[Federal Register Volume 68, Number 250 (Wednesday, December 31, 2003)]
[Notices]
[Pages 75674-75675]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-32173]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48982; File No. SR-CHX-2003-17]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 Thereto by the Chicago Stock Exchange, 
Incorporated Relating to Automatic Quotations

December 23, 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 June 16, 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 Exchange. On November 26, 2003, the Exchange filed Amendment No. 
1 to the proposal.\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 25, 2003 (``Amendment 
No. 1''). In Amendment No. 1, the Exchange expanded its discussion 
regarding the consequences of the proposed rule change, and also 
clarified that the proposed rule change was filed pursuant to 
section 19(b)(2) of the Act. 15 U.S.C. 78s(b)(2).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to delete an interpretation of CHX Article 
XX, Rule 7, which governs recognized quotations. The text of the 
proposed rule change is available at the Commission and at the CHX.

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 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 proposed rule change would delete an interpretation of CHX 
Article XX, Rule 7, which governs recognized quotations, because the 
Exchange believes that the provision is now obsolete. Specifically, the 
CHX seeks to delete an interpretation that prohibits specialists from 
disseminating automatically-generated quotations that are more than 
$.10 away from the Intermarket Trading System (``ITS'') best bid or 
offer. This prohibition extends to all Dual Trading System (i.e., 
listed) issues.\4\
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    \4\ There is no corresponding provision in the CHX rules 
relating to auto-quoting in Nasdaq/NM securities.
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    Like many exchanges, the CHX has a functionality, commonly referred 
to as the ``auto-quote'' functionality, which its specialists may use 
to generate quotations automatically, based on the best bid or offer 
disseminated by another market. The auto-quote functionality typically 
is used by a CHX specialist to generate a quotation when there is no 
interest in the specialist's book that would be the basis for a 
quotation by the specialist.\5\ When the CHX specialist is in auto-
quote mode, CHX Article XX, Rule 7, Interpretation and Policy .02 
prohibits the specialist from disseminating automatically-generated 
quotations that are more than $.10 away from ITS best bid or offer.\6\
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    \5\ The specialist is required to disseminate a continuous two-
sided market in all listed issues pursuant to the terms of the ITS 
plan. Auto-quoting is a tool that enables a CHX specialist to 
satisfy this requirement, even when there is no interest in the 
specialist's book upon which the specialist could base a quotation.
    \6\ Prior to the securities industry transition to decimal 
pricing, the interpretation prohibited quotations of more than 1/8 
of a point away from the ITS best bid or offer.
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    Following the securities industry's transition to decimal pricing, 
the consolidated quotations in the national securities market 
``flicker'' significantly throughout each trading day. Because the 
auto-quote functionality is based on a flickering quotation, quotations 
generated by the CHX auto-quote functionality correspondingly flicker, 
potentially resulting in confusion for order-sending firms (and even 
the specialist himself). Accordingly, the CHX believes that it is 
appropriate to remove the interpretation that mandates an auto-quote 
spread of $.10 or less, so that the CHX specialist may utilize the 
auto-quote functionality (when necessary) to generate a wider or 
different quotation that will not be subject to incessant 
flickering.\7\
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    \7\ For example, the specialist might want to set his or her 
auto-quote functionality based on the quote in a particular market 
(such as the market with the tightest spreads).
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    Significantly, the CHX believes that this change is not only 
appropriate, but is mandated given recent changes in the way that 
systems capacity is allocated and paid for in the listed markets. 
Today, under an amendment to the Consolidated Quotation Association 
(``CQA'') plan, each listed exchange is required to estimate the 
systems capacity needs associated with such exchange's anticipated 
quotation traffic for a given time period. SIAC, as the securities 
information processor (``SIP'') for the listed markets, then bills each 
exchange for the systems capacity used by such exchange in 
disseminating its quotations. To the extent that an exchange exceeds 
its capacity estimates, the CQA plan provides for potentially 
significant financial penalties. Excessive quotation traffic is thus 
not only

[[Page 75675]]

potentially confusing; it may also operate to the financial detriment 
of the CHX.
    For the foregoing reasons, the CHX believes that it is appropriate 
to delete Article XX, Rule 7, Interpretation and Policy .02. The CHX 
anticipates that deletion of the mandatory $.10 auto-quote spread will 
result in a significant reduction in CHX quotation traffic, which 
benefits the national market system. Moreover, because the vast 
majority of the Exchange's automatic executions are based on execution 
guarantees that supplement the specialist's quotation, the Exchange 
does not believe that the proposed rule change will have any negative 
effect on execution prices.\8\ In short, the only material consequence 
of the proposed rule change will be CHX specialist quotations that do 
not flicker continuously throughout the trading day. The CHX would note 
that each CHX specialist remains subject to their fundamental 
obligation to maintain ``fair and orderly markets.''\9\ The CHX 
believes that this obligation will ensure that specialists will not 
abuse the auto-quote functionality to generate quotations that are 
useless or disruptive to the national market system.
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    \8\ CHX Article XX, Rule 37(b) requires that orders executed 
automatically on the CHX be executed at the national best bid or 
offer in effect at the time the order is received.
    \9\ See CHX Article XXX, Rule 1, Interpretation and Policy .02.
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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).\10\ The CHX believes the proposal is 
consistent with section 6(b)(5) of the Act \11\ 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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    \10\ 15 U.S.C. 78(f)(b).
    \11\ 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 burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act.

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 with respect 
to the proposed rule change, as amended.

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 self-regulatory organization consents, the Commission will:
    A. by order approve the 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, 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. Comments may also be submitted electronically at the 
following e-mail address: [email protected]. All comment letters 
should refer to File No. SR-CHX-2003-17. This file number should be 
included on the subject line if e-mail is used. To help the Commission 
process and review comments more efficiently, comments should be sent 
in hardcopy or by e-mail but not by both methods. 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 filings will also be available 
for inspection and copying at the principal office of the CHX. All 
submissions should refer to File No. SR-CHX-2003-17 and should be 
submitted by January 21, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority. \12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-32173 Filed 12-30-03; 8:45 am]
BILLING CODE 8010-01-P