[Federal Register Volume 69, Number 139 (Wednesday, July 21, 2004)]
[Notices]
[Pages 43646-43647]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-16557]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50013; File No. SR-CHX-2004-02]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change by the Chicago Stock Exchange, Incorporated Relating to the 
Minimum Automatic Execution Threshold Size

July 14, 2004.
    On February 11, 2004, the Chicago Stock Exchange, Inc. (``CHX'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act

[[Page 43647]]

of 1934 (the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ a proposed rule 
change to eliminate the existing 100-share minimum automatic execution 
threshold and the rule governing the procedures by which specialists 
obtain permission to switch from automatic execution mode to manual 
execution mode. The proposed rule change was published for comment in 
the Federal Register on June 10, 2004.\3\ The Commission received no 
comments on the proposal. This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 49793 (June 2, 
2004), 69 FR 32645.
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    The Commission finds 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.\4\ 
Specifically, the Commission finds that the proposal is consistent with 
the requirements of Section 6(b) of the Act,\5\ in general, and Section 
6(b)(5) of the Act,\6\ in particular, which requires that the rule of 
the Exchange be designed to promote just and equitable principles of 
trade, to remove impediments 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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    \4\ In approving the proposal, the Commission has considered the 
rule's impact on efficiency, competition, and capital formation. See 
15 U.S.C. 78c(f).
    \5\ 15 U.S.C. 78f(b).
    \6\ 15 U.S.C. 78f(b)(5).
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    The Exchange has represented that under its current rules, a CHX 
specialist is required to permit its MAX system to automatically 
execute an unlimited number of orders for 100 shares or less at the 
then-prevailing national best bid or offer (``NBBO''), until the 
consolidated quotation stream reflects a change in the NBBO price. The 
CHX believes that this requirement imposes virtually unlimited 
liability on its specialists to fill orders at the NBBO regardless of 
the aggregate number shares actually available at the NBBO. The 
Exchange believes that this is an unintended and unwarranted 
consequence of automatic execution guarantees such as the Exchange's 
current rule and that by eliminating the 100-share minimum automatic 
execution threshold, specialists will have the option to act as agent 
for an order or manually execute the order, rather than have an order 
execute against him automatically at the NBBO. Thus, the Commission 
believes that eliminating the 100-share minimum automatic execution 
threshold will give CHX specialists more flexibility in handling 
orders.
    The Exchange has also represented that a number of CHX specialist 
firms have developed and are implementing a remote pricing 
functionality (``RFP'') that permits specialists to respond to orders 
that are dropped for manual handling. The RFP functionality permits 
specialists to price individual orders. The RFP then provides the 
Exchange's MAX system with automated execution instructions for orders 
that otherwise would require further manual intervention of a CHX 
specialist. The Exchange believes that eliminating the 100-share 
minimum automatic execution threshold will grant specialists the option 
to handle more orders in this manner if they choose.
    The Commission believes that the rule requiring specialists to 
guarantee automatic executions at the NBBO was one the CHX imposed on 
it specialists voluntarily in order to make its market more attractive 
to sources of order flow. The Commission believes that the business 
decision to potentially forego order flow by no longer requiring 
specialist to provide such automatic executions is a judgment the Act 
allows the CHX to make. The Commission notes, however, that specialists 
are required to handle all orders in accordance with their best 
execution obligations and the Commission Quote Rule \7\ regardless of 
whether such orders are executed manually or automatically.
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    \7\ 17 CFR 240.11Ac1-1.
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    Finally, the Commission believes it is appropriate to delete the 
current CHX rule governing the procedures by which specialists are to 
obtain permission to switch from automatic execution mode to manual 
execution mode because the elimination of the 100-share minimum 
automatic execution threshold effectively permits CHX specialists to 
switch to manual execution mode at any time.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\8\ that the proposed rule change (File No. SR-CHX-2004-02) be, and 
hereby is, approved.
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    \8\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-16557 Filed 7-20-04; 8:45 am]
BILLING CODE 8010-01-P