[Federal Register Volume 69, Number 102 (Wednesday, May 26, 2004)]
[Notices]
[Pages 29986-29988]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-11842]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49736; File No. SR-CHX-2003-21]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change and Amendment No. 1 and Notice of Filing and Order Granting 
Accelerated Approval to Amendment No. 2 by the Chicago Stock Exchange, 
Inc., Relating to the Price Improvement of Orders Executed 
Automatically on the Exchange

May 19, 2004.

I. Introduction

    On July 17, 2003, the Chicago Stock Exchange, Inc. (``CHX'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend CHX Article XX, Rule 37, 
to revise the rules governing the CHX's SuperMAX 2000 program. The CHX 
filed Amendment Nos. 1 and 2 to the proposal on March 30, 2004,\3\ and 
May 18, 2004,\4\ respectively.
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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, Vice President and 
Associate General Counsel, CHX, to Nancy J. Sanow, Division of 
Market Regulation (``Division''), Commission, dated March 29, 2004.
    \4\ See letter from Kathleen M. Boege, Vice President and 
Associate General Counsel, CHX, to Nancy J. Sanow, Division, 
Commission, dated May 18, 2004 (``Amendment No. 2''). Amendment No. 
2 revises the proposal to: (1) Indicate that an order must receive 
the national best bid, or better, or the national best offer, or 
better, at the time the order was received; and (2) clarify that the 
CHX is deleting CHX Article XX, Rule 37(d)(1)(d) because the CHX 
intends for CHX Article XXXI to govern the execution prices due odd-
lot orders. In addition, Amendment No. 2 states that it replaces an 
earlier version of Amendment No. 2 that the CHX filed with the 
Commission on May 12, 2004.
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    The proposed rule change and Amendment No. 1 were published for 
comment in the Federal Register on April 12, 2004.\5\ The Commission 
received no comments regarding the proposal. This order approves the 
proposed rule change, as amended. In addition, the Commission is 
publishing

[[Page 29987]]

notice to solicit comments on and is simultaneously approving, on an 
accelerated basis, Amendment No. 2.
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    \5\ See Securities Exchange Act Release No. 49530 (April 6, 
2004), 69 FR 19253.
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II. Description of the Proposal

    The CHX proposes to amend CHX Article XX, Rule 37, to revise its 
rules governing the SuperMAX 2000 program. SuperMAX 2000 is a program 
within the CHX's MAX[reg] execution system that uses a computerized 
algorithm to provide automated price improvement to orders executed 
automatically within the MAX system. SuperMAX 2000 is a voluntary price 
improvement program, and CHX specialists may elect to engage SuperMAX 
2000 on an issue-by-issue basis.\6\
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    \6\ The CHX estimates that SuperMAX 2000 is enabled for over 90% 
of the issues traded on the CHX.
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    Currently, the CHX's rules provide that in securities for which 
SuperMAX 2000 has been enabled: (1) An order for at least 100 shares 
will 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 in the security at 
the time the order is received is less than $.02; (2) an order for 100 
shares will 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 the NBB (for a sell order) if the spread in the 
security at the time the order is received is $.02 or more; and (3) an 
order for more than 100 shares will be executed at the ITS Best Offer 
or NBO, or better, (for a buy order) or the ITS Best Bid or NBB, or 
better, (for a sell order) as the specialist may designate and as is 
approved by the CHX.\7\ Thus, for orders of more than 100 shares, CHX 
specialists may establish 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 is 
received, and other objective market factors.
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    \7\ See CHX Article XX, Rule 37(d)(1).
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    The CHX proposes to revise SuperMAX 2000 to: (1) Change the name of 
the program to ``SuperMAX;'' (2) provide that any order of 100 shares 
or more will receive the ITS Best Bid or ITS Best Offer in effect at 
the time the order was received,\8\ or better, or the NBB or NBO in 
effect at the time the order was received, or better, as the specialist 
may designate and as is approved by the CHX; and (3) delete CHX Article 
XX, Rule 37(d)(1)(d), which concerns odd-lot orders for which SuperMAX 
2000 has been enabled.\9\ In lieu of CHX Article XX, Rule 37(d)(1)(d), 
CHX Article XXXI, ``Execution of Odd-Lot Orders during the Primary 
Market Trading,'' will govern the execution prices due odd-lot 
orders.\10\
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    \8\ See Amendment No. 2, supra note 4.
    \9\ Under CHX Rule XX, Article 37(d)(1)(d), an odd-lot order in 
which SuperMAX 2000 is enabled will 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 in the security at the time the order is 
received is less than $.05. If the spread is $.05 or greater, the 
odd-lot order will 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).
    \10\ See Amendment No. 2, supra note 4.
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    According to the CHX, SuperMAX 2000, which was adopted in 2000,\11\ 
combined five different price improvement programs formerly contained 
in the CHX's rules. Each of the programs was based on factors including 
order size and best bid or offer spread. Largely for marketing reasons, 
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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    \11\ 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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    The CHX believes that separate treatment of 100-share orders is no 
longer warranted and that the elimination of special treatment for 100-
share orders could reduce confusion. In addition, the CHX believes that 
it is appropriate for CHX specialists to exercise the same discretion 
with respect to 100-share orders that they currently exercise with 
respect to larger orders in determining the level of price improvement 
that they are willing to provide.\12\ Although the revised rule would 
permit CHX specialists to give 100-share orders worse execution prices 
than would be due under the current rule, the Exchange does not believe 
that the proposal would result in widespread specialist refusal to 
price improve 100-share orders.\13\ Moreover, the CHX notes that even 
if a number of CHX specialists declined to price improve 100-share 
orders, the CHX's rules would continue to obligate CHX specialists to 
execute such orders at a price no worse than the national best bid or 
offer.
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    \12\ 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.
    \13\ 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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    On May 18, 2004, the CHX filed Amendment No. 2 to the proposal. 
Amendment No. 2 modifies the proposal by: (1) Revising the text of the 
proposed rule to indicate that an order will receive the national best 
bid or offer in effect at the time the order was received, or better; 
and (2) clarifying that the CHX is deleting CHX Article XX, Rule 
37(d)(1)(d) because the Exchange intends for CHX Article XXXI to govern 
the execution prices due odd-lot orders.\14\
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    \14\ See Amendment No. 2, supra note 4.
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III. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange \15\ and, in 
particular, with the requirements of Section 6(b)(5) of the Act,\16\ 
which requires, among other things, that the rules of a national 
securities exchange be 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. As described 
more fully above, the proposal modifies the CHX's SuperMAX rules to 
eliminate the requirement that 100-share orders receive price 
improvement of at least $.01 when the national best bid or offer spread 
at the time the order is received is at least $.02. Under the revised 
SuperMAX rules, 100-share orders will receive the same treatment 
provided currently for orders of more than 100 shares. Thus, both 100-
share orders and orders of more than 100 shares will receive the 
national best bid or offer in effect at the time the order was 
received, or a better price, as determined by the specialist and 
approved by the CHX. In addition, the proposal will delete the current 
SuperMAX provisions concerning odd-lot orders and make clear that CHX 
Rule XXXI will govern the execution prices due odd-lot orders.
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    \15\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \16\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that the proposal should provide CHX 
specialists with greater flexibility in determining the level of price 
improvement that they will provide for 100-share orders, as well as for 
orders of more than 100 shares. Although 100-share orders in securities 
for which SuperMAX has been enabled no longer will receive minimum 
price improvement of at least $.01 when the national best bid or offer 
spread at the time the order is received is at least $.02, as provided 
under the current rule, the CHX's rules will continue to require the 
CHX's specialists to execute 100-

[[Page 29988]]

share orders at a price no worse than the national best bid or offer in 
effect at the time the order was received. In addition, CHX specialists 
may continue to offer price improvement for 100-share orders.
    Notwithstanding the foregoing, the Commission cautions that the 
duty of best execution requires a broker-dealer to seek the most 
favorable terms reasonably available under the circumstances for a 
customer's transaction.\17\ A broker-dealer's duty of best execution is 
not necessarily satisfied by routing orders to a market center that 
merely guarantees an execution at the national best bid or offer.\18\ 
Various markets and market makers may provide opportunities for 
executions at prices superior to the national best bid and offer. The 
Commission believes that broker-dealers deciding where to route or 
execute small customer orders must carefully evaluate the extent to 
which this order flow would be afforded better terms if executed in a 
market or with a market maker offering price improvement opportunities. 
In conducting the requisite evaluation of its internal order handling 
procedures, a broker-dealer must regularly and rigorously examine 
execution quality likely to be obtained from the different markets or 
market makers trading a security.\19\
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    \17\ See, e.g., Securities Exchange Act Release Nos. 37619A 
(September 6, 1996), 61 FR 48290 (September 12, 1996) (adopting 
Exchange Act Rule 11Ac1-4 and amending Exchange Act Rule 11Ac1-1) 
(``Order Handling Rules Release'') at Section III.C.2.
    \18\ See, e.g., Order Handling Rules Release at III.C.2. and 
Securities Exchange Act Release No. 42450 (February 23, 2000), 65 FR 
10577 (February 28, 2000) (notice of filing of SR-NYSE-99-48 and 
Commission request for comment on issues relating to market 
fragmentation) at Section IV.A.3.c.
    \19\ See Order Handling Rule Release, supra note 17 at Section 
III.C.2.
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    With respect to odd-lots, because the CHX intends for CHX Article 
XXXI to govern the execution of odd-lot orders,\20\ the Commission 
believes that deleting CHX Rule Article XX, Rule 37(d)(1)(d), will 
clarify the CHX's rules and eliminate potential confusion concerning 
the execution prices due to odd-lot orders.
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    \20\ See Amendment No. 2, supra note 4.
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    The Commission finds good cause for approving Amendment No. 2 prior 
to the thirtieth day after the date of publication of notice of filing 
thereof in the Federal Register. Amendment No. 2 clarifies the proposal 
by indicating that an order must receive the national best bid or offer 
in effect at the time the order was received, and by stating that the 
CHX intends for CHX Article XXXI to govern the execution prices due 
odd-lot orders. Accordingly, the Commission finds that it is consistent 
with Sections 6(b)(5) and 19(b) of the Act to approve Amendment No. 2 
on an accelerated basis.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 2, including whether Amendment No. 2 
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-2003-21 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-2003-21. 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-
2003-21 and should be submitted on or before June 16, 2004.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\21\ that the proposed rule change (SR-CHX-2003-21), as amended , 
is approved.
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    \21\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\22\
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    \22\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-11842 Filed 5-25-04; 8:45 am]
BILLING CODE 8010-01-P