76804 Federal Register / Vol. 69, No. 245 / Wednesday, December 22, 2004 / Notices 

4 15 U.S.C. 78s(b)(3)(A).

5 17 CFR 240.19b–4(f)(6).

6 15 U.S.C. 78s(b)(3)(C).

7 17 CFR 200.30–3(a)(12).

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b–4.

or unethically. This can be difficult to 

prove in cases in which the customer is 

unable or unavailable to testify, or 

refuses to testify because he or she is 

relying on the registered person for 

financial advice. The proposed rule 

change would better enable CBOE to 

monitor and bring disciplinary actions 

in cases involving such loans.

The Exchange notes that the 

safeguards provided under the proposed 

rule, including bringing disciplinary 

actions for violations of the rule, are in 

addition to the general powers that 

CBOE has to bring a disciplinary action 

against a registered person who has 

entered into an unethical lending 

arrangement with a customer under 

CBOE Rule 4.1. It is also important to 

note that this proposal does not change 

the application of Regulation T to 

lending activities by associated persons. 

Specifically, the definition of ‘‘creditor’’

under Regulation T extends to 

associated persons of broker-dealers and 

therefore, certain loans to customers by 

associated persons may require 

compliance with the provisions of 

Regulation T. 

2. Statutory Basis 

CBOE believes the proposed rule 

change is consistent with Section 6(b) of 

the Act, in general, and furthers the 

objectives of Section 6(b)(5) of the Act, 

which requires, among other things, that 

CBOE’s rules be designed to prevent 

fraudulent and manipulative acts and 

practices, promote just and equitable 

principles of trade, and protect investors 

and the public interest. CBOE believes 

the proposed rule change is designed to 

accomplish these ends by establishing a 

regulatory framework that will give 

members greater control over lending 

arrangements by permitting members to 

permit such arrangements only if they 

fall within one of five types of 

permissible arrangements, or, as was the 

case before the proposal of this new 

rule, prohibit such arrangements 

altogether. Members that permit such 

arrangements would be required to keep 

written procedures. These procedures 

would enable both members and CBOE 

to proscribe certain customer-broker 

loans and monitor those that have been 

approved. 

B. Self-Regulatory Organization’s 

Statement on Burden on Competition 

The Exchange does not believe that 

the proposed rule change will impose 

any burden on competition that is not 

necessary or appropriate in furtherance 

of the purposes of the Act. 

C. Self-Regulatory Organization’s 

Statement on Comments on the 

Proposed Rule Change Received From 

Members, Participants, or Others 

No written comments were solicited 

or received with respect to the proposed 

rule change. 

III. Date of Effectiveness of the 

Proposed Rule Change and Timing for 

Commission Action 

CBOE has stated that the foregoing 

proposed rule change has become 

effective pursuant to Section 19(b)(3)(A) 

of the Act 4 and Rule 19b–4(f)(6) 

thereunder 5 because the proposed rule 

change: (1) Does not significantly affect 

the protection of investors or the public 

interest; (2) does not impose any 

significant burden on competition; and 

(3) does not become operative for 30 

days from the date of filing, or such 

shorter time that the Commission may 

designate if consistent with the 

protection of investors and the public 

interest. At any time within 60 days of 

the filing of the proposed rule change, 

the Commission may summarily 

abrogate such rule change if it appears 

to the Commission that such action is 

necessary or appropriate in the public 

interest, for the protection of investors, 

or otherwise in the furtherance of the 

purposes of the Act.6

IV. 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. 

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 rulecomments@sec.gov. Please include File 

Number SR–CBOE–2004–66 on the 

subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Jonathan G. Katz, Secretary, 

Securities and Exchange Commission, 

450 Fifth Street, NW., Washington, DC 

20549–0609. 

All submissions should refer to File 

Number SR–CBOE–2004–66. 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 

Section, 450 Fifth Street, NW., 

Washington, DC 20549. Copies of such 

filing also will be available for 

inspection and copying at the principal 

office of CBOE. All comments received 

will be posted without charge; 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 

Number SR–CBOE–2004–66 and should 

be submitted on or before January 12, 

2005.

For the Commission, by the Division of 

Market Regulation, pursuant to delegated 

authority.7

J. Lynn Taylor, 

Assistant Secretary.

[FR Doc. 04–27968 Filed 12–21–04; 8:45 am] 

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–50865; File No. SR–CHX–

2004–03] 

Self-Regulatory Organizations; Notice 

of Filing of Proposed Rule Change by 

the Chicago Stock Exchange, 

Incorporated Relating to Manual 

Execution of Orders and Amendment 

No. 1 Thereto 

December 16, 2004. 

Pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934 (the 

‘‘Act’’),1 and Rule 19b–4 thereunder,2

notice hereby is given that on February 

11, 2004, the Chicago Stock Exchange, 

Incorporated (‘‘CHX’’ or ‘‘Exchange’’) 

filed with the Securities and Exchange 

Commission (the ‘‘Commission’’) the 

proposed rule change as described in 

Items I, II and III below, which Items 

have been prepared by the selfVerDate jul<14>2003 19:42 Dec 21, 2004 Jkt 205001 PO 00000 Frm 00121 Fmt 4703 Sfmt 4703 E:\FR\FM\22DEN1.SGM 22DEN1
Federal Register / Vol. 69, No. 245 / Wednesday, December 22, 2004 / Notices 76805

3For Nasdaq/NM securities, the NBBO is defined 

as the best bid or offer disseminated pursuant to 

SEC Rule 11Ac1–1. For listed securities, the BBO 

is defined as the best bid or offer disseminated by 

the participants in the Intermarket Trading System 

Plan. See CHX Article XX, Rule 37(a)(2).

4Under the CHX’s rules, orders that are executed 

using the CHX’s automatic execution systems are 

executed at the BBO. See CHX Article XX, Rule 

37(b).

5The CHX believes that it is important to note 

that under the current version of the BEST Rule, a 

CHX specialist acting in his principal capacity is 

required to execute an unlimited number of orders 

at the then-prevailing BBO price, up to the BBO 

displayed size, until the consolidated quotation 

stream reflects a change in the BBO price or size. 

As a consequence, if a large number of orders are 

routed to the CHX specialist simultaneously, before 

the consolidated quotation is updated, the CHX 

specialist would be obligated to fill all of the orders 

at the BBO price, despite the fact that the aggregate 

number of shares vastly exceeded the BBO size. The 

CHX asserts that this virtually unlimited liability is 

an unintended, and unwarranted, consequence of 

execution guarantees such as the BEST Rule. 

For example, if the national best bid (‘‘NBB’’) was 

50 × 1000 shares, the CHX specialist would be 

obligated to execute an unlimited number of 

customer sell orders at 50, as long as each order was 

1000 shares or less in size, until the consolidated 

quotation information indicated a change in the 

NBB. Continuing this hypothetical example, assume 

that 200 sell orders, each for 100 shares, were 

routed to the CHX before a change in the NBB to 

49 one second later. Notwithstanding the onesecond pendency of the 50 NBB, the CHX specialist 

would be obligated to buy 20,000 shares at 50, 

when such liquidity at that price was not truly 

present anywhere in the national market system. In 

today’s decimal environment, such extraordinary 

results, which could not have been anticipated 

when the BEST Rule was enacted, occur often.

regulatory organization. On December 

14, 2004, the Exchange filed 

Amendment No. 1 to its original 

submission. The Commission is 

publishing this notice to solicit 

comments on the proposed rule change 

from interested persons.

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

The Exchange proposes to amend 

Article XX, Rule 37 of the CHX Rules, 

which governs, among other things, 

manual execution of market and 

marketable limit orders, to eliminate a 

specific requirement that a specialist 

execute eligible orders at the price and 

size associated with the national best 

bid or offer. The text of the proposed 

rule change appears below. Additions 

are italicized; deletions are in brackets.

* * * * *

RULE 37(a). Guaranteed Executions. 

1. Eligible Orders. Specialists must 

accept and guarantee execution of all 

agency market and marketable limit 

orders from 100 through 5099 shares in 

accordance with this rule. 

2. Market and Marketable Limit 

Orders. With respect to any market or 

marketable limit order not executed 

automatically, a specialist shall use 

reasonable diligence to ascertain the 

best available price for the subject 

security so that the resultant execution 

price is as favorable to the order sender 

as possible under prevailing market 

conditions. Among the factors that will 

be considered in determining whether a 

specialist has used ‘‘reasonable 

diligence’’ are:

(a) the character of the market for the 

security, e.g., price, volatility, relative 

liquidity, and pressure on available 

communications; and

(b) the size and type of transaction.

[shall be obligated to either (a) manually 

execute such order at a price and size 

equal to or better than the NBBO price 

and size at the time the order was 

received; or (b) act as agent for such 

order in seeking to obtain the best 

available price for such order on a 

marketplace other than the Exchange, 

using order routing systems where 

appropriate. The specialist’s obligation 

shall always be subject to the 

requirements of the short sale rule. For 

purposes of this rule, ‘‘NBBO’’ shall 

mean, for Dual Trading System issues, 

the size and price associated with the 

best bid among the American, Boston, 

Cincinnati, Chicago, New York, Pacific, 

Philadelphia or the Intermarket Trading 

System/Computer Assisted Execution 

System (‘‘ITS/CAES’’) quote (‘‘ITS Best 

Bid’’) on a sell order or the price and 

size associated with the best offer 

among the American, Boston, 

Cincinnati, Chicago, New York Pacific, 

Philadelphia or the ITS/CAES quote 

(‘‘ITS Best Offer’’) on a buy order (the 

‘‘ITS Best Bid’’ and ‘‘ITS Best Offer’’ are 

collectively referred to as the ‘‘ITS 

BBO’’). For NASDAQ/NM Securities, 

‘‘NBBO’’ shall mean the price and size 

associated with the best bid 

disseminated pursuant to SEC Rule 

11Ac1–1 on a sell order or price and 

size associated with the best offer 

disseminated pursuant to SEC Rule 

11Ac1–1 on a buy order (collectively, 

the ‘‘NBBO’’); or, if the specialist is 

quoting at the NBBO, the size associated 

with the specialist’s bid or offer and the 

auto-execution threshold designated by 

the specialist.]

* * * * *

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 basis for 

the 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 IV below. The 

Exchange 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 proposes to amend 

Article XX, Rule 37(a) of the CHX Rules, 

which governs, among other things, 

manual execution of market and 

marketable limit orders, to eliminate a 

specific requirement that a specialist 

execute order at the price and size 

associated with the national best bid or 

offer. 

Background. The CHX currently has a 

rule, referred to as the ‘‘BEST Rule,’’

which sets out specific execution 

guarantees for eligible orders. The BEST 

Rule provides that, when executing 

orders manually, as principal, the 

specialist generally must execute the 

order at the then-prevailing BBO price 

up to the BBO displayed quantity, i.e.,

the best price and liquidity available in 

the national market system.3

Alternatively, the specialist may elect to 

act as agent for the order, in which case 

the specialist must obtain the best 

available price for the order, using 

order-routing systems where 

appropriate.4

Since the securities industry 

conversion to decimal trading, the CHX 

asserts that the availability of liquidity 

at a BBO price point has declined, in 

many cases significantly. The Exchange 

represents that a specialist, if he chooses 

to offset his positions in another market, 

often encounters great difficulty in 

accessing liquidity at the BBO price that 

he is obligated to provide. The Exchange 

asserts that this is particularly true in 

the case of manually-executed orders, 

given the associated time latency and 

the frequency with which quotes in 

other markets are changing. 

According to the Exchange, many 

CHX specialists thus believe that it is no 

longer appropriate to guarantee manual 

principal executions at the BBO price. 

Indeed, they believe that in today’s 

trading environment, the BEST Rule 

exposes them to unwarranted liability, 

which they often have no ability to 

mitigate.5 Moreover, they note, CHX 

order-sending firms now have access to 

comprehensive order execution quality 

statistics, rending a ‘‘front-end’’

execution price guarantee unnecessary 

as a means of attracting order flow. 

Many CHX specialists, the Exchange 

76806 Federal Register / Vol. 69, No. 245 / Wednesday, December 22, 2004 / Notices 

6The proposed new standard is substantially 

similar to Rule 2320 (‘‘Best Execution’’) of the 

National Association of Securities Dealers 

(‘‘NASD’’). However, the NASD has filed a 

proposed rule change to amend Rule 2320. See File 

No. SR–NASD–2004–26.

7 15 U.S.C. 78f(b). 8 15 U.S.C. 78f(b)(5).

9 17 CFR 200.30\3(a)(12).

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b–4.

contends, therefore will continue to 

execute orders at the BBO price 

voluntarily, as a means of maintaining 

superior execution quality statistics.

Under the proposed revision of 

Article XX, Rule 37(a), the specific 

provisions of the BEST Rule would be 

deleted. Instead, the specialist’s 

execution obligation would be described 

in more general terms. Under the 

proposed new standard, a CHX 

specialist would, in executing an order 

manually, be obligated to ‘‘* * * use 

reasonable diligence to ascertain the 

best available price for the subject 

security so that the resultant execution 

price is as favorable to the order sender 

as possible under prevailing market 

conditions.’’ Among the factors that will 

be considered by the Exchange’s 

Department of Market Regulation in 

determining whether a specialist has 

used ‘‘reasonable diligence’’ are: (a) The 

character of the market for the security, 

e.g., price, volatility, relative liquidity, 

and pressure on available 

communications; and (b) the size and 

type of transaction.6

Significantly, although this standard 

may appear more general in its terms, it 

does not remove a CHX specialist’s 

obligation to provide a timely best 

execution for each order, nor does it 

modify any other specialist obligations 

set forth in Article XXX of the CHX 

Rules. The CHX Department of Market 

Regulation has indicated that it will 

continue its surveillance of order 

executions to ensure that CHX 

specialists meet all of their obligations 

to each order. 

It is also important to note that the 

CHX rules (specifically, CHX Article 

XX, Rule 37(b)) would continue to 

require execution of the BBO price for 

orders that are automatically executed 

within the Exchange’s MAX system. 

The Exchange represents that there is no 

proposal forthcoming to modify 

automatic execution price guarantees. 

2. Statutory Basis 

The Exchange believes that the 

proposed rule change 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).7 In 

particular, the proposed rule 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.8

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. 

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. 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 other period (i) 

as the Commission may designate up to 

90 days of such date if it finds such 

longer period to be appropriate and 

publishes its reasons for so finding or 

(ii) as to which the self-regulatory 

organization consents, the Commission 

will: 

(A) By order approve the proposed 

rule change, or 

(B) Institute proceedings to determine 

whether the proposed rule change 

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 rulecomments@sec.gov. Please include File 

Number SR–CHX–2004–03 on the 

subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Jonathan G. Katz, Secretary, 

Securities and Exchange Commission, 

450 Fifth Street, NW., Washington, DC 

20549–0609. 

All submissions should refer to File 

Number SR–CHX–2004–03. 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 

Section, 450 Fifth Street, NW., 

Washington, DC 20549. Copies of such 

filing also will be available for 

inspection and copying at the principal 

offices 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 Number SR–CHX–

2004–03 and should be submitted on or 

before January 12, 2005.

For the Commission, by the Division of 

Market Regulation, pursuant to delegated 

authority.9

J. Lynn Taylor, 

Assistant Secretary.

[FR Doc. 04–27943 Filed 12–21–04; 8:45 am] 

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–50844; File No. SR–NYSE–

2004–53] 

Self Regulatory Organizations; New 

York Stock Exchange, Inc.; Order 

Granting Approval to Proposed Rule 

Change and Amendment Nos. 1 and 2 

Relating to a Fee for the NYSE Alerts 

Datafeed 

December 13, 2004. 

On September 17, 2004, the New York 

Stock Exchange, Inc. (‘‘NYSE’’ 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 and Rule 19b–4 

thereunder,2 a proposed rule change to 

establish a fee of $500 per month for a