[Federal Register Volume 65, Number 230 (Wednesday, November 29, 2000)]
[Notices]
[Pages 71166-71169]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-30384]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43565; File No. SR-CHX-00-36]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by The Chicago Stock Exchange; 
Incorporated Relating to the Trading of Nasdaq/NM Securities on the CHX

November 15, 2000.

    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder \2\

[[Page 71167]]

notice is hereby given that on November 1, 2000, 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. 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. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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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 one-year extension of the pilot 
program relating to the trading of Nasdaq/NM securities on the 
Exchange. Specifically, the pilot program amended Article XX, Rule 37 
and Article XX, Rule 43 of the Exchange's rules. The last pilot expired 
on November 1, 2000. The Exchange proposes that the pilot remain in 
effect on a pilot basis through November 1, 2001. The text of the 
proposed rule is available at the Exchange and at the Commission.

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 has requested a one-year extension of the pilot 
program relating to the trading of Nasdaq/NM securities on the 
Exchange. Specifically, the pilot program amends Article XX, Rule 37 
and Article XX, Rule 43 of the Exchange's Rules. The latest pilot 
program expired on November 1, 2000; the Exchange proposes that the 
amendments remain in effect on a pilot basis through November 1, 2001.
    On May 4, 1987, the Commission approved certain Exchange rules and 
procedures relating to the trading of Nasdaq/NM securities on the 
Exchange.\3\ 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).\4\
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    \3\ 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 expanding 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 1000).
    \4\ 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, but MAX system handling rules remain applicable.
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    On January 3, 1997, the Commission approved, 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 SEC Rule 11Ac1-1 (the ``NBBO'').\5\ 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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    \5\ 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.\6\ The Exchange submitted the report to the 
Commission on January 30, 1998. Subsequently, the Exchange requested 
another three-month extension, in order to give the Commission adequate 
time to approve the pilot program on a permanent basis.
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    \6\ 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.\7\ On July 1, 1998, 
the Commission approved the pilot for an additional six-month period, 
until December 31, 1998.\8\ On December 31, 1998, the Commission 
approved the pilot for an additional six-month period, until June 30, 
1999.\9\ On June 30, 1999, the Commission approved the pilot for an 
additional seven-month period, until January 31, 2000.\10\ On January 
31, 2000, the Commission approved the pilot for an additional three-
month period, until May 1, 2000.\11\ On May 1, 2000, the Commission 
approved the pilot for an additional six-month period, until November 
1, 2000.\12\ The Exchange now requests another extension of the current 
pilot program, through November 1, 2001.
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    \7\ See Securities Exchange Act Release No. 39823 (March 31, 
1998), 63 FR 17246 (April 8, 1998).
    \8\ See Securities Exchange Act Release No. 40150 (July 1, 
1998), 63 FR 36983 (July 8, 1998).
    \9\ See Securities Exchange Act Release No. 40868 (December 31, 
1998), 64 FR 1845 (January 12, 1999).
    \10\ See Securities Exchange Act Release No. 41586 (June 30, 
1999), 64 FR 36938 (July 8, 1999).
    \11\ See Securities Exchange Act Release No. 42372 (January 31, 
2000), 65 FR 6425 (February 9, 2000).
    \12\ See Securities Exchange Act Release No. 42740 (May 1, 2000) 
65 FR 26649 (May 8, 2000).
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    Under the pilot program, specialists must continue to accept agency 
\13\ market orders or marketable limit orders, but only for orders of 
100 to 1000 shares in Nasdaq/NM securities rather than the 2099 share 
limit previously in place. This threshold order acceptance requirement 
is referred to as the ``auto acceptance threshold.'' 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. Specialists are required to automatically execute Nasdaq/NM 
orders in accordance with certain amendments to the pilot program that 
recently were approved by the Commission in connection with Exchange 
submission SR-CHX-00-20.\14\
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    \13\ 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.
    \14\ See Securities Exchange Act Release No. 43443 (October 13, 
2000), 65 FR 63660 (October 24, 2000).
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    The pilot program requires the specialist to set the MAX auto-
execution threshold at 300 shares or greater for Nasdaq/NM securities. 
When a CHX

[[Page 71168]]

specialist is quoting at the NBBO, orders for a number of shares less 
than or equal to the size of the specialist's quote are executed 
automatically (up to the size of the specialist's quote). Orders of a 
size greater than the specialist's quote are automatically executed up 
to the size of the specialist's quote, with the balance of the order 
designated as an open order in the specialist's book, to be filled in 
accordance with the Exchange's rules for manual execution of orders for 
Nasdaq/NM securities. Such rules dictate that 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. Orders for 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 generates an autoquote at an increment away from the NBBO, 
as determined by the specialist from time to time, for either 100 or 
1000 shares, depending on the issue.\15\
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    \15\ Specifically, the autoquote is currently for one normal 
unit of trading (usually 100 shares) for issues that became subject 
to mandatory compliance with SEC Rule 11Ac1-4 on or prior to 
February 24, 1997 and 1000 shares for other issues.
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    When the specialist is not quoting a Nasdaq/NM security at the 
NBBO, an order that is of a size less than or equal to the auto 
execution threshold designated by the specialist will execute 
automatically at the NBBO price up to the size of the auto execution 
threshold. Orders of a size greater than the auto execution threshold 
will be designated as open orders in the specialist's book and manually 
executed, unless the order-sending firm previously has advised the 
specialist that it elects partial automatic execution, in which event 
the order will be executed automatically up to the size of the auto 
execution threshold, with the balance of the order to be designated as 
an open order in the specialist's book.\16\
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    \16\ The ability of an order-sending firm to elect partial 
automatic execution of orders for Nasdaq/NM securities is the result 
of an amendment to the Exchange's pilot program, recently approved 
by the Commission in connection with Exchange submission SR-CHX-00-
32. See Securities Exchange Act Release No. 43444 (October 13, 
2000), 65 FR 63273 (October 23, 2000).
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    Whether the specialist is quoting at the NBBO or not, ``oversized'' 
orders, i.e., orders that are of a size greater than the auto 
acceptance threshold of 1000 shares (or more if designated by the 
specialist), are not subject to the foregoing requirements, and may be 
canceled within one minute of being entered into MAX or designated as 
an open order.
2. Statutory Basis
    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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B. Self-Regulatory Organization's Statement on 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 on 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

    This proposed rule change has been filed by the Exchange as a 
``non-controversial'' rule change pursuant to Section 19(b)(3)(A) of 
the Act \19\ and subparagraph (f)(6) of Rule 19b-4 thereunder.\20\ 
Consequently, because the foregoing rule change: (1) Does not 
significantly affect the protection of investors of the public 
interest; (2) does not impose any significant burden on competition; 
and (3) does not become operative until thirty days after the date of 
filing, or such shorter time as the Commission may designate if 
consistent with the protection of investors and the public interest, 
provided that the Exchange has given the Commission written notice of 
its intent to file the proposed rule change, along with a brief 
description and the text of the proposed rule change, at least five 
business days prior to the date of filing of the proposed rule change, 
or such shorter time as designated by the Commission.
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    \19\ 15 U.S.C. 78s(b)(3)(A)(i).
    \20\ 17 CFR 240.19b-4(f)(6).
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    The Exchange has requested that the Commission accelerate the 
operative date of the proposal. In addition, the Exchange provided the 
Commission with written notice of its intent to file the proposed rule 
change, along with a brief description and text of the proposed rule 
change, more than five business days prior to the date of the filing of 
the proposed rule change. The Commission finds that it is appropriate 
to accelerate the operative date of the proposal and designate the 
proposal to become operative today.\21\
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    \21\ For purposes only of accelerating the operative date of 
this proposal, the Commission has considered the proposed rule's 
impact on efficiency, competition, and capital formation. 15 U.S.C. 
78c(f).
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    The Commission notes that in approving prior extensions of this 
pilot program, it has found that the Exchange's program is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange.\22\ 
Specifically, the Commission has found that the proposed rule change is 
consistent with Section 6(b)(5) \23\ 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 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 has also stated its 
belief that the proposal is consistent with Section 11A(a)(1)(C) \24\ 
and 11A(a)(1)(D) \25\ of the Act. The Commission has found that the 
proposal is consistent with Section 11A(a)(1)(C) in that it seeks to 
ensure economically efficient execution of securities transactions, and 
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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    \22\ See Securities Exchange Act Release Nos. 42372 (January 31, 
2000), 65 FR 6425 (February 9, 2000) (SR-CHX-99-27) and 42740 (May 
1, 2000) 65 FR 26649 (May 8, 2000) (SR-CHX-00-11).
    \23\ 15 U.S.C. 78f(b)(5).
    \24\ 15 U.S.C. 78k-1(a)(1)(C).
    \25\ 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

[[Page 71169]]

Commission expects the Exchange to continue to work towards 
establishing a linkage with the Nasdaq systems as requested in the 
January 1997 Order.\26\ 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 one year so that the 
Exchange may continue to compile this data for the Commission's review.
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    \26\ See January 1997 Order, supra note 7.
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    The Commission also requests that the Exchange continue its effort 
to 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.
    The Commission does not want to interrupt the current operations of 
the Exchange while the above-described issues are being addressed. 
Therefore, the Commission finds that it is appropriate to accelerate 
the operative date of the proposed rule change.
    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 furtherance of the Act.

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, N.W., 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 in Washington, DC Copies of the 
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-00-36 and should be submitted by December 20, 2000.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\27\
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    \27\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-30384 Filed 11-28-00; 8:45 am]
BILLING CODE 8010-01-M