rule 7 
(Interpretation and Policy .05) of the CHX Rules, a CHX specialist must 
display customer limit orders ``immediately,'' which means ``* * * as 
soon as practicable, which under normal market conditions means no 
later than 30 seconds from time of receipt.'' Although past studies 
have shown that CHX specialists, through the use of automated tools, 
display the vast majority of customer limit orders within zero seconds 
after they are required to do so, CHX specialists may choose to 
actually see one or more orders before deciding whether or not to 
execute the order, transfer the order to another marketplace or display 
the order at the Exchange.\6\
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    \5\ 17 CFR 240.11Ac1-4 (``Display Rule'').
    \6\ Specialists can help ensure that they meet their Display 
Rule obligations with respect to these manually handled orders by 
using additional automated functions, such as the default timers 
provided in the CHX trading system. These default timers, which can 
be set, among other things, from zero to 25 seconds (in listed 
securities) or from zero to 30 seconds (in over-the-counter 
(``OTC'') securities), ensure that eligible orders are automatically 
displayed when they improve a specialist's quote and when the timer 
setting has elapsed without the orders having been manually 
displayed, executed or transferred to another marketplace. In 
addition, the CHX Market Regulation Department actively surveils to 
ensure that CHX specialists do not routinely rely on their timers to 
extend the display period beyond what is necessary for the 
specialist to interact with the limit orders they receive.
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    In some cases, however, customers expressly desire the zero-second 
display of their orders. Specifically, the CHX has been advised that, 
for certain customers of CHX floor brokers, zero-second display of 
their limit orders is often their paramount consideration. While CHX 
specialists may choose not to display each limit order in zero 
seconds--because they may wish to have the opportunity to decide 
whether or not to interact with certain limit orders--the CHX floor 
broker community has suggested a solution which protects the interests 
of CHX member order-sending firms and their customers, while permitting 
CHX specialists to appropriately handle limit orders.
    Under the proposed rule change, PPO orders (as designated by a CHX 
floor broker) would be automatically displayed by the specialist in 
zero seconds without any opportunity for a specialist to interact with 
the order prior to display. PPO orders would be treated in accordance 
with applicable CHX rules governing priority and precedence, but would 
not be entitled to trade through protection by the CHX specialist in 
the event of a price penetration in the primary market.\7\ This 
solution will afford CHX floor brokers the flexibility to elect zero-
second display of their customers' limit orders in instances that 
render such immediacy of paramount concern. The proposal in turn does 
not require a specialist to provide subject limit orders with trade 
through protection or the other protections set forth in Article XX, 
Rule 37(a)(3), when the specialist has been denied the opportunity to 
interact with the order.
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    \7\ Under Article XX, Rule 37(a)(3), a limit order for a Dual 
Trading System (i.e., listed) issue, which is resident in a CHX 
specialist's book for 15 seconds or more, generally is entitled to 
``trade through protection,'' i.e., execution at the limit price in 
the event of a price penetration in the primary market. Article XX, 
Rule 37(a)(3) also requires execution at the limit price, subject to 
certain conditions, (a) if the bid or offer has been exhausted in 
the primary market, (b) if the issue is trading at the limit price 
in the primary market, and (c) if a block trade has been printed on 
the Exchange or an away market at superior price. A floor broker 
electing PPO would also forego these protections otherwise due under 
Article XX, Rule 37(a)(3).
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    The CHX believes that the proposal is consistent with the interests 
of the investing public, as a floor broker will be able to elect zero-
second display of a limit order when that display is either requested 
by the customer or otherwise is in a customer's interest.\8\ In other 
instances, an order-sending firm may consider the protections of 
Article XX, Rule 37(a)(3) to constitute a better means of achieving its 
customer's goals, in which case the floor broker could elect to forego 
zero-second display.
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    \8\ Orders routed to a CHX floor broker constitute orders from 
sophisticated investors who choose to utilize the services of a 
floor broker because, among other reasons, the investor can 
communicate certain conditions regarding execution of the order, 
which conditions the floor broker will take into account in seeking 
liquidity to fill the order. Such investors possess sufficient 
market experience to fully evaluate the consequences of having their 
floor broker elect the PPO order option on their behalf. By 
restricting the PPO order option to floor brokers, the CHX believes 
that it will avoid instances where less sophisticated investors 
would elect zero-second display of their limit orders, without fully 
considering the ramifications of foregoing primary market protection 
of such limit orders.
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the provisions of section 6(b) of the Act,\9\ in general, and 
Section 6(b)(5) of the Act,\10\ in particular, which requires, among 
other things, that the rules of an exchange be designed, among other 
things, 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.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose 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

    The Exchange has neither solicited nor received written comments on 
the proposed rule change.

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

[[Page 12115]]

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 Exchange consents, the Commission will:
    (A) By order approve such proposed rule change, as amended, or
    (B) institute proceedings to determine whether the proposed rule 
change, as amended, 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, 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 20549-0609. Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change, as 
amended, that are filed with the Commission, and all written 
communications relating to the proposed rule change, as amended, 
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 Exchange. All 
submissions should refer to File No. SR-CHX-2002-40 and should be 
submitted by April 3, 2003.
    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-5995 Filed 3-12-03; 8:45 am]
BILLING CODE 8010-01-P