[Federal Register Volume 69, Number 210 (Monday, November 1, 2004)]
[Notices]
[Pages 63419-63421]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-2946]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50590; File No. SR-CHX-2004-36]


Self-Regulatory Organizations; Chicago Stock Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of Proposed 
Pilot Rule Change Relating to Transactions in Certain Exchange-Traded 
Funds

October 26, 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 October 25, 2004, the Chicago Stock Exchange, Incorporated 
(``CHX'' or ``Exchange'') filed with the Securities and Exchange 
Commission (the ``Commission'') the proposed pilot rule change as 
described in Items I, II and III below, which Items have been prepared 
by the Exchange. The Exchange filed the proposed rule change pursuant 
to Section 19(b)(3)(A) of the Act,\3\ and Rule 19b-4(f)(6)\4\ 
thereunder, which renders the rule change effective upon filing with 
the Commission. The Commission is publishing this notice to solicit 
comments on the interpretation from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    In its submission, the Exchange submitted a proposed rule change to 
CHX Article XX, Rule 37(a), which governs manual execution of eligible 
market and marketable limit orders. The proposed rule change, which 
will remain in effect for a 60-day pilot period expiring December 24, 
2004, permits a CHX specialist, acting in its principal capacity, to 
manually execute an incoming market or marketable limit order in three 
exchange-traded funds at a price other than the national best bid or 
offer. The text of the proposed rule change is available at the Office 
of the Secretary, CHX and at the Commission.

[[Page 63420]]

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
    On August 28, 2002, the Commission issued an order granting a de 
minimis exemption (the ``Exemption'') for transactions in certain 
exchange-traded funds (``Exempt ETFs'') \5\ from the trade-through 
provisions of the Intermarket Trading System (``ITS'') Plan.\6\
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    \5\ The three affected Exempt ETFs are the exchange-traded funds 
tracking the Nasdaq-100 Index (``QQQ''), the Dow Jones Industrial 
Average (``DIAMONDs'') and the Standard & Poor's 500 Index 
(``SPDRs'').
    \6\ See Securities Exchange Act Release No. 46428 (August 28, 
2002). At present, the Exemption extends to transactions that are 
``executed at a price that is no more than three cents lower than 
the highest bid displayed in CQS and no more than three cents higher 
than the lowest offer displayed in CQS.''
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    According to the CHX, as stated by both Commission staff and 
commissioners at an open meeting on August 27, 2002, rapid-fire 
quotations and executions in Exempt ETFs occur consistently throughout 
the trading day within a range around the NBBO, rendering it extremely 
difficult, if not impossible, to access liquidity at an exact NBBO 
price point. Compounding the ``flickering'' noted by the Commission, 
the Exchange has noted a marked increased in the incidence of locked 
and crossed markets in Exempt ETFs.
    CHX Article XX, Rule 37(a), commonly referred to as the Exchange's 
``Best Rule,'' requires that with respect to any market or marketable 
limit order not executed automatically, a CHX specialist must ``* * * 
either (a) manually execute such order at a price and size equal to the 
NBBO price and size at the time the order was received; or (b) act as 
agent for such order in seeking to obtain the best available price for 
such order on a marketplace other than the Exchange, using order 
routing systems where appropriate.''
    According to the CHX, given the unique environment in which the 
ETFs are traded, and the difficulty that CHX represents that its 
specialists often encounter in accessing NBBO price points, the 
Exchange's Department of Market Regulation (the ``Department'') 
believes that its enforcement of the BEST Rule must take the ETF 
trading environment into account when the Department evaluates the 
execution prices of eligible market and marketable limit orders for 
Exempt ETFs. The Department believes that in certain instances, 
execution of an order in an Exempt ETF at a price other than the NBBO 
may nonetheless be consistent with the specialist's best execution 
obligation, in light of the unique environment that characterizes 
trading in Exempt ETFs. The Exchange believes that the current version 
of the BEST Rule contains sufficient latitude with respect to an order 
executed by a CHX specialist acting as agent for the order,\7\ but does 
not contemplate any flexibility for specialists acting in their 
principal capacity.\8\ Accordingly, the Exchange is submitting the 
proposed rule change, which permits a CHX specialist, acting in its 
principal capacity, to manually execute an incoming market or 
marketable limit order in an Exempt ETF at a price other than the 
NBBO.\9\
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    \7\ The Best Rule provision governing manual agency executions 
obligates the CHX specialist to seek ``* * * the best available 
price.'' CHX Article XX, Rule 37(a)(2).
    \8\ The Best Rule provision governing manual principal 
executions obligates the CHX specialist to execute the order at the 
``* * * NBBO price and size at the time the order was received.'' 
CHX Article XX, Rule 37(a)(2).
    \9\ The CHX represents that this rule change is closely 
analogous to the Exchange's previously submitted interpretation 
regarding execution of resting limit orders in Exempt ETFs. Under 
the limit order interpretation, CHX specialists need not provide 
execution guarantees for Exempt ETFs, based on trade-throughs by 
other markets, that CHX specialists typically provide to all other 
listed issues. See Securities Exchange Act Release No. 46557 
(September 26, 2002), 67 FR 61941 (October 2, 2002).
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    Significantly, the proposed rule change is not intended to excuse a 
CHX specialist from its best execution obligations with respect to 
manually-executed orders. Moreover, the proposed rule change only 
relates to orders that are executed manually, when a CHX specialist's 
ability to obtain liquidity at an exact NBBO price point is extremely 
limited. Orders that are executed automatically will continue to be 
executed by the Exchange's MAX automated execution system at the NBBO 
in effect at the time the order is received.
2. Statutory Basis
    The CHX believes the proposal 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) of the Act.\10\ The CHX further believes 
the proposal is consistent with Section 6(b)(5) of the Act \11\ in that 
it is designed to promote just and equitable principles of trade, to 
remove impediments to, 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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    \10\ 15 U.S.C. 78(f)(b).
    \11\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement of 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 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

    The foregoing rule change has been filed by the Exchange as a 
``non-controversial'' rule change pursuant to Section 19(b)(3)(A)(i) of 
the Act \12\ and subparagraph (f)(6) of Rule 19b-4 thereunder.\13\ 
Consequently, because the foregoing rule change: (1) Does not 
significantly affect the protection of investors or the public 
interest; (2) does not impose any significant burden on competition; 
and (3) does not become operative for thirty days from the date on 
which it was filed or such shorter time as the Commission may designate 
if consistent with the protection of investors and the public interest, 
it has become effective pursuant to Section 19(b)(3)(A) of the Act and 
Rule 19b-4 thereunder.\14\
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    \12\ 15 U.S.C. 78s(b)(3)(A)(i).
    \13\ 17 CFR 240.19b-4(f)(6).
    \14\ The Commission has waived the requirement that the Exchange 
provide the Commission with written notice of its intent to file the 
proposed rule change at least five days prior to the filing date.
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    A proposed rule change filed under Rule 19b-4(f)(6) \15\ normally 
does not become operative prior to thirty days after the date of 
filing. However, pursuant to Rule 19b-4(f)(6)(iii), the Commission may 
designate a shorter

[[Page 63421]]

time if such action is consistent with the protection of investors and 
the public interest. The Exchange seeks to have the proposed rule 
change become operative immediately so that its specialists may begin 
trading in accordance with the proposed rule change. The Commission, 
consistent with the protection of investors and the public interest, 
has determined to make the proposed rule change effective as of the 
date of this notice.\16\ The Commission notes that the execution 
guarantees provided by the Exchange are made on a voluntary basis by 
the Exchange, and that a specialist's duty of best execution will in no 
way be affected by this proposed rule change.
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    \15\ 17 CFR 240.19b-4(f)(6).
    \16\ For purposes of only accelerating the operative date of 
this proposal, the Commission has considered the proposed rule's 
impact on efficiency, competition, and capital formation. 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of such proposed rule 
change, the Commission may summarily abrogate such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.

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-2004-36 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-2004-36. 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 offices 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-
2004-36 and should be submitted on or before November 22, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\
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    \17\ CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
 [FR Doc. E4-2946 Filed 10-29-04; 8:45 am]
BILLING CODE 8010-01-P