[Federal Register Volume 69, Number 100 (Monday, May 24, 2004)]
[Notices]
[Pages 29592-29597]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-11653]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49721; File No. SR-CHX-2004-10]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 Thereto by the Chicago Stock Exchange, Inc. 
Relating to Co-Specialist Assignments and Evaluations

May 18, 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 February 3, 2004 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 CHX. On 
May 12, 2004, the Commission received Amendment No. 1 to the proposed 
rule change.\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 Ellen J. Neely, Senior Vice President and 
General Counsel, CHX, to Nancy J. Sanow, Assistant Director, 
Division of Market Regulation (``Division''), Commission, dated May 
11, 2004 (``Amendment No. 1''). Amendment No. 1 superseded and 
replaced the original rule filing in its entirety.
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    CHX proposes to amend Interpretations .01 and .02 to Article

[[Page 29593]]

XXX, Rule 1 of the CHX Rules and to add a new Interpretation .04. These 
new and revised provisions would govern the assignment of securities to 
co-specialists and the evaluation of co-specialist trading activity. 
The text of the proposed rule change is set forth below. New text is 
italicized. Deletions are in brackets. In addition, the Exchange 
proposes changes to its floor member questionnaire. A copy of the 
proposed new questionnaire is available from the Office of the 
Secretary of the Commission or the CHX.
* * * * *
Chicago Stock Exchange Rules
ARTICLE XXX
Specialists
    Rule 1. No change to text.
* * * Interpretations and Policies
.01 [Committee on Specialist Assignment & Evaluation]

Committee on Specialist Assignment and Evaluation

Assignment Function
I. Events Leading to Assignment Proceedings
    1-6. No change to text.
    7. Unsatisfactory Performance Action.
    (a) The Committee shall periodically evaluate the performance of 
co-specialists as described in Interpretation and Policy .04. As part 
of that process, the Committee may, from time to time, take steps to 
encourage a unit to reallocate books in the case of unsatisfactory 
performance by a co-specialist.
    For example, based on the informal hearing with a co-specialist 
described in Article XVII, Rule 2, the Committee may believe that the 
co-specialist cannot bring his performance up to the required level 
within a reasonable period of time. The Committee may then encourage 
the specialist to reassign the issues to a stronger co-specialist. 
Because the Committee does not want any disincentive for the specialist 
unit to assign issues to the strongest possible co-specialist, it will 
permit reallocation without posting in such circumstances prior to a 
final determination by the Committee to reassign an issue. Any such 
intrafirm transfer should be to an obviously stronger co-specialist.
    (b[a]) When a co-specialist or specialist has [low evaluation 
ratings] unsatisfactory performance, the Committee may also proceed 
according to Article XVII[, of Rule 2] of the Rules of the Exchange to 
re-assign one or more issues traded by that co-specialist by suspending 
his registration in the securities or by terminating his registration 
in the securities. The Committee may also require a specialist to 
reassign the issue to a satisfactory performer.
    A co-specialist's or specialist's registration, in one or more of 
the securities in which he or it is registered, may be suspended or 
terminated by the Committee on Specialist Assignment and Evaluation 
upon a determination that the co-specialist has not satisfactorily 
performed his responsibilities as co-specialist. A determination by the 
Committee on Specialist Assignment and Evaluation to suspend or 
terminate a co-specialist's or specialist's registration may be based 
on (a) any statistical data on the co-specialist's activities or 
performance as co-specialist, including data identifying a co-
specialist's violations of Federal law and/or Exchange rules and 
policies and data that reveals the quality of the co-specialist's order 
executions; and (b) any action previously taken against the co-
specialist for unsatisfactory performance and shall be made in 
accordance with rules of the Exchange establishing fair procedures, 
such as those set out in Article XVII of the Exchange's Rules. Once the 
Committee has made a formal determination that the performance of a co-
specialist is unsatisfactory and that the books should be reassigned, 
the books will be posted without an opportunity for an intra-unit 
transfer.[Only co-specialists will be periodically evaluated since only 
co-specialists actually trade the book. Relief specialists only trade 
the book in the absence or inability of the co-specialists to do so. 
Specialists have the financial responsibility for the book and for any 
actions, errors or omissions of the co-specialists, or relief 
specialists for the particular book.]
    [(b) From time to time, the Committee may take steps to encourage a 
unit to reallocate books in the case of unsatisfactory performance by a 
co-specialist.]
    [(i) For example, based on an informal hearing with a co-
specialist, the Committee may believe that the co-specialist can bring 
his performance up to the required level within a reasonable period of 
time. The Committee may then encourage the specialist to reassign the 
issues to a stronger co-specialist. Because the Committee does not want 
any disincentive for the specialist unit to assign issues to the 
strongest possible co-specialist, it will permit reallocation without 
posting in such circumstances prior to a final determination by the 
Committee to reassign an issue. Any such intrafirm transfer should be 
to an obviously stronger co-specialist.]
    [(ii) In the case of continued unsatisfactory performance by a co-
specialist, the Committee may require the specialist to reassign the 
issue to a satisfactory performer.]
    [(iii) Once the Committee has made a formal determination that the 
performance of a co-specialist is unsatisfactory and that the books 
should be reassigned, the books will be posted without an opportunity 
for an intra-unit transfer.]
    8. No change to text.
II. Assignment Procedures
    2. Decision Making. The Committee will hold assignment meetings as 
appropriate, consistent with the schedules of the Committee members. In 
advance of each meeting, members of the Committee will be provided by 
the Exchange with data on the securities to be assigned, copies of the 
applications, and the most recent performance evaluation ratings and 
other data on the applicants and the relevant co-specialist. Applicants 
will receive, a reasonable time prior to the meeting, copies of the 
data relating to their own performance that is shared with the 
Committee and may make personal appearances at the assignment meetings 
in support of their applications. These appearances will begin at 3:30, 
if the applicants request this meeting time to accommodate floor 
members' schedules. Before all personal appearances, a closed meeting 
of the Committee will be held to review all data provided to the 
Committee by the Exchange.
    In the absence of applications which the Committee considers 
acceptable, the Committee may assign a new security to any unit which 
it believes to be qualified. If there are no acceptable applications 
for a security that is up for reassignment, the Committee may leave the 
stock with the incumbent specialist unit or reassign it to a new unit 
which it believes to be qualified.
    3.-5. No change to text.
III. Guidelines for Assignment of Issues to Co-Specialists
    1. Basic Standard. In reviewing an application to act as the 
specialist in a security, the Committee will, in addition to evaluating 
the qualifications of the specialist unit, consider the designated co-
specialist's demonstrated ability, experience and financial 
responsibility in accordance with Article XXX, Rule 1 of the Rules.
    The Committee will determine the respective weights to be given to 
each of these three factors in arriving at a decision as to whether to 
approve or disapprove any particular application. In deciding among 
applicants who have

[[Page 29594]]

designated co-specialists with approximately comparable demonstrated 
ability and experience, the Committee may consider additional factors, 
including the number and type of stocks in which each designated co-
specialist is already registered as co-specialist, recent registration 
decisions and the overall best interest of the Exchange.
    (a) Demonstrated ability. In evaluating demonstrated ability, the 
Committee will rely primarily on:
    1. The results of the co-specialist evaluation questionnaire, 
including individual comments from responding floor brokers;
    2. Other statistical data on the designated individual's activities 
or performance as a co-specialist, including [surveillance] data 
identifying a co-specialist's violations of Federal law and/or Exchange 
rules and policies and data that reveals the quality of the co-
specialist's order executions;
    3. Any action previously taken against the designated individual 
for unsatisfactory performance of his obligations as a co-specialist; 
and
    4. Any other information submitted to the Committee, by the 
applicant or by any other person or entity, which bears on the 
designated individual's ability to carry out the responsibilities of a 
co-specialist.
    Of these sources of information, the Committee will give 
substantial weight to the data that reveals the quality of the co-
specialist's order executions [co-specialist evaluation questionnaire 
and may give varying weights to individual questions in the 
questionnaire]. All information will be evaluated in terms of the 
standards in the co-specialist job description and the Code of 
Acceptable Business Practices for co-specialists, with particular 
emphasis on (i) the co-specialist's demonstrated ability to make 
continuous two-sided markets in depth, and (ii) the co-specialist's 
demonstrated ability to trade in such a manner as to increase the order 
flow to the Exchange and, hence, the competitiveness of its market with 
markets elsewhere.
    (b) No change to text.
    (c) No change to text.
.02 Co-Specialist Job Description

I. General

[I. General]
    An Exchange member who is registered as a co-specialist is 
accountable to the Exchange and the investing public for the quality of 
the Exchange markets in the securities in which he is registered and is 
responsible for fostering and acting to maintain liquid and continuous 
two-sided auction markets on the Exchange Floor in those securities. 
This is accomplished by his acting as agent and principal in such 
securities, in accordance with the provisions of Federal law and 
Exchange rules and policies, to help ensure that such markets are fair, 
orderly and operationally efficient in the public interest, and 
competitive with non-Exchange markets in those securities. A ``fair'' 
market is one which is free from manipulative and deceptive practices 
and which affords no undue advantage to any of the participants 
therein. An ``orderly'' market is one with regularity and reliability 
of operation manifested by the presence of price continuity and depth 
exhibited by the avoidance of large and unreasonable price variations 
between consecutive sales on the consolidated tape for Dual Trading 
System issues, on the Exchange tape for exchange issues and on the 
NASDAQ System for Nasdaq/NM Securities and the avoidance of overall 
price movements, without appropriate accompanying volume.
    [A co-specialist's continuing registration in the securities in 
which he is registered is dependent upon his satisfactory performance 
of his responsibilities as a co-specialist as defined in Federal and 
Exchange rules, interpretations, releases and notices, this job 
description, the Code of Acceptable Business Practices for co-
specialists and the rules and practices for trading on the Exchange. A 
co-specialist's registration, in one or more of the securities in which 
he is registered, may be suspended or terminated by the Committee on 
Specialist Assignment and Evaluation upon a determination that he has 
not satisfactorily performed his responsibilities as co-specialist. A 
determination by the Committee on Specialist Assignment and Evaluation 
to suspend or terminate a co-specialist's registration may be based on 
answers by floor members to questionnaires sent out by the Committee 
and shall be made in accordance with rules of the Exchange establishing 
fair procedures.]

II. Principal Duties

[II. Principal Duties]

III. Eligibility Requirements

[III. Eligibility Requirements]
.03 Code of Acceptable Business Practices for Co-Specialists
    No change to text.

.04 Co-Specialist Performance Evaluation

    A co-specialist's continuing registration in the securities in 
which he is registered is dependent upon his satisfactory performance 
of his responsibilities as a co-specialist as defined in Federal and 
Exchange rules, interpretations, releases and notices, the Co-
Specialist Job Description, the Code of Acceptable Business Practices 
for co-specialists and the rules and practices for trading on the 
Exchange. 
    The Committee on Specialist Assignment and Evaluation shall 
periodically evaluate the performance of co-specialists. The Committee 
may choose, in its discretion, to evaluate the performance of relief or 
temporary specialists.

I. Performance Leading to Automatic Meeting With Committee

    The Committee shall review data, compiled on an issue-by-issue 
basis, which identifies the co-specialists who have had low order 
execution quality scores in two consecutive evaluation periods when 
compared to other co-specialists. For purposes of this provision, an 
``evaluation period'' is a period of three months. The term ``order 
execution quality score'' means the cumulative score, in a particular 
issue, of two equally-weighted factors derived from data compiled 
pursuant to SEC Rule 11Ac1-5: (a) effective spread index, and (b) speed 
of execution. The term ``bottom tier'' shall mean the bottom 5% of all 
stocks traded by co-specialists, when ranked using the order execution 
quality score. 
    If a co-specialist's order execution quality score for any security 
is in the bottom tier, for two consecutive periods, of the ranking 
reviewed by the Committee, the co-specialist shall be notified of that 
fact and shall be required to have an initial meeting with one or more 
members of the Committee, as described in Article XVII, Rule 2. These 
meetings shall take place as soon as reasonably possible after the end 
of each applicable evaluation period. Based on the results of that 
meeting, the Committee may take a variety of informal actions designed 
to provide encouragement and assistance to the co-specialist, 
including, but not limited to, encouraging the specialist firm to 
reallocate part of the co-specialist's book. Nothing in this rule would 
permit the Committee, however, to suspend the co-specialist's 
registration or reallocate a security in which the co-specialist is 
registered without the use of the procedures described in Article XVII. 


[[Page 29595]]

II. Other Performance Measures Leading to Possible Meeting With 
Committee

    The Committee shall have the ability to review any other data 
relevant to a co-specialist's performance such as (a) any statistical 
data on the co-specialist's activities or performance as co-specialist 
(including data identifying a co-specialist's violations of Federal law 
and/or Exchange rules and policies and other data that reveals the 
quality of the co-specialist's order executions); and (b) any action 
previously taken against the co-specialist for unsatisfactory 
performance. The Committee may determine, based on any or all of these 
performance measures, that a co-specialist's performance warrants the 
initial meeting described in Article XVII, Rule 2 and may take, as a 
result of that meeting, any of the actions described above. 
* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, CHX included statements 
concerning the purpose of, and basis for, the proposed rule change, as 
amended, and discussed any comments it received on the proposal. The 
text of these statements may be examined at the places specified in 
Item IV below. 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
    Under the Exchange's rules, the Committee on Specialist Assignment 
and Evaluation (``CSAE'') is charged with the responsibility of 
assigning new securities to co-specialists and evaluating the work of 
those co-specialists after the securities are assigned. Article XXX, 
Rule 1, Interpretation .01 describes the assignment process followed by 
the CSAE and identifies the factors that the CSAE should consider in 
making its assignment decisions. This interpretation also describes the 
situations where the CSAE may re-assign a security due to the 
unsatisfactory performance of a co-specialist or specialist. 
Interpretation .02 to the same rule contains the co-specialist job 
description and a code of acceptable business practices for co-
specialists. This submission seeks to make changes to both of those 
provisions and to add a new section, Interpretation .04, to set out a 
specific co-specialist performance evaluation process. In addition, the 
Exchange proposes to revise its floor member questionnaire.
    Assignment decisions. When reviewing a member firm's application to 
act as the specialist in a security, the CSAE evaluates the 
qualifications of both the specialist unit as a whole and the 
individual co-specialist who is designated to trade the security. In 
reviewing a co-specialist's qualifications, existing CHX rules permit 
the CSAE to consider specific factors relating to the co-specialist's 
demonstrated ability, experience and financial responsibility.\4\ The 
CHX rules also permit the CSAE to consider additional factors, such as 
the number and type of stocks in which the co-specialist is already 
registered and the overall best interest of the Exchange.
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    \4\ For example, when evaluating a co-specialist's demonstrated 
ability, the CHX rules require the CSAE to rely primarily on the 
results of the co-specialist evaluation questionnaire, other 
statistical data relating to the co-specialist's performance, any 
action previously taken against the co-specialist for unsatisfactory 
performance as a co-specialist, and any other information submitted 
by the applicant which bears on the person's ability to perform his 
co-specialist obligations. See CHX Article XXX, Rule 1, 
Interpretation and Policy .01 (III)(1)(a).
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    This submission seeks to clarify the factors used by the CSAE in 
determining a co-specialist's demonstrated ability. Specifically, under 
this proposal the Exchange would (1) specifically confirm that the CSAE 
will review execution quality data during the assignment process; and 
(2) require that the CSAE give substantial weight to this execution 
quality data (instead of the results of the co-specialist evaluation 
questionnaire) when making its assignment decisions. These changes are 
designed to recognize the Exchange's view that the quality of the order 
executions given by a co-specialist should be one of the primary 
factors used by the CSAE in determining whether an individual should be 
designated as a co-specialist in a new security.\5\
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    \5\ Four minor changes to CHX Article XXX, Rule 1, 
Interpretation and Policy .01(II) and (III), are designed (1) to 
confirm that CSAE assignment meetings will take place after the 
close of trading only if requested by an applicant for a security; 
(2) to make clear that the CSAE will consider information submitted 
by any person, not just by the applicant, that bears on an 
individual's ability to carry out the responsibilities of a co-
specialist; (3) to confirm that, prior to an assignment meeting, the 
Exchange will provide each co-specialist with copies of data that is 
being shared with the CSAE about that co-specialist; and (4) to 
replace a somewhat ambiguous reference to ``surveillance data'' with 
text confirming that the CSAE is given data ``identifying a co-
specialist's violations of Federal law and/or Exchange rules and 
policies.'' This last change is not designed to change the 
information currently provided to the CSAE--the CSAE now receives 
data about rule violations that have resulted in fines under the 
Exchange's Minor Rule Violation Plan or in sanctions issued as a 
result of formal disciplinary proceedings--but merely to more 
accurately describe the information that is provided.
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    Co-specialist evaluations. In addition to the proposed changes to 
the CHX rules governing the CSAE's assignment of securities, this 
submission seeks to set out a new co-specialist performance evaluation 
process and to change the CHX rules governing the CSAE's decisions to 
remove a security from a particular co-specialist.
    a. In proposed Interpretation .04 (``Co-Specialist Performance 
Evaluation''), the Exchange describes a new process through which the 
CSAE would evaluate co-specialist performance against objective 
performance measures that employ a system of relative rankings. 
Specifically, the proposal would require the CSAE, or a subgroup of the 
CSAE, to hold a special performance meeting with the co-specialists 
who, on an issue-by-issue basis, rank (for two consecutive evaluation 
periods) in the bottom 5% of a special order execution quality score. 
The order execution quality score would be composed of two equally-
weighted factors derived from data reported under SEC Rule 11Ac1-5: (1) 
Effective spread; and (2) speed of execution.\6\ Although

[[Page 29596]]

the CSAE intends to begin this new evaluation process by ranking co-
specialists in all of the securities assigned for specialist trading, 
the CSAE may later choose to review co-specialist order execution 
quality scores as part of a ranking of the scores in smaller subgroups 
of securities traded by co-specialists.\7\ Finally, this section of the 
proposal provides that the Committee may choose to use additional 
measures for evaluating specialist performance.\8\
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    \6\ The calculated score includes factors that compare an 
Exchange specialist's performance to the performance of the person 
or persons making markets in a designated market used as the 
competitive benchmark for the security. For example, in calculating 
the number of points for a co-specialist with respect to the 
effective spread in a particular stock, the Exchange would: (1) 
Calculate a share-weighted effective spread for the co-specialist, 
in each of the four Rule 11Ac1-5 order size levels, for both market 
and marketable limit orders, by multiplying the effective spread 
taken from each month's Rule 11Ac1-5 data by the number of shares 
traded on the Exchange, accumulating three months of data (because 
the evaluation period is three months long) and then dividing the 
share-weighted shares by the total number of shares traded on the 
Exchange; (2) Calculate a share-weighted effective spread for the 
appropriate competitive benchmark, using the same technique; (3) 
Determine the percentage difference between the CHX co-specialist 
and the competitive benchmark and convert the result into whole 
numbers; and (4) Add the points for each order size level to 
determine the overall point score for the effective spread in the 
security.
    Similarly, in determining the points associated with speed of 
execution, the Exchange would (1) Calculate a share-weighted speed 
of execution for the CHX co-specialist in each of the Rule 11Ac1-5 
order size levels, within each of the NBBO buckets (at the NBBO, 
inside the NBBO and outside the NBBO) by multiplying the number of 
executed shares in each bucket by the execution times set out in the 
Rule 11Ac1-5 data and then dividing that number by the total number 
of shares that were executed on the Exchange; (2) Calculate a share-
weighted speed of execution for the competitive benchmark, using the 
same technique; (3) Determine the percentage difference between the 
CHX co-specialist and the competitive benchmark and convert the 
result into whole numbers; and (4) Add the points for each order 
size level to determine the overall point score for speed of 
execution in the security.
    To determine an overall score for a co-specialist, the Exchange 
would then add together the total effective spread points and the 
total speed of execution points.
    \7\ If the Committee chooses to rank co-specialist order 
execution quality scores within a smaller subgroup of securities, 
the Exchange understands that it must identify that subgroup by 
filing a rule change proposal with the Commission. The Exchange 
intends to submit those filings as interpretations of existing 
Exchange rules under Section 19(b)(3)(A) of the Act and SEC Rule 
19b-4(f)(1). Similarly, if the Exchange intends to use other order 
execution quality statistics in its performance review process, it 
will make additional submissions to the Commission to identify the 
data that it intends to use and the objective performance measures 
that relate to it.
    \8\ Importantly, the proposal is integrated with the procedures 
that already exist for handling unsatisfactory performance by co-
specialists. Under Article XVII of the Exchange's Rules, the CSAE 
may remove a co-specialist's registration in a particular security 
after (a) holding an initial, informal meeting with the member; and, 
if performance does not improve, (b) convening a more formal hearing 
to determine whether it is appropriate to take one or more 
securities away. The new performance evaluation process causes the 
CSAE to hold the first of these meetings with co-specialists who 
rank in the bottom 5% of the special order execution quality score 
for two consecutive evaluation periods. The Exchange will not use 
order execution quality statistics other than those described in 
this filing in its performance evaluation process without submitting 
the rule change proposal under Section 19(b) of the Act. Telephone 
conversation between Ellen J. Neely, Senior Vice President and 
General Counsel, CHX, and Leah Mesfin, Attorney, Division, 
Commission, on May 17, 2004.
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    b. Under the Exchange's existing rules, the CSAE may suspend or 
terminate a co-specialist's registration in a security based on the 
answers given by floor members to the co-specialist evaluation 
questionnaire.\9\ This proposal would modify those rules to explicitly 
state that the CSAE may suspend or terminate a co-specialist's 
registration in an issue using factors almost identical to those used 
in making the initial decision to assign the security to the co-
specialist, but not on the responses to the floor broker 
questionnaire.\10\ Specifically, this proposal would allow a CSAE 
removal or suspension decision to be based on statistical data (such as 
order execution quality information, including the special order 
execution quality score described above, and data regarding a co-
specialist's disciplinary history) and on actions previously taken 
against the co-specialist for unsatisfactory performance.\11\
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    \9\ See CHX Article XXX, Rule 1, Interpretation and Policy 
.01(I)(7) and Interpretation and Policy .02(I).
    \10\ See proposed new text in CHX Article XXX, Rule 1, 
Interpretation and Policy .01(I)(7). In addition to this new 
language, the CHX has proposed moving some of the text from 
Interpretation and Policy .02(I) to this section to combine into one 
location the discussion of unsatisfactory performance actions.
    \11\ The only other assignment factor that is not contained in 
this proposed list is one that permits the CSAE to consider other 
information that bears on the co-specialist's ability to carry out 
his or her responsibilities.
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    These changes are designed to recognize the Exchange's view that 
the results of the co-specialist questionnaire are not the most 
appropriate factor that the CSAE should consider in making any decision 
to remove a security from a co-specialist. Other factors, including the 
individual's disciplinary history and the quality of the executions 
given to orders are, in many ways, better indicators of a co-
specialist's performance.
    The revised floor member questionnaire. Over the past several 
years, the Exchange has used a questionnaire that asks its floor 
members to rate the performance of CHX co-specialists in eight 
different categories.\12\ A supplement to the survey required floor 
members to identify the number of interactions that they had with a 
particular co-specialist in an average trading month. Ratings were made 
on a scale of one to five, with five being the highest rating.\13\ In 
recent evaluation periods, the vast majority of co-specialists received 
overall ratings (when the individual ratings are combined) that hovered 
around a score of three.
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    \12\ These categories seek ratings as to how well a co-
specialist (1) displays bids and offers for actively traded issues; 
(2) accepts and fills orders in thinly traded issues; (3) executes 
public limit orders on a timely basis; (4) fills retail orders when 
the order is larger than the best bid or offer; (5) deals with 
professional orders; (6) deals with the block cross situation; (7) 
provides information to brokers; and (8) resolves and adjusts 
errors.
    \13\ Within each category, the form provided additional text 
that was presumably designed to guide the floor member in choosing 
the appropriate rating. For example, in the category relating to 
resolution and adjustment of errors, this text noted that a rating 
of one means that a co-specialist ``refuses to take an error even if 
it is the specialist's fault;'' that a rating of three means that a 
specialist ``usually resolves and adjusts errors in a fair manner;'' 
and that a rating of five means that a specialist ``always resolves 
and adjusts errors in a fair manner.''
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    In recent months, the Exchange has worked to revise the 
questionnaire so that it is both more efficient for floor members to 
complete and more helpful to the CSAE. The revised questionnaire asks 
that a floor member give a single numerical rating (on a scale of one 
to three) to the overall performance of each individual co-specialist, 
evaluated against nine criteria.\14\ Floor members must also rate the 
performance of each specialist firm against the same nine criteria, 
providing one overall rating for each firm. The questionnaire requests 
that a floor member provide a written description of any reasons 
supporting a score of one, which would indicate performance that ``does 
not meet'' the criteria. By requiring the floor members to provide one 
overall score for each co-specialist or specialist firm--but while also 
receiving written explanations of the reasons for any scores of one--
the CSAE believes that it will secure the basic information that it 
needs to conduct this facet of its evaluation of co-specialists and 
specialist firms. In addition, the shortened form, which replaces the 
current eight separate ratings in distinct categories with one overall 
rating that covers nine separate performance measures, would allow the 
Exchange's floor members to provide important input on specialist 
performance while not being required to spend an excessive amount of 
time doing so.\15\
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    \14\ These new categories `` which incorporate many of the same 
concepts embodied in the original criteria `` require consideration 
of how well a co-specialist (1) displays public orders; (2) accepts 
and fills orders pursuant to minimum requirements; (3) executes 
public limit orders on a timely basis; (4) is generally helpful in 
providing depth and liquidity when necessary; (5) accepts and 
reflects bids and offers that better the existing market (i.e., 
professional orders); (6) does not inappropriately interfere with 
cross trades; (7) provides relevant information to floor brokers; 
(8) resolves and adjusts disputes in a timely and fair manner; and 
(9) adheres to all applicable rules of the Exchange. The last 
criterion `` which seeks input on a co-specialist's adherence to 
applicable Exchange rules `` was added to questionnaire to provide 
floor members with an opportunity to rate a co-specialist's 
compliance with rules other than those set out in criteria (1) 
through (8).
    \15\ The Exchange distributes these surveys twice each year, 
seeking floor member input on specialist performance. 
Representatives of floor broker firms participated in the re-design 
of the form, in large part because of their desire to ensure that 
the form does not impose unnecessary burdens on the people who are 
required to complete it, while still providing relevant performance 
information to the CSAE. The existing version of the form was viewed 
by these members as requiring too much time to complete, 
particularly when floor brokers have increased their use of 
automated means to send orders to specialists, thus decreasing the 
number of personal interactions between the two groups. The floor 
members who participated in the re-design of the form and the CSAE 
believe that the new form will provide an efficient tool for seeking 
floor member input, while not imposing unnecessary burdens.

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[[Page 29597]]

2. Statutory Basis
    The proposed rule 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).\16\ In particular, the proposed rule is consistent 
with section 6(b)(5) of the Act \17\ in that 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.
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    \16\ 15 U.S.C. 78f(b).
    \17\ 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 inappropriate burden on competition.

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.

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 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 proposed rule change, as amended, including 
whether it 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-2004-10 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-2004-10. 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 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-2004-10 
and should be submitted on or before June 14, 2004.
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    \18\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\18\
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 04-11653 Filed 5-21-04; 8:45 am]
BILLING CODE 8010-01-P