[Federal Register Volume 70, Number 222 (Friday, November 18, 2005)]
[Notices]
[Pages 70002-70006]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-6380]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52766; File No. SR-CHX-2004-38]


Self-Regulatory Organizations; Chicago Stock Exchange, Inc.; 
Notice of Filing of Proposed Rule Change and Amendment Nos. 1 and 2 
Thereto Relating to Records of Orders and Executions

November 10, 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 November 3, 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 July

[[Page 70003]]

3, 2005, the Exchange filed Amendment No. 1 to the proposal \3\ and on 
September 8, 2005, the Exchange filed Amendment No. 2 to the 
proposal.\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    \3\ In Amendment No. 1, which replaced and superseded the 
original filing in its entirety, the Exchange amended the proposed 
rule text to add requirements that participants confirm whether an 
order was an agency or professional order; whether an order was 
short or short exempt; the market to which the order was 
transmitted; the identification of any party cancelling or modifying 
the order; the date and time of any order expiration; and the contra 
party to the execution (if applicable). The Exchange also added 
Interpretation and Policy .09 to confirm that the requirements of 
the proposed rule would not replace any record retention obligations 
to which the Exchange's participants may be subject under the Act 
and the rules thereunder. Finally, the Exchange replaced references 
to the Exchange's ``members'' with references to its 
``participants,'' reflecting changes in terminology associated with 
the Exchange's February 2005 demutualization. See Securities 
Exchange Act Release No. 51149 (February 8, 2005), 70 FR 7531 
(February 14, 2005) (approval order for the Exchange's proposed rule 
changes in connection with its demutualization).
    \4\ In Amendment No. 2, which replaced and superseded the filing 
as amended by Amendment No. 1 in its entirety, the Exchange made 
minor changes to the proposed rule text, including (1) confirming 
that a participant must record any modifications to the date and 
time of any order expiration and (2) consistently capitalizing the 
word ``Rule.'' In addition, the Exchange conformed the footnotes in 
the purpose section to reflect changes made to the rule language in 
Amendment No. 1. The substantive changes in Amendment No. 1 were 
included in Amendment No. 2.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The CHX proposes to amend its rules to require its on-floor 
participants to electronically record specific details about orders 
originating on or off the floor of the Exchange for execution on the 
Exchange, as well as orders issued from the floor of the Exchange to 
any other market or trading venue.
    The text of the proposed rule change is below. Proposed new 
language is in italics; proposed deletions are in [brackets].
* * * * *

ARTICLE XX

Regular Trading Sessions

* * * * *

Records of Orders and Executions

    RULE 24. (a) Every Floor Participant shall preserve for at least 
three years (or any longer period of time required by Exchange Act Rule 
17a-4) a record, meeting the criteria set out in paragraph (b) below, 
of:
    (1) every order originat[ed]ing [by him or it] on the Floor [and] 
that is given to (or received from) another Participant for execution 
and any execution of that order, and
    (2) [of] every order [commitment or obligation to trade] issued 
from the Floor to any other market or trading venue and any execution 
of that order [through ITS or any other application of the System or 
pursuant to Rule 39 or Rule 40,]; and
    (3) [of] every order originating off the Floor, transmitted by any 
person, whether or not that person is [other than] a Participant, to 
such Participant on the Floor and any execution of that order[, which 
record shall include the name and the amount of the security, the terms 
of the order and the time when such order was so given or transmitted]; 
provided, however, that the Exchange may, upon application, grant 
exemption from the provisions of this Rule.
    (b) Subject to the exceptions set out in Interpretations .02, .04, 
.05 and .07 below, each Floor Participant must record, in such 
electronic system(s) as the Exchange shall designate, the following 
details about each order and execution identified in (a)(1) through (3) 
above:
    (1) Symbol;
    (2) Clearing Participant;
    (3) Order identifier that uniquely identifies the order;
    (4) Identification of Participant recording the order details;
    (5) Number of shares or quantity of security;
    (6) Side of market;
    (7) Designation of order type (e.g., market, limit, stop, stop 
limit);
    (8) Whether the order is agency or professional;
    (9) Whether the order is being handled pursuant to Exchange Act 
Section 11(a)(1)(G) and any applicable rules thereunder;
    (10) Whether the order is short or short exempt;
    (11) Whether the order is a bona fide arbitrage order;
    (12) Any limit price and/or stop price;
    (13) Date and time of order receipt or transmission (as 
applicable);
    (14) The market, off-floor firm or on-floor Participant to which 
the order was transmitted or from which the order was received (if 
applicable);
    (15) Time in force;
    (16) Designation as held or not held;
    (17) Any special conditions or instructions (including any customer 
do-not-display or display instructions and any all-or-none conditions);
    (18) Any modifications to the details set out in (1)-(17) above or 
(20) below, for all or part of the order, or any cancellation of all or 
part of the order;
    (19) Date and time of receipt or transmission of any modifications 
to the order or any cancellation of the order;
    (20) Date and time of any order expiration;
    (21) Identification of the party cancelling or modifying the order;
    (22) Transaction price (if applicable);
    (23) Number of shares executed (if applicable);
    (24) Date and time of execution (if applicable);
    (25) Contra party to the execution (if applicable);
    (26) Settlement instructions (if applicable);
    (27) System-generated time(s) of recording required information; 
and
    (28) Such other information as the Exchange may from time to time 
require.
    [Whenever a cancellation is entered with respect to such an order 
or commitment or obligation to trade, or a report of the execution of 
such an order or commitment or obligation to trade is received, there 
shall be preserved for at least three years, in addition to the record 
required by the foregoing paragraph, a record of the cancellation of 
the order or commitment or obligation to trade or of the receipt of 
such report, which shall include the time of entry of such cancellation 
or of the receipt of such report.]
    (c) Floor Participants must record the information required by (b) 
above immediately after such information is received or becomes 
available.
    [c](d) Before any such order is executed, including the case where 
an order is to be executed by the issuance from the Floor of a 
commitment or obligation to trade through ITS or any other application 
of the System or pursuant to Rule 39 or Rule 40, there shall be placed 
upon the order slip or other record the name or designation of the 
account for which such order is to be executed. No change to the name 
or designation of the [in such ] account for which an order is to be 
executed [name or designation] shall be made unless the change has been 
authorized by the Participant or by a partner or officer of the 
Participant Firm, who shall, prior to giving his approval of such 
change, be personally informed of the essential facts relative thereto 
and shall indicate his approval of such change in writing on the order.
    [Exceptions
    Under exceptional circumstances the Exchange may upon written 
request waive the requirements contained in (1)(a) above.]

* * * Interpretations and Policies:

    .01 Every order covered by [(1)] paragraph (a) above, which is to 
be

[[Page 70004]]

executed pursuant to Section 11(a)(1)(G) of the Act and Rule 11a1-1(T) 
thereunder, shall bear an identifying notation that will enable the 
executing Participant to disclose to other Participants that the order 
is subject to those provisions.
    .02 For purposes of this Rule, an order shall be any written, oral 
or electronic instruction to effect a transaction. A decision by a co-
specialist, market maker or floor broker to buy or sell securities for 
his or her own account on the Floor of the Exchange shall not 
constitute an order for which a record must be made under this Rule.
    .03 Each required record of the time of an event shall be expressed 
in terms of hours, minutes and seconds.
    .04 This Rule shall not apply to orders sent or received through 
the Exchange's MAX system or through any other electronic systems that 
the Exchange expressly recognizes as providing the required information 
in a format acceptable to the Exchange. The Exchange will not recognize 
a non-Exchange system as providing information in an acceptable format 
unless that system has synchronized its business clocks for recording 
data with reference to a time source designated by the Exchange and 
maintains that synchronization in conformity with procedures prescribed 
by the Exchange.
    .05 Any orders which the Exchange has expressly recognized as 
incompatible for entry in an Exchange system relied on by a Floor 
Participant to record the details of the order in compliance with this 
Rule shall be exempt from the order entry requirements of paragraph (b) 
above; provided, however, that Floor Participants shall retain a 
written record of those orders which includes as much of the 
information set out in paragraph (b) as is possible, but no less than 
the name and the amount of the security, the terms of the order, the 
time when such order was so given or transmitted, the date and time of 
any modifications or cancellations of the order, the date and time of 
execution and the execution price.
    .06 With respect to a bona fide arbitrage order, a Floor 
Participant may execute such order before entering the order into an 
electronic system as required by paragraph (b) above, but such Floor 
Participant must enter such order into such electronic system no later 
than 60 seconds after the execution of such order. With respect to an 
order to offset a transaction made in error, a Floor Participant may, 
upon discovering such error within the same trading session, effect an 
offsetting transaction without first entering such order into an 
electronic system, but such Floor Participant must enter such order 
into such electronic system no later than 60 seconds after the 
execution of such order.
    .07 A Floor Participant who receives orders to buy and sell the 
same security and executes those orders in full immediately upon 
receipt shall record only the information set out in (b)(1), (2), (4), 
(9), (10) and (22) through (28) above.
    .08 Failure to comply with the provisions of this Rule may be 
considered conduct inconsistent with just and equitable principles of 
trade, in violation of Article VIII, Rule 7.
    .09 The provisions of this Rule do not replace any record retention 
obligations to which the Exchange's Participants may be subject under 
the Exchange Act and the rules thereunder.

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's on-floor participants execute trades on the Exchange 
and on other markets.\5\ Currently, the Exchange's electronic systems 
capture information about most of the orders executed on the Exchange 
and about many of the orders executed in other markets. This 
information is used by the Exchange to conduct surveillance of its 
floor participants' trading activities. In some instances, however, the 
Exchange does not have complete information about the orders received 
and executed by its participants or does not have that information in 
electronic form. To bolster its ability to conduct automated 
surveillance of its participants' trading activities, the Exchange is 
proposing to require its floor participants to provide particular data 
about all orders originating on or off the floor of the Exchange for 
execution on the Exchange, as well as all orders issued from the floor 
of the Exchange to any other market or trading venue.\6\ For purposes 
of this submission, these orders will be called ``covered orders.''
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    \5\ On February 9, 2005, the Exchange's proposal to demutualize 
took effect. Under the Exchange's new rules, the Exchange's members 
are referred to as ``participants.''
    \6\ The proposed rule, for example, would require a floor broker 
who receives an order from another participant (whether the 
participant is on-floor or off-floor) to record detailed information 
relating to the order, any changes to the order, and its execution. 
Similarly, if a floor broker receives an order and then transmits it 
to another market, he would be required to record information not 
only about the order, but about its transmission to another market 
and any execution that it received in that market. The proposed rule 
change is designed to provide a complete record of the handling of 
orders received by the Exchange's floor participants and, together 
with a recently-adopted rule, will provide a complete record of any 
orders sent by the Exchange's floor participants to other trading 
venues. See Securities Exchange Act Release No. 52534 (September 29, 
2005), 70 FR 58500 (October 6, 2005) (SR-CHX-2004-25) (rule change 
relating to a prohibition on using a layoff service unless the 
service provides required information to the Exchange).
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    Specifically, through this submission, the Exchange is proposing to 
require floor participants to record, in electronic systems designated 
by the Exchange, the following details about each covered order: (1) 
The symbol of the security; (2) the clearing participant; (3) an order 
identifier that uniquely identifies the order;\7\ (4) the identity of 
the participant recording the order details; (5) the number of shares 
or quantity of the security; (6) the side of the market (i.e., whether 
the order is a buy or sell order); (7) a designation of the order type 
(e.g., market, limit, stop, stop limit); (8) whether the order is 
agency or professional;\8\ (9) whether the order is being handled 
pursuant to Section 11(a)(1)(G) of the Act and any applicable rules 
thereunder; (10) whether the order is short or short exempt; (11) 
whether the order is a bona fide arbitrage order; (12) any limit price 
and/or stop price; (13) the date and time of order receipt or 
transmission (as applicable); (14) the market, off-floor firm, or on-
floor participant to which the order was transmitted or from which the 
order was received (if applicable); (15) the order's time in force; 
(16) any designation as held or not held; (17) any special conditions 
or instructions (e.g., any customer display or do-not-display

[[Page 70005]]

instructions or any all-or-none conditions); (18) any modifications 
that are made to the details set out in (1) through (17) or (20) below, 
for all or part of the order, or any cancellation of all or part of the 
order; (19) the date and time of receipt or transmission of any 
modifications to, or cancellation of, the order; (20) the date and time 
of any order expiration; (21) the identity of the party cancelling or 
modifying the order; (22) the transaction price, if applicable; (23) 
the number of shares executed, if applicable; (24) the date and time of 
execution, if applicable; (25) the contra party to the execution (if 
applicable); (26) the settlement instructions associated with the 
order, if applicable; (27) system-generated time(s) of recording 
required information; and (28) any other information that may be 
required by the Exchange from time to time.\9\ Floor participants would 
be required to record this information immediately after that 
information is received or becomes available.\10\
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    \7\ This order identifier does not change when modifications are 
made to the order, or when it is cancelled, allowing any changes to 
be tracked back to the original order.
    \8\ The Exchange's rules define a ``professional'' order as one 
that is for the account of a broker-dealer, the account of an 
associated person of a broker-dealer, or any account in which a 
broker-dealer or an associated person of a broker-dealer has any 
direct or indirect interest. See CHX Article XXX, Rule 2, 
Interpretation and Policy .04.
    \9\ See CHX Article XX, Proposed Rule 24(b).
    \10\ See CHX Article XX, Proposed Rule 24(c).
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    Proposed Interpretations and Policies .01 to .09 to the proposed 
rule change contain additional information about the information that 
participants must record and preserve. Among other things, these 
interpretations confirm that each required record of the time of an 
event must be expressed in terms of hours, minutes, and seconds. These 
interpretations also provide a definition of the term ``order'' and 
identify particular items of information that must be provided by 
participants who receive orders to buy and sell a security and 
immediately execute those orders.\11\ The remaining interpretations 
note that participants will not be required to record information with 
respect to orders sent or received through the Exchange's MAX[reg] 
system or through any other electronic systems that the Exchange 
recognizes as providing the required information in an acceptable 
format and set out two limited exceptions to the data-recording 
requirements.\12\
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    \11\ Proposed Interpretation and Policy .02 defines an order as 
``any written, oral or electronic instruction to effect a 
transaction.'' This interpretation also notes that a decision by a 
co-specialist, market maker or floor broker to buy or sell 
securities for his or her own account on the floor of the Exchange 
would not constitute an order for purposes of the rule's data 
recording requirements. This exception for principal trading on the 
Exchange's floor is designed to recognize that all necessary 
information about a floor participant's own trading is already 
captured by the Exchange's trade reporting systems.
    Proposed Interpretation and Policy .07 confirms that a floor 
participant who receives orders to buy and sell the same security 
and who executes those orders in full immediately upon receipt, 
would be required to record information only about the security's 
symbol, the clearing organization, the identity of the participant 
firm recording the order details, whether the order is short or 
short exempt, whether the order is being handled pursuant to Section 
11(a)(1)(G) of the Act, the transaction price, the number of shares 
executed, the date and time of execution, settlement instructions, 
the contra side to the execution, a system-generated time of 
recording the required information and any other information 
required from the Exchange from time to time. This requirement is 
designed to recognize that the Exchange currently believes that it 
may not be necessary for the Exchange's participants to record 
detailed order information about orders that are immediately 
executed; at the same time, however, the Exchange has retained the 
ability (through paragraph (b)(28)) to require participants to 
provide additional information about those orders, including 
information that is set out in other provisions of paragraph (b).
    \12\ See Proposed Interpretations and Policies .04 (regarding 
orders sent and received through certain systems), .05 (regarding 
orders that the Exchange expressly recognizes as incompatible for 
entry into an Exchange system) and .06 (regarding bona fide 
arbitrage orders and orders to offset a transaction made in error). 
As set forth below in note 13, the Exchange believes that these 
exceptions are appropriately tailored to ensure that the Exchange's 
participants are not required to enter unnecessary information about 
orders, while still providing information necessary for the 
Exchange's surveillance efforts.
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    The Exchange believes that these proposed requirements 
appropriately permit the Exchange to collect the electronic information 
needed to conduct automated surveillance of its participants' trading 
activities.\13\ The Exchange has worked to tailor the rules so that 
they require participants to record and retain information needed to 
conduct appropriate surveillance, without imposing unnecessary data-
collection requirements.\14\ Moreover, the Exchange is working to 
complete changes to its existing Brokerplex[reg] system, so that that 
system can be used by CHX floor brokers and market makers to record all 
required order details.\15\ As a result, the Exchange's on-floor 
participants will not be required to develop their own data-recording 
systems in response to this rule.\16\
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    \13\ Moreover, this proposal is consistent with recommendations 
made by the independent consultant retained by the Exchange under 
its recent settlement agreement with the Commission. See Securities 
Exchange Act Release No. 48566 (September 30, 2003), Administrative 
Proceeding File No. 3-11282.
    \14\ For example, Proposed Interpretation and Policy .04 
recognizes that participants are not required to record information 
that is already captured by the Exchange's systems or by other 
systems that the Exchange expressly recognizes as providing the 
required data in an acceptable format. (The Exchange's MAX system 
already captures all of the information required by this rule). 
Other exceptions to the recording requirements--such as the 
exceptions for bona fide arbitrage orders and for orders offsetting 
transactions made in error--are designed to recognize participants' 
need to immediately execute certain types of orders, while still 
requiring prompt input of required order information to permit the 
Exchange to conduct appropriate surveillance. Finally, Proposed 
Interpretation and Policy .05--a general provision that would allow 
the Exchange to identify specific types of orders that might be 
exempt from the data-recording requirements when they are 
incompatible for entry into Exchange systems--is designed to cover 
those rare situations where, due to unexpected consequences of 
unrelated systems changes or a software failure, participants cannot 
enter data about a particular type of order into the Exchange's 
systems for a limited period of time. This exception is not intended 
to allow participants to avoid the recording requirements of the 
rule; indeed, it requires participants to record as much information 
about these orders as possible. The Exchange anticipates that both 
it and its participants would work quickly to correct any software 
or systems problems that prevented some or all of the required 
information from being transmitted to, or received by, the Exchange.
    \15\ The CHX has represented that these changes would not delay 
the implementation of the proposed rule change once approved by the 
Commission. Telephone conversation between Ellen J. Neely, President 
and General Counsel, CHX, and Richard Holley III, Special Counsel, 
Division of Market Regulation, Commission, on September 16, 2005. 
The Exchange's Brokerplex system currently can be used by CHX floor 
brokers to manage their orders, route orders to the Exchange's co-
specialists for execution and report executed trades.
    \16\ The Exchange's staff will present to the Exchange's Board 
of Directors a separate rule that confirms the record-keeping 
obligations of its off-floor participants.
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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).\17\ In particular, the CHX believes that 
the proposed rule change is consistent with Section 6(b)(5) of the Act 
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 by permitting the Exchange to require 
its participants to provide the Exchange with data necessary to conduct 
appropriate surveillance of its participants' trading activities.
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    \17\ 15 U.S.C. 78f(b).
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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 burden on competition.

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

    Written comments were neither solicited nor received by the 
Exchange.

[[Page 70006]]

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 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 such proposed rule change, as amended, or
    (B) Institute proceedings to determine whether the proposed rule 
change, as amended, 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-2004-38 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-2004-38. 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. 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-2004-38 and should be submitted on or before December 
9, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. E5-6380 Filed 11-17-05; 8:45 am]
BILLING CODE 8010-01-P