[Federal Register Volume 68, Number 178 (Monday, September 15, 2003)]
[Notices]
[Pages 54032-54034]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-23417]


=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48454; File No. SR-CHX-2003-12]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Stock Exchange, Incorporated Relating to 
Automatic Execution of Partial Orders

September 5, 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 August 1, 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. On 
September 5, 2003, the Exchange amended the proposed rule change.\3\ 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Letter from Kathleen Boege, Associate General Counsel, 
CHX, to Ms. Nancy Sanow, Assistant Director, Division of Market 
Regulation, Commission, dated September 5, 2003 (``Amendment No. 
1''). In Amendment No. 1, the CHX corrected a minor typographical 
error in their rule text and noted that its MAX automatic execution 
system provides electronic notice to order-sending firms when 
Exchange specialists modify their automatic execution parameters.
---------------------------------------------------------------------------

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 (Guaranteed Execution System and Midwest Automated 
Execution System), which governs, among other things, automatic 
execution of market and marketable limit orders. Specifically, the CHX 
seeks to add an Interpretation and Policy providing that a CHX 
specialist may elect to activate the ``auto-partials'' functionality on 
a voluntary basis, at any point during the regular trading session. 
Proposed Interpretation and Policy .11 constitutes the Exchange's 
stated existing policy, practice and interpretation with respect to the 
auto-partial provisions of CHX Article XX, Rule 37(b).
    The text of the proposed rule change is below. Proposed new 
language is italicized; proposed deletions are in [brackets].
* * * * *
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 
automatic execution on the Exchange.
* * * * *
    (6) Execution of Dual Trading System Issues.
    (A) A MAX market or marketable limit agency order that is of a size 
less than or equal to the auto-execution threshold shall be 
automatically filled at the ITS BBO price up to the size of the auto-
execution threshold. If the size of the incoming order is greater than 
the auto-execution threshold, the order shall be designated as a open 
order; provided, however, that if an order sending firm has notified 
the specialist, in a manner approved by the Exchange, that the order 
sending firm elects to have such orders filled up to the size of the 
auto-execution threshold and if the specialist has engaged the auto-
partial functionality as described in Interpretation and Policy .11, 
the order shall automatically be filled up to the size of the auto-
execution threshold and the portion of the order that exceeds the auto-
execution threshold shall be designated as an open order. If the size 
of the order is greater than the auto-acceptance threshold, the order 
shall be designated as an open order; provided, however, that the 
specialists may cancel the order within one minute of its being entered 
into MAX.
* * * * *
    (7) Execution of NASDAQ/NM Securities.
    (A) In NASDAQ/NM Securities, if the specialist is quoting at the 
NBBO price at the time a MAX market or marketable limit order is 
received, an order that is less than or equal to the auto-execution 
threshold shall automatically be filled at such NBBO price up to the 
size of the auto-execution threshold (or the specialist's bid or offer 
if greater than the auto execution threshold). If the order is of a 
size greater than the auto-execution threshold, the order shall 
automatically be filled up to the size of the specialist's bid or offer 
(as the case may be) and the portion of the order that exceeds the 
specialist's bid or offer shall be designated as an open order.
* * * * *
    (B) If the specialist is not quoting at the NBBO at the time a MAX 
market or marketable limit agency order is received, an order that is 
less than or equal to the auto-execution threshold shall be 
automatically filled at the NBBO up to the size of the auto-execution 
threshold if the specialist has not, within 20 seconds (or a lesser 
time increment designated by the specialist) after receipt of the 
order, complied with the manual execution requirement of Rule [43(d)] 
37(a) of this Article. If the size of the incoming order is greater 
than the auto-execution threshold, the order shall be designated as an 
open order; provided, however, that if an order sending firm has 
notified the specialist, in a manner approved by the Exchange, that the 
order sending firm elects to have such orders filled up to the size of 
the auto-execution threshold and if the specialist has engaged the 
auto-partial functionality as described in Interpretation and Policy 
.11, the order shall automatically be filled up to the size of the 
auto-execution threshold and the portion of the order that exceed

[[Page 54033]]

the auto-execution threshold shall be designated as an open order. If 
the size of the incoming order is greater than the auto-acceptance 
threshold, the order shall be designated as an open order; provided, 
however, that the specialist may cancel the order within one minute of 
its being entered into MAX.
* * * * *
    Interpretations and Policies:
* * * * *
    .11 The partial automatic execution algorithms referenced in Rule 
37(b) constitute voluntary MAX enhancements that may be enabled by a 
CHX specialist on an issue-by-issue basis. The CHX specialist may elect 
to enable or disable these enhancements during any portion of the 
Primary Trading Session.

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 proposed rule change would amend certain provisions of CHX 
Article XX, Rule 37, which governs, among other things, automatic 
execution of partial market and marketable limit orders. Specifically, 
the CHX seeks to add an Interpretation and Policy providing that a CHX 
specialist may elect to activate the auto-partials functionality on a 
voluntary basis, at any point during the regular trading session. 
Proposed Interpretation and Policy .11 constitutes the Exchange's 
stated existing policy, practice and interpretation with respect to the 
auto-partial provisions of CHX Article XX, Rule 37(b).
    The Exchange's Midwest Automatic Execution System (``MAX''') 
provides for automatic execution of eligible market and marketable 
limit orders, in accordance with the provisions of CHX Article XX, Rule 
37(b), which governs automatic execution of such orders. The Commission 
previously has approved changes to CHX Article XX, Rule 37(b) that 
permit automatic execution of partial orders, if an order-sending firm 
has affirmatively elected to permit such partial executions.\4\ The 
technological enhancement to the Exchange's MAX system, that effects 
automatic execution of partial orders, is referred to as the ``auto-
partials'' functionality.
---------------------------------------------------------------------------

    \4\ See Securities Exchange Act Release No. 44778 (September 7, 
2001), 66 FR 48074 (September 17, 2001) (SR-CHX-2001-11), Securities 
Exchange Act Release No. 46321 (August 7, 2002), 67 FR 53369 (August 
15, 2002) (CHX 2001-32).
---------------------------------------------------------------------------

    According to the Exchange, throughout the development and 
implementation of the auto-partials functionality, the Exchange's staff 
and members have consistently treated the auto-partials functionality 
as a voluntary systems enhancement that could be enabled at the 
discretion of the CHX specialist.\5\ The proposed rule change clarifies 
the consistent interpretation of those provisions of CHX Article XX, 
Rule 37(b) that contemplate the auto-partials enhancement.
---------------------------------------------------------------------------

    \5\ Even if a CHX specialist elects to enable the auto-partials 
functionality, partial orders will not be executed unless an order-
sending firm has affirmatively indicated its election to have orders 
executed on a partial basis. Thus, despite the CHX specialist's 
discretion to enable the auto-partials functionality, CHX order-
sending firms still maintain the discretion to forego partial 
executions if their preferences and/or business model dictate that 
they receive fills of entire orders.
---------------------------------------------------------------------------

    In the case of stocks with low trading volume, for example, a CHX 
specialist who received a large order for that issue might not be able 
to secure sufficient liquidity in another market to fill the order for 
his customer. In such case, if the CHX specialist has offered auto-
partial execution, a portion of the order would be executed 
automatically but the remaining portion would be subject to manual 
execution at the best price the CHX specialist could obtain as agent 
for the balance of the order. If the CHX specialist had not offered 
auto-partials, the customer would quickly discern that it had not 
received an automatic execution and would then have the option to 
cancel the order and seek execution of the entire order in another 
market center.
    The CHX believes that another instance in which a CHX specialist 
might elect to disengage the auto-partials algorithm is immediately 
prior to the close of the regular trading session. In the case of a 
large order received immediately prior to the close that received an 
auto-partial execution, most customers would request (and for business 
reasons most CHX specialists would give) execution of the balance of 
the order at the auto-partial execution price. The CHX specialist, 
perhaps lacking the liquidity to fill the entire order out of his 
inventory, would be without recourse to obtain liquidity in another 
market center, and would be left with a significant position overnight, 
potentially subjecting the CHX specialist to extreme and unwarranted 
exposure at the open the following morning.
    The CHX believes that the proposed rule change, which reflects 
existing pattern and practice with respect to the auto-partials 
functionality, represents a reasonable balance between the various 
business models of CHX specialists, and permits specialists to offer a 
customer enhancement without prejudicing other specialists whose 
circumstances dictate that they forego engagement of the auto-partials 
functionality.
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) 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.
---------------------------------------------------------------------------

    \6\ 15 U.S.C. 78f(b).
    \7\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

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 solicited or received with respect to 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 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

[[Page 54034]]

(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 number SR-CHX-2003-12 and 
should be submitted by October 6, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\
---------------------------------------------------------------------------

    \8\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-23417 Filed 9-12-03; 8:45 am]
BILLING CODE 8010-01-P