[Federal Register Volume 65, Number 27 (Wednesday, February 9, 2000)]
[Notices]
[Pages 6425-6427]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-2882]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42372; File No. SR-CHX-99-27]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by the Chicago 
Stock Exchange, Incorporated Relating to the Trading of Nasdaq/NM 
Securities on the CHX

January 31, 2000.
    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 December 27, 1999, the Chicago Stock Exchange, Incorporated (``CHX'' 
or ``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by the Exchange. On January 
31, 2000, the CHX submitted to the Commission Amendment No. 1 to the 
proposed rule change.\3\ The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons 
and to grant accelerated approval of the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, the CHX requested that the Commission 
approve extension of the pilot program through May 1, 2000 instead 
of December 31, 2000 as initially proposed. Amendment No. 1 also 
removed proposed rule language that is currently being considered in 
another Exchange filing (SR-CHX-99-27). See letter from Kathleen M. 
Boege, Associate General Counsel, CHX, to Katherine A. England, 
Assistant Director, Division of Market Regulation, Commission, dated 
January 28, 2000.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The Exchange has requested a three-month extension of the pilot 
program relating to the trading of Nasdaq/NM securities on the 
Exchange. Specifically, the pilot program proposes to amend Article XX, 
Rule 37 and Article XX, Rule 43 of the Exchange's rules. The current 
pilot expires on January 31, 2000. The Exchange proposes to extend the 
rules governing trading of Nasdaq/NM securities on the Exchange through 
May 1, 2000.\4\
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    \4\ See Amendment No. 1, supra note 3.
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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 III 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
    On May 4, 1987, the Commission approved certain Exchange rules and 
procedures relating to the trading of Nasdaq/NM securities on the 
Exchange.\5\ Among other things, these rules rendered the Exchange's 
BEST Rule guarantee (Article XX, Rule 37(a)) applicable to Nasdaq/NM 
securities and made Nasdaq/NM securities eligible for the automatic 
execution feature of the Exchange's Midwest Automated Execution System 
(the ``MAX'' system).\6\
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    \5\ See Securities Exchange Act Release No. 24424 (May 4, 1987), 
52 FR 17868 (May 12, 1987) (order approving File No. SR-MSE-87-2); 
see also, Securities Exchange Act Release Nos. 28146 (June 26, 
1990), 55 FR 27917 (July 6, 1990) (order expending the number of 
eligible securities to 100); 36102 (August 14, 1995), 60 FR 43626 
(August 22, 1995) (order expanding the number of eligible securities 
to 500); 41392 (May 12, 1999), 64 FR 27839 (May 21, 1999) (order 
expanding the number of eligible securities to 1,000).
    \6\ 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 and certain other orders. See CHX 
Rules, Art. XX, Rule 37(b). A MAX order that fits within the BEST 
parameters is executed pursuant to the BEST Rule via the MAX system. 
If an order is outside the BEST parameters, the BEST rule does not 
apply, by MAX system handling rules remain applicable.
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    On January 3, 1997, the Commission approved,\7\ on a one year pilot 
basis, a program that eliminated the requirement that CHX specialists 
automatically execute orders for Nasdaq/NM securities when the 
specialist is not quoting at the national best bid or best offer 
disseminated pursuant to Exchange Act Rule 11Ac1-1 (the ``NBBO''). When 
the Commission approved the program on a pilot basis, it requested that 
the Exchange submit a report to the Commission describing the 
Exchange's experience with the pilot program. The Commission stated 
that the report should include at least six months of trading data. Due 
to programming issues, the pilot program was not implemented until 
April 1997. Six months of trading data did not become available until 
November 1997. As a result, the Exchange requested an additional three-
month extension to collect the data and prepare the report for the 
Commission.
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    \7\ See Securities Exchange Act Release No. 38119 (January 3, 
1997), 62 FR 1788 (January 13, 1997).
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    On December 31, 1997, the Commission extended the pilot program for 
an additional three months, until March 31, 1998, to give the Exchange 
additional time to prepare and submit the report and to give the 
Commission adequate time to review the report prior to approving the 
pilot on a permanent basis.\8\ The Exchange submitted the report to the 
Commission on January 30, 1998. Subsequently, the Exchange requested 
another three-month extension, to give the Commission adequate time to 
approve the pilot program on a permanent basis.
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    \8\ See Securities Exchange Act Release No. 39512 (December 31, 
1997), 63 FR 1517 (January 9, 1998).
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    On March 31, 1998, the Commission approved the pilot for an 
additional three-month period, until June 30, 1998.\9\ On July 1, 1998, 
the Commission approved the pilot for an additional six-month period, 
until December 31, 1998.\10\ On December 31, 1998, the Commission 
approved the pilot for an additional six-month period, until June

[[Page 6426]]

30, 1999.\11\ On June 30, 1999, the Commission approved the pilot for 
an additional seven-month period, until January 31, 2000.\12\ The 
Exchange now requests another extension of the current pilot program, 
through May 1, 2000.\13\ On December 22, 1999, the Exchange also 
submitted to the Commission a report identical in format to the 
Exchange's report of January 30, 1998, to enable the Commission to 
continue its review of the pilot program.
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    \9\ See Securities Exchange Act Release No. 39823 (March 31, 
1998), 63 FR 17246 (April 8, 1998).
    \10\ See Securities Exchange Act Release No. 40150 (July 1, 
1998), 63 FR 36983 (July 8, 1998).
    \11\ See Securities Exchange Act Release No. 40868 (December 31, 
1998), 64 FR 1845 (January 12, 1999).
    \12\ See Securities Exchange Act Release No. 41586 (June 30, 
1999), 64 FR 36938 (July 8, 1999).
    \13\ See Amendment No. 1, supra note 3.
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    Under the pilot program, specialists must continue to accept agency 
\14\ market orders or marketable limit orders, but only for orders of 
100 to 1,000 shares of Nasdaq/NM securities rather than the 2,099 share 
limit previously in place. Specialists, however, 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. As described 
below, however, specialists are required to automatically execute 
Nasdaq/NM orders only if they are quoting at the NBBO when the order 
was received.
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    \14\ The term ``agency order'' means an order for the account of 
a customer, but does not include professional orders, as defined in 
CHX Rules, Art. XXX, Rule 2, Interp. and Policy .04. The rule 
defines a ``professional order'' as any order for the account of a 
broker-dealer, the account of an associated person of a broker-
dealer, or any account in which a broker-dealer or an associated 
person of a broker-dealer has any direct or indirect interest.
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    The pilot program requires the specialists to set the MAX auto-
execution threshold at 1,000 shares or greater for Nasdaq/NM 
securities.\15\ When a CHX specialist is quoting at the NBBO, orders 
for a number of shares less than or equal to the auto-execution 
threshold designated by the specialist are executed automatically (in 
an amount up to the size of the specialist's quote). Orders in 
securities quoted with a spread greater than the minimum variation 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 
then automatically decremented by the size of the execution. When the 
specialist's quote is exhausted, the system will generate an autoquote 
at an increment away from the NBBO, as determined by the specialist 
from time to time, for either 100 or 1,000 shares, depending on the 
issue.\16\
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    \15\ The Exchange currently is seeking Commission approval of a 
rule amendment that would lower the auto-execution minimum to 300 
shares in the case of Nasdaq/NM securities. See SR-CHX-99-21.
    \16\ Specifically, the autoquote is currently for one normal 
unit of trading (usually 100 shares) for issues that became subject 
to mandatory compliance with Exchange Act Rule 11Ac1-4 on or prior 
to February 24, 1997 to 1,000 shares for other issues.
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    When the specialist is not quoting a Nasdaq/NM security at the 
NNBBO, it can elect, on an order-by-order basis, to manually execute 
orders in that security. If the specialist does not elect manual 
execution, MAX market and marketable limit orders in that security that 
are of a size equal to or less than the auto-execution threshold will 
automatically be executed at the NBBO, provided that the auto-execution 
threshold is less than or equal to the NBBO. If the specialist elects 
manual execution, the specialist must either manually execute the order 
at the NBBO or a better price or act as agent for the order in seeking 
to obtain the best available price for the order on a marketplace other 
than the Exchange. If the specialist decides to act as agent for the 
order, the pilot program requires the specialist to use order-routing 
systems to obtain an execution where appropriate. Market and marketable 
limit orders that are for a number of shares greater than the auto-
execution threshold are not subject to these requirements, and may be 
canceled within one minute of being entered into MAX or designated as 
an open order.
2. Statutory Basis
    The CHX believes that the proposed rule 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).\17\ In particular, the proposed 
rule is consistent with Section 6(b)(5) \18\ 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.
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    \17\ 15 U.S.C. 78f(b).
    \18\ 15 U.S.C. 78f(b)(5).
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    The CHX's proposal is intended to conform CHX specialist 
obligations to those applicable to OTC market makers in Nasdaq/NM 
securities, while recognizing that the CHX provides a separate, 
competitive market for Nasdaq/NM securities. The rules establish 
execution procedures and guarantees that attempt to provide executions 
reflective of the best quotes among OTC market makers and specialists 
in Nasdaq/NM securities without subjecting CHX specialists to execution 
guarantees that are substantially greater than those imposed on their 
competitors.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any unnecessary or inappropriate burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    Written comments were neither solicited nor received.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing including whether the proposal is 
consistent with the Act. Persons making written submission should file 
six copies thereof with the Secretary, Securities and Exchange 
Commission, 450 Fifth Street, NW., Washington, DC 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 Exchange. All 
submissions should refer to File No. SR-CHX-99-27 and should be 
submitted by March 1, 2000.

IV. Commission's Findings and Order Granting Accelerated 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.\19\ 
Specifically, the Commission finds that the proposed rule change is 
consistent with section 6(b)(5) \20\ of the Act, which requires that an 
Exchange have rules designed to prevent fraudulent and manipulative 
acts and practices, to promote just and equitable principles of trade, 
to remove

[[Page 6427]]

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. The Commission also believes that the proposal is 
consistent with section 11A(a)(1)(C) \21\ and 11A(a)(1)(D) \22\ of the 
Act. The proposal is consistent with section 11A(a)(1)(C) in that it 
seeks to ensure economically efficient execution of securities 
transactions. Moreover, the proposal is consistent with Section 
11A(a)(1)(D) in that it attempts to foster the linking of markets for 
qualified securities through communication and data processing 
facilities.
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    \19\ In reviewing this proposal, the Commission has considered 
its impact on efficiency, competition and capital formation. 15 USC 
78c(f).
    \20\ 15 U.S.C. 78f(b)(5).
    \21\ 15 U.S.C. 78k-1(a)(1)(C).
    \22\ 15 U.S.C. 78k-1(a)(1)(D).
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    The Commission notes, however, that while the Exchange has been 
working toward establishing a linkage, specialists and OTC market 
makers do not yet have an effective method of routing orders to each 
other. The Commission expects the Exchange to continue to work towards 
establishing a linkage with the Nasdaq systems as requested in the 
January 1997 Order.\23\ In connection with this effort, the Commission 
has requested an update on the information provided in the December 21, 
1999 report using the Exchange's surveillance system. The Commission 
requests that the Exchange supplement the available trading data so 
that it can consider issues concerning the pilot program, including the 
circumstances involving orders that are not automatically executed 
through MAX, whether orders are given the NBBO shown at the time the 
order is received or the NBBO posted at the time the order is executed, 
and what explanations are available for price disimprovement. The 
Commission is extending the pilot program for 90 days so that the 
Exchange may compile this data for the Commission's review.
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    \23\ 23 See 1997 Order, supra note 7.
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    At the conclusion of this pilot's extension, the Commission 
requests that the Exchange rewrite Article XX, Rule 37 and Article XX, 
Rule 43 of the Exchange's rules so these rules clearly explain the 
difference between how listed (or dually traded) securities and over-
the-counter (or Nasdaq/NM) securities are routed and executed by the 
Exchange, and submit the new proposed language to the Commission for 
review and approval. Additionally, the Commission requests that the 
Exchange include in its rules an explanation of how the provisions of 
the Exchange's Best Rule interact with the Exchange's Rules governing 
automatic execution of orders. Thus, the Commission's approval of the 
pilot extension has several ramifications. Approval will: (1) Allow the 
Exchange to operate without interruption; (2) provide a period for 
compilation of additional data; and (3) allow the Exchange to revise 
the language of the existing rules for clarity and ease of 
understanding in the public interest and for protection of investors.
    The Commission does not want to interrupt the current operations of 
the Exchange while the above-described issues are being addressed. The 
Commission, therefore, finds good cause for approving the proposed rule 
change prior to the thirtieth day after the date of publication of 
notice of filing thereof in the Federal Register.
    It Is Therefore Ordered, pursuant to section 19(b)(2) \24\ of the 
Act that the proposed rule change (SR-CHX-99-27) be, and hereby is, 
approved through May 1, 2000.
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    \24\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\25\
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    \25\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-2882 Filed 2-8-00; 8:45 am]
BILLING CODE 8010-01-M