Federal Register / Vol. 65, No. 230 / Wednesday, November 29, 2000 / Notices 71161

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

2 17 CFR 240.19b–4.

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–43600; File No. SR–CHX–

00–34]

Self-Regulatory Organizations; Notice

of Filing of Proposed Rule Change by

the Chicago Stock Exchange,

Incorporated Relating to Its Market

Program and Floor Trading Operations

November 21, 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 October

23, 2000, the Chicago Stock Exchange,

Incorporated (‘‘Exchange’’ or ‘‘CHX’’)

filed with the Securities and Exchange

Commission (‘‘SEC’’ or ‘‘Commission’’)

the proposed rule change as described

in Items I, II, and III below, which Items

have been prepared by the CHX. The

Commission is publishing this notice to

solicit comments on the proposed rule

change from interested persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The CHX proposes to amend its rules

relating to its market maker program

and to its floor trading operations.

Specifically, the Exchange proposes to

amend the following: (i) CHX Rules 8,

9 and 10 under Article XXXIV; (ii)

Interpretations and Policies of CHX

Rule 7 under Article XX; (iii) CHX Rule

10 under Article XX; and (iv) paragraph

(b)(12) of CHX Rule 37 under Article

XX.

Below is the text of the proposed rule

change. Proposed new language is in

italics and proposed deletions are in

brackets.

* * * * *

ARTICLE XX

Regular Trading Sessions

* * * * *

Recognized Quotations

RULE 7. No change to text.

Interpretations and Policies:

.01 Specialists shall input their

current markets and sizes to the

quotation system [through the key

terminal or the mark sense terminal] at

the post or utilize Exchange systems

that provide automated generation of

quotations. These quotations shall be

firm as to both price and size unless

exempted under one of the conditions

specified in paragraphs .06–.09 of this

Rule.

.02 In respect to Dual Trading

System issues specialists utilizing the

Auto Quote mode are prohibited from

disseminating a bid and/or offer more

than $0.10 (for issues trading in

decimals) or 1⁄8 point (for issues trading

in fractions) away from the best ITS

market.

.03 Market [M]makers and floor

brokers, while at the post, shall provide

to the specialist for input to the

quotation system their bids and/or offers

which better the current Exchange

market. These bids and/or offers, and

any modification or withdrawal of these

bids and/or offers, must be provided to

the specialist through a written

quotation ticket or in any other format

agreed upon by the specialist and the

market maker or floor broker. The

specialist must input to the quotation

system any bid and/or offer which

betters the current Exchange market.

For purposes of this rule, a bid or offer

will better the current Exchange market

if it improves the price of the current bid

or offer or if it causes the specialist to

change the existing Exchange quotation.

[Such quotations shall remain in force

until the market maker leaves the post.]

Market maker and floor broker

quotations and accompanying sizes

shall be firm unless exempted under

one of the conditions specified in

paragraphs .06–.09 of this Rule.

Market makers and floor brokers,

while at the post, may provide to the

specialist their orders to buy or sell

securities. The specialist must include

these orders in the book to the extent

required by Exchange Rules. These

orders, and any modification or

cancellation of these orders, must be

provided to the specialist through a

written order ticket or in any other

format agreed upon by the specialist

and the market maker or floor broker.

These orders will remain in effect until

cancelled or until they otherwise expire

by their terms. If a market or floor

broker transfers possession of an order

to a specialist, the specialist is

responsible for disseminating any

required quotations relating to that

order.

[.04 Floor Brokers, while at the post,

shall input to the quotation system

those bids or offers which better the

current Exchange market, unless the bid

or offer is cancelled or withdrawn if not

executed immediately. If a floor broker

transfers possession of an order to a

specialist, the requirement for input to

the quotation system becomes the

obligation of the specialist. When a floor

broker who retains possession of an

order leaves the post he must withdraw

his bid or offer from the quotation

system. Quotations and accompanying

sizes shall be firm until withdrawn

unless exempted under one of the

conditions specified in paragraphs .06–

.09 of this Rule.]

* * * * *

Manner of Bidding and Offering

RULE 10. Bids and offers to be

effective must be [audibly] made at the

post and shall remain in full force until

the person making the bid or offer shall

[audibly] withdraw the bid or offer

[announce that he is out of the market

or until he leaves the post].

Interpretations and Policies:

.01 Although there may be a certain

amount of negotiation by voice away

from the post, every trade must be

consummated at the post.

Amended Jan. 15, 1997.

.02 Clearing the Post.

Policy. All orders received by floor

brokers or originated by market makers

on the floor of the Exchange and

Exposable Orders, as that term is

defined below, received by specialists on

the floor of the Exchange must

effectively clear the post before the

orders may be routed to another market,

either via the ITS System or through the

use of alternative means.

Floor brokers who receive an order on

the floor have a fiduciary responsibility

to seek a best price execution for such

order. This responsibility includes

clearing of the Exchange’s post prior to

routing an order to another market so

that other buying and selling interest at

the post can be checked for a potential

execution that may be as good as or

better than the execution available in

another market.

Market makers, in certain

circumstances, are required to provide

depth and liquidity to the Exchange

market, among other things. Exchange

Rules require that all market maker

transactions constitute a course of

dealings reasonably calculated to

contribute to the maintenance of a fair

and orderly market. In so doing, market

makers must adhere to traditional

agency/auction market principles on the

floor. Transactions by Exchange market

makers on other exchanges or in other

markets which fail to clear the Exchange

post do not constitute such a course of

dealings.

Specialists have an ongoing

requirement to provide depth and

liquidity to the Exchange market by

maintaining liquid continuous twosided markets on the Exchange floor

and insuring that those markets are fair,

orderly and efficient in the public

interest. To meet those requirements,

specialists must adhere to traditional

agency/auction market principles on the

71162 Federal Register / Vol. 65, No. 230 / Wednesday, November 29, 2000 / Notices

floor. Among other things, these

principles require that a specialist not

route all or any part of an Exposable

Order to another market, either via the

ITS System or through the use of

alternative means, until the specialist

has first exposed the portion of the

order that he intends to route elsewhere

to any market makers and floor brokers

at the post. An Exposable Order is all

or any part of an order for more than

100 shares that is either (i) a market

order or (ii) a limit order that is at or

better than the ITS BBO or NBBO.

Transactions by Exchange specialists on

other exchanges or in other markets

which fail to clear the Exchange post in

the manner required by this

Interpretation do not constitute a course

of dealings that fulfills a specialist’s

obligation to insure that markets are

fair, orderly and efficient in the public

interest.

Notwithstanding the above, it is

understood that on occasion a customer

will insist on special handling for a

particular order that would preclude it

from clearing the post on the Exchange

floor. For example, a customer might

request that a specific order be given a

primary market execution. These

situations must be documented and

reported to the Exchange. Customer

directives for special handling of all

orders in a particular stock or all stocks,

however, will not be considered as

exceptions to the clearing the post

policy.

All executions resulting from bids and

offers reflected on Instinet terminals

residents on the Exchange floor

constitute ‘‘orders’’ which are

‘‘communicated’’ to the Exchange floor.

Therefore, all orders resulting from

interest reflected on Instinet terminals

on the Exchange floor must be handled

as any other order communicated to the

floor. All such orders must be presented

to the post during normal trading hours.

All trades between Instinet and

Exchange floor members are Exchange

trades and must be executed on the

Exchange.

Method of Clearing the Post. Subject

to Article XX, Rule 11 relating to cabinet

securities, the Exchange’s clearing the

post policy requires the floor broker or

market maker to be physically present at

the post. A market maker, after

requesting the specialist’s market quote,

must bid or offer the price and size of

his intended interest at the post. A floor

broker must clear the post by requesting

a market quote from the specialist.

When required by these rules to clear

the post, a specialist must do so by

bidding or offering, at the post, the price

and size of his intended interest.

* * * * *

Guaranteed Execution System and

Midwest Automated Execution System

* * * * *

RULE 37.

* * * * *

(b)

* * * * *

(12) Automated Execution of Limit

Orders.

A Specialist may voluntarily choose

to activate a feature of MAX that

automatically executes limit orders on a

specialist’s book that are at or less than

the specialist’s auto acceptance level at

the limit price after both of the

following conditions are met: (1) The

issue is trading at the limit price in the

primary market, and (2) enough

transactions in the issue are executed in

the primary market at prices which are

equal to the limit price of the order such

that the size associated with such

transactions are, in aggregate, equal to or

greater than the sum of (a) the size

displayed at the limit price in the

primary market when the limit order

was entered on the specialist’s book,

plus (b) the size of the limit order. This

feature can be activated on a stock-bystock basis only. Once activated, it must

remain activated for a minimum of five

trading days and can only be

deactivated on a certain day (to be

determined by the Exchange from time

to time) each month.

* * * * *

ARTICLE XXXIV

Registered Market Makers—Equity

Floor

* * * * *

Joint Participation

RULE 8. (a) Orders Eligible for Joint

Participation. Registered market makers

are entitled to participate with the

specialist in any round lot order in the

specialist’s book that is greater in size

than a specialist’s auto-acceptance

threshold for that security. When

requested by a specialist or floor broker

to make a market with respect to any

other order, a registered market maker

is also entitled to participate in that

order with the specialist or floor broker.

(b) Extent of Joint Participation. When

the bids or offers of one or more

registered market makers are equal in

price to those of the specialist with

respect to the orders described above,

the registered market maker or market

makers as a group are entitled to

participate in the transactions effected

on those orders [thereon] to the extent

of [one-third] 40% of the total shares

involved (excluding those needed to

satisfy public orders).

When the bids or offers of one or more

registered market makers are better in

price than those of the specialist, the

registered market maker or market

makers as a group are entitled to the

entire transaction.

Interpretations and Policies:

.01 No change to text.

Openings

RULE 9. Registered market makers as

a group are entitled to participate in

opening a security on the Exchange to

the extent of [one-third] 40% of the net

imbalance (excluding specialist

participation) of purchase and sale

orders on the Exchange.

Public Outcry

RULE 10. No specialist [or market

maker] shall effect a transaction for his

own account with respect to any order

greater in size than his auto-acceptance

threshold for that security until the

specialist has first exposed that order to

any market makers and floor brokers at

the post. Nothing in this Rule prevents

specialists from exposing, to any market

makers and floor brokers at the post,

any order that is equal or smaller in size

than his auto-acceptance threshold.

[unless the presence of the other side of

that transaction had been audibly

announced at the post.]

No market maker shall effect a

transaction for his own account with

respect to any order until the market

maker has first exposed that order to the

specialist and any market makers or

floor brokers at the post.

* * * * *

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

CHX 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. The CHX has prepared

summaries, set forth in sections A, B,

and C below, of the most significant

aspects of such statements.

Federal Register / Vol. 65, No. 230 / Wednesday, November 29, 2000 / Notices 71163

3This participation right is an increase from the

current one-third participation right. The new

participation level would also apply to openings as

provided by Rule 9, Article.

4See Securities Exchange Act Release No. 43084

(July 28, 2000), 65 FR 48406 (August 8, 2000)

(Proposing Release on Disclosure of Order Routing

and Execution Practices discussing the need to

strengthen quote competition). See also Securities

Exchange Act Release No. 43590 (November 17,

2000).

5A similar change to this Interpretation has also

been proposed in SR–CHX–99–18 (filed September

24, 1999), a filing which was primarily designed to

modify the CHX’s description of its limit order

display rule (Article XX, Rule 7, Interpretation and

Policy .05).

A. Self-Regulatory Organization’s

Statements of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

1. Purpose

The purpose of the proposed rule

change is to modify the CHX’s market

maker program (‘‘Program’’) and to

make certain changes to reflect technical

enhancements to the CHX’s trading

operations.

Changes to the Market Maker

Program. The Program was originally

designed to provide supplemental

liquidity to specialists on the CHX by

permitting auxiliary market makers to

trade for their own accounts on the floor

of the CHX. Currently, the CHX market

makers are required to fulfill certain

market-making obligations, and in

return are granted a one-third

participation right in shares presented

to the specialist for purchase or sale.

The CHX is engaged in an

examination of how to reconfigure its

operations in order to compete in a

technologically driven marketplace that

has begun to face competition from

electronic communication networks

(‘‘ECNs’’) and the NASDAQ Stock

Market, Inc. (‘‘NASDAQ’’) in listed

stocks. As part of this evaluation, the

CHX recognized that it needs to

continue to increase the automation of

its trading operations and address the

role of floor traders on the CHX,

especially market makers that do not

contribute substantially to the liquidity

of the Exchange.

The CHX’s evaluation included an

analysis of trading by market makers.

This analysis found that market makers

rarely supply liquidity outside of

several exchange-traded funds (‘‘ETFs’’).

Specifically, market makers participate

in less than 0.83% of trade volume

outside of ETFs. For ETFs, especially

the NASDAQ 100 Depository Receipts,

market makers often participate in

trades of 5,000 shares or greater. They

accounted for 17% of the share volume

of four ETFs during a sample period

examined by the CHX (but only 2.4% of

the trade volume in these issues), and a

significant portion of the 17% of share

volume involved market makers trading

with brokers who were filling customer

orders for large transactions.

In light of the data, the CHX explored

several approaches to address market

maker activity. One approach would

have eliminated market makers because

their activity is limited almost entirely

to participating in large ETF

transactions. In response to concerns by

some members about eliminating market

makers and the liquidity they provide to

large, brokered orders, the CHX decided

to focus on encouraging market maker

participation in large orders and

stimulating increased quote competition

for small orders.

This proposed rule change would

implement the CHX’s modification of

market maker obligations. Under the

proposed rule change, registered market

makers would be entitled to participate

with the specialist in any round lot

order in the specialist’s book that is

greater in size than the specialist’s autoacceptance threshold for a given

security. For these orders, if the bids or

offers of one or more registered market

makers are equal to those of the

specialist, the registered market maker

or market makers as a group would be

entitled to participate in forty percent of

the total shares involved (excluding the

shares needed to satisfy public orders).3

Prior to effecting a transaction for its

own account, a specialist must expose

any order greater than its autoacceptance size to market makers and

floor brokers at the post. Furthermore,

when the bids or offers of one or more

market makers are better than those of

the specialist, the market maker or

market makers as a group would be

entitled to participate fully in the

transaction without the specialist.

With respect to orders at or less than

the specialist’s auto-acceptance

threshold, the specialist could still

request market maker interaction, in

which event the market maker would be

entitled to participate in that order. In

addition, a specialist must request such

interaction if the specialist chooses not

to fill an order within the autoacceptance parameters. A floor broker or

specialist can also request market maker

participation in a floor broker order.

Market makers in these situations would

also be entitled to participate in forty

percent of the trade.

Under the proposed rules, market

makers and floor brokers must continue

to provide the specialist with their bids

and/or offers that better the current CHX

market. The specialist must input these

bids and offers to the quotation system.

Market makers and floor brokers may

also provide their orders to buy or sell

securities to the specialist, in which

event the specialist must include these

orders in the book as required by the

CHX rules.

The proposed rule change limits

market makers’ ability to participate in

small sized orders unless they improve

the CHX quote, but offers them

increased participation rights for larger

sized orders and for those orders for

which their participation is requested

by a specialist. As a whole, the CHX

believes that the proposed rule change

does not alter the Program significantly,

other than for small sized orders, which

have not been subject to much market

maker participation in the past.

The intent of the proposed rule

change is to stimulate market makers to

continue to provide liquidity for larger

orders by increasing their participation

rights for those orders. Similarly, the

proposed rule change could increase

quote competition on the CHX in

smaller size orders by creating

incentives for market makers to improve

the specialist’s quote. As discussed

above, a market maker who improves

the specialist’s quote would be entitled

to participate in the entire transaction.

This is a change from the current rules

which allows market makers to receive

one-third participation for merely

matching a specialist’s quote. The new

rule would force market makers to

improve the quote to participate in a

trade, but reward such improvement by

providing a greater participation right to

the market maker. CHX believes that

this proposed rule change is consistent

with the recent SEC proposals to

strengthen quote competition.4 The

proposed rule change thus has the

potential to benefit retail investors

whose orders are usually executed

automatically based on the national best

bid or offer (‘‘NBBO’’) because market

makers would have an incentive to

narrow spreads in order to participate in

the entire order.

Modifications to Trading Floor

Operations Rules. The proposed rule

change also makes several changes to

floor procedure to incorporate the use of

existing technology on the Exchange

floor. The change to Interpretation .01 to

CHX Rule 7 of Article XX reflects the

replacement of key terminals and mark

sense terminals with other Exchange

systems and the use of Exchange autoquote systems.5 The change to

Interpretation .03 to CHX Rule 7 of

Article XX is intended to reduce

disputes as to whether market makers

and floor brokers properly vocalized

their bids and offers for input into the

71164 Federal Register / Vol. 65, No. 230 / Wednesday, November 29, 2000 / Notices

6To better the market, the quote would have to

improve the CHX quote by one quoting increment,

or otherwise cause the specialist to change the

existing CHX quotation. Currently, Article XX, Rule

7, Interpretation .05 requires a specialist to input

any bids or offers that increase the size that has

been bid or offered at the current price. The CHX

has proposed an amendment to this provision in

SR–CHX–99–18, which is pending with the

Commission.

7An exposable order will be defined in the

proposed rule change as ‘‘all or any part of an order

for more than 100 shares that is either (i) a market

order or (ii) a limit order that is at or better than

the ITS best bid or offer or the national best bid or

offer.’’

8 15 U.S.C. 78f(b).

9 15 U.S.C. 78k.

10 15 U.S.C. 78f(b)(5).

11 17 CFR 240.11b–1.

12 17 CFR 200.30–3(a)(12).

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

2 17 CFR 240.19b–4.

Exchange’s quotation system. The

proposal would require bids or offers

that better the Exchange market 6 to be

provided to the specialist via written

ticket, or by any other form agreed upon

by the specialist and market maker or

floor broker. The proposed rule change

also contains a similar requirement for

limit orders left with the specialist by

market makers or floor brokers.

The CHX is making a few changes to

its CHX Rule 10 of Article XX. The first

change would reflect the changes made

to CHX Rule 7 of Article XX by

removing the audibalization

requirement. Because bids and offers

will have to be provided to the

specialist for input into the Exchange’s

quotation system, the audibalization

requirement is no longer necessary. The

proposed rule change also adds

language to require specialists to adhere

to agency/auction market principles.

Among other things, specialists are

required to clear the post of exposable

orders they received on the floor.7 Thus,

a specialist would not be permitted to

route exposable orders to another

market until the specialist has first

exposed the portion of the order that he

intends to route to another market to

market makers and floor brokers at the

post. The intent of the proposed rule

change is to extend to specialists the

requirement of clearing the post that

now applies to orders received by floor

brokers and market makers on the floor

of the Exchange. The CHX believes it is

consistent with exchange auction

market principles to require all market

orders and marketable or displayable

limit orders received by the specialist to

have the opportunity to interact with

other interest on the Exchange floor

before being routed to another market.

Finally, the CHX is proposing to

amend CHX Rule 37 of Article XX to

limit the automtic execution feature of

MAX, the Exchange’s automatic

execution system, for limit orders at or

less than the specialist’s auto

acceptance level. Currently, if a

specialist chooses to activate the limit

order auto-ex feature, he must do so for

all limit orders on the book regardless

of size. By allowng the specialist to

automatically execute these limit orders

only when the orders are of a size at or

less than his auto acceptance level, the

specialist will be required to present

larger orders to the crowd as required by

the new market maker participation

rules. Of course, specialists will still be

obligated to exercise care and diligence

to provide quality executions to

manually handled limit orders if the

two conditions of paragraph (b)(12) of

CHX Rule 37 of Article XX are triggered

by executions in the primary market.

2. Statutory Basis

The Exchange believes the proposed

rule change is consistent with Section

6 8 and Section 11 9 of the Act. The

proposal furthers the objectives of

Section 6(b)(5) 10 of the Act in particular

in that it should promote just and

equitable principles of trade, serve to

remove impediments to and perfect the

mechanism of a free and open market

and a national market system, and

protect investors and the public interest.

The proposal is also consistent with

Rule 11b–1 11 of the Act because it is

designed to require specialists and

market makers to assist in the

maintenance of a fair and orderly

market.

B. Self-Regulatory Organization’s

Statement on Burden on Competition

The Exchange believes that the

proposed rule change does not impose

any burden on competition that is not

necessary or appropriate in furtherance

of the purposes of the Act. The CHX

believes that the proposed rule change

will enhance competition on the

Exchange by providing an incentive for

the CHX market makers to aggressively

compete on quotes.

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

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 Exchange consents,

the Commission will:

(A) by order approve such proposed

rule change, or

(B) 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, 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. 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–00–34 and should be

submitted by December 20, 2000.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.12

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–30375 Filed 11–28–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–43577; File No. SR–CHX–

00–37]

Self-Regulatory Organizations; Notice

of Filing of Proposed Rule Change and

Amendment No. 1 by the Chicago

Stock Exchange, Incorporated,

Relating to the Exchange’s SuperMAX

2000 Price Improvement Program

November 16, 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 November