[Federal Register Volume 68, Number 144 (Monday, July 28, 2003)]
[Notices]
[Pages 44370-44372]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-19085]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48202; File No. SR-CHX-2003-20]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by the Chicago 
Stock Exchange, Incorporated Relating to Execution of Limit Orders 
Following Exempted ITS Trade-Through

July 21, 2003.
    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 July 17, 2003, 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 and II below, which Items have been prepared by the 
Exchange. The Commission is publishing this notice to

[[Page 44371]]

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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    The proposal is intended to coincide with the Commission's 
extension of a de minimis exemption from the trade-through provisions 
of the Intermarket Trading System (``ITS'') Plan with respect to 
certain transactions in the Nasdaq-100 Index (``QQQs''), the Dow Jones 
Industrial Average (``DIAMONDs''), and the Standard & Poor's 500 Index 
(``SPDRs'').\3\ The Commission's original exemption expired on June 4, 
2003. The Exchange Rule that mirrors the Commission's exemption 
similarly expired on June 4, 2003.\4\ The Commission recently extended 
the effectiveness of the exemption to March 4, 2004.\5\ In order to 
avoid a lapse in the effectiveness of the corresponding Exchange Rule, 
this order is approving the Exchange's proposal to extend the rule from 
June 5, 2003 until March 4, 2004.
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    \3\ See Securities Exchange Act Release No. 46428 (August 28, 
2002), 67 FR 56607 (September 4, 2002) at 56607 (``ITS Exemption 
Order'').
    \4\ See Securities Exchange Act Release No. 46760 (November 1, 
2002), 67 FR 68219 (November 8, 2002)(order approving SR-CHX-2002-
29).
    \5\ See Securities Exchange Act Release No. 47950 (May 30, 
2003), 68 FR 33748 (June 5, 2003)(order extending ITS Exemption 
Order).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    In response to the Commission's extension of a de minimis exemption 
for transactions in certain exchange-traded funds (``ETFs'') from the 
trade-through provisions of the ITS Plan to March 4, 2004,\6\ the 
Exchange proposes to amend certain provisions of CHX Article XX, Rule 
37, 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 render voluntary a CHX specialist's 
obligation to fill limit orders in the specialist's book following a 
primary market trade-through, if such trade-through constitutes an 
Exempted Trade-Through.\7\ The text of the proposed rule change is 
available at the Commission and at the CHX.
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    \6\ Id.
    \7\ An Exempted Trade-Through is a trade-through in one of the 
three ETFs designated in the ITS Exemption Order when the 
transaction is executed at a price that is no more than three cents 
lower than the highest bid displayed in CQS and no more than three 
cents higher than the lowest offer displayed in CQS.
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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 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 III 
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
    Article XX, Rules 37(a)(3) and 37(b)(6) of the CHX Rules, which 
govern execution of limit orders in a CHX specialist's book, provide 
for the execution of such orders at the limit price when certain 
conditions occur in the primary market. Specifically, these provisions 
obligate a CHX specialist to fill limit orders in his book if there is 
a trade-through of the limit price in the primary market.
    With continued effectiveness of the ITS Exemption Order until March 
4, 2004, certain primary market trade-throughs in ETFs that will 
trigger a CHX specialist's obligation to provide trade-through 
protection will constitute Exempt Trade-Throughs, and will leave the 
CHX specialist without recourse to seek satisfaction from the primary 
market. While the CHX believes that certain CHX specialists may still 
wish to provide trade-through protection to their limit orders for 
business and marketing reasons, the CHX believes that trade-through 
protection should no longer be mandated in the case of Exempted Trade-
Throughs. The proposed rule change would continue to permit, but would 
not require, a CHX specialist firm to fill limit orders in his book 
when an Exempted Trade-Through occurs in the primary market.
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 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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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
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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

    No written comments were either solicited or received.

III. 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-2003-20 and should 
be submitted by August 18, 2003.

IV. Discussion

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\10\ In particular, the Commission finds that the proposed 
rule is consistent with the requirements of section 6(b)(5) of the Act 
\11\ because it is designed to facilitate transactions in securities; 
to remove impediments to

[[Page 44372]]

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; and is not designed to permit unfair discrimination between 
customers, issuers, brokers or dealers.
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    \10\ In approving this rule proposal, the Commission notes that 
it has also considered the proposed rule's impact on efficiency, 
competition, and capital formation. 15 U.S.C. 78c(f).
    \11\ 15 U.S.C. 78f(b)(5).
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    The Commission finds good cause for approving the proposed rule 
change prior to the thirtieth day after the date of the publication of 
notice thereof in the Federal Register, and is granting approval 
retroactively to June 5, 2003, the effective date of the Commission's 
extension of the ITS exemption so that the proposed rule change 
coincides with the Commission's extension of its de minimis trade-
through exemption for certain ITS securities. The Commission believes 
that by extending the Exchange's proposed exemption for its members, 
the Exchange removes the specialist's obligation to provide trade-
through protection in situations where it will not be permitted to seek 
satisfaction through ITS from the primary market.
    This obligation was one the CHX assumed voluntarily in order to 
make its market more attractive to sources of order flow, not an 
obligation the Act imposes on a market. The Commission believes that 
the business decision to potentially forego order flow by no longer 
providing print protection is a judgment the Act allows the CHX to 
make.\12\
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    \12\ The Commission notes that the CHX's proposed rule change 
will remain in effect only until the expiration of the extension of 
Commission's ITS Exemption Order on March 4, 2004.
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V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\13\ that the proposed rule change (SR--CHX-2003-20) is approved on 
an accelerated basis and is effective retroactively to June 5, 2003.
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    \13\ 15 U.S.C. 78f(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson
Assistant Secretary
[FR Doc. 03-19085 Filed 7-25-03; 8:45 am]
BILLING CODE 8010-01-P