[Federal Register Volume 70, Number 96 (Thursday, May 19, 2005)]
[Notices]
[Pages 28969-28970]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-2504]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51692; File No. SR-CHX-2005-04]


Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; 
Order Granting Approval of Proposed Rule Change and Amendment Nos. 1 
and 2 Thereto, To Clarify That Specialists May Not Charge Commissions 
With Respect to the Execution of CHXpress Orders

May 12, 2005.
    On March 1, 2005, the Chicago Stock Exchange, Inc. (``CHX'' or 
``Exchange''), filed with the Securities and Exchange Commission 
(``Commission'') a proposed rule change pursuant to section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ to amend its rules to clarify that a CHX specialist is 
not permitted to charge a commission for the execution of CHXpress(tm) 
orders.

[[Page 28970]]

On March 21, 2005 and March 30, 2005, the Exchange filed Amendment Nos. 
1 and 2, respectively, to the proposal. The proposed rule change, as 
amended, was published for comment in the Federal Register on April 7, 
2005.\3\ The Commission received no comments on the proposal. This 
order approves the proposed rule change, as amended.
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    \1\ 1 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 51465 (April 1, 
2005), 70 FR 17743.
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    The Exchange is rolling out a new, automated functionality, 
CHXpress, which, according to the Exchange, is designed to provide 
additional opportunities for the Exchange's participants to seek and 
receive liquidity through automated executions of orders at the 
Exchange.\4\ With a few exceptions, CHXpress orders will be executed 
immediately and automatically against same or better-priced orders in 
the specialist's book, or against the specialist's quote (when CHXpress 
is available).\5\ If a CHXpress order cannot be immediately executed, 
it will be placed in the specialist's book for display or later 
execution.\6\ The handling of CHXpress orders within the Exchange's 
systems is entirely automatic. CHX specialists do not provide CHXpress 
orders with the execution guarantees that might otherwise be available 
to agency limit orders,\7\ and CHX specialists also would not be 
required to seek liquidity for CHXpress orders in other markets. This 
proposal clarifies that a CHX specialist would not be permitted to 
charge a commission in connection with the execution of a CHXpress 
order.
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    \4\ See Securities Exchange Act Release No. 50481 (September 30, 
2004); 69 FR 60197 (October 7, 2004) (SR-CHX-2004-12).
    \5\ See CHX Article XX, Rule 37(b)(11)(C).
    \6\ A CHXpress order will be instantaneously and automatically 
displayed when it constitutes the best bid or offer in the CHX book. 
See CHX Article XX, Rule 37(b)(11)(D).
    \7\ See CHX Article XX, Rule 37(b)(11)(E)-(F).
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    The Commission has reviewed carefully the proposed rule change, as 
amended, and finds that it is consistent with the requirements of 
Section 6 of the Act \8\ and the rules and regulations thereunder 
applicable to a national securities exchange.\9\ In particular, the 
Commission finds that the proposed rule change is consistent with 
sections 6(b)(5) and 6(e)(1) of the Act,\10\ because 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; and is not designed to impose any schedule or fix rates of 
commissions, allowances, discounts, or other fees to be charged by its 
members. The Commission also believes that the proposed rule change is 
consistent with section 11(A)(a)(1)(C) of the Act,\11\ which states 
that it is in the public interest and appropriate for the protection of 
investors and the maintenance of fair and orderly markets to assure, 
among other things, economically efficient execution of securities 
transactions, and fair competition among brokers and dealers, among 
exchange markets, and between exchange markets and markets other than 
exchange markets.
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    \8\ 15 U.S.C. 78f.
    \9\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f). The Commission notes that it previously 
approved similar proposed rule changes filed by the New York Stock 
Exchange, Inc. (``NYSE'') to prohibit a specialist on the NYSE from 
charging ``floor brokerage'' (i.e., a commission imposed on exchange 
floor brokers) for the execution of an order received by the 
specialist via the NYSE's automated order routing system, known as 
SuperDot. See Securities Exchange Act Release Nos. 42727 (April 27, 
2000), 65 FR 26258 (May 5, 2000); 42694 (April 17, 2000), 65 FR 
24245 (April 25, 2000); and 42184 (November 30, 1999), 64 FR 68710 
(December 8, 1999). In addition, the Commission recently approved a 
proposed rule change submitted by the Chicago Board Options Exchange 
(``CBOE'') to prohibit Designated Primary Market Makers (``DPMs'') 
from charging a brokerage commission for an order, or the portion of 
an order: (i) For which the DPM was not the executing broker, which 
includes any portion of the order that is automatically executed 
through a CBOE system; (ii) that is automatically cancelled; or 
(iii) that is not executed, and not cancelled. See Securities 
Exchange Act Release No. 51235 (February 22, 2005), 70 FR 9687 
(February 28, 2005).
    \10\ 15 U.S.C. 78f(b)(5) and 78f(e)(1).
    \11\ 15 U.S.C. 78k-1(a)(1)(C).
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    The Commission believes that the Exchange's proposal is consistent 
with section 6(e) of the Act.\12\ Section 6(e) of the Act \13\ was 
adopted by Congress in 1975 to statutorily prohibit the fixed minimum 
commission rate system. As noted in a report of the House of 
Representatives, one of the purposes of the legislation was to 
``reverse the industry practice of charging fixed rates of commissions 
for transactions on the securities exchanges.'' \14\ The fixed minimum 
commission rate system allowed exchanges to set minimum commission 
rates that their members had to charge their customers, but allowed 
members to charge more. CHX's proposal, by contrast, does not establish 
a minimum commission rate, but instead prohibits commissions in 
circumstances in which the CHX specialist does not handle the order. 
Accordingly, the Commission does not believe that the Exchange's 
proposal to limit the fees charged by CHX specialists constitutes 
fixing commissions, allowances, discounts, or other fees for purposes 
of Section 6(e)(1) of the Act.\15\ In addition, the Commission believes 
that the Exchange's proposal is reasonable because it prohibits a CHX 
specialist from charging a commission for an order executed without 
assistance or handling by the CHX specialist. In this regard, the 
Commission notes that it has not viewed a self-regulatory 
organization's limits on fees that its members may charge, even when a 
member acts as agent, as inconsistent with section 6(e) of the Act.\16\ 
In addition, the Exchange's limits on fees that CHX specialists may 
charge applies only to members who choose to be specialists on the 
Exchange. Therefore, CHX is not fixing fees generally; it is merely 
imposing a condition, which is consistent with the Act, on a member's 
appointment as a specialist.
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    \12\ 15 U.S.C. 78f(e).
    \13\ Id.
    \14\ H.R. Rep. No. 94-123, 94th Cong., 1st Sess. 42 (1975).
    \15\ 15 U.S.C. 78f(e)(1).
    \16\ 15 U.S.C. 78f(e)(1).
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    For the foregoing reasons, the Commission finds that the proposed 
rule change is consistent with the Act and the rules and regulations 
thereunder applicable to a national securities exchange, and, in 
particular, with sections 6(b)(5) and 6(e)(1) of the Act.\17\ It is 
therefore ordered, pursuant to section 19(b)(2) of the Act,\18\ that 
the proposed rule change (SR-CHX-2005-04), as amended, is approved.
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    \17\ 15 U.S.C. 78f(b)(5) and 78f(e)(1).
    \18\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. E5-2504 Filed 5-18-05; 8:45 am]
BILLING CODE 8010-01-P