[Federal Register Volume 70, Number 46 (Thursday, March 10, 2005)]
[Notices]
[Pages 12026-12027]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-1012]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51303; File No. SR-CHX-2005-05]


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

March 2, 2005.
    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 March 2, 2005, the Chicago Stock Exchange, Incorporated 
(``CHX'' or ``Exchange'') filed with the Securities and Exchange 
Commission (the ``Commission'') a request for reinstatement and 
extension of a pilot rule change as described in Items I and II 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.\5\ The Commission is 
publishing this notice to solicit comments on the proposal 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\ 4 17 CFR 240.19b-4(f)(6).
    \5\ The Commission waived the 5-day prefiling notice 
requirement.
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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 requested extension of a pilot rule 
change to CHX Article XX, Rule 37(a), which governs manual execution of 
eligible market and marketable limit orders. The pilot rule change, 
which will remain in effect for an additional 60-day pilot period, 
permits a CHX specialist, acting in its principal capacity, to manually 
execute an incoming market or marketable limit order in one of three 
exchange-traded funds at a price other than the national best bid or 
offer.

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 (``Exemption'') for transactions in certain exchange-
traded funds (``Exempt ETFs'') \6\ from the trade-through provisions of 
the Intermarket Trading System (``ITS'') Plan.\7\
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    \6\ 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'').
    \7\ 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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    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 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.''
    Given the unique environment in which the ETFs are traded, and the 
difficulty that CHX specialists often encounter in accessing NBBO price 
points, the Exchange's Department of Market Regulation (``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,\8\ but does 
not contemplate any flexibility for specialists acting in their 
principal capacity.\9\ Accordingly, the Exchange obtained pilot 
approval of the attached 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.\10\ The pilot expired on February 24, 2005.\11\ Accordingly, 
the Exchange requests reinstatement and a sixty-day extension of the 
pilot rule change; the pilot rule text incorporated into this 
submission as Exhibit 5 does not differ in any respect from the 
existing pilot rule provisions.
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    \8\ 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).
    \9\ 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).
    \10\ 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).
    \11\ See Securities Exchange Act Release No. 50935 (December 27, 
2004), 70 FR 414 (January 4, 2005).
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    Significantly, the pilot rule change does not excuse a CHX 
specialist from their best execution obligations with respect to 
manually-executed orders. Moreover, the pilot 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[supreg] automated execution system at the NBBO in 
effect at the time the order is received.

[[Page 12027]]

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).\12\ The CHX believes the proposal is 
consistent with Section 6(b)(5) of the Act \13\ in that it is 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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    \12\ 15 U.S.C. 78(f)(b).
    \13\ 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 on 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

    Because the foregoing proposed pilot rule change does not:
    (i) Significantly affect the protection of investors or the public 
interest;
    (ii) Impose any significant burden on competition; and
    (iii) Become operative for 30 days from the date on which it was 
filed, or such shorter time as the Commission may designate, it has 
become effective pursuant to Section 19(b)(3)(A) of the Act \14\ and 
Rule 19b-4(f)(6) thereunder.\15\ At any time during the 60-day pilot 
period, 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.
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    \14\ 15 U.S.C. 78s(b)(3)(A).
    \15\ 17 CFR 240.19b-4(f)(6).
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    The Exchange has requested that the Commission waive the 30-day 
operative delay in Rule 19b-4(f)(6)(iii). The Commission believes such 
waiver is consistent with the protection of investors and the public 
interest because it will allow the pilot to operate without delay. For 
this reason, the Commission designates the proposal to be effective and 
operative upon filing with the Commission.\16\
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    \16\ For purposes only of waiving the 30-day operative delay, 
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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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposal 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 No. SR-CHX-2005-05 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-2005-05. 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 changes 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. Copies of the 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-
2005-05 and should be submitted on or before March 31, 2005.

    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).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-1012 Filed 3-9-05; 8:45 am]
BILLING CODE 8010-01-P