[Federal Register Volume 62, Number 172 (Friday, September 5, 1997)]
[Notices]
[Pages 47078-47080]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-23601]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38989; File No. SR-CHX-97-3]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change, Amendments Nos. 1, 2 and 3 by The Chicago Stock Exchange, Inc., 
and Order Granting Accelerated Partial Approval to the Proposed Rule 
Change Relating to the Trading of Nasdaq National Market Securities on 
the Chicago Stock Exchange

August 28, 1997.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on February 17, 1997, the 
Chicago Stock Exchange, Incorporated (``CHX'' or ``Exchange'') filed 
with the Securities and Exchange Commission (``Commission'') a proposed 
rule change relating to quotes in the Midwest Automated Execution 
System (``Max system'') for Nasdaq National Market (``Nasdaq/NM'') 
securities. On May 14, 1997, the Exchange submitted Amendment No. 1 to 
the rule filing to limit the application of the proposed rule change to 
150 Nasdaq/NM securities. On July 7, 1997, the Exchange submitted 
Amendments Nos. 2 and 3 to the rule filing clarifying which 150 Nasdaq/
NM securities would be subject to a reduced minimum quotation size. The 
proposed is described in Items I, II, and III below, which Items have 
been prepared by the self-regulatory organization. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.
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    \1\ 15 U.S.C. Sec. 78s(b)(1).
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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 relating to the 
generation of an autoquote when a specialist's quote in a Nasdaq/NM 
security is exhausted due to an automatic execution. Below is the text 
of the proposed rule change. Proposed new text is in italics; deleted 
text is in brackets.

Article XX

Rule 37. Guaranteed Execution System and Midwest Automated Execution 
System

    (a) Guarantee Executions. The Exchange's Guaranteed Execution 
System (the BEST System) shall be available 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. System orders shall be 
executed pursuant to the following requirements:
    1. Eligible Orders. Specialists must accept and guarantee execution 
on all agency orders in Dual Trading System Issues from 100 up to and 
including 2099 shares in accordance with this rule. Specialists must 
accept and execute all agency market orders or marketable limit orders 
in NASDAQ/NM [s]Securities from 100 up to and including 1000 shares in 
accordance with this rule. Specialists 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.
    2.-7. No change in text.
    (b) Automated Executions. The Exchange's Midwest Automated 
Execution System (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 (Article XX, Rule 37(a)) and 
certain other orders. In the event that an order that is subject to the 
BEST Rule is sent through MAX, it shall be executed in accordance with 
the parameters of the BEST Rule and the following. In the event that an 
order that is not subject to the BEST Rule is sent through MAX, it 
shall be executed in accordance with the parameters of the following:
    (1)-(6). No change in text.
    (7) Execution of NASDAQ/NM [issues] Securities. In NASDAQ/NM 
[Issues] Securities, if the specialist is quoting at the NBBO at the 
time a MAX market or marketable limit order is received, that order 
shall automatically be filled at such NBBO (after the same time delays 
specified in paragraph 6 above for Dual Trading System issues) up to 
the size of the specialist's bid or offer (as the case may be). In such 
case, the specialist's bid or offer will be decremented by the size of 
the execution. In the event the specialist's bid or offer is exhausted, 
the system will generate a quote [\1/8\ point] an increment away from 
the NBBO as determined by

[[Page 47079]]

the specialist from time to time, for 1000 shares; provided, however, 
if the Nasdaq/NM Security became subject to mandatory compliance with 
SEC Rule 11Ac1-4 on or prior to February 24, 1997, the size of the 
quote that is generated will be one normal unit of trading (usually 100 
shares). If the specialist is not quoting at the NBBO at the time a MAX 
market or marketable limit agency order is received, such order shall 
be automatically filled at the NBBO up to the size of the auto-
execution threshold if the specialist has not, within 20 seconds after 
receipt of the order, complied with the manual execution requirement of 
Rule 43(d) of this Article.
    (8)-(13) No change in text.

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 self-regulatory organization 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
    On January 3, 1997, the Commission approved certain Exchange rules 
relating to the trading of Nasdaq/NM securities on the Exchange on a 
one-year pilot basis, ending in December, 1997.\2\ Among other things, 
the January Order set the auto-execution threshold at 1000 shares or 
greater for Nasdaq/NM securities. Orders for a size less than or equal 
to the auto-execution threshold set by the specialist are automatically 
executed if the CHX specialist is quoting at the National Best Bid or 
Offer (``NBBO'') for the lesser of the size of the order or the 
specialist's quote. The orders 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 automatically decremented by 
the size of the execution and, when the specialist's quote is 
exhausted, the system then generates an autoquote \1/8\th point away 
from the NBBO for 1000 shares.
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    \2\ See Securities Exchange Act Release No. 38119 (January 3, 
1997), File No. SR-CHX-96-16 (the ``January Order'').
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    The purpose of the proposed rule change is to permit a specialist 
to autoquote for 100 shares for certain Nasdaq/NM securities \3\ and to 
change the increment by which a specialist can quote away from the NBBO 
from \1/8\th point away to an increment that will be determined by the 
specialist from time to time. This proposed rule change will conform 
the CHX rules for Nasdaq/NM securities to the CHX rules on minimum 
quote size for listed securities.
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    \3\ The securities are the 150 Nasdaq/NM securities that became 
subject to the mandatory obligations of SEC Rule 11Ac1-4 on or prior 
to February 24, 1997.
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2. Statutory Basis
    The basis under the Act for the proposed rule change is the 
requirement under Section 6(b)(5) that an exchange have rules that are 
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.

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

    The Exchange has neither solicited nor received written comments on 
the proposed rule change.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street NW., Washington, DC 20549. 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, 450 Fifth Street NW., Washington, 
DC 20549. Copies of such filing will also be available for inspection 
and copying at the principal office of the Exchange. All submissions 
should refer to File No. SR-CHX-97-3 and should be submitted by 
September 26, 1997.

IV. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    With in 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 remainder of the proposed rule change, or
    (B) Institute proceedings to determine whether the remainder of the 
proposed rule change should be disapproved.

V. Commission's Findings and Order Granting Accelerated Partial 
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,\4\ which requires that an exchange have 
rules that are 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. In addition, the Commission finds that the rule change 
is consistent with the Congressional objectives for the equity markets, 
set out in Section 11A of the Act, of achieving more efficient and 
effective market operations, fair competition among brokers and 
dealers, and the economically efficient execution of investor orders in 
the best market.
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    \4\ 15 U.S.C. Sec. 78f(b)(5).
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    The Commission believes that the Exchange's rule permitting a 
specialist to determine the increment at which its quotation is 
automatically updated may lead to improved price competition. In 
addition, the constraint that the increment be set at \1/8\ is 
inconsistent with current initiatives to reduce the minimum quotation 
increment and migrate to decimal pricing in the future.

[[Page 47080]]

The Commission, therefore, has determined to permanently approve, on an 
accelerated basis, the proposed rule change permitting a CHX specialist 
to autoquote in increments as determined by the specialist from time to 
time.\5\
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    \5\ The increment used by the specialists for autoquoting, 
however, must be an increment that is available for quotation on the 
exchange by all members.
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    The Commission believes it is reasonable for the CHX to determine 
that for competitive reasons it will not continue to require its 
specialists to maintain a minimum quotation size of 1000 shares in 
certain Nasdaq/NM securities when Nasdaq market makers' in those 
securities are permitted a minimum quotation size, for proprietary 
quotes, of 100 shares.\6\ The Commission notes, however, that it has 
not approved the NASD Pilot on a permanent basis nor has it determined 
that it should continue past December 31, 1997.\7\ The Commission is, 
therefore, approving the CHX proposal on a pilot basis equal to the 
limitations of the Nasdaq market makers; 50 securities and until 
December 31, 1997. Because Nasdaq market makers have been quoting a 
minimum of 100 shares for the 50 Nasdaq/NM securities in the NASD Pilot 
since January, 1997, the Commission is approving this part of the 
proposal on an accelerated basis to allow CHX specialists to also 
reduce the minimum quotation size in those 50 Nasdaq/NM securities.
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    \6\ See Securities Exchange Act Release No. 38156 (January 10, 
1997), 62 FR 2415 (January 16, 1997), order approving reduction in 
the minimum quotation size for Nasdaq market makers in fifty Nasdaq/
NM securities (``NASD Pilot''). A list of the 50 Nasdaq/NM 
securities is located on the Nasdaq web site (www.nasdaq.com).
    \7\ See Securities Exchange Act Release No. 38851 (July 18, 
1997), 62 FR 39565 (July 23, 1997), approving the extension of the 
NASD Pilot for a minimum quotation size of 100 shares in 50 Nasdaq/
NM securities until December 31, 1997.
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    The Commission is deferring approval of the proposal to permit CHX 
specialists to reduce the quotation minimum in an additional 100 
Nasdaq/NM securities until comments on the proposal are received and 
the Commission takes action on the NASD's proposal to expand the NASD 
Pilot by 100 securities.\8\
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    \8\ See Securities Exchange Act Release Nos. 38513 (April 15, 
1997), 62 FR 19369 (April 21, 1997); 38872 (July 24, 1997), 62 FR 
40879 (July 30, 1997), (notices of request to expand the number of 
Nasdaq/NM securities to 150).
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    For the foregoing reasons, the Commission finds good cause for 
approving the proposed rule change, in part, prior to the thirtieth day 
after date of publication of notice of filing thereof in the Federal 
Register.
    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\9\ that the proposed rule change (SR-CHX-97-3) be, and hereby is, 
approved.

    \9\ 15 U.S.C. Sec. 78s(b)(12).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 97-23601 Filed 9-4-97; 8:45 am]
BILLING CODE 8010-01-M