[Federal Register Volume 69, Number 188 (Wednesday, September 29, 2004)]
[Notices]
[Pages 58208-58210]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-21839]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50417; File No. SR-CHX-2003-07]


Self-Regulatory Organizations; Notice of Filing of a Proposed 
Rule Change and Amendments No. 1 and 2 Thereto by the Chicago Stock 
Exchange, Incorporated Relating to Out-of-Range Execution Rules

September 21, 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 March 20, 2003, 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. On March 
10, 2004, the Exchange filed Amendment No. 1 to the proposed rule 
change,\3\ and on September 15, 2004, the Exchange filed Amendment No. 
2 to the proposed rule change.\4\ 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 Kathleen M. Boege, Vice President & 
Associate General Counsel, CHX, to Nancy J. Sanow, Assistant 
Director, Division of Market Regulation (``Division''), Commission, 
dated March 10, 2004 (``Amendment No. 1''). Amendment No. 1 
clarified the purpose and effects of the proposal.
    \4\ See letter from Kathleen M. Boege, Vice President & 
Associate General Counsel, CHX, to Nancy J. Sanow, Assistant 
Director, Division, Commission, dated September 13, 2004 
(``Amendment No. 2''). Amendment No. 2 replaced the original 
proposal and Amendment No. 1 in their entirety.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend CHX Article XX, Rule 37, which 
governs, among other things, ``out-of-range'' executions. The text of 
the proposed rule change, as amended, appears below. Additions appear 
in italics; deletions are in [brackets].
* * * * *

Chicago Stock Exchange Rules

ARTICLE XX

Guaranteed Execution System and Midwest Automated Execution System

RULE 37. (a)Guaranteed Executions.
* * * * *
    [6. Executions Outside of Range. Since executions are guaranteed on 
the basis of the size and price of the best bid or offering, the order 
may be executed out of the primary market range for the day but in a 
Dual Trading System issue a stop must be granted if requested.]
    [7.]6. No change to text.
* * * * *
(b) Automated Executions.
* * * * *
    (9) [All market orders received through the MAX System that would 
result in an out of range execution shall be deemed to be received with 
a request to STOP. Additionally, specialists may stop limit orders that 
are marketable when entered into the MAX System. Subject to 
Interpretations and Policies .03 under this Rule 37, a specialist may 
execute a stopped order out of the primary market range, at no worse 
than the stopped price, provided the specialist receives approval to do 
so from two floor officials.]
* * * * *
(d) SuperMAX 2000.
    SuperMAX 2000 shall be a voluntary automatic execution program 
within the MAX System. SuperMAX 2000 shall be available for any 
security trading on the

[[Page 58209]]

Exchange in decimal price increments. A specialist may choose to enable 
this voluntary program within the MAX System on an issue-by-issue 
basis.
* * * * *
    [(5) Out of Range. Notwithstanding anything herein to the contrary, 
SuperMAX 2000 will not automatically execute an order if such execution 
would result in an out of range execution.]
* * * * *

. . . Interpretations and Policies

.01 No change to text.
.02 No change to text.
.03 Reserved for future use. [With regard to paragraph 6 of paragraph 
(a) of this Rule, in the case of a minimum variation market, a stopped 
sell order will not be filled until a transaction takes place at the 
bid price or lower on the primary exchange or the Exchange's displayed 
share volume at the offering has been exhausted. A stopped buy order 
will not be filled until a transaction takes place at the offering 
price or higher on the primary exchange or the Exchange's displayed 
share volume at the bid has been exhausted. Notwithstanding the 
foregoing, all orders stopped pursuant to this Interpretation and 
Policy .03 shall be executed by the end of the trading day on which 
such order was stopped at no worse than the stopped price.]
* * * * *

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 CHX included statements 
concerning the purpose of and basis for the proposed rule change, 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 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
    The Exchange proposes to amend CHX Article XX, Rule 37, which 
governs, among other things, ``out-of-range'' executions. The 
Exchange's rules currently impose specific order handling requirements 
on specialists when the execution of an order would result in an out-
of-range execution.\5\ For example, Exchange rules require that market 
orders received through MAX[supreg], the Exchange's automated routing 
and execution system that would result in an out-of-range execution are 
deemed received with a request to stop.\6\ Under existing rules, a 
specialist may execute a stopped order out of the primary market range 
only with the approval of two floor officials.
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    \5\ An ``out-of-range'' execution is an execution that would 
create a new high or new low for the day when compared to the 
primary market range.
    \6\ See CHX Article XX, Rule 37(b)(9).
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    This out-of-range rule likely was put in place at the request of 
customers, or as a marketing tool to attract new customers, when 
trading occurred in much larger minimum variations and when trading on 
regional exchanges was somewhat less common. Today, trading on regional 
exchanges is not a new phenomenon. Moreover, trading on all markets now 
occurs in a decimal trading environment, where an out-of-range 
execution based on the national best bid or offer is more readily seen 
by customers as accurately and appropriately reflecting the current 
market for the security. In addition, the existing rule can have the 
unintended--and in today's sometimes fast-paced trading environment--
inappropriate result of delaying order executions when the specialist 
has stopped the order waiting for an opportunity to fill it within the 
primary market range.\7\ For all of these reasons, the Exchange 
believes that it is no longer necessary to require that its specialists 
only fill orders within the primary market range for the day.
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    \7\ Inadvertent violations of the current rule also require 
specialists to correct improper executions, which can be an 
inconvenience to the Exchange's order-sending firms who must send 
additional execution confirmations to their customers.
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    The proposed rule text would eliminate all references to specific 
order-handling responsibilities with respect to out-of-range 
executions.\8\ Once the out-of-range functionality is eliminated from 
the Exchange's systems, an order that is eligible for automatic 
execution will be automatically executed by the Exchange's MAX system, 
even if it will constitute an out-of-range execution.
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    \8\ Deletion of the out-of-range provisions relating to the 
stopping of otherwise out-of-range orders may impact CHX Article XX, 
Rule 28, which deals with a CHX specialist's liability for stopped 
orders. The Exchange, based on discussions with the Commission, 
agrees that it is appropriate to clarify whether the practice of 
stopping stock should be permitted on the Exchange. If the 
Exchange's management, member committees and Board of Governors 
determines that this practice should be prohibited, the Exchange 
will effect such a rule change, including deletion of CHX Article 
XX, Rule 28, by means of a separate submission to the Commission. If 
the Exchange determines that it remains appropriate for CHX 
specialists to stop stock in certain limited circumstances, then the 
Exchange will submit a rule change to the Commission that would 
specifically define the circumstances under which stock may be 
stopped on the CHX, and specifically outlining appropriate CHX 
specialist conduct under such circumstances.
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2. Statutory Basis
    The CHX believes that the proposed rule change, as amended, is 
consistent with Section 6(b) of the Act,\9\ in general, and furthers 
the objectives of Section 6(b)(5) of the Act,\10\ in particular, 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. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement of Burden on Competition

    The Exchange believes that no burden will be placed on competition 
as a result of the proposed rule change.

C. Self-Regulatory Organization's Statement on Comments Regarding 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 its 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 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 foregoing, including whether the proposed rule 
change, as amended, 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

[[Page 58210]]

     Send e-mail to [email protected]. Please include File 
No. SR-CHX-2003-07 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 No. SR-CHX-2003-07. 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 Room, 450 Fifth Street, 
NW., Washington, DC 20549-0609. Copies of such filing will also 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 No. SR-CHX-
2003-07 and should be submitted on or before October 20, 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. 04-21839 Filed 9-28-04; 8:45 am]
BILLING CODE 8010-01-P