[Federal Register Volume 63, Number 130 (Wednesday, July 8, 1998)]
[Notices]
[Pages 36983-36985]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-18052]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40150; File No. SR-CHX-98-16]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval of Proposed Rule Change by The Chicago
Stock Exchange, Incorporated Relating to the Trading of Nasdaq/NM
Securities on the CHX
July 1, 1998.
On June 17, 1998, 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
Exchange Act of 1934 (``Act''),\1\ the proposed rule change as
described in Items I, II, and III below, which Items have been prepared
by the Exchange. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons and to
grant accelerated approval of the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
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I. Self-Regulatory Organizations Statement of the Terms of
Substance of the Proposed Rule Change
The Exchange hereby requests a six month extension of the pilot
program relating to the trading of Nasdaq/NM Securities on the Exchange
that is currently due to expire on June 30, 1998. Specifically, the
pilot program amended Article XX, Rule 37 and Article XX, Rule 43 of
the Exchange's Rules and the Exchange proposes that the amendments
remain in effect on a pilot basis through December 31, 1998.
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 Exchange included statements
concerning the purpose of, and statutory basis for, the proposed rule
change and discussed any comments it received on the proposed rule
change. The text of these statements may be examined at the places
specified in Item III below. The Exchange has prepared summaries, set
forth in Sections A, B and C below, of the most significant aspects of
such statements.
[[Page 36984]]
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
On May 4, 1987, the Commission approved certain CHX rules and
procedures relating to the trading of Nasdaq/NM securities on the
Exchange.\2\ Among other things, these rules made the Exchange's BEST
Rule guarantee (Article XX, Rule 37(a)) applicable to Nasdaq/NM
securities and made Nasdaq/NM securities eligible for the automatic
execution feature of the Exchange's Midwest Automated Execution System
(``MAX system'').\3\
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\2\ See Securities Exchange Act Release No. 24424 (May 4, 1987),
52 FR 17868 (May 12, 1987) (ordering approving File No. SR-MSE-87-
2). See also Securities Exchange Act Release Nos. 28146 (June 26,
1990) (order expanding the number of eligible Nasdaq/NM securities
to 100); and 36102 (August 14, 1995) (ordering expanding the number
of Nadaq/NM securities to 500).
\3\ The MAX system may be used to provide an automated delivery
and execution facility for orders that are eligible for execution
under the Exchange's BEST Rule and certain other orders. See CHX,
Art. XX, Rule 37(b). A MAX order that fits under the BEST parameters
is executed pursuant to the BEST Rule via the MAX system. If an
order is outside the BEST parameters, the BEST Rule does not apply,
but MAX system handling rules do apply.
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On January 3, 1997, the Commission approved,\4\ on a one year pilot
basis, a program that eliminated the requirement that CHX specialist
automatically execute orders in Nasdaq/NM securities when the
specialists is not quoting at the national best bid or best offer
(``NBBO'').\5\ When the Commission approved the program on a pilot
basis, it stated that the arrangement in place for Exchange specialists
to access OTC market makers was not an ideal linkage between the
markets on a permanent basis and that the Exchange should work with
Nasdaq to establish a more effective linkage. In addition, the
Commission requested that the Exchange submit a report to the
Commission describing the Exchange's experience with the pilot program.
The Commission stated that the report should include a least six months
worth of trading data. Due to programming issues, the pilot program was
not implemented until April, 1997.
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\4\ See Securities Exchange Act Release No. 38119.
\5\ The NBBO is the best bid or offer disseminated pursuant to
SEC Rule 11Ac1-1.
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Six months of trading data did not become available until November,
1997. As a result, the Exchange requested an additional three month
extension to collect the data and prepare the report for the
Commission. On December 31, 1997, the Commission extended the pilot
program for an additional three months, until March 31, 1998, to give
the Exchange additional time to prepare and submit the report and to
give the Commission adequate time to review the report prior to
approving the pilot on a permanent basis.\6\ The Exchange submitted the
report to the Commission on January 30, 1998.
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\6\ See Securities Exchange Act Release No. 39512 (December 31,
1997), 62 FR 1517 (January 9, 1998).
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The Exchange, prior to the pilot expiring, requested another three
month extension. On March 31, 1998, the Commission approved the pilot
for an additional three month period, until June 30, 1998.\7\ The
Exchange now requests another extension of the current pilot program,
through December 31, 1998.
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\7\ See Securities Exchange Act Release No. 39823 (March 31,
1998).
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Under the pilot program, specialists must continue to accept agency
\8\ market orders or marketable limit orders, but only for orders of
100 to 1000 shares in Nasdaq/NM securities rather than the 2099 share
limit previously in place. \9\ Specialists, however, must accept all
agency limit orders in Nasdaq/NM securities from 100 up to and
including 10,000 shares for placement in the limit order book. As
described below, however, specialists are required to automatically
execute Nasdaq/NM orders only if they are quoting at the NBBO where the
order was received.
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\8\ The term ``agency order'' means an order for the account of
a customer, but shall not include professional orders as defined in
CHX, Article XXX, Rule 2, interpretation and policy .04. The Rule
defines a ``professional order'' as any order 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.
\9\ The 100 to 2099 share auto-acceptance threshold previously
in place continues to apply to Dually Listed securities (those
issues that are traded on the CHX and are listed on either the New
York Stock Exchange or American Stock Exchange).
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The pilot program requires the specialist to set the MAX auto-
execution threshold at 1000 shares or greater for Nasdaq/NM securities.
When a CHX specialist is quoting at the NBBO, orders for a number of
shares less than or equal to the auto-execution threshold set by the
specialist will be automatically executed (in an amount up to the size
of the specialist's quote). Orders in securities quoted with a spread
greater than the minimum variation are executed automatically after a
fifteen second delay from the time the order is entered into MAX. The
size of the specialist's bid or offer is then automatically decremented
by the size of the execution. When the specialist's quote is exhausted,
the system will generate an autoquote at an increment away from the
NBBO, as determined by the specialist from time to time, for either 100
or 1000 shares, depending on the issue.\10\
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\10\ Specifically, the autoquote is currently for one normal
unit of trading (usually 100 shares) in issues that became subject
to mandatory compliance with SEC Rule 11Ac1-4 on or prior to
February 24, 1997, and for 1000 shares in other issues.
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When the specialist is not quoting a Nasdaq/NM security at the
NBBO, it can elect, on an order-by-order basis, to manually execute
orders in that security. If the specialist does not elect manual
execution, MAX market and marketable limit orders in that security that
are of a size equal to or less than the auto-execution threshold will
automatically be executed at the NBBO after a twenty second delay.\11\
If the specialist elects manual execution, the specialist must either
manually execute the order at the NBBO or a better price or act as
agent for the order in seeking to obtain the best available price for
the order on a marketplace other than the Exchange. If the specialist
decides to act as agent for the order, the pilot program requires the
specialist to use order-routing systems to obtain an execution where
appropriate. Market and marketable limit orders that are for a number
of shares greater than the auto-execution threshold are not subject to
these requirements, and may be canceled within one minute of being
entered into MAX or designated as an open order.
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\11\ The twenty second delay is designed, in part, to provide an
opportunity for the order to receive price improvement from the
specialist's displayed quote.
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2. Statutory Basis
The basis under the Act for the proposed rule change is the
requirements under Section 6(b)(5) \12\ that an exchange have rules
that are designed, in part, to promote just and equitable principles of
trade, to foster cooperation and coordination with persons engaged in
regulating, clearing, settling, processing information with respect to,
and facilitating transactions in securities, to remove impediments to
and perfect the mechanism of a free and open market and a national
market system.
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\12\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose a burden on competition.
[[Page 36985]]
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
No comments were solicited or received.
III. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Persons making written submission
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549.
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 also will be
available for inspection and copying at the Exchange. All submissions
should refer to file number SR-CHX-98-16 and should be submitted by
July 29, 1998.
IV. Commission's Findings and Order Granting Accelerated Approval
of Proposed Rule Change
The Commission finds that the Exchange's proposal is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to a national securities exchange. Specifically,
the Commission finds that the proposed rule change is consistent with
Section 6(b)(5) of the Act,\13\ which requires that an exchange have
rules designed to prevent fraudulent and manipulative acts and
practices, 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. The Commission also believes that the proposal is
consistent with Section 11A(a)(1)(C) and 11A(a)(1)(D) of the Act
because the Exchange's proposal conforms CHX specialist obligations to
those applicable to OTC market makers in Nasdaq/NM securities, while
CHX provides a separate, competitive market for Nasdaq/NM securities.
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\13\ 15 U.S.C. 78f(b)(5).
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The Commission notes however that, while the Exchange has been
working towards establishing a linkage, specialists and OTC market
makers do not yet have an effective method of routing orders to each
other. The Commission expects the Exchange to continue to work towards
establishing a linkage with the Nasdaq systems as requested in the
January 3, 1997 order.\14\ The Commission is approving the extension of
the pilot so that the rules of the exchange will operate without
interruption.
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\14\ See Securities Exchange Act Release No. 38119 (January 3,
1997), 62 FR 1788 (January 13, 1997).
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The Commission therefore finds good cause for approving the
proposed rule change prior to the thirtieth day after the date of
publication of notice of filing thereof in the Federal Register.
It is Therefore Ordered, pursuant to Section 19(b)(2),\15\ that the
proposed rule change (SR-CHX-98-16) be, and hereby is, approved through
December 31, 1998.
\15\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\16\
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\16\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-18052 Filed 7-7-98; 8:45 am]
BILLING CODE 8010-01-M