[Federal Register Volume 68, Number 116 (Tuesday, June 17, 2003)]
[Notices]
[Pages 35923-35925]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-15266]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48014; File No. SR-CHX-2003-05]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Chicago Stock Exchange, 
Incorporated Relating to the Execution of Limit Orders for OTC 
Securities

    June 11, 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 April 28, 2003, the Chicago Stock Exchange, Incorporated (``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 
Exchange filed the proposal pursuant to section 19(b)(3)(A) of the 
Act,\3\ and Rule 19b-4(f)(6)\4\ thereunder, which renders the proposal 
effective upon filing with the Commission.\5\ 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.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6).
    \5\ The CHX provided the Commission with written notice of its 
intent to file the proposed rule change on March 2, 2002. The 
proposed rule change will become operative on June 1, 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 certain provisions of CHX Article 
XX, Rule 37(a)(3), which governs, among other things, the execution of 
limit orders in a CHX specialist's book. Specifically, the CHX seeks to 
add a provision that would permit a CHX specialist to enable a 
functionality that would automatically execute designated limit orders 
for Nasdaq/NM (``OTC'') securities, following dissemination of a 
locking or crossing quotation in that security by one or more 
designated OTC market centers. The text of the proposed rule change is 
below. Proposed new language is in italics. Proposed deletions are in 
brackets.\6\
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    \6\ The CHX inadvertently neglected to underscore a word in the 
proposed rule text when it filed this proposed rule change. With the 
CHX's permission, the Commission corrected the omission, so that the 
proposed rule text as printed in this notice accurately reflects the 
CHX's intentions. May 22, 2003 telephone conversation between 
Kathleen M. Boege, Associate General Counsel, CHX, and Joseph P. 
Morra, Special Counsel, Division of Market Regulation, Commission.
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Chicago Stock Exchange Rules

Article XX--Regular Trading Sessions
* * * * *
Precedence of Bids at Same Price
    Rule 16. Subject to Article XX, Rule 37(b), [W]where bids are made 
at the same price, the priority and precedence shall be determined as 
follows:
    (a) When a bid is clearly established as the first made at a 
particular price, the maker shall be entitled to priority and shall 
have precedence over [on] the next sale at that price, up to the number 
of shares of stock specified in the bid, irrespective of the number of 
shares of stock specified in such bid.
* * * * *
Guaranteed Execution System and Midwest Automated Execution System
    Rule 37. (a) Guaranteed Executions. The Exchange's Guaranteed 
Execution System (the BEST System) shall be available, during the 
Primary Trading Session and the Post Primary Trading Session, to 
Exchange member firms and, where applicable, to members of a 
participating exchange who send orders to the Floor through a linkage 
pursuant to Rule 39 of this Article, in all issues in the specialist 
system which are traded in the Dual Trading System and NASDAQ/NM 
Securities. System orders shall be executed pursuant to the following 
requirements:
    1. No change to text.
    2. No change to text.
    3. [Dual Trading System] Execution of 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; [and]
    (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.
    A specialist may elect automatic execution of such agency limit 
orders on an issue-by-issue basis.
    In the case of Nasdaq/NM securities, a CHX specialist may elect, on 
an issue-by-issue basis, to engage a functionality that will 
automatically execute designated resting agency limit orders (or 
portions of such orders) at the limit price, up to the size of the 
Limit Order Auto Execution Threshold, when the Designated Market 
quotation locks or crosses the limit price. For purposes of this 
provision, (i) ``Limit Order Auto Execution Threshold'' means an 
aggregate number of shares designated by the CHX specialist, on an 
issue-by-issue basis, that may be executed automatically at the limit 
price; and (ii) ``Designated Market'' means the market

[[Page 35924]]

center designated by the CHX specialist, and approved by the Exchange.
* * * * *

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 its proposal 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 CHX proposes to permit a CHX specialist to enable a 
functionality that would automatically execute designated limit orders 
for OTC securities, following dissemination of a locking or crossing 
quotation in that security by one or more designated OTC market 
centers.
    Under existing CHX rules relating to listed securities, limit 
orders that are resident in the CHX specialist's book are entitled to a 
fill at the limit price if a price penetration (i.e., a trade-through) 
or certain other conditions occur in the primary market.\7\ Although 
there is not an analogous trade-through rule in the OTC market, and 
therefore no analogous limit order protection provisions currently set 
forth in the CHX rules, certain CHX specialists desire to provide such 
protections in instances where one or more designated OTC market 
centers disseminate a quotation that locks or crosses the CHX 
specialist's quotation.\8\
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    \7\ See CHX Article XX, Rule 37(a)(3). The limit order would be 
filled on the CHX at the limit price regardless of whether the CHX 
specialist was able to obtain recourse via the Intermarket Trading 
System (``ITS'') administrative process following the trade-through.
    \8\ A designated market's bid (offer) will lock the CHX 
specialist's quote if it equals the CHX specialist's offer (bid). A 
designated market's bid (offer) will cross the CHX specialist's 
quote if it penetrates the CHX specialist's offer (bid). The CHX 
will consider a designated market to have locked or crossed a CHX 
specialist's quote each time that it moves from an unlocked/
uncrossed state to a locked or crossed state. For example, if a 
designated market crosses a CHX specialist's offer at 52 with a 53 
bid, it will not again cross the CHX's, for purposes of this rule, 
if the designated market continues to cross the CHX's offer with a 
bid of 54.
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    Accordingly, a subcommittee of the CHX OTC Committee undertook to 
evaluate the issue, and to design a functionality that, if enabled by a 
CHX specialist, would automatically execute certain resting limit 
orders for OTC securities. The proposed rule change, which was 
discussed extensively by the CHX OTC Committee and other member 
committees, would permit a CHX specialist to enable such a 
functionality on a voluntary basis. The functionality would 
automatically execute designated resting limit orders, if the 
designated OTC markets lock or cross the CHX quotation.\9\ The type of 
orders and the total number of shares to be executed automatically 
would be designated by the CHX specialist; orders not eligible for 
automatic execution would remain in the specialist's book and would be 
eligible for manual execution.\10\
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    \9\ Because there is no primary market for over-the-counter 
securities, the CHX has not simply designated the ``primary market'' 
as the market that would trigger limit order protection on the CHX. 
Instead, this rule would allow CHX specialists to identify the 
designated market, with the approval of the Exchange, on an issue-
by-issue basis. Initially, all CHX specialists have identified the 
``Designated Market'' as the Nasdaq Stock Market. If all CHX 
specialists make a different or additional designation for all 
securities traded on the Exchange, the Exchange will notify its 
order-sending firms of those Exchange-wide changes and file those 
changes with the Commission as an interpretation of an existing rule 
pursuant to Section 19(b)(3)(A) of the Act and Rule 19b-4(f)(1) 
thereunder. If, however, CHX specialists respond to the 
fragmentation in the market by identifying different designated 
markets for different securities, the Exchange will file, pursuant 
to Rule 19b-4(f)(1), a new interpretation confirming that 
specialists have identified different designated markets in 
different securities for purposes of this voluntary designation, but 
will not list all of those different designations.
    \10\ In addition to permitting the new functionality described 
above, the proposed rule change provides for a modification of the 
CHX rule governing priority of same-priced orders. This modification 
contemplates that, on an issue-by-issue basis, specialists could 
designate certain same-priced orders as eligible for automatic 
execution, while other orders might not be so designated, thus 
automatically executing some orders out of traditional time-price 
priority sequence.
    For instance, if a specialist designates all limit orders in an 
issue under 10,000 shares as eligible for possible auto-execution 
under this rule, those orders of 10,000 shares or more would not be 
eligible for automatic execution and thus would remain in the 
specialist's book, eligible for manual execution, even though a 
smaller order at the same price that was received at a later time 
would be eligible for automatic execution (up to the size of the 
Limit Order Auto Execution Threshold).
    Because the CHX specialist is not obligated (under CHX rules, 
the Act or any other governing rules) to execute OTC limit orders 
based on conditions in other OTC market centers, rendering 
engagement of this proposed functionality strictly voluntary, the 
Exchange believes that it is appropriate for a CHX specialist to 
condition automatic execution in a manner that could, based on 
issue-by-issue designations of certain types of orders, modify the 
precedence of same-priced orders.
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    The CHX believes that the proposed rule change will be welcomed by 
its order-sending firms, as it will provide for protection of certain 
limit orders on a voluntary basis in the OTC market, which currently 
does not require that such protections be afforded limit orders. 
Indeed, the CHX believes that the proposed rule change, which could 
dramatically increase the number of limit orders executed automatically 
on the CHX (which currently does not have a rule requiring automatic 
execution of limit orders for OTC securities based on conditions in 
other market centers), is to the material benefit of the investing 
public. The CHX believes that the proposed rule change constitutes a 
reasoned approach to offering execution guarantees in an evolving OTC 
market, and anticipates that many of its OTC specialists will elect to 
enable the functionality contemplated by the proposed rule change.
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).\11\ In particular, the CHX believes the 
proposal is consistent with section 6(b)(5) of the Act \12\ in that it 
is designed to promote just and equitable principles of trade, to 
remove impediments to, 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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    \11\ 15 U.S.C. 78f(b).
    \12\ 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 inappropriate burden on competition.

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.

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

    Because the foregoing proposed rule change does not:
    (i) Significantly affect the protection of investors or the public 
interest;
    (ii) Impose any significant burden on competition; and
    (iii) Become operative for 30 days from the date on which it was 
filed, or

[[Page 35925]]

such shorter time as the Commission may designate, it has become 
effective pursuant to section 19(b)(3)(A) of the Act \13\ and Rule 19b-
4(f)(6) thereunder.\14\ 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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    \13\ 15 U.S.C. 78s(b)(3)(A).
    \14\ 17 CFR 240.19b-4(f)(6).
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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 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 205490609. 
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 number SR-CHX-2003-05 and 
should be submitted by July 8, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-15266 Filed 6-16-03; 8:45 am]
BILLING CODE 8010-01-P