[Federal Register Volume 68, Number 55 (Friday, March 21, 2003)]
[Notices]
[Pages 13974-13975]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-6829]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47505; File No. SR-CHX-2003-09]


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

March 14, 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 March 6, 2003, 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 proposes to amend certain provisions of CHX Article 
XXXI, Odd Lots and Odd-Lot Dealers, Dual System, rule 9, Execution of 
Odd-Lot Orders During the Primary Session, which governs execution of 
odd-lot orders on the CHX. Specifically, the CHX seeks to add a 
provision that would permit inclusion of 100-share primary market 
quotations in the CHX's calculation of the adjusted Intermarket Trading 
System best bid or offer (``ITS BBO''). The text of the proposed rule 
change is below. Proposed new language is in italics.

Chicago Stock Exchange Rules
Article XXXI
Odd Lots and Odd-Lot Dealers, Dual System
* * * * *
Rule 9. Execution of Odd-Lot Orders During the Primary Trading Session
* * * * *
    (b) Nasdaq/NM Securities and Dually Traded Issues. As to Nasdaq/NM 
Securities, market orders will be accepted for execution as an odd lot 
based on the best bid disseminated pursuant to SEC rule 11Ac1-1 on a 
sell order or the best offer disseminated pursuant to SEC rule 11Ac1-1 
on a buy order in effect at the time the order is presented at the 
specialist post, provided the order is for a number of shares less than 
the full lot in said stock. Any market order to purchase or sell a Dual 
Trading System issue in an odd-lot amount, which is transmitted for 
execution to an odd-lot dealer or its agent shall be executed, unless 
otherwise provided herein, at the price of the adjusted ITS bid (in the 
case of an order to sell) or adjusted ITS offer (in the case of an 
order to purchase) in the security at the time the order is received by 
the Exchange system designated to process odd-lot orders (the ``odd lot 
system'').
* * * * *
    (c) General
* * * * *
    (vi) In instances in which quotation information is not available, 
e.g., the quotation collection or dissemination facilities are 
inoperable, or the primary market in the security has been determined 
to be in non-firm mode (as referenced in Interpretation and Policy 
.01), standard, regular way odd-lot market orders shall be executed 
based on the next primary market round lot sale or shall be executed by 
the member organization designated by the Exchange as the odd-lot 
dealer for the issue, at a price deemed appropriate under prevailing 
market conditions.
* * * * *
    Interpretations and Policies:
    .01 Adjusted Best Bid or Offer. For purposes of paragraph (b) of 
this rule, the terms ``adjusted ITS best bid'' and ``adjusted ITS best 
offer'' for a security shall mean the highest bid and lowest offer, 
respectively, disseminated by (i) the Exchange or (ii) a market center 
participating in the Intermarket Trading System; provided, however, 
that the bid and offer in another ITS market center will be considered 
in determining the adjusted ITS best bid or adjusted ITS best offer in 
a security only if (a) the security is included in ITS in that market 
center; (b) the size of the quotation is greater than 100 shares; 
provided, however, that 100-share quotations by the primary market may 
be considered; (c) the bid or offer is no more than $.25 away from the 
bid or offer disseminated by the primary market; (d) the quotation 
conforms to Exchange requirements regarding minimum trading variations; 
(e) the quotation does not result in a locked market; (f) the market 
center is not experiencing operational or system problems with respect 
to the dissemination of quotation information; and (g) the bid or offer 
is ``firm,'' that is, members of the market center disseminating the 
bid or offer are not relieved of their obligations with respect to such 
bid or offer under paragraph (c)(2) of rule 11Ac1-1 pursuant to the 
``unusual market'' exception of paragraph (b)(3) of rule 11Ac1-1.

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 proposed rule change would permit inclusion of 100-share 
primary market quotations in the CHX's calculation of the adjusted ITS 
BBO. The Commission previously approved a change to CHX Article XXXI, 
rule 9, based on rule 124(A) of the New York Stock Exchange.\3\ The 
rule change

[[Page 13975]]

provided for execution of odd-lot orders at the adjusted ITS BBO. Under 
the version of the rule that was approved, the adjusted ITS BBO was 
defined to exclude the quotation of another ITS market center if the 
quotation is 100 shares or less.\4\
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    \3\ See Securities Exchange Act Release No. 46657 (October 11, 
2002), 67 FR 64679 (October 21, 2002).
    \4\ See Article XXXI, rule 9, Interpretation and Policy .01.
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    In testing the systems functionality that would execute odd-lot 
orders at the adjusted ITS BBO, the CHX determined that exclusion of 
100-share quotations disseminated by the primary market in an issue 
could result in inferior executions on the CHX, a result not fully 
anticipated. Accordingly, the CHX seeks approval to modify 
Interpretation and Policy .01, in order to permit inclusion of 100-
share primary market quotations when calculating the adjusted ITS BBO. 
The CHX believes that the proposed rule change is amply warranted, as 
it will in many cases result in a superior execution price for the 
investor.
    Because the proposed rule change will modify the execution system 
change previously approved by the Commission, the CHX has disengaged 
the adjusted ITS BBO execution algorithm until such time as the 
algorithm can be reprogrammed to include primary market 100-share 
quotations.\5\ The CHX estimates that this reprogramming can be 
concluded within a relatively short time frame, in less than 30 days. 
If the reprogramming effort is not concluded within this 30-day period, 
the CHX represents that it will seek further relief from the 
Commission.
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    \5\ While the adjusted BBO algorithm is being reprogrammed, the 
CHX will execute odd-lot orders under the previous version of 
Article XXXI, rule 9, which required execution of such orders at the 
national best bid or offer disseminated pursuant to SEC rule 11 Ac1-
1, 17 CFR 240.11Ac1-1.
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2. Statutory Basis
    The CHX believes that the proposed rule change is consistent with 
section 6(b) of the Act,\6\ generally, and section 6(b)(5) of the 
Act,\7\ in particular, 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 Exchange believes that no burden will be placed on competition 
as a result of the proposed rule change.

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

    No written comments were solicited or received.

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

    Because the proposal effects a change in an existing order-entry or 
trading system of the Exchange that (i) does not significantly affect 
the protection of investors or the public interest; (ii) does not 
impose any significant burden on competition; and (iii) does not have 
the effect of limiting the access to or availability of the system, it 
has become effective pursuant to section 19(b)(3)(A) of the Act \8\ and 
subparagraph (f)(5) of rule 19b-4\9\ thereunder. 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.
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    \8\ 15 U.S.C. 78s(b)(3)(A).
    \9\ 17 CFR 240.19b-4(f)(5).
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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-2003-09 and should 
be submitted by April 11, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-6829 Filed 3-20-03; 8:45 am]
BILLING CODE 8010-01-P