[Federal Register Volume 69, Number 22 (Tuesday, February 3, 2004)]
[Notices]
[Pages 5227-5228]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-2144]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49130; File No. SR-CHX-2003-27]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 Thereto by the Chicago Stock Exchange, 
Incorporated Relating to Execution of Limit Orders Following Exempted 
ITS Trade-Through

January 27, 2004.
    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 August 7, 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, II and III below, which Items have been prepared by the 
Exchange. On January 20, 2004, the Exchange filed Amendment No. 1 to 
the proposed rule change.\3\ 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.
    \3\ Amendment No. 1 replaces and supercedes the original filing 
in its entirety.
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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 certain provisions of CHX Article 
XX, Rule 37, which governs, among other things, execution of limit 
orders, in listed securities, 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 when the primary market is trading at the limit 
price, if the issue traded constitutes an Exempt ETF (as defined 
below). 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
    On August 28, 2002, the Commission issued an order granting a de 
minimis exemption (the ``Exemption'') for transactions in certain 
exchange-traded funds (the ``Exempt ETFs'') from the trade-through 
provisions of the Intermarket Trading System (``ITS'') Plan.\4\ On May 
30, 2003, the Commission issued an order extending effectiveness of the 
Exemption, through March 4, 2004.\5\ In its orders relating to the 
Exemption, the Commission clearly outlined its belief that the nature 
of the ETF market is so dynamic and rapidly-changing that the trade-
through provisions of the ITS Plan are inadequate and unduly 
restrictive.\6\
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    \4\ See Securities Exchange Act Release No. 46428 (August 28, 
2002), 67 FR 56607 (September 4, 2002). At present, the exemption 
extends to transactions in three designated Exempt ETFs--the Nasdaq-
100 Index (``QQQ''), the Dow Jones Industrial Average (``DIAMONDs'') 
and the Standard & Poor's 500 Index (``SPDRs'')--when the 
transactions are ``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'' (each, 
an ``Exempted Trade-Through''). The exemption was effective as of 
September 4, 2002. The Exchange notes that the Commission's 
exemption extended to the subject transactions rather than the three 
subject issues. For purposes of this submission, however, the 
Exchange will refer to such issues at the ``Exempt ETFs.''
    \5\ See Securities Exchange Act Release No. 47950 (May 30, 
2003), 68 FR 33748 (June 5, 2003).
    \6\ See supra note 3, 67 FR at 56607-56608.
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    Article XX, Rule 37(a)(3) of the CHX Rules, which governs execution 
of limit orders in a CHX specialist's book, provides for execution of 
such orders at the limit price, i.e., it requires the CHX specialist to 
provide ``limit order protection,'' when certain conditions occur in 
the primary market. Among other things, these provisions generally 
obligate a CHX specialist to fill limit orders in his book if the 
primary market is trading at or through the limit price.
    Following issuance of its Exemption order, the Commission approved 
a rule change proposed by the CHX, removing the requirement that CHX 
specialists guarantee limit order protection in the case of an Exempt 
Trade-Through in the primary market.\7\ CHX specialists are permitted 
to provide this protection on a voluntary basis.
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    \7\ See Securities Exchange Act Release No. 46760 (November 1, 
2002), 67 FR 68219 (November 8, 2002). The CHX rule language 
approved by the Commission is currently in effect until March 4, 
2004, the expiration date of the Exemption order. See Securities 
Exchange Act Release No. 48202 (July 21, 2003), 68 FR 44370 (July 
28, 2003).
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    The Exchange believes that it is appropriate to extend the effect 
of this rule change by removing the remaining limit order protection 
requirements for orders in any of the Exempt ETFs. Specifically, the 
CHX believes that in instances where the primary market in an Exempt 
ETF is trading at the limit price, the CHX specialist should not be 
required to execute resting limit orders in his book under CHX Article 
XX, Rule 37(a)(3)(a) and 37(a)(3)(c).
    Accordingly, the proposed rule change would permit, but would not 
require, a CHX specialist to fill limit orders in his book when the 
primary market in an Exempt ETF is trading at the limit price.\8\ The 
CHX asserts that rationale for this proposal is similar to that 
articulated by the Commission in the Exemption order--it is difficult, 
if

[[Page 5228]]

not impossible, for a CHX specialist to obtain liquidity on behalf of 
his customer via the ITS system in the case of Exempt ETFs, given the 
dynamic and rapidly changing nature of the Exempt ETF market.
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    \8\ The CHX believes that the proposed rule change, which 
broadens the scope of Interpretation and Policy .10 to CHX Article 
XX, Rule 37, contemplates the proposal outlined above. To the extent 
that the CHX Board of Governors designates subject issues other than 
or in addition to the Exempt ETFs, the Exchange will file those 
changes with the Commission as an interpretation of an existing rule 
pursuant to Section 19(b)(3)(A) of the Act and Rule 19b-4(f)(1).
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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).\9\ The CHX believes the proposal is 
consistent with Section 6(b)(5) of the Act \10\ 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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    \9\ 15 U.S.C. 78(f)(b).
    \10\ 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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such other 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 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-2003-27. This file number should be included on the 
subject line if e-mail is used. To help the Commission process and 
review your 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 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-2003-27 and be submitted by 
February 24, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 04-2144 Filed 2-2-04; 8:45 am]
BILLING CODE 8010-01-P