[Federal Register Volume 68, Number 217 (Monday, November 10, 2003)]
[Notices]
[Pages 63829-63831]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-28149]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48742; File No. SR-CHX-2003-35]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the Chicago Stock Exchange, 
Inc. Relating to the Trading of Nasdaq/NM Securities

November 3, 2003.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice hereby is given 
that on October 31, 2003, the Chicago Stock Exchange, Incorporated 
(``CHX'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``SEC'' or ``Commission'') the proposed rule change as 
described in Items I, II and III below, which Items have been prepared 
by the self-regulatory organization. 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 has requested a one-year extension of the pilot 
relating to the trading of Nasdaq/NM securities on the Exchange. 
Specifically, the pilot amended CHX Article XX, Rule 37 and CHX Article 
XX, Rule 43. The pilot currently is due to expire on November 1, 2003. 
The Exchange proposes that the pilot remain in effect on a pilot basis 
through November 1, 2004. The text of the proposed rule change is 
available at the principal offices of the CHX and at the Commission. 
This proposed extension of the pilot does not alter the text of the 
pilot language, but simply extends the expiration date of the pilot 
through November 1, 2004.

[[Page 63830]]

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 regarding 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 Exchange has requested a one-year extension of the pilot 
relating to the trading of Nasdaq/NM securities on the Exchange. 
Specifically, the pilot amends CHX Article XX, Rule 37 and CHX Article 
XX, Rule 43. The pilot currently is due to expire on November 1, 2003; 
the Exchange proposes that the amendments remain in effect on a pilot 
basis through November 1, 2004.
    On May 4, 1987, the Commission approved certain Exchange rules and 
procedures relating to the trading of Nasdaq/NM securities on the 
Exchange.\3\ Among other things, these rules rendered the Exchange's 
BEST Rule guarantee (CHX Article XX, Rule 37(a)) applicable to Nasdaq/
NM securities and made Nasdaq/NM securities eligible for the automatic 
execution feature of the Exchange's Midwest Automated Execution System 
(the ``MAX'' system).\4\
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    \3\ See Securities Exchange Act Release No. 24424 (May 4, 1987), 
52 FR 17868 (May 12, 1987) (order approving File No. SR-MSER-87-2); 
see also Securities Exchange Act Release Nos. 28146 (June 26, 1990), 
55 FR 27917 (July 6, 1990) (order expanding the number of eligible 
securities to 100); 36102 (August 14, 1995), 60 FR 43626 (August 22, 
1995) (order expanding the number of eligible securities to 500); 
41392 (May 12, 1999), 64 FR 27839 (May 21, 1999) (order expanding 
the number of eligible securities to 1000).
    \4\ The MAX system may be used to provide an automated delivery 
and execution facility for orders that are eligible for execution 
under the Exchange's BEST Rule and certain other orders. See CHX 
Rules, Art. XX, Rule 37(b). A MAX order that fits within the BEST 
parameters is executed pursuant to the BEST Rule via the MAX system. 
If an order is outside the BEST parameters, the BEST rule does not 
apply, but MAX system handling rules remain applicable.
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    On January 3, 1997, the Commission approved, on a one year pilot 
basis, a program that eliminated the requirement that CHX specialists 
automatically execute orders for Nasdaq/NM securities when the 
specialist is not quoting at the national best bid or best offer 
disseminated pursuant to SEC Rule 11Ac1-1 (the ``NBBO'').\5\ When the 
Commission approved the program on a pilot basis, it requested that the 
Exchange submit a report to the Commission describing the Exchange's 
experience with the pilot program. The Commission stated that the 
report should include at least six months of trading data. Due to 
programming issues, the pilot program was not implemented until April 
1997. Six months of trading data did not become available until 
November 1997. As a result, the Exchange requested an additional three-
month extension to collect the data and prepare the report for the 
Commission.
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    \5\ See Securities Exchange Act Release No. 38119 (January 3, 
1997), 62 FR 1788 (January 13, 1997).
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    On December 31, 1997, the Commission extended the pilot program for 
an additional three months, until March 31, 1998, to give the Exchange 
additional time to prepare and submit the report and to give the 
Commission adequate time to review the report prior to approving the 
pilot on a permanent basis.\6\ The Exchange submitted the report to the 
Commission on January 30, 1998. Subsequently, the Exchange requested 
another three-month extension, in order to give the Commission adequate 
time to approve the pilot program on a permanent basis. On March 31, 
1998, the Commission approved the pilot for an additional three-month 
period, until June 30, 1998.\7\ On July 1, 1998, the Commission 
approved the pilot for an additional six-month period, until December 
31, 1998.\8\ On December 31, 1998, the Commission approved the pilot 
for an additional six-month period, until June 30, 1999.\9\ On June 30, 
1999, the Commission approved the pilot for an additional seven-month 
period, until January 31, 2000.\10\ On January 31, 2000, the Commission 
approved the pilot for an additional three-month period, until May 1, 
2000.\11\ On May 1, 2000, the Commission approved the pilot for an 
additional six-month period, until November 1, 2000.\12\ On November 
15, 2000, the Commission approved the pilot for an additional one-year 
period, until November 1, 2001.\13\ On November 1, 2001, the pilot was 
extended for an additional one-year period, until November 1, 2002.\14\ 
On November 1, 2002, the pilot was extended for an additional one-year 
period, until November 1, 2003.\15\ In light of the evolving nature of 
the Nasdaq market and unlisted trading of Nasdaq/NM securities, the 
Exchange now requests another extension of the current pilot program, 
through November 1, 2004. The Exchange is not requesting approval of 
any changes to the pilot in this submission.
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    \6\ See Securities Exchange Act Release No. 39512 (December 31, 
1997), 63 FR 1517 (January 9, 1998).
    \7\ See Securities Exchange Act Release No. 39823 (March 31, 
1998), 63 FR 17246 (April 8, 1998).
    \8\ See Securities Exchange Act Release No. 40150 (July 1, 
1998), 63 FR 36983 (July 8, 1998).
    \9\ See Securities Exchange Act Release No. 40868 (December 31, 
1998), 64 FR 1845 (January 12, 1999).
    \10\ See Securities Exchange Act Release No. 41586 (June 30, 
1999), 64 FR 36938 (July 8, 1999).
    \11\ See Securities Exchange Act Release No. 42372 (January 31, 
2000), 65 FR 6425 (February 9, 2000).
    \12\ See Securities Exchange Act Release No. 42740 (May 1, 2000) 
65 FR 26649 (May 8, 2000).
    \13\ See Securities Exchange Act Release No. 43565 (November 15, 
2000), 65 FR 71166 (November 29, 2000).
    \14\ See Securities Exchange Act Release No. 45010 (November 1, 
2001), 66 FR 56585 (November 8, 2001).
    \15\ See Securities Exchange Act Release No. 46932 (November 29, 
2002), 67 FR 72990 (December 9, 2002).
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    Under the pilot program, specialists must continue to accept agency 
market orders \16\ or marketable limit orders, but only for orders of 
100 to 5099 shares in Nasdaq/NM securities. This threshold order 
acceptance requirement is referred to as the ``auto acceptance 
threshold.'' Specialists, however, must accept all agency limit orders 
in Nasdaq/NM securities from 100 up to and including 10,000 shares for 
placement in the limit order book. Specialists are required to 
automatically execute Nasdaq/NM orders in accordance with certain 
amendments to the pilot program that were approved by the 
Commission.\17\
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    \16\ The term ``agency order'' means an order for the account of 
a customer, but does not include professional orders, as defined in 
CHX Rules, Art. XXX, Rule 2, Interpretation and Policy .04. The rule 
defines a ``professional order'' as any order for the account of a 
broker-dealer, the account of an associated person of a broker-
dealer, or any account in which a broker-dealer or an associated 
person of a broker-dealer has any direct or indirect interest.
    \17\ See Securities Exchange Act Release No. 44778 (September 7, 
2001), 66 FR 48075 (September 17, 2001).
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    The pilot program requires the specialist to set the MAX auto-
execution threshold at 100 shares or greater for Nasdaq/NM securities. 
When a CHX specialist is quoting at the NBBO, orders for a number of 
shares less than or equal to the size of the specialist's quote are 
executed automatically (in an amount up to the size of the specialist's 
quote). Orders of a size greater than the specialist's quote are 
automatically executed up to the size of the specialist's quote, with 
the balance of the order designated as an open order in the 
specialist's book, to be filled in accordance with the Exchange's rules 
for manual execution of orders for Nasdaq/NM securities. Such rules

[[Page 63831]]

dictate that the specialist must either manually execute the order at 
the NBBO or a better price or act as agent for the order in seeking to 
obtain the best available price for the order on a marketplace other 
than the Exchange. If the specialist decides to act as agent for the 
order, the pilot program requires the specialist to use order-routing 
systems to obtain an execution where appropriate. Orders for securities 
quoted with a spread greater than the minimum variation are executed 
automatically after a fifteen second delay from the time the order is 
entered into MAX. The size of the specialist's bid or offer is then 
automatically decremented by the size of the execution. When the 
specialist's quote is exhausted, the system generates an autoquote at 
an increment away from the NBBO for 100 shares.
    When the specialist is not quoting a Nasdaq/NM security at the 
NBBO, an order that is of a size less than or equal to the auto 
execution threshold designated by the specialist will execute 
automatically at the NBBO price up to the size of the auto execution 
threshold. Orders of a size greater than the auto execution threshold 
will be designated as open orders in the specialist's book and manually 
executed, unless the order-sending firm previously has advised the 
specialist that it elects partial automatic execution, in which event 
the order will be executed automatically up to the size of the auto 
execution threshold, with the balance of the order to be designated as 
an open order in the specialist's book.
    Whether the specialist is quoting at the NBBO or not, ``oversized'' 
orders, i.e., orders that are of a size greater than the auto 
acceptance threshold of 5099 shares (as designated by the specialist), 
are not subject to the foregoing requirements, and may be canceled 
within one minute of being entered into MAX or designated as an open 
order.
2. Statutory Basis
    The CHX believes that the proposed rule is consistent with section 
6(b) of the Act,\18\ generally, and section 6(b)(5) of the Act \19\ 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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    \18\ 15 U.S.C. 78f(b).
    \19\ 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. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The foregoing rule change has become effective pursuant to section 
19(b)(3)(A) of the Act \20\ and subparagraph (f)(6) of Rule 19b-4\21\ 
thereunder because the proposal: (1) Does not significantly affect the 
protection of investors or the public interest; (2) does not impose any 
significant burden on competition; and (3) does not become operative 
for 30 days from the date of filing, or such shorter time as the 
Commission may designate if consistent with the protection of investors 
and the public interest; provided that the Exchange has given the 
Commission written notice of its intent to file the proposed rule 
change at least five business days prior to the filing date of the 
proposed rule change. At any time within 60 days of the filing of such 
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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    \20\ 15 U.S.C. 78s(b)(3)(A).
    \21\ 17 CFR 240.19b-4.
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    The Exchange has requested that the Commission waive the 5-day pre-
filing notification requirement and the 30-day operative delay. The 
Commission believes that waiving the 5-day pre-filing notification 
requirement and the 30-day operative delay is consistent with the 
protection of investors and the public interest.\22\ The Commission 
notes that waiver of the 5-day pre-filing requirement and acceleration 
of the operative date will prevent the Exchange's pilot program 
relating to the trade of Nasdaq/NM securities from lapsing, and will 
allow the current rules to remain effective.
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    \22\ For purposes only of accelerating the operative date of 
this proposal, the Commission has considered the proposed rule's 
impact on efficiency, competition, and capital formation. 15 U.S.C. 
78c(f).
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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 the 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-2003-35 and 
should be submitted by December 1, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\23\
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    \23\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 03-28149 Filed 11-7-03; 8:45 am]
BILLING CODE 8010-01-P