[Federal Register Volume 69, Number 77 (Wednesday, April 21, 2004)]
[Notices]
[Pages 21591-21593]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-9004]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49567; File No. SR-CHX-2004-12]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 Thereto by the Chicago Stock Exchange, Inc. 
Relating to the Implementation of a Fully-Automated Functionality for 
the Handling of Particular Orders Called CHXpress

April 15, 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 February 20, 2004, the Chicago Stock Exchange, Inc. (``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 April 
8, 2004, the Exchange amended the proposed rule change.\3\ The 
Commission is publishing this notice to solicit comments on the 
proposed rule change, as amended, from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Ellen J. Neely, Senior Vice President and 
General Counsel, CHX, to Nancy J. Sanow, Assistant Director, 
Division of Market Regulation (``Division''), Commission, dated 
April 7, 2004, and the attached Form 19b-4, which replaced the 
original filing in its entirety (``Amendment No. 1'').
---------------------------------------------------------------------------

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 implement a 
new automated functionality for handling particular orders, called 
CHXpress. Below is the text of the proposed rule change.\4\ Proposed 
new language is in italics.
---------------------------------------------------------------------------

    \4\ With the Exchange's consent, the Commission has made 
technical corrections to the text of the proposed rule change, which 
the Exchange has committed to correct formally by filing an 
amendment. Telephone conversation between Ellen J. Neely, Senior 
Vice President and General Counsel, CHX, and David Hsu, Attorney, 
Division, Commission, on April 15, 2004.
---------------------------------------------------------------------------

* * * * *

ARTICLE XX

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

Rule 37.

    (a) Guaranteed Executions. The Exchange's Guaranteed Execution 
System (the BEST System) shall be available, during the Primary Trading 
Session and the Post Primary Trading Session, to Exchange member firms 
and, where applicable, to members of a participating exchange who send 
orders to the Floor through a linkage pursuant to Rule 39 of this 
Article, in all issues in the specialist system which are traded in the 
Dual Trading System and Nasdaq/NM Securities. System orders shall be 
executed pursuant to the following requirements, subject to section 
(b)(11) of this Rule 37:
* * * * *
    (b) Automated Executions. The Exchange's Midwest Automated 
Execution System (the MAX System) may be used to provide an automated 
delivery and execution facility for orders that are eligible for 
execution under the Exchange's BEST Rule (Article XX, Rule 37(a)) and 
certain other orders. In the event that an order that is subject to the 
BEST Rule is sent through MAX, it shall be executed in accordance with 
the parameters of the BEST Rule and the following. In the event that an 
order that is not subject to the BEST Rule is sent through MAX, it 
shall be executed in accordance with the parameters of the following:
* * * * *
    (8) All orders sent through MAX shall include the appropriate 
account type designator. The following are acceptable account types:

``P''--Principal/Professional Order
``D''--Program Trade, index arbitrage for Member/Member Organization
``A''--Agency
``C''--Program Trade, non-index arbitrage for Member/Member 
Organization
``I''--Individual Investor
``J''--Program Trade, index arbitrage for Individual Customer
``K''--Program Trade, index arbitrage for other agency
``U''--Program Trade, non-index arbitrage for Individual Customer
``Y''--Program Trade, non-index arbitrage for other agency
``E''--CHXpress Order
``Z''--Professional Order--Automatic Execution
* * * * *

[[Page 21592]]

    (11) CHXpress Orders. This section applies to the execution and 
display of orders through CHXpress, an automated functionality offered 
by the Exchange. All other rules of the Exchange are applicable, unless 
expressly superseded by this section.
    (A) Only an unconditional round lot limit order is eligible for 
entry as a CHXpress order. A CHXpress order may not be entered until an 
order has been executed on the primary market in the subject issue. A 
CHXpress order is good only for the day on which it is submitted and 
will be automatically cancelled at the end of each day's trading 
session.
    (B) A CHX specialist may not place a CHXpress order on hold or 
otherwise prevent an order-sending firm from cancelling the order. A 
CHX specialist may not cancel a CHXpress order.
    (C) A CHXpress order to buy will be executed immediately against 
same or better-priced sell order(s) represented in the CHX specialist's 
book (or against the specialist), and a CHXpress order to sell will be 
executed immediately against same or better-priced buy order(s) 
represented in the CHX specialist's book (or against the specialist), 
unless:
    i. the execution would trade through another ITS market; or
    ii. trading in the subject issue has been halted.
    If the execution of an inbound CHXpress order would cause an 
improper trade-through of another ITS market, the CHXpress order will 
be automatically cancelled.
    (D) If a CHXpress order cannot be immediately executed, it will be 
placed in the specialist's book for display or later execution, in 
accordance with CHX rules. A CHXpress order will be instantaneously 
displayed, when it constitutes the best bid or offer in the CHX book. A 
CHXpress order, however, will not be displayed, if its display would 
improperly lock or cross another ITS market. If the display of an 
inbound CHXpress order would improperly lock or cross another ITS 
market, the CHXpress order will be automatically cancelled.
    (E) CHXpress orders will not be eligible for SuperMAX automated 
price improvement, which is governed by Article XX, Rule 37(d).
    (F) CHXpress orders will not be eligible for execution based on 
quotes in the national market system or activity in the primary market, 
as otherwise provided in Article XX, Rule 37(a)(2) and (3). As a 
result, an order eligible for execution based on quotes or trading 
activity in other markets may be filled even though a CHXpress order 
having a higher priority in the book is not filled.
    (G) CHX specialists must integrate their handling of CHXpress 
orders with any manual executions that occur at the post by honoring 
manual trades that have been agreed upon, but not have yet been entered 
into the Exchange's systems.
* * * * *
    (d) SuperMAX 2000
    SuperMAX 2000 shall be a voluntary automatic execution program 
within the MAX System. Subject to section (b)(11) of this Rule 37, 
SuperMAX 2000 shall be available for any security trading on the 
Exchange in decimal price increments. A specialist may choose to enable 
this voluntary program within the MAX System on an issue-by-issue 
basis.
* * * * *

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 Exchange included statements 
concerning the purpose of and basis for the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange 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 Exchange proposes to implement a new automated functionality 
called CHXpress for certain orders. The Exchange represents that the 
CHXpress functionality, built into the Exchange's MAX[reg] system, is 
designed to provide additional opportunities for the Exchange's members 
and their customers to seek and receive liquidity through automated 
executions of orders at the Exchange.\5\
---------------------------------------------------------------------------

    \5\ The MAX system provides automated display and execution for 
orders sent to the Exchange's specialists for execution.
---------------------------------------------------------------------------

    Eligible orders. Under the proposed rules, only unconditional, 
round-lot limit orders could be designated as CHXpress orders.\6\ 
CHXpress orders could be submitted in an issue only after an order has 
been executed on the primary market in that issue and would be 
automatically cancelled at the end of each trading day, if they remain 
unexecuted.\7\
---------------------------------------------------------------------------

    \6\ See CHX Article XX, Rule 37(b), proposed section 11(A).
    \7\ Id. See also CHX Article XX, Rule 37(b), proposed section 
11(B).
---------------------------------------------------------------------------

    Execution of CHXpress orders. CHXpress orders could be routed into 
the MAX system by the Exchange's order-sending firms or by CHX floor 
brokers. All orders would be required to be specifically designated as 
CHXpress orders to ensure appropriate handling in the Exchange's 
automated systems.\8\
---------------------------------------------------------------------------

    \8\ See proposed addition to CHX Article XX, Rule 37(b)(8).
---------------------------------------------------------------------------

    CHXpress orders would be executed immediately and automatically 
against same or better-priced orders in the specialist's book, or 
against the specialist, unless those executions would trade through 
another Intermarket Trading System (``ITS'') market or unless trading 
in the issue has been halted.\9\ If a CHXpress order could not be 
immediately executed, it would be placed in the specialist's book for 
instantaneous display or later execution.\10\ CHXpress orders, like all 
other orders at the Exchange, would not be eligible for automated 
display if that display would improperly lock or cross another ITS 
market.\11\ CHX specialists would be required to integrate their 
handling of these orders with any executions that occur at the post 
with floor brokers or market makers.\12\
---------------------------------------------------------------------------

    \9\ If the execution of a CHXpress order would cause an improper 
trade-through of another ITS market, the CHXpress order would be 
automatically cancelled. See CHX Article XX, Rule 37(b), proposed 
section (11)(C). The Exchange would handle trading halts in CHXpress 
orders just as it does for all other types of orders in securities 
traded on the Exchange.
    \10\ A CHXpress order would be instantaneously and automatically 
displayed when it constitutes the best bid or offer in the CHX book. 
See CHX Article XX, Rule 37(b), proposed section 11(D).
    \11\ The Exchange's MAX system does not permit the automatic 
display of any order greater than 100 shares where that order would 
lock or cross another ITS market.
    \12\ For example, if the specialist is in the process of 
manually executing a floor broker order at the displayed bid, but a 
CHXpress order automatically executes against that bid--before the 
specialist is able to complete the transaction with the floor broker 
order--the specialist would still be required to honor the trade 
with the floor broker order at the displayed bid price, even if that 
displayed interest is no longer available.
---------------------------------------------------------------------------

    Execution guarantees provided to CHXpress orders. Under the 
proposed rules, CHXpress orders primarily are designed to match against 
orders in the specialist's book.\13\ As a result, CHX specialists would 
not provide CHXpress orders with the execution guarantees that might 
otherwise be available to agency limit orders.\14\ Specifically, these 
orders would not be eligible for automated price improvement, or 
execution based on quotes in the

[[Page 21593]]

national market system or prints in the primary market for a 
security.\15\ CHX specialists also would not act as agent for the 
orders in other markets. The Exchange believes that CHXpress orders 
would be used by order-senders that want either immediate executions 
against available interest or instantaneous order display, but do not 
want their orders to be placed on hold while a specialist seeks 
liquidity in other markets nor require that a specialist provide order 
execution guarantees of the type otherwise available to agency orders.
---------------------------------------------------------------------------

    \13\ A specialist could participate in filling a CHXpress order, 
but could not do so if that execution would cause the specialist to 
trade ahead of any other order in the book.
    \14\ See CHX Article XX, Rule 37(b), proposed sections 11(E) and 
(F).
    \15\ Under the Exchange's existing rules, a specialist can 
engage an automated functionality in the MAX system to provide price 
improvement to eligible agency orders and can use automated 
functionalities to provide agency orders with protection against 
trades in the primary market for both listed and Nasdaq/NM 
securities. See CHX Article XX, Rule 37(d) (describing the SuperMAX 
price improvement functionality) and Rule 37(a)(3) (setting out the 
limit order protections otherwise guaranteed to limit orders, such 
as protections against primary market trades at or through a limit 
order's price).
---------------------------------------------------------------------------

    The Exchange has designed the CHXpress functionality to permit 
specifically-designated orders to immediately access available 
liquidity at the Exchange. The Exchange believes that this 
functionality would provide an important new way for eligible orders to 
interact within the Exchange's systems and that it would protect 
investors and the public interest by providing fair, automatic 
execution of those orders.
2. Statutory Basis
    The Exchange believes that the proposed rule change, as amended, is 
consistent with section 6(b) of the Act \16\ in general, and furthers 
the objectives of section 6(b)(5) of the Act \17\ in particular, 
because it is designed to promote just and equitable principles of 
trade, 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.
---------------------------------------------------------------------------

    \16\ 15 U.S.C. 78(f)(b).
    \17\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change, as 
amended, will impose any burden on competition that is 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

    The Exchange has neither solicited nor received written comments on 
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 Exchange 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. Comments may be submitted by any of 
the following methods:

Electronic comments:

     Use the Commission's Internet comment form 
(http://www.sec.gov/rules/sro.shtml); or
     Send an E-mail to [email protected]. Please 
include File Number SR-CHX-2004-12 on the subject line.

Paper comments:
     Send paper comments in triplicate to Jonathan G. 
Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, 
NW., Washington, DC 20549-0609.
    All submissions should refer to File Number SR-CHX-2004-12. 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, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). 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 Section, 450 Fifth 
Street, NW., Washington, DC 20549. Copies of such filing also will be 
available for inspection and copying at the principal office of the 
CHX. All comments received will be posted without change; the 
Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-CHX-
2004-12 and should be submitted on or before May 12, 2004.
---------------------------------------------------------------------------

    \18\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\18\
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-9004 Filed 4-20-04; 8:45 am]
BILLING CODE 8001-01-P