[Federal Register Volume 62, Number 225 (Friday, November 21, 1997)]
[Notices]
[Pages 62384-62385]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-30626]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39323; File No. SR-CHX-97-24]


Self-Regulatory Organizations; Chicago Stock Exchange, Inc; Order 
Granting Accelerated Approval to Proposed Rule Change and Notice of 
Filing and Order Granting Accelerated Approval of Amendment No. 1 
Thereto Relating to a Ban on the Entry of Certain Stop Orders and Stop 
Limit Orders

November 13, 1997.

I. Introduction

    On September 22, 1997, the Chicago Stock Exchange, Inc. (``CHX'' or 
``Exchange'') submitted to the Securities and Exchange Commission 
(``SEC'' or ``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 adopt a new rule to prohibit 
the entry of certain stop orders and stop limit orders if the New York 
Stock Exchange (``NYSE'') implements a stop order ban pursuant to NYSE 
Rule 80A.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    The proposed rule change was published for comment in the Federal 
Register on October 20, 1997.\3\ No comments were received on the 
proposal. On October 31, 1997, the CHX submitted Amendment No. 1 to the 
proposed rule change.\4\ This order approves the proposed rule change 
and approves Amendment No. 1 on an accelerated basis.
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    \3\ See Securities Exchange Act Release No. 39320 (October 10, 
1997) 62 FR 54496.
    \4\ See Letter from Charles R. Haywood, Foley & Lardner, to 
Debbie Flynn, Division of Market Regulation, SEC, dated October 30, 
1997 (``Amendment No. 1''). In Amendment No. 1, the CHX requested 
that the rule filing by approved on an accelerated basis due to the 
recent volatility in the financial markets and the Exchange's belief 
that such volatility may continue.
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II. Description of the Proposal

    The Exchange proposes to add Article IX, Rule 10B (Stop Order Ban 
Due to Extraordinary Market Volatility) to prohibit the entry of 
certain stop orders and stop limit orders if the NYSE implements a stop 
order ban pursuant to NYSE Rule 80A. The NYSE's Rule 80A prohibits the 
entry of stop orders and stop limit orders if the price of the primary 
Standard and Poor's 500 Stock Price Index \5\ futures contract traded 
on the Chicago Mercantile Exchange reaches a value 12 points below the 
contract's closing value on the previous trading day. Likewise, the 
Boston Stock Exchange (``BSE'') prohibits the entry of stop and stop 
limit orders on the BSE when the NYSE has a ban in place.\6\ The 
Exchange's new rule would exempt from the ban stop orders and stop 
limit orders of 2,099 shares or less for the account of an individual 
investor pursuant to instructions received directly from the individual 
investor.
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    \5\ Standard and Poor's 500 Stock Index is a service mark of 
Standard and Poor's Corporation.
    \6\ See Ch. II, Sec. 35(b) of the BSE's rules.
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    The Exchange has previously adopted circuit breaker rules on a 
pilot basis \7\ which parallel the circuit breaker rules of the 
NYSE.\8\ Such rules are designed to dampen market volatility by 
providing a ``time-out'' to permit investors and market professionals 
to evaluate the state of the market. However, unlike the NYSE, the 
Exchange has not previously prohibited the entry of stop and stop limit 
orders during times of market stress.
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    \7\ See Securities Exchange Act Release Nos. 26218 (October 26, 
1988) 53 FR 44137 (November 1, 1988) (order approving File No. SR-
MSE-88-9); 27370 (October 23, 1989) 54 FR 43881 (October 27, 1989) 
(order approving File No. SR-MSE-89-9); 28580 (October 25, 1990) 55 
FR 45895 (October 31, 1990) (order approving File No. SR-MSE-90-16); 
29868 (October 28, 1991) 56 FR 56535 (November 5, 1991) (order 
approving File No. SR-MSE-91-14); 33120 (October 29, 1993) 58 FR 
59503 (November 9, 1993) (order approving File No SR-CHX-93-22); 
36414 (October 25, 1995) 60 FR 55630 (November 1, 1995) (order 
approving File No. SR-CHX-95-23); 37459 (July 19, 1996) 61 FR 39172 
(July 26, 1996) (order approving File No. SR-CHX-96-20); and 38221 
(January 31, 1997) 62 FR 5871 (February 7, 1997) (order approving 
File No. SR-CHX-96-33).
    \8\ See CHX Art. IX, Rule 10A.
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III. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirement of Section 6 of the Act \9\ and the rules and 
regulations thereunder applicable to a national securities 
exchange.\10\ The Commission believes that the proposed rule change is 
consistent with and furthers the objectives of Section 6(b)(5) of the 
Act \11\ in that it is designed to perfect the mechanism of a free and 
open market and to protect investors and the public interest. 
Specifically, the Commission believes that the prohibition against 
accepting stop orders and stop limit orders, except for individual 
investor orders of up to 2,099 shares, during periods of market stress 
will facilitate the maintenance of an orderly market and reduce market 
volatility.
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    \9\ 15 U.S.C. 78f.
    \10\ In approving this rule, the Commission notes that it has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \11\ 15 U.S.C. 78f(b)(5).
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    The Commission recognizes that banning the entry of stop orders and 
stop limit orders in a significant market decline may help to reduce 
market volatility related to increased selling pressure in the 
security. The Commission believes that banning the entry of stop orders 
and stop limit orders in dually-traded issues when NYSE Rule 80A is in 
effect should prevent the transfer of market volatility from the NYSE 
to the CHX. The Commission believes that the CHX proposal represents a 
reasonable effort to arrive at a coordinated means to address potential 
strain on the market that may develop should the CHX become inundated 
with orders that have been banned pursuant to NYSE Rule 80A.
    The Commission notes that stop orders and stop limit orders on the 
specialist's book at the time the ban is

[[Page 62385]]

instituted will remain eligible for execution. Consequently, the 
Commission believes that investors who have submitted orders will be 
unduly disadvantaged or effected by any subsequent ban on such orders. 
The Commission further believes that allowing individual investors to 
enter stop orders or stop limit orders for 2,099 shares or less, while 
restricting the professional use of such orders when the NYSE 
institutes a ban pursuant to Rule 80A represents a reasonable response 
to the problem presented by smaller, individual investors who may be 
able to monitor market conditions on a continuous basis and who desire 
a measure of downside protection in a rapidly moving market. In 
contrast, market professionals are able to monitor the market on a 
continuous basis and have less of a need to enter such orders. The 
Commission believes that this exception to the proposed rule should 
protect investors and the public interest by ensuring that individual 
investors' stop orders and stop limit orders will be handled even 
during periods of market volatility.\12\
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    \12\ The Commission notes that this exception to the proposed 
rule is consistent with the rules adopted by the NYSE and BSE. See 
NYSE Rule 80A(b) and Ch. II, Sec. 35(b) of the BSE's rules.
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    The Commission finds good cause for approving the proposed rule 
change, including Amendment No. 1, prior to the thirtieth day after the 
date of publication of notice of filing thereof in the Federal 
Register. The Commission notes that Amendment No. 1 merely accelerates 
the effectiveness of the proposed rule. The Commission further notes 
that no comments were received on this proposal.Finally, the Commission 
notes that it has previously approved an identical proposal submitted 
by the BSE.\13\ Therefore, the Commission believes that this filing 
raises no new regulatory issues. Accordingly, the Commission believes 
that it is consistent with Section 6(b)(5) of the Act \14\ to approve 
the proposed rule change and Amendment No. 1 on an accelerated basis.
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    \13\ See Securities Exchange Act Release No. 32697 (July 29, 
1993) 58 FR 41538 (August 4, 1993) (order approving File No. SR-BSE-
92-05).
    \14\ 15 U.S.C. 78f(b)(5).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning Amendment No. 1. Persons making written 
submissions should file six copies thereof with the Secretary, 
Securities and Exchange Commission, 450 Fifth Street, N.W., 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 at the Commission's Public Reference Section, 450 Fifth Street, 
N.W., Washington, DC 20549. Copies of such filing will also be 
available for inspection and copying at the principal office of the 
CHX. All submissions should refer to File No. SR-CHX-97-24 and should 
be submitted by December 12, 1997.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)2() of the 
Act,\15\ that the proposed rule change (SR-CHX-97-24), including 
Amendment No. 1, is approved.

    \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. 97-30626 Filed 11-20-97; 8:45 am]
BILLING CODE 8010-01-M