[Federal Register Volume 69, Number 70 (Monday, April 12, 2004)]
[Notices]
[Pages 19253-19255]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-8177]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49530; File No. SR-CHX-2003-21]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 by the Chicago Stock Exchange, Inc., 
Relating to the Price Improvement of Orders Executed Automatically on 
the Exchange

April 6, 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 July 17, 2003, the Chicago Stock Exchange, Inc. (``CHX'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by the CHX. 
The CHX filed Amendment No. 1 to the proposal on March 30, 2004.\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\ Amendment No. 1 replaces the original filing in its 
entirety. See letter from Kathleen M. Boege, Vice President and 
Associate General Counsel, CHX, to Nancy J. Sanow, Division of 
Market Regulation (``Division''), Commission, dated March 29, 2004.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The CHX proposes to amend CHX Article XX, Rule 37, to revise its 
rules governing price improvement for orders executed automatically by 
the CHX's MAX[reg] execution system. The text of the proposed rule 
change appears below. Additions are italicized; deletions are 
bracketed.\4\
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    \4\ With the CHX's consent, the Commission made minor technical 
changes to indicate language being added to the text of the proposed 
rule. Telephone conversation between Kathleen M. Boege, Vice 
President and Associate General Counsel, CHX, and Yvonne Fraticelli, 
Special Counsel, Division, Commission, on March 31, 2004.
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ARTICLE XX

Regular Trading Sessions
* * * * *
Guaranteed Execution System and Midwest Automated Execution System

Rule 37

* * * * *
(d) Super MAX [2000]
    [SuperMAX 2000 shall be a voluntary automatic execution program 
within the MAX System. SuperMAX 2000 shall be available for any 
security trading on the Exchange in decimal price increments.] A 
specialist may elect, on a security-by-security basis, to enable the 
SuperMAX program, which will provide automated price improvement to 
orders automatically executed within the MAX System [choose to enable 
this voluntary program within the MAX System on a security-by-security 
basis].
(1) Pricing
    [(a) In the event that an order to buy or sell at least 100 shares 
is received in a security in which SuperMAX 2000 has been enabled, such 
order shall be executed at the ITS Best Offer or NBO (for a buy order) 
or the ITS Best Bid or NBB (for a sell order) if the spread between the 
ITS Best Bid and the ITS Best Offer (or NBB and NBO, for Nasdaq/NM 
issues) in such security at the time the order is received is less than 
$.02.
    (b) In the event that an order to buy or sell 100 shares is 
received in a security in which SuperMAX 2000 has been enabled, and the 
spread between the ITS Best Bid and the ITS Best Offer (or NBB and NBO, 
for Nasdaq/NM issues) in such security at the time the order is 
received is $.02 or greater, such order shall be executed (subject to 
the short sale rule) at a price at least $.01 lower than the ITS Best 
Offer or NBO (for a buy order) or at least $.01 higher than the ITS 
Best Bid or NBB (for a sell order).
    (c)] In the event that an order to buy or sell 100 shares or more 
[more than 100 shares] is received in a security in which SuperMAX 
[2000] has been enabled, such order shall be executed (subject to the 
short sale rule) at the ITS Best Offer (or NBO for Nasdaq/NM 
securities), or better (for a buy order) or the ITS Best Bid (or NBB 
for Nasdaq/NM securities), or better (for a sell order) as the 
specialist may designate and as is approved by the Exchange.
    [(d) Odd Lot Market Orders. In the event that a market order to buy 
or sell less than 100 shares (or a market order otherwise deemed an odd 
lot by the Exchange) is received in a security in which SuperMAX 2000 
has been enabled, and the spread between the ITS Best Bid and the ITS 
Best offer (or NBB and NBO, for Nasdaq/NM issues) in such security at 
the time the order is received is (A) less than $.05, such order shall 
be executed at the ITS Best Offer or NBO (for a buy order) or the ITS 
Best Bid or NBB (for a sell order); or (B) $.05 or greater, such order 
shall be executed at a price at least $.01 lower than the ITS Best 
Offer or NBO (for a buy order) or at least $.01 higher than the ITS 
Best Bid or NBB (for a sell order)].

[[Page 19254]]

    (2) Operating Time. SuperMAX [2000] will operate each day that the 
Exchange is open for trading from the commencement of the Primary 
Trading Session until the close of the Primary Trading Session; 
provided, however, that preopening orders shall not be eligible for 
SuperMAX [2000] price improvement. A specialist may enable or remove 
SuperMAX [2000] for a particular security only on one given day each 
month, as determined by the Exchange from time to time. Notwithstanding 
the previous sentence, during unusual market conditions, individual 
securities or all securities may be removed from SuperMAX [2000] with 
approval of two members of the Committee on Floor Procedure.
    (3) Timing. Orders entered into SuperMAX [2000] shall be 
immediately executed upon completion of the [foregoing] price 
improvement algorithm without any delay (i.e., in 0 seconds).
    (4) Applicability to Odd Lots Generated by OLES. Although an order 
generated by the Odd-Lot Execution Service (``OLES'') is a professional 
order (because it is deemed to be for the account of a broker-dealer), 
it is nonetheless eligible for SuperMAX [2000] execution if (i) the 
order is for 100 to 199 shares and (ii) the order is an OLES passively-
driven system-generated market order (and not an actively managed 
order).
    (5) Out of Range. Notwithstanding anything herein to the contrary, 
SuperMAX 2000 will not automatically execute an order if such execution 
would result in an out of range execution.
    (6) Other. Any eligible order in a security for which SuperMAX 
[2000] has been enabled which is manually presented at the post by a 
floor broker must also be guaranteed an execution by the specialist 
pursuant to the pricing criteria set forth in paragraph (1) above. If 
the contra side order which would better a SuperMAX [2000] execution is 
presented at the post, the incoming order which is executed pursuant to 
the SuperMAX [2000] criteria must be adjusted to the better price.

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 on the proposed rule change. 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 proposes to amend CHX Article XX, Rule 37, which governs 
the price improvement of orders executed automatically on the CHX. 
Specifically, as described more fully below, the CHX seeks to amend CHX 
Article XX, Rule 37 to (i) delete rule provisions mandating different 
treatment for orders of 100 shares or less; and (ii) update the name of 
the automated price improvement program described in the rule from 
``SuperMAX 2000'' to ``SuperMAX.''
    SuperMAX 2000 is a voluntary CHX program under which CHX 
specialists may elect to provide price improvement of orders that are 
executed automatically by the CHX's MAX[reg] execution system. 
Specialists may engage SuperMAX 2000 on an issue-by-issue basis.\5\ 
Currently, under the SuperMAX 2000 rules, orders of 100 shares receive 
automatic price improvement of $.01 or better when the BBO spread is 
$.02 or greater. Larger orders may receive automatic price improvement 
of $.01 or better.\6\
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    \5\ According to the CHX, all CHX specialist firms rely on the 
SuperMAX 2000 price improvement program to provide customers with 
execution prices that are superior to the national best bid or 
offer. The CHX estimates that SuperMAX 2000 is enabled for over 90% 
of the issues traded on the CHX.
    \6\ Price improvement of larger orders is effected by the 
SuperMAX 2000 system in accordance with algorithms designated by 
each CHX specialist on an issue-by-issue basis. The CHX specialist 
has the discretion to set price improvement algorithms to provide 
varying levels of price improvement for each issue, based on factors 
including order size, the bid/offer spread at the time the order was 
received, and other objective market factors. The CHX specialist may 
not use SuperMAX 2000 to provide for different price improvement 
outcomes based on the identity of the order sending firm.
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    When it was adopted in 2000,\7\ SuperMAX 2000 represented the 
Exchange's efforts to combine five different price improvement programs 
that formerly were contained in the CHX rules. Each of these programs 
was based on factors including order size and BBO spread. The CHX hoped 
that SuperMAX 2000, as a distillation of the essential attributes of 
the five price improvement programs that preceded it, would eliminate 
the confusion that often resulted from the formerly labyrinthine CHX 
price improvement rules. Largely for marketing reasons, and to avoid 
concerns that SuperMAX 2000 represented too significant of a departure 
from the previous price improvement structure, SuperMAX 2000 contained 
separate provisions for price improvement of 100-share orders to 
establish a minimum threshold of price improvement for small orders.
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    \7\ See Securities Exchange Act Release No. 43742 (December 19, 
2000), 65 FR 83119 (December 29, 2000) (order approving File No. SR-
CHX-00-37).
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    At this juncture, several years after the adoption of the SuperMAX 
2000 rules, the CHX believes that separate treatment of 100-share 
orders is no longer warranted. Indeed, the CHX believes that the 
elimination of any special treatment in the rules for 100-share orders 
may operate to reduce confusion, to the benefit of order-sending firms 
and the investing public. The CHX believes that it is appropriate for 
the CHX specialist to exercise the same discretion with respect to 100-
share orders that he currently exercises with respect to larger orders 
in determining the level of price improvement that he is willing to 
provide for each issue.\8\ Although this discretion would permit a CHX 
specialist to give a 100-share order a worse execution price than would 
be due under the current version of the rule, the Exchange does not 
believe that the proposed rule change would result in widespread 
specialist refusal to price improve 100-share orders.\9\ Moreover, even 
if a number of CHX specialists do decline to price improve 100-share 
orders, the Exchange's rules still obligate CHX specialists to execute 
such orders at a price no worse than the national best bid or offer.
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    \8\ The CHX specialist's discretion is limited by the CHX 
Article XX, Rule 37(d)(2), which prohibits changing SuperMAX 2000 
price improvement parameters more than once per month.
    \9\ In this regard, the CHX believes that specialist business 
considerations, including competitive forces in the securities 
markets, may dictate that CHX specialists continue to price improve 
most 100-share orders.
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    The proposed rule change also would delete CHX Article XX, Rule 
37(d)(1)(d), the rule provision that deals specifically with price 
improvement of odd lot orders. In lieu of the deleted provision, CHX 
Article XXXI governs execution prices due odd lot orders.
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

[[Page 19255]]

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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    \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 CHX 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 on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were 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.

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-2003-21. The 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 CHX. All 
submissions should refer to File No. SR-CHX-2003-21 and should be 
submitted by May 3, 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. 04-8177 Filed 4-9-04; 8:45 am]
BILLING CODE 8010-01-P