[Federal Register Volume 64, Number 202 (Wednesday, October 20, 1999)]
[Notices]
[Pages 56548-56553]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-27307]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-42004; File No. SR-CHX-99-16]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change and Amendment Nos. 1 and 2 and Order Granting Accelerated
Approval of Proposed Rules Change and Amendment Nos. 1 and 2 by the
Chicago Stock Exchange Relating to the Implementation of an Extended
Hours Trading Session
October 13, 1999.
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 September 14, 1999, the Chicago Stock Exchange, Incorporated
(``CHX'' or ``Exchange'') filed with the Securities and Exchange
Commission (``SEC'' or ``Commission'') the proposed rule change as
described in Items I and II below, which Items have been prepared by
the CHX. On October 7, 1999, the CHX submitted Amendment No. 1 to the
proposed rule change.\3\ On October 8, 1999, the CHX filed Amendment
No. 2 to the proposed rule change.\4\ The
[[Page 56549]]
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons, and to grant accelerated
approval to the proposed rule change and Amendment Nos. 1 and 2 on a
pilot basis through March 1, 2000.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Letter to Katherine A. England, Assistant Director, Division
of Market Regulation (``Division''), Commission, from Paul B.
O'Kelly, Executive Vice President, Market Regulation and Legal, CHX,
dated October 5, 1999 (``Amendment No. 1''). In Amendment No. 1, the
CHX proposes to amend the initial filing to request that the
Commission approve its proposed extended hours trading session on a
pilot basis through March 1, 2000.
\4\ Letter to Katherine A. England, Assistant Director,
Division, Commission, from Paul B. O'Kelly, Executive Vice
President, Market Regulation and Legal, CHX, dated October 7, 1999
(``Amendment No. 2''). In Amendment No. 2, the CHX proposes that,
although effective upon Commission approval, its proposed extended
trading session will not be operational until October 29, 1999.
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change.
The Exchange proposes to add new Article XXA to the Exchange's
Rules to implement an extended hours trading session (the ``E-
SessionTM'') on a pilot basis through March 1, 2000. The
Exchange also proposes to amend the following rules to reflect changes
to trading times and to various procedures that arise because of the E-
Session: Article IX, Rule 10(b); Article XX, Rules 1, 2 and 37; Article
XXI, Rule 1; Article XXXI, Rules 6 and 9; and Article XXXIV. Below is
the text of the proposed rule change. Proposed new language is
italicized; proposed deletions are in brackets;
Article XXA--Trading Rules and Procedures Applicable To Equity Trading
During the Extended Trading Session
Introduction
The trading rules and procedures in this Article shall apply to
trading conducted on the Exchange during the Extended Trading Session
(the ``E-Session''). Unless otherwise defined in this Article,
capitalized terms used in this Article shall have the same meanings
given them elsewhere in the Rules. Except where the context requires
otherwise, the provisions of the Constitution and all other Rules and
policies of the Board of Governors, including those that apply to
trading conducted during the Primary Trading Session (the ``PTS''),
shall continue to be applicable to trading during the E-Session. If any
rule in this Article is inconsistent with any other provisions of the
Rules, the provisions of this Article shall control and shall be deemed
to supplement or amend the inconsistent provisions.
Hours of Trading
Rule 1. The E-Session shall be conducted on the Floor of the
Exchange, commencing immediately following the close of the Post
Primary Trading Session (the ``PPTS'') and ending at 5:30 P.M. Central
time, Monday through Friday; provided, however, that no E-Session will
be conducted, or a shortened E-Session will be conducted, on those days
identified by the Board of Governors, in its discretion, from time to
time. So long as the rules in this Article remain in effect, the
Secondary Trading Session shall be discontinued.
Eligible Securities
Rule 2. Securities eligible for trading during the E-Session (``E-
Session Eligible Securities'') shall be selected, from time to time, by
the Committee on Floor Procedure from the securities eligible for
trading during the PTS.
E-Orders
Rule 3. Orders eligible to be entered in the E-Session on a given
day (``E-Orders'') shall consist of those orders received by the
Exchange on that day that are designated as E-Orders in the manner
specified by the Exchange. All E-Orders transmitted via MAX shall
include the account type designators in Article XX, Rule 37(b)(9).
Unexecuted Orders
Rule 4. All E-Orders for E-Session Eligible Securities remaining
unexecuted at the end of an E-Session shall automatically be canceled.
Specialist Firms
Rule 5. The specialist firm for a security traded in the E-Session
shall be the specialist firm assigned to that same security in the PTS,
unless that specialist firm, with the approval of the Committee on
Specialist Assignment and Evaluation, has transferred the assignment to
another specialist firm for purposes of the E-Session only. A
specialist firm assigned to one or more securities in the E-Session may
cease acting in that capacity only with the permission of the Committee
on Specialist Assignment and Evaluation.
Co-Specialists
Rule 6. A specialist firm may designate any qualified co-
specialists in its assigned securities for the E-Session, whether or
not they are co-specialists for those same securities during the PTS. A
co-specialist must maintain a continuous, two-sided market in each
assigned security.
Preopening Orders
Rule 7. Preopening orders in all E-Session Eligible Securities will
be eligible for a single price opening.
Manner of Making Bids and Offers
Rule 8. The only orders eligible to be entered during the E-Session
are unconditional limit orders for E-Session Eligible Securities. These
orders shall be electronically and directly transmitted, via MAX, to
the specialist's limit order book; except that Floor Brokers (1) may
route limit orders via MAX to the specialist's limit order book or,
where permissible, transmit them to another market; or (2) may, after
receiving a limit order to buy and a limit order to sell an equivalent
amount of the same security (a) execute the orders at the specialist's
post pursuant to Article XX, Rule 23 or (b) route the orders via MAX to
the specialist's limit order book. NASDAQ System market makers, acting
in their capacities as market makers, shall have direct telephone
access to the specialist post in each NASDAQ/NM Security in which that
market maker is registered as market maker to transmit orders for
execution on the Exchange.
Specialist's Books
Rule 9. The book of limit orders entered for execution in the E-
Session shall be maintained by the specialist in the E-Session and
shall be separate from the specialist's books of limit orders
maintained for that same security in the PTS and the PPTS.
Trading Halts Due to Extraordinary Market Volatility
Rule 10. If trading in all securities on the Exchange is halted
during the PTS pursuant to Article IX, Rule 10A, and such halt is still
in effect at the close of the PTS, the Exchange shall cancel the E-
Session scheduled for that day. Two floor officials may halt trading in
any or all securities during an E-Session if they determine that such
action is necessary to preserve a fair and orderly market. Once trading
in a given security is halted, two floor officials may reopen trading
in the halted security if they determine that a fair and orderly market
shall ensue from such action.
Intermarket Trading System
Rule 11. The Intermarket Trading System (``ITS'') shall be in
operation any time during the E-Session when another participant market
is open for trading.
Customer Disclosure
Rule 12. No member or member organization may accept an order from
a non-member for execution in the E-Session without first disclosing to
that non-member that: (1) orders for E-Session Eligible Securities are
eligible only for a single E-Session and, if not executed during that
E-Session, shall automatically be canceled; (2) unconditional limit
orders are the only orders that are eligible for execution in the E-
Session; (3) there is likely to be less liquidity during trading that
occurs once normal trading hours have ended and, as a consequence,
there may be
[[Page 56550]]
greater fluctuations in securities prices; and (4) distinct systems and
facilities trade securities after normal trading hours have ended and,
as a consequence, at any particular time, quotations and transaction
prices for a security may vary among those systems.
Article IX--Trading Rules
* * * * *
Business Days and Hours of Trading
* * * * *
Rule 10(b) The Exchange will be open for business for three
trading sessions during each business day.
The first trading session (the ``Primary Trading Session'') will be
conducted on the floor of the Exchange (i) during the same hours the
security is traded on its primary market, if the Exchange is not the
primary market for such security, provided, however, if the primary
market for such security is the Pacific Stock Exchange, the Primary
Trading Session for that security shall end no later than 3 P.M. [p.m.]
Central time, or (ii) from 8:30 A.M. to 3 P.M. Central time, Monday
through Friday, if the Exchange is the primary market for such
security. Notwithstanding the foregoing, trading in the Chicago Basket
shall be conducted on the floor of the Exchange from 8:30 A.M. to 3:15
P.M., Central time, Monday through Friday.
The next trading session (the ``Post Primary Trading Session'')
will be conducted on the floor of the Exchange for orders and
securities designated as eligible for the Post Primary Trading Session,
pursuant to Article XX, Rule 37. The Post Primary Trading Session shall
be one-half hour after the close of regular trading on the primary
market. In the event that trading on the Exchange is halted during the
Primary Trading Session pursuant to Article XX, Rule 10A, and such halt
is still in effect at the close of a Primary Trading Session, the
Exchange will cancel the Post Primary Trading Session scheduled for
that day.
The last session the ``E-Session'') shall be conducted on the floor
of the Exchange, commencing immediately following the close of the Post
Primary Trading Session and ending at 5:30 P.M., Central time, Monday
through Friday; provided, however, that no E-Session will be conducted,
or a shortened E-Session will be conducted, on those days identified by
the Board of Governors, in its discretion, from time to time.
So long as the E-Session is being held, [(]the [``]Secondary
Trading Session,['')] which was [will be] conducted through the
Portfolio Trading System, pursuant to the provisions of Article XXXV
from 3:30 P.M. to 5 P.M., Central time, Monday through Friday, will be
discontinued. [The Floor of the Exchange shall be closed during the
Secondary Trading Session.]
In the event of a crisis, the chairman or the vice-chairman of the
Board of Governors or the president may, with the prior approval of a
governor from a member firm and a governor from the floor, suspend
trading at any time during a session.
Article XX--Regular Trading Sessions Application
Rule 1. These Rules shall apply to all Exchange Contracts made on
the Exchange during the Primary Trading Session, [and] the Post Primary
Trading Session and the E-Session and, to the extent determined by the
Exchange to be applicable, to Exchange Contracts not made on the
Exchange.
* * * * *
Hours of Floor Dealings
Rule 2. Except as provided in Article XX, no member or member
organization shall make any bid, offer or transaction upon the Floor of
the Exchange, issue a commitment to trade through ITS from the Floor,
or send an order in a Nasdaq/NM Security for execution via telephone to
a NASDAQ System market maker other than during the Primary Trading
Session, [or] the Post Primary Trading Session or the E-Session, except
that a specialist may issue and receive pre-opening notifications and
pre-opening responses, pursuant to the provisions of the Plan relating
to the Pre-Opening Application of the System, before the official
opening of business of the Exchange and loans of money or securities
may be made after those hours.
* * * * *
Guaranteed Execution System and Midwest Automated Execution System
Rule 37.(a) Guaranteed Executions. The Exchange's Guaranteed
Execution System (the BEST System) shall be available, during the
Primary Trading Session and the Post Primary Trading Session, to
Exchange member firms and, where applicable, to members of a
participating exchange who send orders to the Floor through a linkage
pursuant to Rule 39 of this Article, in all issues in the specialist
system which are traded in the Dual Trading System and NASDAQ/NM
Securities.
* * * * *
Article XXI--Exchange of Contracts, Tickets and Comparisons
Reporting of Transactions
Rule 1. The Exchange shall report all transactions executed on the
Floor during the Primary Trading Session, Post Primary Trading Session,
the E-Session or , when it is in operation, through the Portfolio
Trading System. It shall be the duty of every member to advise the
Exchange of each of his transactions as promptly as possible.
Article XXXI--Odd Lots and Odd-Lot Dealers, Dual System
* * * * *
Dealer Required To Purchase All Odd Lots Offered
Rule 6. In any security in which he or it is registered as such, an
odd-lot dealer shall be required, during the Primary Trading Session
and the Post Primary Trading Session, to purchase all odd lots offered
him or it by any member or member organization of the Exchange and he
or it shall be required to sell to any member or member organization of
the Exchange any odd lots bid for by such member or member
organization.
Execution of Odd-Lot Orders During the Primary Trading Session
Rule 9.(a) Exclusive Issues. * * *
* * * * *
Execution of Odd-Lot Orders During the E-Session
Rule 9a. During the E-Session, odd lot orders shall be handled
according to the requirements of Article XXA, Rule 8.
Article XXXIV--Registered Market Makers--Equity Floor
Rule 1. A registered market maker shall only participate in
transactions, while on the trading floor, during the Primary Trading
Session and Post Primary Trading Session. A registered market maker
shall effect all of his transactions in securities traded on the
Exchange so that they constitute a course of dealings reasonably
calculated to contribute to the maintenance of a fair and orderly
market. No registered market maker shall enter into transactions or
make bids or offers that are inconsistent with such a course of
dealings.
* * * * *
II. Self-Regulatory Organizations'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
[[Page 56551]]
proposed rule change and discussed any comments it received regarding
the proposed rule change. The text of these statements may be examined
at the places specified in Item III 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 is proposing to add new Article XXA and to amend
several related rules, as detailed above, to implement an extended
hours trading session. According to the Exchange, market participants
and CHX members are demanding that the Exchange begin trading in hours
that extend beyond the current trading day. The Exchange believes that
after-hours trading may well become a permanent feature of the U.S.
securities market and believes that investors will be best served if
exchanges are participants in that market.
The operation of the E-Session. The E-Session extended trading
hours session will be held from 3:30 p.m. (immediately following the
close of the CHX's post primary trading session) to 5:30 p.m., Central
time, Monday through Friday.\5\
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\5\ See proposed amendments to Article IX, Rule 10(b) (Business
Days and Hours of Trading) and Article XX, Rule 2 (Hours of Floor
Dealing).
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Trading during the E-Session will be conducted, in some respects,
as it is during the CHX's primary trading session; however, the
Exchange has added new features to more fully automate the transmission
of orders and to provide additional protections to investors who trade
during the E-Session. Only unconditional limit orders will be eligible
for execution in the E-Session and each limit order must be
appropriately designated for trading in the E-Session. Any orders
remaining unexecuted at the end of the E-Session will be automatically
canceled and will not carry over to any other trading session.
Specialist firms will continue to make two-sided, continuous markets in
the stocks assigned to them during the existing trading sessions at
their posts on the floor of the CHS, unless a specialist firm has
transferred its assignment, for the E-Session only, to another
specialist firm with the approval of the CHX's Committee on Specialist
Assignment and Evaluation (``CSAE'').
During the E-Session, in most cases, limit orders must be
electronically and directly transmitted, via the MAXTM
electronic order routing system, to the specialist's limit order
book.\6\ Floor brokers may route limit orders to the specialist's limit
order book via MAX or may transmit the orders to another market. In
addition, a floor broker may route orders to buy and sell equivalent
quantities of the same security eligible to be executed at the same
price through MAX to the specialist's limit order book or may execute
those orders as a crossing transaction at the specialist's post in
accordance with existing Exchange rules.
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\6\ Preopening orders in all E-Session Eligible Securities will
be eligible for a single price opening. See proposed Article XXA,
Rule 7. The single price to be applied to preopening orders will be
determined based on the preopening limit orders represented on the
limit order book at that time. In the event that there are no
preopening limit orders represented on the limit order book at that
time. In the event that there are no preopening limit orders on the
book, the specialist will determine the opening price based on the
closing price of the primary trading session. Telephone conversation
between Paul O'Kelly, Executive Vice President, Market Regulation
and Legal, CHX, and Deborah Flynn, Special Counsel, Division,
Commission, on October 13, 1999.
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Expect as described in Article XXA or in the rules amended as part
of this submission, execution, reporting, and clearance and settlement
of transactions that occur during the E-Session will follow the
procedures currently in place for those activities in the Exchange's
primary trading session.\7\ Among other things, the National Securities
Clearing Corporation (``NSCC'') will clear the transaction that take
place during this session \8\ and the Securities Industry Automation
Corporation (``SIAC'') and Nasdaq, Inc. will disseminate CHX quotations
and trade data.
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\7\ See proposed amendments to Article XX, Rule 1 (Application)
and Article XXI, Rule 1 (Reporting of Transaction).
\8\ Transactions that take place during the E-Session will be
reported to NSCC as part of the same end-of-day transmissions used
for transactions conducted during the regular trading session. As a
result, these transactions will be reported as same-day trades and
will be subject to the normal three-day (``T+3'') settlement cycle.
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The Exchange, however, proposes three changes to existing rules
that arise from either the Exchange's desire to more fully automate the
E-Session or from the fact that no primary market will be immediately
available during the E-Session. First, the CHX's Guaranteed Execution
System (the ``Best System'') and the automatic execution features of
the Midwest Automated Execution System will not operate during the E-
Session. In general, the Best System requires specialists to accept and
execute orders at prices keyed to the primary market in each security.
The primary market likely will not be immediately available during the
E-Session. The second change required by the E-Session relates to the
execution of odd-lot orders. Current CHX rules require odd-lot dealers
to execute all odd-lot orders from members and member organizations and
require executive of all odd-lot orders (from members and others) at
certain prices keyed to transactions on the primary market. Like the
rules relating to the Best System, these rules will apply during the E-
Session because of the likely absence of a primary market similar to
the one that exists during normal trading hours. Finally, current
Exchange rules permit market makers to operate during the primary
trading session. Because market makers will not have access to MAX
terminals, and therefore cannot route order to the specialists' limit
order books during the E-Session, market makers will not participate in
the E-Session from other trading floor. The amendments to Article XX,
Rule 37 (relating to the Best System), Article XXXI, Rules 6 and 9
(Relating to odd-lot order execution) and Article XXXIV (relating to
market makers) reflect these changes.
Securities eligible for trading during the E-Session. The CHX's
Committee on Floor Procedure will identify, from time to time, the
securities eligible for trading during the E-Session. At its meeting on
September 21, 1999, the Committee on Floor Procedure adopted the list
of potentially eligible securities recommended to it by the Exchange's
New Product Development Committee. The 311 securities approved by the
Committee on Floor Procedure include the securities listed on the
Standard & Poor's (``S&P'') 100 Stock Index TM (``OEX'') as
of August 30, 1999, the securities listed on the Nasdaq-100 Index
(``NDX'') as August 30, 1999, and any other securities
that ranked among the 100 most active listed and 100 most active New
York Stock Exchange (``NYSE'') or Nasdaq/NMS securities, and certain
S&P Midcap and S&P 9 Select SPDRs securities as of the end of the
second quarter of 1999.\9\
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\9\ Telephone conversation between Paul O'Kelly, Executive Vice
President, Market Regulation and Legal, CHX, and Deborah Flynn,
Special Counsel, Division, Commission, on October 7, 1999.
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Members eligible to participate in the E-Sesson. All CHX members
will access to the E-Session, in accordance with applicable CHX
rules.\10\
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\10\ Under a rule recently proposed by the CHX, if approved by
the Commission, CHX members would be able to lease certain E-Session
trading privileges to others, so long as the lessees are approved as
members of the Exchange and meet other requirements. See Securities
Exchange At Release No. 41968 (September 30, 1999), 64 FR 54701
(October 7, 1999) (noticing File No. SR-CHX-99-08).
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[[Page 56552]]
Trading halts due to extraordinary market volatility. If trading in
all securities on the CHX is halted during the primary trading session
and the halt remains in effect at the close of that session, the
Exchange will cancel the E-Session for that day. Two CHX floor
officials can halt trading in any or all securities during and E-
Session if they determine that such action is necessary to preserve a
fair and orderly market, and two floor officials may reopen trading in
any halted security on the same basis.
Mandatory disclosures to non-members. Because the E-Session
operates in a manner, and at a time, that is different from the CHX's
primary trading session, the proposal requires members to provide
specific disclosures to non-members before accepting orders for
execution in the E-Session. Specifically, a member cannot accept an
order from a non-member before first disclosing that: (1) Orders for E-
Session Eligible securities are eligible only for a single E-Session
and, if not executed during that E-Session, shall automatically be
canceled; (2) unconditional limit orders are the only orders that are
eligible for execution in the E-Session; (3) there is likely to be less
liquidity during trading that occurs once normal trading hours have
ended and, as a consequence, there may be greater fluctuations in
securities prices; and (4) distinct systems and facilities trade
securities after normal trading hours have ended and, as a consequence,
at any particular time, quotations and transaction prices for a
security may vary among those systems. These disclosures are designed
to ensure that participants in the after-hours market understand the
potential risks of that participation.
Surveillance and oversight. The Exchange will surveil E-Session
trading using enhanced surveillance programs.\11\ E-Session order
delivery, quoting and matching will be almost entirely controlled by
the Exchange's electronic systems. These systems should reduce the
possibility for intentional or inadvertent mishandling of orders and
will enhance the effectiveness of the surveillance programs.
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\11\ Letters to Belinda Blaine, Associate Director, Division,
Commission, from Paul B. O'Kelly, Executive Vice President, Market
Regulation and Legal, CHX, dated October 6, 1999 and October 7,
1999.
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Procedures for reviewing capacity, security and contingency
planning. The CHX plans to use many of the same review procedures for
systems security, capacity management, and recovery and contingency
planning that it employs for the systems that support the primary
trading session.
2. Statutory Basis
The CHX believes that the proposed rule change is consistent with
Section 6(b)(5) of the Act \12\ 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.
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\12\ 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 will
impose any inappropriate burden on competition. Indeed, the Exchange
believes that the proposed rule change will foster competition in the
after-hours market.
C. Self-Regulatory Organization's Statement on Comments Regarding the
Proposed Rule Change Received From Members, Participants or Others
No written comments were either 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, as amended, is consistent with the act. Persons making written
submissions should file six copies thereof with the Secretary,
Securities and Exchange Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549-0609. Copies of the submissions, 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 at the Commission's Public Reference Room. Copies of such
filings will also be available for inspection and copying at the
principal office of the CHX. All submissions should refer to File No.
SR-CHR-99-16 and should be submitted by November 10, 1999.
IV. Commission's Findings and Order Granting Accelerated Approval
of Proposed Rule Change
The Commission has reviewed carefully the CHX's proposed rule
change and believes, for the reasons set forth below, that the proposal
is consistent with the requirements of Section 6 of the Act \13\ and
the rules and regulations thereunder applicable to a national
securities exchange.\14\ Specifically, the Commission believes that, by
providing retail investors with an additional means to trade after
regular trading hours, the proposal is consistent with Section 6(b)(5)
of the Act \15\ in that it is designed to remove impediments to, and to
perfect the mechanism of, a free and open market. The implementation of
the CHX's E-Session should enhance competition in the after-hours
market. Currently, several electronic trading systems provide retail
investors the opportunity to trade after-hours. The presence of a
national securities exchange in the after-hours market should provide
retail investors with an alternative forum through which to conduct
after-hours transactions.
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\13\ 15 U.S.C. 78f.
\14\ In approving this rule, the Commission has considered the
proposed rule's impact on efficiency, competition, and capital
formation. 15 U.S.C. 78c(f).
\15\ 15 U.S.C. 78f(b)(5).
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The Commission also believes that the rules and regulations
applicable to Exchange members should enhance the transparency and
integrity of the after-hours market and promote the goals of the
national market system. Specifically, the Commission finds that the
proposed rule change is consistent with Section 11A(a)(1)(C) of the
Act.\16\ Congress found in those provisions that it is in the public
interest and appropriate for the protection of investors and the
maintenance of fair and orderly markets to assure the availability to
brokers, dealers, and investors of information with respect to
quotations for and transactions in securities, and to assure the
practicability of brokers executing investors' orders in the best
market.\17\ The proposed rule change accomplishes the objectives of the
Act by ensuring that Nasdaq and SIAC systems, which are used by market
participants to communicate quotations and transactions, will be
available to investors outside of traditional market hours, thereby
providing for greater transparency in the after-hours market.
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\16\ 15 U.S.C. 78k-1(a)(1)(C).
\17\ Id.
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In addition, the Commission notes that the CHX has added new
features to
[[Page 56553]]
more fully automate the transmission of orders and to provide
additional protections to investors who trade during the E-Session. For
example, only unconditional limit orders will be eligible for execution
in the proposed E-Session and all such orders must be specifically
designated as E-Session orders. E-Session orders that are not executed
during the E-Session will be automatically canceled and are not carried
over to the next-day primary session. The Commission further notes that
the CHX proposes to require its members to provide certain disclosures
to non-members about the proposed E-Session. The Commission believes
that the CHX's proposed mandatory disclosures to non-members should
ensure that customers are reasonably informed about the specific risks
associated with participation in the after-hours market before their
orders are accepted by a CHX member. These requirements are designed to
limit, to the extent possible, the likelihood of investor confusion
regarding the significant differences between the E-Session and the
existing trading sessions. Moreover, the proposed requirement that
specialist firms continue to make two-sided, continuous markets in the
securities assigned to them for the existing trading sessions may
provide further liquidity for investor orders.
In the Commission's view, the CHX's proposal to require its members
to follow the rules and procedures currently in place for the existing
trading session, with certain exceptions, is reasonable. The Commission
notes that proposed exceptions result from the CHX's desire to more
fully automate its E-Session and the fact that no primary markets are
expected to be operating in the after-hours market at the time the
CHX's E-Session is implemented. Although the Commission believes that
the proposed exceptions are reasonable at this time, the Commission
expects that the CHX's Best System and its existing rules governing
odd-lot orders would be applied by the CHX to the E-Session as soon as
the primary markets initiate trading in the after-hours market.\18\
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\18\ These changes would require the CHX to submit a rule filing
with the Commission pursuant to Section 19(b) of the Act. 15 U.S.C.
78s(b).
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The Commission further notes that the CHX has represented that it
intends to implement enhanced surveillance procedure with respect to
the proposed E-Session.\19\ The enhanced surveillance capabilities
should assist the CHX in satisfying the requirements of Section 6(b)(5)
of the Act \20\ that Exchange proposals be designed to promote just and
equitable principles of trade.
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\19\ See supra note 11.
\20\ 15 U.S.C. 78f(b)(5).
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Finally, the CHX has requested that the Commission find good cause
pursuant to Section 19(b)(2) of the Act \21\ for approving the proposed
rule change prior to the 30th day after publication in the Federal
Register. The Commission finds good cause for approving the proposed
rule change prior to the 30th day after the date of publication of
notice of filing thereof in the Federal Register because accelerated
approval will benefit investors by providing retail investors with
another venue, in this case, a national securities exchange, for
executing transactions after regular trading hours. Moreover, the rules
and regulations applicable to Exchange members should increase
competition in, and enhance the transparency of, the after-hours
market. In particular, SIAC and Nasdaq will disseminate CHX quotations
and trade data on a real-time basis over the consolidated tape.
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\21\ 15 U.S.C. 78s(b)(2).
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The Commission further believes that good cause exists for
approving Amendment No. 1 to the proposed rule change prior to the
thirtieth day after the date of publication in the Federal Register.
The Commission notes that Amendment No. 1 merely establishes the
extended hours trading session as a pilot program, scheduled to expire
on March 1, 2000. The Commission believes that designation the E-
Session as a pilot program will provide the Commission and the CHX with
additional time to evaluate the issues implicated by after-hours
trading. In addition, a pilot program should provide the Commission and
the CHX with greater flexibility to modify the program to ensure
consistency across markets when the primary markets extend their
trading hours.
The Commission believes that good cause also exists to accelerate
approval of Amendment No. 2 to the proposed rule change. Amendment No.
2 delays the date on which the proposal becomes operative to October
29, 1999 to provide the Exchange additional time to ensure that its
systems are ready. The Commission believes that it is prudent for the
CHX to take the requisite time to ensure that its systems are fully
prepared prior to implementing its proposed E-Session. The Commission
finds, therefore, that granting accelerated approval of the proposed
rule change, including Amendment Nos. 1 and 2, is appropriate and
consistent with Section 6 of the Act.\22\
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\22\ 15 U.S.C. 78f.
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V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\23\ that the proposed rule change (SR-CHX-99-16), as amended, is
hereby approved on an accelerated basis as a pilot program, through
March 1, 2000.
\23\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\24\
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\24\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-27307 Filed 10-19-99; 8:45 am]
BILLING CODE 8010-01-M