[Federal Register Volume 70, Number 132 (Tuesday, July 12, 2005)]
[Notices]
[Pages 40086-40088]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-3665]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51967; File No. SR-CHX-2004-25]


Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; 
Notice of Filing of Proposed Rule Change and Amendment Nos. 1 and 2 
Thereto Relating to a Prohibition on Using a Layoff Service Unless the 
Service Provides Required Information to the Exchange

July 1, 2005.
    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 August 31, 2004, the Chicago Stock Exchange, Inc. (``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 CHX. On June 7, 
2005 and June 27, 2005, the Exchange filed Amendment Nos. 1 \3\ and 2 
\4\ to the proposed rule change, respectively. 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 Amendment No. 1 dated June 7, 2005. In Amendment No. 1, 
the Exchange modified the text of the proposed rule change in 
response to comments by the Commission staff. See infra notes 12-16 
and accompanying text for a description of items included in 
Amendment No. 1.
    \4\ See Amendment No. 2 dated June 27, 2005, replacing the 
original filing and Amendment No. 1 in their entirety. In Amendment 
No. 2, the Exchange eliminated the requirement to provide 
information about the contra party to the execution and made other 
technical changes to the proposal.
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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 V, Rule 4 to prohibit 
Exchange participants, beginning August 1, 2005, from using any 
communications means to send orders to another market for execution 
(``layoff service''), unless that layoff service has established a 
process for providing the Exchange with specific information about the 
orders and the executions that participants receive. The text of the 
proposed rule change, as amended, is available on CHX's Web site 
(http://www.chx.com/marketreg/proposed rules.htm), at CHX's principal 
office, and at the Commission's Public Reference Room.

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 Changes

1. Purpose
    The Exchange's participants execute trades on the Exchange and on 
other markets. Most interaction with other markets occurs through 
electronic systems that are provided either by other markets themselves 
or by members of those markets. Although the Exchange currently 
receives execution information about its participants' trading in other 
markets, the Exchange believes that it could conduct more efficient 
surveillance of its participants' order-handling activities if it 
received additional types of information.
    This proposal, which would amend the Exchange's rule relating to 
communications from the trading floor, is designed to provide the 
Exchange with the layoff service information that it needs to enhance 
its surveillance programs. Specifically, the proposal would prohibit 
Exchange participants, beginning August 1, 2005, from using a layoff 
service to send orders to another market for execution, unless that 
service (or the participant using the service) has established a 
process for providing the Exchange with the following specific 
information: (1) The symbol of the security to be traded; (2) the 
clearing organization; (3) an order identifier that uniquely identifies 
the order; (4) the participant recording the order details; (5) the 
number of shares; (6) the side of the market on which the order is 
placed; (7) a designation of the order type (e.g., market, limit, stop, 
stop limit); (8) whether the order is for the account of a customer or 
for the account of the participant sending the order; (9) whether the 
order is short or short exempt; (10) any limit price and/or stop price; 
(11) the date and time of order transmission; (12) the market to which 
the order was transmitted; (13) the time in force; (14) a designation 
of the order as held or not held; (15) any special conditions or 
instructions associated with the order (including any customer do-not-
display instructions or all-or-none conditions); (16) any modifications 
to the details set out in (1) through (15), for all or part of an order 
or any cancellation of all or part of the order; (17) the date and time 
of the transmission of any modifications to the order or any 
cancellation of the order; (18) the date and time of any order 
expiration; (19) the identification of the party canceling or modifying 
the order; (20) the transaction price; (21) the number of shares 
executed; (22) the date and time of execution; (23) settlement 
instructions; (24) a system-generated time(s) of recording the required 
information; and (25) any other information that the Exchange may 
require from time to time.\5\ For purposes

[[Page 40087]]

of this proposal, an ``order'' would be defined as any written, oral or 
electronic instruction to effect a transaction.\6\
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    \5\ See Proposed CHX Article V, Rule 4, Interpretation and 
Policy .01.
    \6\ See Proposed CHX Article V, Rule 4, Interpretation and 
Policy .03.
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    Other provisions of the proposal would set out additional 
requirements that are designed to ensure that the Exchange receives 
uniformly-presented, useful data.\7\ For example, the Exchange proposes 
that all information be provided on a real-time basis and in an 
electronic format acceptable to the Exchange.\8\ Moreover, each layoff 
service would be required to synchronize its business clocks with 
reference to a time source designated by the Exchange and maintain that 
synchronization following procedures prescribed by the Exchange.\9\ The 
Exchange confirms in another provision that all time references be 
expressed in terms of hours, minutes, and seconds.\10\
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    \7\ As an administrative matter, the proposal also would delete 
CHX Article V, Rule 5, which applied to wires from the Exchange's 
floor to its branch offices. The Exchange represents that it no 
longer maintains branch offices and has no purpose for keeping this 
rule in place.
    \8\ See Proposed CHX Article V, Rule 4, Interpretation and 
Policy .01.
    \9\ See Proposed CHX Article V, Rule 4, Interpretation and 
Policy .02.
    \10\ See Proposed CHX Article V, Rule 4, Interpretation and 
Policy .03.
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    Furthermore, the Exchange confirms that a violation of these new 
requirements would be considered conduct inconsistent with just and 
equitable principles of trade, in violation of CHX Article VIII, Rule 
7.\11\ Therefore, these violations would not be eligible for handling 
under the Exchange's Minor Rule Violation Plan.
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    \11\ See Proposed CHX Article V, Rule 4, Interpretation and 
Policy .04.
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    The Exchange submitted Amendment No. 1 to require that participants 
provide additional information about their layoff activity; \12\ to 
replace references to the Exchange's ``members'' with references to its 
``participants,'' reflecting changes in terminology associated with the 
Exchange's February 2005 demutualization; \13\ to require that 
participants notify the Exchange before using an alternative or 
additional layoff vendor; \14\ and to confirm that these rules would 
not replace any record retention obligations to which the Exchange's 
participants would be subject under the Act and the rules 
thereunder.\15\ Other changes proposed in Amendment No. 1 clarify the 
application of the rule text and make other minor corrections to the 
text.\16\ Amendment No. 2 eliminated one proposed field of data 
relating to the contra party to an execution and corrected a few 
typographical errors.\17\
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    \12\ See Amendment No. 1, supra note 3. Among other things, the 
Exchange added requirements that participants confirm whether an 
order was for the account of a customer or for the account of the 
participant sending the order to the other market; whether an order 
was short or short exempt; the market to which the order was 
transmitted; the identification of any party canceling or modifying 
the order; the date and time of any order expiration; and the contra 
party to the execution (if applicable).
    \13\ See Securities Exchange Act Release No. 51149 (February 8, 
2005), 70 FR 7531 (February 14, 2005).
    \14\ See Proposed CHX Article V, Rule 4, Interpretation and 
Policy .05.
    \15\ See Proposed CHX Article V, Rule 4, Interpretation and 
Policy .06.
    \16\ For example, the Exchange had mistakenly identified the 
proposed rule change as occurring in CHX Article VI, not in CHX 
Article V.
    \17\ See Amendment No. 2, supra note 4.
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    As noted above, the Exchange believes that this proposal would 
enhance the Exchange's ability to review its members' order-handling 
activities and to determine their compliance with applicable trading 
rules. Moreover, the Exchange believes that this proposal is consistent 
with recommendations made by the independent consultant retained by the 
Exchange under its recent settlement agreement with the Commission.\18\
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    \18\ See Securities Exchange Act Release No. 48566 (September 
30, 2003) (Administrative Proceeding File No. 3-11282), available at 
http://www.sec.gov/litigation/admin/34-48566.htm.
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2. Statutory Basis
    The Exchange believes that the proposal, as amended, 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.\19\ 
Specifically, the CHX believes that the proposal, as amended, is 
consistent with Section 6(b)(5) of the Act,\20\ 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 by permitting the Exchange to require its participants 
(or their layoff service providers) to provide the Exchange with data 
necessary to conduct appropriate surveillance of its participants' 
trading activities.
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    \19\ 15 U.S.C. 78f(b).
    \20\ 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, as 
amended, will impose any burden on competition.

C. Self-Regulatory Organization's Statement on Comments Regarding the 
Proposed Rule Changes Received From Members, Participants or Others

    No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Changes and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such other period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    A. By order approve the proposed rule changes, or
    B. Institute proceedings to determine whether the proposed rule 
changes 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
     Send an e-mail to [email protected]. Please include 
File Number SR-CHX-2004-25 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-9303.
    All submissions should refer to File No. SR-CHX-2004-25. 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

[[Page 40088]]

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 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-2004-25 and should be 
submitted on or before August 2, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. E5-3665 Filed 7-11-05; 8:45 am]
BILLING CODE 8010-01-P