[Federal Register Volume 69, Number 38 (Thursday, February 26, 2004)]
[Notices]
[Pages 8998-8999]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-4223]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49283; File No. SR-CHX-2003-25]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendments No. 1 and No. 2 Thereto by the Chicago Stock 
Exchange, Incorporated Relating to Stop Order Handling Rules

February 19, 2004.
    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 11, 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 
January 29, 2004, the Exchange filed Amendment No. 1 to the proposed 
rule change.\3\ On February 17, 2004, the Exchange filed Amendment No. 
2 to the proposed rule change.\4\ 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 (``Division''), Commission, dated January 28, 2004 
(``Amendment No. 1''). Amendment No. 1 replaced the originally filed 
proposal in its entirety.
    \4\ See letter from Kathleen M. Boege, Associate General 
Counsel, CHX, to Nancy J. Sanow, Assistant Director, Division of 
Market Regulation (``Division''), Commission, dated February 13, 
2004 (``Amendment No. 2''). Amendment No. 2 replaced the originally 
filed proposal, as superceded by Amendment No. 1, in its entirety.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 CHX Article XXX, Rule 22, which 
governs handling of stop orders. Specifically, the proposed rule change 
would add a general provision defining a stop order, in the context of 
listed securities, and confirming that a stop order, once ``elected'' 
by a price penetration on a national securities exchange or 
association, should be treated as a market order for purposes of 
determining the execution price due the order.
    Below is the text of the proposed rule change, as amended. Proposed 
new language is italicized.
* * * * *

Chicago Stock Exchange Rules

Article XXX

Specialists
* * * * *
Stop Orders
    RULE 22. A stop order to buy becomes a market order when a 
transaction in the security occurs on the Exchange or another national 
securities exchange or association at or above the stop price. A stop 
order to sell becomes a market order when a transaction in the security 
occurs on the Exchange or another national securities exchange at or 
below the stop price. A specialist must not initiate a transaction for 
his own account in a stock in which he is registered that would result 
in putting into effect any stop order he may have on his book. However, 
a specialist may be party to the election of a stop order only when his 
bid or offer made with the approval of a Floor Official has the effect 
of bettering the market and when he guarantees that the stop order will 
be executed at the same price as the electing sale.
* * * * *

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 proposed rule change, as amended, would amend CHX Article XXX, 
Rule 22, which governs the handling of stop orders. Specifically, the 
proposed rule change, as amended, would add a general provision 
defining a stop order, in the context of listed securities, and 
confirming that a stop order, once ``elected'' by a price penetration 
on a national securities exchange or association, would be treated as a 
market order for purposes of determining the execution price due the 
order.

[[Page 8999]]

    The Exchange does not currently have a rule that defines a stop 
order or a rule that sets out the required treatment of elected stop 
orders and believes that it is appropriate to provide certainty to its 
members and the investors that they serve by putting such a rule in 
place.\5\ Under the Exchange's proposal, stop orders would no longer be 
executed in accordance with the Exchange's ``next, no better'' policy. 
Rather, a stop order would be defined as an order that becomes a market 
order once the price of the stop order is equaled or penetrated on a 
national securities exchange or association.\6\ The Exchange represents 
that this proposed handling of a stop order is in line with the rules 
of other markets, including the New York Stock Exchange, Inc., the 
American Stock Exchange LLC, and the Pacific Exchange, Inc. and 
provides an appropriate fill for stop orders sent to the Exchange for 
execution.\7\
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    \5\ Although the Exchange does not currently have a rule 
defining stop orders, the Exchange has operated under a long-
standing policy relating to stop orders; the standing policy 
provides that a stop order in a listed security that is routed to 
the CHX (and then elected by a primary market print at the stop 
price) is given a ``next, no better'' execution, meaning that the 
order must be executed at the next execution price on the primary 
market. If the next primary market execution is at a price better 
than the election price, the order may be executed at the election 
price. Otherwise stated, if the next primary market execution is at 
a better price than the election price, the CHX specialist has the 
discretion to provide either the election price or the better price.
    \6\ On the CHX, market orders are executed in accordance with 
CHX Article XX, Rule 37, which requires that (a) market orders 
executed automatically be executed at the national best bid or offer 
in effect at the time the order was received; and (b) market orders 
executed manually be executed by the specialist in his principal 
capacity at the national best bid or offer in effect at the time the 
order was received, or, if the specialist elects to act as agent for 
the order, at the best available price in the national marketplace, 
using order routing systems where appropriate. If the Commission 
approves this proposed rule change, elected stop orders would be 
executed in accordance with the provisions of CHX Article XX, Rule 
37. An elected stop order would be eligible for automatic execution 
if it were within the auto ex size threshold designated by the 
specialist in accordance with CHX Article XX, Rule 37(b)(1).
    \7\ See, e.g., NYSE Rule 13 (``A stop order to buy becomes a 
market order when a transaction in the security occurs at or above 
the stop price after the order is represented in the Trading Crowd. 
A stop order to sell becomes a market order when a transaction in 
the security occurs at or below the stop price after the order is 
represented in the Trading Crowd''); Amex Rule 131 (same text as 
NYSE Rule 13); and Archipelago Exchange Facility Rule 7.31(``A stop 
order to buy becomes a market order when a transaction in the 
security occurs on the Corporation or on another national securities 
exchange or association at or above the stop price. A Stop Order to 
sell becomes a market order when a transaction in the security 
occurs on the Corporation or on another national securities exchange 
or association at or below the stop price'').
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2. Statutory Basis
    The CHX believes that the proposed rule change, as amended, is 
consistent with section 6(b) \8\ of the Act, in general, and furthers 
the objectives of section 6(b)(5) \9\ of the Act, in particular, in 
that it is designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to foster 
cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, to remove impediments to and 
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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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement of Burden on Competition

    The Exchange believes that no burden will be placed on competition 
as a result of the proposed rule change.

C. Self-Regulatory Organization's Statement on Comments Regarding 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 its 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.

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-2003-25. 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 at 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 the File No. SR-CHX-2003-25 and should be 
submitted by March 18, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-4223 Filed 2-25-04; 8:45 am]
BILLING CODE 8010-01-P