[Federal Register Volume 69, Number 134 (Wednesday, July 14, 2004)]
[Notices]
[Pages 42231-42233]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-15876]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49978; File No. SR-CHX-2004-14]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Stock Exchange, Incorporated Relating to the 
Handling of Preopening Orders in Nasdaq/NM Securities

July 7, 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 May 19, 2004, 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. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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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, regarding the 
execution of preopening orders in Nasdaq/NM securities. The text of the 
proposed rule change is below. Proposed new language is in italics; 
proposed deletions are in brackets.

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] 
Nasdaq/NM Securities. System orders shall be executed pursuant to the 
following requirements:
    (1) No change to text.
    (2) No change to text.
    (3) No change to text.
    (4) Preopenings. Preopening orders in Dual Trading System issues 
must be accepted and filled at the primary market opening trading 
price. In trading halt situations occurring in the primary market, 
orders will be executed based upon the reopening price. Preopening 
orders in [NASDAQ/NM] Nasdaq/NM securities must be accepted and filled 
on a single price opening at or better than the NBBO at the first 
unlocked, uncrossed market that occurs on or after 8:30 a.m., to the 
extent that those orders can be matched at a single price. The 
specialist will be responsible for executing any imbalance of shares in 
Nasdaq/NM securities left after the offset process, in accordance with 
Exchange rules that govern the handling of orders during the Primary 
Trading Session. In trading halt situations,

[[Page 42232]]

orders will be executed based on the Exchange reopening price. For 
purposes of this rule, (a) preopening orders in Dual Trading System 
Issues are orders that are received before a primary market opens a 
subject security based on a print or based on a quote and (b) 
preopening orders in [NASDAQ/NM] Nasdaq/NM securities are orders 
received [at or ]prior to the opening of the Exchange market [8:20 a.m. 
(Central Time)] on the date of the opening.
* * * * *
    (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:
    (1) No change to text.
    (2) No change to text.
    (3) No change to text.
    (4) No change to text.
    (5) Pre[-O]opening Orders. [Pre-Opening] Preopening orders [that 
are less than or equal to the auto-acceptance threshold] will 
automatically be offset by the MAX System at a single price at or 
better than the NBBO at the first unlocked, uncrossed market that 
occurs on or after 8:30 a.m., to the full extent that those orders can 
be matched at a single price. The [S]specialist will be responsible for 
executing [only be required to take a position when there is] any 
imbalance of shares left after the offset process, in accordance with 
Exchange rules that govern the handling of orders during the Primary 
Trading Session. [Pre-Opening orders will be filled at the price 
specified in the BEST Rule for Pre-Opening orders.]
* * * * *

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 its proposal 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 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
    Under the Exchange's current rule, a CHX specialist must accept and 
execute all preopening orders in Nasdaq/NM securities on a single price 
opening at or better than the national best bid and offer (``NBBO'') at 
the first unlocked, uncrossed market.\3\ A preopening order, for 
purposes of the rule, is an order received at or before 8:20 a.m. 
(Central Time) on the date of the opening. Under the current rule, the 
specialist is required to take a position when there is an imbalance of 
shares left after eligible orders are offset.\4\ Orders received after 
8:20 a.m. and before 8:30 a.m. (Central Time) are not guaranteed a fill 
at any particular price.
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    \3\ See CHX Article XX, Rule 37(a)(4). The NBBO is the price 
associated with the best bid and best offer disseminated pursuant to 
Rule 11Ac1-1 under the Act.
    \4\ See CHX Article XX, Rule 37(b)(5).
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    The Exchange proposes to change the operation of this rule to 
remove the distinction in the treatment of orders received at or before 
8:20 a.m. and those received after 8:20 a.m. (Central Time) until the 
opening of trading. Under the proposed rule change, all orders received 
before the opening would be treated in the same manner. Specifically, 
under this proposal, an Exchange specialist would match, to the extent 
possible, all orders received before the Exchange's opening at a single 
price that is at or between the NBBO at the first unlocked, uncrossed 
market that occurs on or after 8:30 a.m. (Central Time).\5\ The 
specialist would be responsible for executing any imbalance in shares 
left after the offset process, in accordance with Exchange rules that 
govern the handling of orders during the regular trading session.\6\ As 
a result, the specialist no longer would guarantee that orders received 
before 8:20 a.m. (Central Time) would receive a fill--orders that could 
be matched, would be matched--any order imbalance would remain for 
handling by the specialist.\7\ The Exchange believes that this proposed 
rule change is appropriate because it simplifies the procedures for the 
handling and execution of preopening orders. It also allows a 
specialist to better fulfill its overall order handling 
responsibilities by eliminating any different treatment of orders 
received before and after 8:20 a.m. (Central Time).\8\
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    \5\ See proposed CHX Article XX, Rules 37(a)(4) and 37(b)(4).
    \6\ These rules include the Exchange's rules relating to the 
execution of agency market, marketable limit and limit orders, as 
well as its rules relating to the precedence of orders in the CHX 
specialist's book. See CHX Article XX, Rules 37(a)(2) and 37(a)(3); 
CHX Article XXX, Rule 2.
    \7\ As a technical matter, the Exchange's MAX system would 
identify the single opening price, based on the orders in the book 
and, to facilitate the execution of the maximum number of orders at 
that price, would insert the specialist into the execution of each 
order. For example, if there were two buy orders (for 120 shares and 
150 shares) and two sell orders (for 100 shares and 170 shares) that 
could be matched at a single price at or between the NBBO, the 
system would match each order against the specialist, at the 
appropriate price, resulting in four execution reports, one for each 
order. The specialist does not profit through this practice. Any 
other handling of the matching process--for example, trying to match 
100 shares of the first buy order against the 100-share sell order, 
and 150 shares of the second buy order against the second sell 
order, leaving 20 shares of the first buy order and 20 shares of the 
second sell order to execute against each other--results in 
additional, unwanted execution reports to the Exchange's order-
sending firms. The Exchange would report only one side of these 
transactions (the side with the highest number of reportable shares, 
representing the best indication of the trades that actually 
occurred) to the tape to ensure that this practice does not have any 
potentially inappropriate impact on the Exchange's tape revenue.
    \8\ Nothing in this proposed rule change, however, would 
prohibit a specialist, before the opening of the Exchange, from 
buying or selling in the over-the-counter market--for example, 
during Nasdaq's ``trade or move'' session--to position itself for 
the opening.
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2. Statutory Basis
    The Exchange believes that the proposed rule change 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).\9\ The CHX 
believes the proposal is consistent with section 6(b)(5) of the Act 
\10\ 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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    \9\ 15 U.S.C. 78(f)(b).
    \10\ 15 U.S.C. 78(f)(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.

[[Page 42233]]

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 CHX 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-2004-14 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-2004-14. 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-
2004-14 and should be submitted on or before August 4, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-15876 Filed 7-13-04; 8:45 am]
BILLING CODE 8010-01-P