[Federal Register Volume 63, Number 65 (Monday, April 6, 1998)] [Notices] [Pages 16840-16841] From the Federal Register Online via the Government Publishing Office [www.gpo.gov] [FR Doc No: 98-8925] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-39803; File No. SR-CHX-97-32] Self-Regulatory Organizations; Order Approving Proposed Rule Change by the Chicago Stock Exchange, Incorporated Relating to the Acceptance of Oversized Orders in the MAX System March 25, 1998. I. Introduction On December 9, 1997, the Chicago Stock Exchange, Incorporated (``CHX'' or ``Exchange'') filed with the Securities and Exchange Commission (``Commission'') pursuant to Section 19(b)(1) of the Securities Act of 1934 (``Act''),\1\ a proposed rule change which was subsequently amended on January 9, 1998. The proposed rule change to amend the Exchange's rules relating to the entry and acceptance of oversized orders received through the MAX System was published for comment in the Federal Register on February 11, 1998.\2\ No comments were received on the proposal. For the reasons discussed below, the Commission is approving the proposed rule change. --------------------------------------------------------------------------- \1\ 15 U.S.C. 78s(b)(1). \2\ Securities Exchange Act Release No. 39615 (February 3, 1998). --------------------------------------------------------------------------- II. Description of the Proposal Under the Exchange's BEST Rule, Exchange specialists are required to guarantee executions of all agency \3\ market and limit orders for Dual Trading System issues \4\ from 100 shares up to and including 2099 shares. Subject to the requirements of the short sale rule, market orders must be executed on the basis of the Intermarket Trading System's (``ITS'') best bid or offer (``BBO''). Limit order must be executed at their limit price or better when: (1) the ITS BBO at the limit price has been exhausted in the primary market; (2) there has been a price penetration of the limit in the primary market (generally known as a trade-through of a CHX limit order); or (3) the issue is trading at the limit price on the primary market unless it can be demonstrated that the order would not have been executed if it had been transmitted to the primary market \5\ or the broker and specialist agree to a specific volume related to, or other criteria for, requiring an execution. --------------------------------------------------------------------------- \3\ The term ``agency order'' means an order for the account of a customer, but does not include professional orders as defined in CHX, Art. XXX, Rule 2, interpretation and policy .04. That Rule defines a ``professional order'' as any order for the account 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. \4\ Dual Trading System Issues are issues that are traded on the CHX, either through listing on the CHX or pursuant to unlisted trading privileges, and are also listed on either the New York Stock Exchange or American Stock Exchange. \5\ The CHX specialist has the burden to demonstrate that the order would not have been executed had it been routed to the primary market. The Commission notes that this is often accomplished by sending a ``marker'' order to the primary market. See also CHX Article XX, Rule 37(b)(12). --------------------------------------------------------------------------- As stated above, the Exchange's MAX System provides for the automatic execution of orders that are eligible for execution under the Exchange's BEST Rule and certain other orders.\6\ The MAX System has two size parameters which must be designated by the specialist on a stock-by-stock basis. For Dual Trading System issues, the specialist must set the auto-execution threshold at 1099 shares or greater and the auto-acceptance threshold at 2099 shares or greater. In no event may the auto-acceptance threshold be less than the auto-execution threshold. If the order-entry firm sends an order through MAX that is less than or equal to the auto-execution threshold, the order is executed automatically, unless an exception applies. If the order-entry firm sends an order through MAX that is less than the auto-acceptance threshold but greater than the auto-execution threshold, the order is not available for automatic execution but is designated in the open order book. A specialist may manually execute any portion of the order; the difference must remain as an open order. --------------------------------------------------------------------------- \6\ A MAX order that fits under the BEST parameters must be executed pursuant to BEST Rules via the MAX system. If the order is outside the BEST parameters, the BEST Rules do not apply, but MAX system handling rules do apply. --------------------------------------------------------------------------- Under the current MAX rules, if the order-entry firm sends an order through the MAX System that is greater than the specialist's auto- acceptance threshold, a specialist may cancel the order within three minutes of it being entered into MAX. If not canceled by the specialist, the order is designated as an open order.\7\ The Exchange proposed to change the way that these oversized orders are handled. --------------------------------------------------------------------------- \7\ Under current rules, if an oversized market or limit order is received by the specialist, he must either reject the order immediately or immediately display it in accordance with CHX rules and the Commission's Order Execution Rules (Securities Exchange Act Release No. 37619A (Sept. 6, 1996), 61 FR 48290 (Sept. 12, 1996)). If the order is displayed, the specialist must check with the order entry broker to determine the validity of the oversized order. During the three minute period, the specialist can cancel the order and return it to the order entry firm, but until it is canceled the displayed order is eligible for execution. --------------------------------------------------------------------------- First, the Exchange proposed to amend Rule 37(b)(1) of Article XX to [[Page 16841]] change the amount of time in which the specialist can cancel the oversized order. Rather than the current three minute window, the Exchange proposed to reduce this time period to one minute. If the specialist has not canceled the order in the one minute period, the order will be designated as an open order. Second, the Exchange proposed to add interpretation and policy .06 to Rule 37 to specifically describe how oversized orders are to be handled during the one minute period in which the specialist can cancel the order. The interpretation will provide that if the oversized order is an agency limit order, the order must immediately be reflected in the specialist's quote in accordance with CHX rules.\8\ Additionally, during the one minute window, the order must receive ``post protection.'' This means that while the BEST Rule will not apply during this period, the specialist must allow the order to interact with other orders received by the specialist at the post, using the same priority and precedence rules that apply to other orders received at the post. --------------------------------------------------------------------------- \8\ Article XX, Rule 7 of the CHX rules requires every limit order that is priced at or better than the specialist's quote to be included in the specialist's quote, subject to certain exceptions. --------------------------------------------------------------------------- Finally, during the one minute window, the specialist must notify the order sending firm's MAX floor broker representative if the specialist determines to cancel the order. III. Discussion The Commission believes 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 Section 6(b)(5) which requires that the rules of an exchange be 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.\9\ --------------------------------------------------------------------------- \9\ 15 U.S.C. 78f(b)(5). --------------------------------------------------------------------------- The Exchange's proposal reduces the amount of time that a CHX specialist has to reject an order that is larger than the auto- acceptance threshold thereby reducing an impediment to a free and open market. The Commission believes that this will benefit investors because the firm sending the order to the CHX specialist will be more certain of the ultimate status of the order and will no longer have to wait three minutes to determine if the order was being accepted or rejected by the specialist. The Commission believes that it is necessary to impose specific duties on the CHX specialist during the one minute window to ensure that orders are handled consistent with best execution principles. The Commission believes that the Exchange's proposed interpretation and policy .06 to Rule 37 will benefit investors because it clarifies the obligations of the CHX specialist during the one minute period in which the specialist can cancel the order. For example, customer limit orders that are received by the CHX specialist must be displayed immediately, in accordance with the Commission's Limit Order Display Rule \10\ and the Exchange's limit order rule,\11\ even when the size of the limit order is in excess of the auto-acceptance threshold. In addition, under the proposed interpretation and policy .06 to Rule 37, CHX specialists are obligated to give orders in excess of the auto-acceptance threshold post protection during the one minute window, allowing them to interact with other orders received by the specialist at the post. --------------------------------------------------------------------------- \10\ 17 CFR 240.11Ac1-4. \11\ CHX Article XX, Rule 7. --------------------------------------------------------------------------- The Commission also believes that reducing the time frame from three minutes to one minute is an appropriate first step given the many improvements in technology since the three minute window was established. The Commission expects the Exchange to continue to evaluate further reductions as technology advances and causes the one minute window to be too long a period of time. IV. Conclusion For the foregoing reasons, the Commission believes 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 Section 6(b)(5).\12\ --------------------------------------------------------------------------- \12\ 15 U.S.C. 78f(b)(5). --------------------------------------------------------------------------- It is therefore ordered, pursuant to Section 19(b)(2) of the Act,\13\ that the proposed rule change (SR-CHX-97-32) be, and hereby is, approved. \13\ 15 U.S.C. 78s(b)(2). --------------------------------------------------------------------------- For the Commission, by the Division of Market Regulation, pursuant to delegated authority.\14\ --------------------------------------------------------------------------- \14\ 17 CFR 200.30-3(a)(12). --------------------------------------------------------------------------- Margaret H. McFarland, Deputy Secretary. [FR Doc. 98-8925 Filed 4-3-98; 8:45 am] BILLING CODE 8010-01-M