[Federal Register Volume 68, Number 235 (Monday, December 8, 2003)]
[Notices]
[Pages 68434-68436]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-30352]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48859; File No. SR-CHX-2003-23]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 Thereto by the Chicago Stock Exchange, 
Incorporated to Amend Article XX, Rule 37(a)(4) Relating to the 
Definition of Preopening Order

December 1, 2003.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\

[[Page 68435]]

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. The Exchange submitted an amendment to the 
proposed rule change on November 6, 2003.\3\ The Commission is 
publishing this notice to solicit comments on the proposed rule change, 
as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Kathleen M. Boege, Associate General 
Counsel, CHX, to Nancy J. Sanow, Assistant Director, Division of 
Market Regulation, Commission, dated November 4, 2003, replacing 
Form 19b-4 in its entirety (``Amendment No. 1''). In Amendment No. 
1, the CHX expands upon the purpose of the proposed rule change.
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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 CHX Article XX, Rule 37(a)(4), which 
governs execution of preopening orders on the CHX. Specifically, the 
CHX seeks to modify the definition of ``preopening order'' to provide 
that preopening orders for Nasdaq/NM securities must be received at or 
prior to 8:20 a.m. (CT), instead of the 8:25 (CT) deadline currently 
set forth in the rule.\4\ Below is the text of the proposed rule 
change, as amended. New language is italicized, and deletions are 
bracketed.
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    \4\ All times referred to in the proposed rule change, as 
amended, are Central Time (CT).
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* * * * *

Chicago Stock Exchange Rules

ARTICLE XX
Regular Trading Sessions
Guaranteed Execution System and Midwest Automated Execution System
RULE 37.
    (a) No change to text.
    1-3. No change to text.
    4. Preopenings. Preopening orders in Dual Trading System issues 
must be accepted and filled at the primary market opening trading 
price. In trading halt situations occurring in the primary market, 
orders will be executed based upon the reopening price. Preopening 
orders in NASDAQ/NM securities must be accepted and filled on a single 
price opening at or better than the NBBO at the first unlocked, 
uncrossed market. In trading halt situations, orders will be executed 
based on the Exchange reopening price. For purposes of this rule, (a) 
pre-opening orders in Dual Trading System Issues are orders that are 
received before a primary market opens a subject security based on a 
print or based on a quote and (b) preopening orders in NASDAQ/NM 
securities are orders received at or prior to 8:20 [25] a.m. (Central 
Time) on the date of the opening.
* * * * *

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, as 
amended, 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 seeks to amend CHX Article XX, Rule 37(a)(4), which governs 
execution of preopening orders on the CHX, by modifying the definition 
of ``preopening order'' to provide that preopening orders for Nasdaq/NM 
securities must be received at or prior to 8:20 a.m. (CT), instead of 
the 8:25 (CT) deadline currently set forth in the rule.
    Under the current version of the CHX rule, all preopening orders 
for Nasdaq/NM securities are accepted and filled on a single price 
opening at or better than the national best bid or offer (``NBBO'') at 
the first unlocked, uncrossed market. The Exchange represents that the 
single price opening for preopening orders was enacted voluntarily by 
the Exchange in early 2001 \5\ as an execution guarantee similar to the 
Exchange's provisions relating to price improvement. The Exchange 
believes that the single price opening, like price improvement, often 
provides for execution of preopening orders at execution prices more 
favorable than if the Exchange did not offer a single price opening. 
The Exchange's 2001 submission established an 8:25 (CT) deadline for 
preopening orders. Orders received after 8:25 (CT) are treated as 
standard market orders under the Exchange's general rules governing 
execution of market orders.
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    \5\ See Securities Exchange Act Release No. 44062 (March 12, 
2001), 66 FR 15514 (March 19, 2001).
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    The proposed change to the rule governing the 8:25 (CT) deadline 
for preopening orders was formulated by the Exchange's OTC 
Subcommittee, which is composed of CHX specialists who trade Nasdaq/NM 
securities. The members of the OTC Subcommittee believe that an earlier 
deadline for preopening orders is a modest yet important modification 
to their single price execution guarantee for preopening orders.
    To place their request in context, the CHX represents that it is 
virtually the only market center that guarantees a single price opening 
at or better than the NBBO at the first unlocked, uncrossed market. The 
Exchange's competitors generally base their execution of preopening 
orders on the prices and order imbalances within their own systems, 
rather than the NBBO for Nasdaq/NM securities. Accordingly, the 
Exchange believes that its OTC specialists bear a significantly higher 
degree of risk with respect to preopening orders, since they are 
obligated to execute such orders based on the first unlocked, uncrossed 
NBBO. In situations where there is a significant imbalance in 
preopening orders for a particular issue, this execution guarantee can 
result in significantly adverse swings in a CHX specialist's position. 
The Exchange believes that an earlier deadline for preopening orders, 
by operating to reduce the aggregate amount of preopening orders 
received by a CHX specialist, would better enable the CHX specialist to 
manage his position and to better fulfill his specialist duties by 
giving him time to fully evaluate his position and to make a 
professional price assessment that would inform his executions once 
trading commences for the day.\6\
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    \6\ Significantly, an order received prior to the open which is 
not a ``preopening'' order (i.e., which is received between the 
preopening order deadline and the 8:30 (CT) open) must still be 
executed in accordance with the Exchange's BEST rule (CHX Article 
XX, Rule 37(a)), which requires execution of market and marketable 
limit orders at the NBBO, or requires a CHX specialist to act as 
agent for the order to obtain the best available price in the 
marketplace, using order routing systems where appropriate. The CHX 
thus does not anticipate that such orders would be disadvantaged in 
terms of price once they are executed following the open; the orders 
simply would not participate in the single price opening.
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    An additional reason for an 8:20 (CT) deadline relates to the 
operation of NASDAQ's SuperMontage[reg] system, in which the CHX 
participates. The SuperMontage rules establish 8:20:00 (CT) through 
8:29:59 (CT) as the time period during which NASDAQ market makers 
(including electronic communication networks) can route ``trade or 
move'' messages to SuperMontage participants whose quotes might be 
inferior in price to a price that another participant seeks to

[[Page 68436]]

disseminate. Before a CHX specialist can respond to a ``trade or move'' 
request in an informed fashion, he must be fully apprised of his 
updated position, based on the comprehensive data of all preopening 
orders that he has received. The Exchange believes that an 8:20 (CT) 
deadline for CHX preopening orders would better enable CHX specialists 
to comply with SuperMontage rules and procedures governing the vital 
``trade or move'' functionality.
    Accordingly, the Exchange believes that the modification requested 
by the OTC Subcommittee is appropriate. Because the Exchange believes 
that the current single price opening guarantee was enacted voluntarily 
as a means of attracting customer order flow and is not required under 
the Act or any other legislative mandate, the Exchange believes that it 
is appropriate for OTC specialists to modify slightly the parameters 
under which this guarantee is available.
2. Statutory Basis
    The CHX believes the proposal, as amended, is consistent with the 
requirements of Section 6(b) \7\ of the Act in general, and Section 
6(b)(5) of the Act \8\ in particular, because 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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    \7\ 15 U.S.C. 78(f)(b).
    \8\ 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, as 
amended, 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

    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 (ii) as to 
which the Exchange 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.
    The CHX has requested accelerated approval of the proposed rule 
change, as amended. While the Commission will not grant accelerated 
approval at this time, the Commission will consider granting 
accelerated approval of the proposal, as amended, at the close of an 
abbreviated comment period of 15 days from the date of publication of 
the proposal in the Federal Register.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, 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, as 
amended, that are filed with the Commission, and all written 
communications relating to the proposed rule change, as amended, 
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-2003-23 and should be 
submitted by December 23, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-30352 Filed 12-5-03; 8:45 am]
BILLING CODE 8010-01-P