63660 Federal Register / Vol. 65, No. 206 / Tuesday, October 24, 2000 / Notices

6See Chicago Mercantile Exchange Rule 542,

which provides that spread and combination

transactions involving options need not satisfy the

requirement that at least one leg must be within the

price range established during the trading session

whenever the spread or combination involves one

or more contract months which have an established

price range.

7 17 CFR 200.30–3(a)(12).

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

2 17 CFR 240.19b–4.

3See Letter from Paul O’Kelly, Executive Vice

President, CHX, to Katherine England, Assistant

Director, Division of Market Regulation,

Commission, dated August 15, 2000. (‘‘Amendment

No. 1’’). In Amendment No. 1, the Exchange

clarified how specialists would utilize the proposed

enhanced liquidity function, and deleted a portion

of the proposed rule text that would have permitted

a specialist to switch to manual execution mode in

unusual trading situations after, among other

things, seeking relief from a member of the

the originally quoted prices were tied to

the delta of the options.

The following example illustrates

how proposed CBOE Rule 24.20 would

operate: Assume that the S&P 500 Index

September futures contract is trading at

1495 and an SPX trader requests quotes

for the SPX September 1495 call and

September 1495 put, for the purpose of

pricing an SPX combo that will

reproduce the S&P 500 future at 1495.

Assume the September 1495 call and

September 1495 put are each quoted at

12 bid, 121⁄8 asked. Assume that the

trader then requests quotes for the 30

delta SPX September 1480 puts, based

on the underlying futures value of 1495,

and receives a quote of 6 bid, 61⁄8 asked.

The trader agrees to buy 100 of the 1480

puts at 61⁄8 and to hedge these agrees to

buy 30 September 1495 calls at 12 and

to sell 30 September 1495 puts at 12 (30

‘‘long’’ combos). Now assume that the

market rallies five points, to a new

underlying futures level of 1500, before

these orders can be executed. The

September 1495 call is now trading at

15, the September 1495 put at 10 and

the September 1480 puts at 45⁄8. Under

current Exchange rules, the trader could

purchase the 1480 puts at 61⁄8, but could

not execute the legs of the SPX combo

at 12 because they would trade out-ofrange of the current displayed market.

Proposed CBOE Rule 24.20 would allow

the parties to the trade to print and

execute the orders at the original quotes,

12 and 61⁄8, because the options would

not have traded outside the displayed

bids or offers in the crowd or in the

book (12 bid, 121⁄8 asked: 6 bid, 61⁄8

asked), and because the transaction as

agreed to at a futures level of 1495 had

market neutrality and would not have

been affected by the five point market

rally (the gain on the SPX combo of 5

points × 30 contracts x 500 multiplier =

$75,000, is offset by the loss on the 1480

puts of 1.5 × 100 contracts × 500 =

$75,000).

When an SPX combo transaction is

effected out-of-range pursuant to

proposed CBOE Rule 24.20, that fact

will be denoted in the Exchange’s

disseminated quote by an ‘‘indicator.’’

The Exchange believes the proposed

CBOE Rule 24.20 will give both

customers and traders of SPX options an

efficient means of hedging positions in

SPX options, benefiting the

marketplace. The Exchange believes that

as a result of proposed CBOE Rule

24.20, SPX combo trading will become

more consistent with current pricing

practices in the futures markets 6 and

the over-the-counter market, enabling

the Exchange to compete more

effectively with these markets and

offering Exchange members and their

customers greater flexibility.

The CBOE believes that the proposed

rule will allow for the efficient conduct

of SPX combo orders and will be

beneficial to both customers and traders.

Accordingly, the CBOE believes that the

proposed rule change is consistent with

and furthers the objectives of Section

6(b) of the Act, in general, and Section

6(b)(5), in particular, in that is designed

to facilitate transactions in securities, to

perfect the mechanisms of a free and

open market and to protect investors

and the public interest.

B. Self-Regulatory Organization’s

Statement on Burden on Competition

The CBOE 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

Within 35 days of the date of

publication of this notice in the Federal

Register or within such longer 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 by order approve such proposed

rule change, or 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 is consistent with the Act.

Persons making written submissions

should file six copies thereof with the

Secretary, Securities and Exchange

Commission, 450 Fifth Street, NW.,

Washington, DC 20549–0609. 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 will also be

available for inspection and copying at

the principal office of the CBOE. All

submission should refer to File No. SR–

CBOE–00–40 and should be submitted

by November 14, 2000.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.7

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–27239 Filed 10–23–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–43443; File No. SR–CHX–

00–20]

Self-Regulatory Organizations Chicago

Stock Exchange, Inc.; Order Granting

Approval of Proposed Rule Change

and Amendment No. 1 by the Chicago

Stock Exchange, Incorporated Relating

to Automatic Execution of Orders for

Nasdaq/NM Securities

October 13, 2000.

I. Introduction

On June 9, 2000, the Chicago Stock

Exchange, Incorporated (‘‘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

relating to the automatic execution of

orders for Nasdaq/NM Securities. On

August 18, 2000, the Exchange filed

Amendment No. 1, to the proposed rule

change.3

Federal Register / Vol. 65, No. 206 / Tuesday, October 24, 2000 / Notices 63661

Exchange. Under the amended version of the rule,

a specialist must seek relief from two floor officials.

4Securities Exchange Release No. 43199 August

23, 2000), 65 FR 52802.

5See CHX Article XX, rules 37 and 43.

6See NASD Notices to Members 99–11 and 99–

12 (February, 1999)(discussing NASD member firm

order execution practices, particularly during

periods of significant market volatility).

7The CHX has represented that reduction of the

minimum auto-execution threshold is intended to

limit the exposure of Nasdaq/NM specialists in the

case of highly-volatile Nasdaq/NM Securities. The

Exchange anticipates, however, that for the majority

of Nasdaq/NM Securities, specialists will

voluntarily remain at the 1000-share auto-execution

threshold.

8See Amendment No. 1, supra note 3.

9See Amendment No. 1, supra note 3.

10 In approving this rule proposal, the

Commission notes that it has also considered the

proposed rule’s impact on efficiency, competition,

and capital formation. 15 U.S.C. 78c(f).

11 15 U.S.C. 78s(b)(5).

The proposed rule change, including

Amendment No. 1, was published for

comment in the Federal Register on

August 30, 2000.4 No comments were

received on the proposal. This order

approves the proposal.

II. Description of Proposal

In its proposed rule change, the

Exchange seeks to amend the CHX rules

governing automatic execution

sequences and algorithms relating to the

trading of Nasdaq/NM Securities on the

Exchange.5 The Exchange has

represented that the proposed changes

are intended to bring the CHX rules in

line with the practices that currently

exist in the Nasdaq market with respect

to the trading of Nasdaq/NM Securities.6

CHX Article XX, Rule 37, describes

among other things, the circumstances

under which orders must be accepted

and guaranteed an execution at the

national best bid or offer (the ‘‘BEST

Rule’’). CHX Rule 37 also describes a

specialist’s ability to set a parameter

(the auto-execution threshold) that

identifies (by size) which orders

guaranteed a fill under the BEST Rule

will be automatically executed.

The proposed rule change would

allow specialists to reduce the

minimum auto-execution threshold

from 1,000 shares to 300 shares for each

security in which the specialist makes a

market. It would not change specialists’

obligations under the BEST Rule.7 In

other words, specialists could choose to

obligate themselves to automatically

execute only those orders for 300 shares

or less. Under these circumstances,

specialists would still be required,

however, to guarantee execution at the

national best bid or offer (‘‘NBBO’’) for

orders up to the size associated with the

NBBO.

Further, under the proposed rule, if a

specialist at the NBBO chooses to set the

auto-execution threshold at 300 shares,

and an order for 1,000 shares is entered,

the specialist must automatically

execute 300 shares (the size of his bid

or offer). The portion of the order that

exceeds 300 shares (in this example, 700

shares) shall be treated as an open order,

and must be manually executed at the

NBBO.

The proposed rule also would permit

specialists to choose to provide an

enhanced execution guarantee for orders

by setting a new parameter called an

‘‘enhanced liquidity quantity.’’ The

enhanced liquidity quantity, as the

name implies, would permit a specialist

to raise its automatic execution

threshold to a size greater than 300

shares. If a specialist chooses to utilize

this parameter, orders would be

automatically executed up to the

enhanced liquidity quantity designated

by the specialist.8 The specialist can

designate an enhanced liquidity

quantity on a stock by stock basis.

Lastly, the proposed rule provides

new guidelines for Nasdaq/NM

specialists that want to switch from

automatic execution mode to a manual

execution mode when unusual trading

conditions exist. The proposed rule

would define the term ‘‘unusual trading

conditions’’ to include the existence of

large order imbalances and/or

significant price volatility. the rule

would require that upon switching to

manual execution mode based on the

existence of unusual trading conditions,

a specialist must: (1) Document the

basis for election of manual execution

mode; (2) disclose to its customers the

differences in procedures from normal

market conditions and the

circumstances under which the

specialist generally may activate manual

execution mode; and (3) seek

permission to switch to manual

execution mode for two floor officials.9

III. Discussion

After careful review, the Commission

finds that the proposed rule is

consistent with the requirements of the

Act and the rules and regulations

thereunder applicable to a national

securities exchange.10 In particular, the

Commission believes that the proposed

rule change is consistent with the

requirements of Section 6(b)(5) of the

Act 11 in that it is designed to promote

just an equitable principles of trade, to

facilitate transactions in securities, to

remove impediments to 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.

The Commission believes that it is

appropriate for the Exchange to allow

specialist flexibility in determining the

size of orders that they will guarantee

receive automatic executions.

Automatic execution systems help

specialists meet the demands of high

trade volume in the Nasdaq market, and

competitive pressures to provide fast,

efficient executions. The Commission

recognizes that there are conditions

under which specialists are not willing

to provide automatic executions. During

extreme market conditions, where there

are large order imbalances or significant

private volatility, guarantees of

automatic executions for large orders

subject specialists to a high degree of

risk. The proposed rule change offered

by the CHX is designed to mitigate that

risk.

By giving specialists the option of

lowering the size of orders that they

must guarantee an automatic execution

from 1,000 shares to 300 shares, the

Commission believes the Exchange is

providing specialists with an acceptable

way to limit their exposure. The CHX

has represented that reduction of the

minimum auto-execution threshold is

intended to limit the exposure of

Nasdaq/NM specialists in the case of

highly-volatile Nasdaq/NM Securities.

The Exchange has stated that it

anticipates that for the majority of

Nasdaq/NM Securities, specialists will

voluntarily remain at the 1,000-share

auto-execution threshold.

In reviewing this proposal, the

Commission considered it important

that while a specialist may lower the

size of orders that are guaranteed

automatic execution to 300 shares,

under the proposed rule change a

specialist must still provide an

execution at the NBBO for all orders of

1,000 shares or less pursuant to the

Exchange’s Best Rule. Further, the

proposed rule provides that in the case

of orders larger than a specialist’s

automatic execution threshold, the

specialist must provide an automatic

execution up to the specialist’s

threshold, with the remainder of the

order sent for manual execution. In this

way, the Exchange is providing

investors with some opportunity for a

guaranteed automatic execution, while

at the same time, protecting the

specialist from unreasonable risk.

The Commission also finds that the

Exchange’s proposal to allow specialists

to designate an ‘‘enhanced liquidity

quantity’’ will give specialists an

appropriate level of flexibility in

determining what size orders they want

to guarantee automatic executions. If a

specialist chooses to offer automatic

executions to orders greater than his or

63662 Federal Register / Vol. 65, No. 206 / Tuesday, October 24, 2000 / Notices

12The Commission expects the Exchange to keep

records of instances when specialists are permitted

to switch to a manual execution mode so that the

Exchange and the Commission can monitor the use

of this option.

13 15 U.S.C. 78f(b)(2).

14 17 CFR 200.30–3(a)(12).

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

2The Commission has modified the text of the

summaries prepared by NSCC.

3Securities Exchange Act Release No. 31937

(March 1, 1993), 58 FR 12609 [SR–NSCC–92–14]

(order approving post settlement correction

initiated by Settling Members and TPA Members).

4NSCC will issue an ‘‘Important Notice’’ at least

30 days prior to implementing changes in the time

frames required for rejections of extended

corrections. Telephone conversation with Richard J.

Paley, Associate Counsel, NSCC (October 16, 2000).

5Pursuant to Section 21 of Rule 52A, a Fund

Member or Mutual Fund Processor (‘‘Receiving

Fund Member’’) may initiate a request for the

transfer of a customer’s mutual fund shares,

investment fund, or UIT units from another Fund

Member or Mutual Fund Processor (‘‘Delivering

Fund Member’’). The Delivering Fund Member

must acknowledge or reject the transfer request

within two business days. Once the transfer is

acknowledged, the Delivering Fund Member must

also confirm the value of the shares to be

transferred within the time frame specified under

Section 21. Under the proposed rule change, a

Delivering Fund Member must submit the

confirmation no earlier than one business day and

no later than ten business days after acknowledging

the transfer.

her automatic execution threshold, he or

she may do so using this function.

Next, the Commission believes that

the Exchange’s proposal to allow

Nasdaq/NM specialists to switch from

automatic execution mode to a manual

execution mode in the event of unusual

trading situations if they comply with

certain requirements will also provide

specialists with adequate protection in

the event of large order imbalances and/

or significant price volatility, or other

unusual trading situations.12 The

proposed rule requires that upon

switching to manual execution mode

based on the existence of unusual

trading conditions, a specialist must: (1)

document the basis for election of

manual execution mode; (2) disclose to

its customers the differences in

procedures from normal market

conditions and the circumstances under

which the specialist generally may

activate manual execution mode; and (3)

seek permission to switch to manual

execution mode from two floor officials.

The Commission believes the proposed

rule adequately balances the concern

that specialists not be required to offer

automatic executions under truly

unusual circumstances with the concern

that investors who reasonably except to

receive an automatic execution pursuant

to Exchange rules and policies actually

receive an automatic execution. The

Commission believes that with the

aforementioned requirements prior to

switching from automatic to manual

executions, both specialists and

investors will be protected in the event

of unusual market conditions.

IV. Conclusion

It Is Therefore Ordered, pursuant to

Section 19(b)(2) of the Act,13 that the

proposed rule change (SR–CHX–00–20)

is approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.14

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–27240 Filed 10–23–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–43457; File No. SR–NSCC–

00–12]

Self-Regulatory Organizations;

National Securities Clearing

Corporation; Notice of Filing of

Proposed Rule Change Relating the

Submission of Extended Corrections

in Fund/Serv

October 17, 2000.

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

Securities Exchange Act of 1934

(‘‘Act’’),1 notice is hereby given that on

August 28, 2000, the National Securities

Clearing Corporation (‘‘NSCC’’) filed

with the Securities and Exchange

Commission (‘‘Commission’’) and on

October 16, 2000, amended the

proposed rule change as described in

Items I, II, and II below, which items

have been prepared primarily by NSCC.

The Commission is publishing this

notice to solicit comments on the

proposed rule change from interested

parties.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The proposed rule change will modify

NSCC’s rules to allow Fund Members

and Mutual Fund Processors to submit

extended (post settlement) corrections

in NSCC’s Fund/Serv.

II. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

In its filing with the Commission,

NSCC included statements concerning

the purpose of and 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 IV below. NSCC has prepared

summaries, set forth in sections (A), (B),

and (C) below, of the most significant

aspects of these statements.2

(A) Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

Pursuant to NSCC’s Rule 52A, Section

12, only a Settling Member or TPA

Member may currently submit extended

(post settlement) correction instructions.

These types of instructions are

submitted when a Settling Member or

TPA Member determines that data

previously transmitted to a Fund

Member or Mutual Fund Processor with

respect to a settled order is in need of

correction.3

Under the proposed rule change,

Section 12 will be amended to also

permit Fund Members and Mutual Fund

Processors to submit extended (post

settlement) corrections to Settling

Members or TPA Members. No action

will be required by a Settling Member

or TPA Member if it determines to

accept the extended correction of a

Fund Member or Mutual Fund

Processor. A Settling Member or TPA

Member will be able to reject the

extended correction instruction within

the time frame established by NSCC.4 In

addition, Section 12 will be revised to

permit extended corrections for

exchange orders.

The rule change also proposes to

make two additional changes to Rule

52A. Sections 4 and 8 of Rule 52A will

be amended to allow NSCC to delete

certain orders, corrections, and

extended corrections that have not been

confirmed or rejected, respectively,

within a time frame established by

NSCC. Section 21 will permit NSCC to

reduce the maximum time frame within

which a Delivering Fund Member must

confirm the value of Fund/Serv eligible

mutual fund shares, investment funds,

or UIT units from sixty days to ten

days.5

NSCC intends to implement these

changes, subject to SEC approval, on

November 20, 2000.

NSCC believes the proposed rule

change is consistent with Section

17A(b)(3)(F) of the Act and the rules

thereunder because it will facilitate the

prompt and accurate clearance and

settlement of securities transactions.