1788 Federal Register / Vol. 62, No. 8 / Monday, January 13, 1997 / Notices

6 17 CFR 200.30–3(a)(12).

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

2 17 CFR 240.19b–4.

3On Dec. 19, 1996, the CHX filed Amendment

No. 1 to its proposal. Letter from J. Craig Long,

Attorney, Foley & Lardner, to Howard L. Kramer,

Associate Director, Division of Market Regulation,

SEC, dated Dec. 19, 1996. In Amendment No. 1, the

CHX requested that the Commission approve the

proposal on a pilot basis for a one year period.

4See Securities Exchange Act Release No. 37369

(June 25, 1996), 61 FR 34462 (July 2, 1996) (notice

of File No. SR–CHX–96–16) (‘‘Notice’’).

5Securities Exchange Act Release No. 24424 (May

4, 1987), 52 FR 17868 (May 12, 1987) (order

approving File No. SR–MSE–87–2). See 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).

6The 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, Art.

XX, Rule 37(b).

7See CHX Manual, Art. XX, Rule 37(a).

8The term ‘‘agency order’’ means an order for the

account of a customer, but shall not include

professional orders as defined in CHX, Article XXX,

Rule 2, interpretation 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.

Id.

9According to the Exchange, Dual Trading

System Issues are issues that are traded on the CHX,

pursuant to unlisted trading privileges, and listed

on either the New York Stock Exchange or

American Stock Exchange. Telephone conversation

on June 5, 1996 between David T. Rusoff, Attorney,

Foley & Lardner, and George A. Villasana, Attorney,

Division of Market Regulation, SEC.

10While the Commission and the NASD have

rules that prohibit short sales, under certain

conditions, or securities registered on, or admitted

to unlisted trading privileges on, a national

securities exchange and short sales of securities

traded on Nasdaq, there is no rule governing short

sales in Nasdaq/NM securities traded on the CHX.

See 17 CFR § 240.10a–1 and NASD Rule 3350.

11A MAX order that fits under the BEST

parameters must be executed pursuant to BEST

Rules via the MAX system. If the order is outside

the BEST parameters, the BEST Rules do not apply,

but MAX system handling rules do apply.

12 If an oversized market or limit order is received

by the specialist, he will either reject the order

immediately or display it. If the order is displayed,

the specialist will check with the order entry broker

to determine the validity of the oversized order.

During the three minute period, the specialist can

cancel the order and return it to the order entry

firm, but until it is cancelled the displayed order

is eligible for execution. Although these procedures

currently exist under CHX rules, the Commission

has concerns as to whether the three minute period

is necessary and urges the CHX to reduce the time

period or otherwise address the necessity of the

specialists’ discretion during the three minute

period. Moreover, the handling of orders by CHX

specialists must still comply with the Commission’s

recently adopted Order Execution Rules (Securities

Exchange Act Release No. 37619A (Sept. 6, 1996),

61 FR 48290 (Sept. 12, 1996)) and any subsequently

issued interpretations of the Order Execution Rules.

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 filing will also be

available for inspection and copying at

the principal office of the Exchange. All

submissions should refer to File No. SRAmex-96–45 and should be submitted

by February 3, 1997.

For the Commission, by the Division of

Market Regulation, pursuant to delegate

authority.6

[FR Doc. 97–688 Filed 1–10–97; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–38119; File No. SR–CHX–

96–16]

Self-Regulatory Organizations; the

Chicago Stock Exchange, Inc.; Order

Granting Approval to Proposed Rule

Change Relating to the Trading of

Nasdaq/NM Securities on the CHX

January 3, 1997.

I. Introduction

On June 14, 1996, the Chicago Stock

Exchange, Inc. (‘‘CHX’’ or ‘‘Exchange’’)

submitted to the Securities and

Exchange Commission (‘‘SEC’’ or

‘‘Commission’’), pursuant to Section

19(b)(1) of the Securities Exchange Act

of 1934 (‘‘Act’’) 1 and Rule 19b–4

thereunder,2 a proposed rule change to

amend Article XX, Rule 37 and Article

XX, Rule 43 relating to the trading of

Nasdaq National Market (‘‘Nasdaq/NM’’)

securities (previously known as

NASDAQ/NMS securities) on the

Exchange.3

The proposed rule change was

published for comment in the Federal

Register on July 2, 1996.4 No comments

were received on the proposal.

II. Background

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 made 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 (‘‘MAX system’’).6

1. BEST Rule 7

Currently, under the BEST Rule,

Exchange specialists are required to

guarantee executions of all agency 8

market and limit orders for Dual

Trading System issues 9 and all agency

market orders for Nasdaq/NM securities,

from 100 up to and including 2099

shares. Subject to the requirements of

the short sale rule,10 the specialist must

fill all agency market orders at a price

equal to or greater than the national best

bid or best offer (‘‘NBBO’’). For all

agency limit orders in Dual Trading

System issues, the specialist must fill

the order if: (1) the NBBO at the limit

price has been exhausted in the primary

market; (2) there has been a price

penetration of the limit in the primary

market (generally known as a tradethrough of a CHX limit order); or (3) the

issue is trading at the limit price on the

primary market unless it can be

demonstrated that the order would not

have been executed if it had been

transmitted to the primary market or the

broker and specialist agree to a specific

volume related to, or other criteria for,

requiring a fill.

2. MAX System

The Exchange’s MAX system provides

for the automatic execution of orders

that are eligible for execution under the

Exchange’s BEST Rule (i.e., agency

market orders in securities listed on the

NYSE or AMEX and Nasdaq/NM

securities, as discussed above), and

certain other orders.11

The MAX system has two size

parameters which must be designated

by the specialist on a stock-by-stock

basis. Currently, the specialist must set

the auto-execution threshold at 1099

shares or greater and the autoacceptance threshold at 2099 shares or

greater. In no event may the autoacceptance threshold be less than the

auto-execution threshold. If the orderentry firm sends an order through the

MAX system that is greater than the

specialist’s auto-acceptance threshold, a

specialist may cancel the order within

three minutes of it being entered into

MAX. If not canceled by the specialist,

the order is designated as an open

order.12 If the order-entry firm sends an

order through MAX that is less than the

auto-acceptance threshold but greater

than the auto-execution threshold, the

order is not available for automatic

execution but is designated in the open

order book. A specialist may manually

execute any portion of the order; the

difference must remain as an open

order. If the order-entry firm sends an

order through MAX that is less than or

equal to the auto-execution threshold,

the order is executed automatically.

The MAX system currently provides

for a fifteen second delay between the

time an agency market order is entered

into the MAX system and the time it is

automatically executed at the NBBO in
Federal Register / Vol. 62, No. 8 / Monday, January 13, 1997 / Notices 1789

13 If, however, the difference between the tradethrough price and the last sale price is greater than

1⁄4 point or 1% of the value of the trade-through

price, whichever is less, a second print at a tradethrough price, which is less than 1⁄4 point or 1%

away from the previous trade-through price is

necessary before that MAX system will

automatically execute the agency limit order.

14The 100 to 2099 share auto-acceptance

threshold previously in place will only continue to

apply to Dually Listed securities.

15The CHX has clarified that the twenty second

delay is designed, in part, to provide an opportunity

for the order to receive price improvement from the

specialist’s displayed quote. Id.

16Letter dated Aug. 1, 1996 from David Rusoff,

Attorney, Foley & Lardner, to George A. Villasana,

Attorney, Securities & Exchange Commission.

17 15 U.S.C. 78f(b).

18The CHX has represented that a CHX specialist

in Nasdaq/NM securities, if not an NASD member,

currently may use a CHX member that is also an

NASD member to route orders via SelectNet and

SOES to Nasdaq/NM market makers. The CHX has

explained further that this access currently is

provided by the NASD member to an existing CHX

specialist in Nasdaq/NM securities, but the

arrangement may not necessarily apply to any

future CHX specialists in Nasdaq/NM securities.

Thus, the CHX has indicated that it will not allocate

any Nasdaq/NM securities to any additional CHX

specialists until an order-routing linkage is

completed between the CHX and the Nasdaq.

Telephone conversation on October 29, 1996

between Craig Long, Esq., Foley & Lardner, and

Betsy Prout Lefler, Esq., Division of Market

Regulation, SEC.

order to provide the specialist with an

opportunity to provide price

improvement to the order. If, however,

the spread between the NBBO in a stock

eligible for automatic execution in the

MAX system is 1⁄8 point at the time an

order is entered into the MAX system,

that order is executed immediately

without the fifteen second delay. Nonmarketable agency limit orders, subject

to the BEST Rule, are automatically

filled at the limit price when there is a

price penetration of the limit price in

the primary market.13

III. Description of Proposal

The Exchange proposes to end its

requirement that CHX specialists

automatically execute orders in Nasdaq/

NM securities when the specialist is not

quoting at the NBBO.

Under the proposed revisions to the

BEST Rule, specialists must continue to

accept agency market orders or

marketable limit orders, but only for

orders of 100 to 1000 shares in Nasdaq/

NM securities rather than the 2099

shares limit previously in place.14

Specialists 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 would be required to

automatically execute Nasdaq/NM

orders only when they were quoting to

the NBBO when the order was received.

The proposal requires the specialist to

set the auto-executive threshold at 1000

shares or greater for Nasdaq/NM

securities. Orders for a number of shares

less than or equal to the auto-execution

threshold set by the specialist will be

automatically executed if the CHX

specialist is quoting at the NBBO for the

lesser of the size of the order or the

specialist’s quote. The orders 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 will

automatically be decremented by the

size of the execution. When the

specialist’s quote is exhausted, the

system will generate an autoquote at 1⁄8

point away from the NBBO for 1000

shares.

When the specialist is not quoting a

Nasdaq/NM security at the NBBO, 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

after a twenty second delay.15

Under the proposal, 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.16 If the specialist decides to

act as agent for the order, the proposed

rule requires the specialist to use orderrouting systems to obtain an execution

where appropriate. Market and

marketable limit orders that are for a

number of shares greater than the autoexecution threshold are not subject to

these requirements, and may be

canceled within three minutes of being

entered into MAX or designated as an

open order.

IV. Discussion

The Commission finds that the

proposed rule change is consistent with

the requirements of the Act and the

rules and regulations thereunder

applicable to a national securities

exchange, and, in particular, with the

requirements of Section 6(b).17 In

particular, the Commission believes the

proposal is consistent with the

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

rules of an exchange be designed to

promote just and equitable principles of

trade, to prevent fraudulent and

manipulative acts, and, in general, to

protect investors and the public interest.

The Commission also believes that the

proposal is consistent with Sections

11A(1)(D) and 11A(1)(C) of the Act.

The CHX’s proposal to not require

automatic execution for Nasdaq/NM

securities when the specialist is not

quoting at the NBBO, and to allow the

specialist to execute the order as agent,

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 an

execution 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.

The Commission does not believe that

the Act necessarily requires the CHX to

provide automatic execution of orders.

Nonetheless, if the CHX chooses to

make available an order-routing system

to its members, to be consistent with the

Act, this system must not be designed

in a manner that will result in customer

orders receiving executions at prices

worse than those reasonably available in

the market, which generally would be

the NBBO. Otherwise, members could

violate their best execution duty to their

customers if they used the system. The

CHX’s proposed modification of its

MAX system seeks to ensure that

customer orders receive the best prices

by requiring specialists, if they do not

execute orders automatically at the

NBBO or better, at a minimum to

represent the orders as agent off the

Exchange.

Under these circumstances, CHX Rule

43 requires a specialist to use orderrouting systems where appropriate. At

present, however, CHX specialists have

available only limited order-routing

systems. A CHX specialist currently can

route orders to Nasdaq market makers

only via the telephone or, if the CHX

specialist is an NASD member, through

Selectnet and SOES.18 Clearly, a more

efficient linkage between the CHX and

Nasdaq would better enable CHX

specialists to access OTC market makers

quickly on a consistent basis.

While operation of the proposed

system is not necessarily inconsistent

with the duty of CHX specialists to

provide best execution of customer

orders, the Commission believes that the

arrangement in place for specialists to

access OTC market makers is not an

ideal linkage between two markets on a

permanent basis. Consequently, the

CHX has represented that it intends to
1790 Federal Register / Vol. 62, No. 8 / Monday, January 13, 1997 / Notices

19See Amendment No. 1, supra note 3.

20 Id.

21 15 U.S.C. 78s(b)(2)

22 17 CFR 200.30–3(a)(12).

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

2Letter from J. Keith Kessel, Compliance Officer,

Philadep (December 31, 1996).

3The Commission has modified the text of the

summaries submitted by Philadep.

4For a description of Philadep’s risk management

controls for its same-day funds settlement (‘‘SDFS’’)

system, refer to Securities Exchange Act Release no.

36876 (February 22, 1996), 61 FR 7841 [SRPhiladep-95-08] (order granting partial temporary

approval and partial permanent approval of a

proposed rule change to convert the settlement

system to a same-day funds settlement systems).

work towards quickly establishing a

linkage between the CHX systems and

Nasdaq systems in order to permit

market makers in each market to route

orders to the other market center.19

Consequently, the Commission is

approving the CHX proposal for only

one year, during which time the

Commission expects the CHX and

Nasdaq to effectuate a linkage. The

Commission also expects the CHX to

monitor closely the executions provided

to CHX market and marketable limit

orders for Nasdaq/NM securities that are

not automatically executed at the NBBO

(or better) at the time the order is

received. The Commission further

requests that the Exchange submit to the

Commission a report, based on six

months of trading data, on or before 240

days following the issuance of this

order, that describes the executions

provided these orders.

The Commission is approving the

CHX proposal on a pilot basis for a oneyear period beginning in January 1997

and extending through December 1997.

The Commission’s approval is based, in

part, on CHX’s expressed commitment

to work in good faith with the Nasdaq,

during the one-year pilot period, to set

up an order routing system between the

Nasdaq and the CHX.20

V. Conclusion

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act,21 that the

proposed rule change (SR–CHX–96–16)

is approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.22

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–690 Filed 1–10–97; 8:45 am]

BILLING CODE 8010–01–M

[Release no. 34-38120; File No. SR–

Philadep–96–22]

Self-Regulatory Organizations;

Philadelphia Depository Trust

Company; Notice of Filing and Order

Granting Accelerated Approval of a

Proposed Rule Change to Establish

Family of Account Processing

Procedures

January 3, 1997.

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

Securities Exchange Act of 1934

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

December 17, 1996, the Philadelphia

Depository Trust Company (‘‘Philadep’’)

filed with the Securities and Exchange

Commission (‘‘Commission’’) that

proposed rule change (File No. SR–

Philadep–96–22) as described in Items I

and II below, which items have been

prepared primarily by Philadep. On

December 31, 1996, Philadep filed an

amendment to the proposed rule change

to make certain technical corrections.2

The Commission is publishing this

notice and order to solicit comments

from interested persons and to grant

accelerated approval of the proposed

rule change.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The purpose of the proposed rule

change is to establish an automated

family of accounts risk review for

omnibus settlement accounts.

II. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

It its filing with the Commission,

Philadep included statements

concerning the purpose of and basis for

the proposed rule change and discussed

any comments it received on the

propose rule change. The text of these

statements may be examined at the

places specified in Item IV below.

Philadep has prepared summaries, set

forth in sections (A), (B), and (C) below,

of the most significant aspects of such

statements.3

(A) Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

The purpose of the proposed rule

change is to establish an automated

family of accounts risk review for

settlement activity in omnibus accounts.

Philadep currently monitors individual

subaccount activity underlying omnibus

settling accounts and applies its risk

management controls (i.e., collateral

monitor and net debit caps) to such

subaccounts in a manual fashion.4

Philadep proposes to automate its risk

management procedures in this area by

incorporating an automated family of

accounts risk monitoring system. In

accordance with this proposal, Philadep

will apply this family of accounts

system to its only omnibus account

(Canadian Depository for Securities) and

to any future omnibus accounts.

The family of accounts risk

monitoring system will group together

the activity of subaccounts which

underlie a participant’s omnibus

settlement account. The delivery and

receive activity of individual

subaccounts will be reviewed in

connection with the omnibus account’s

aggregate net debit cap and collateral

monitor. For each receive or delivery

transaction, the system will update the

omnibus account’s settlement balance

and will automatically calculate the net

debit impact and the collateral monitor

impact that the receive and/or delivery

have on a group basis. In this regard, it

a subaccount’s receive or delivery,

adjusted for the appropriate haircut and

added or subtracted to or from the

omnibus account’s collateral monitor,

results in the omnibus account’s

collateral monitor being less than the

omnibus account’s accumulated net

debit amount, the receive or delivery

will pend. As the settlement balance

changes as a result of other activity, the

system will continuously determine

whether pending items may be

processed. Receives and deliveries that

are still pending by the settlement cutoff

time will be dropped from the system.

Philadep believes the proposed rule

change is consistent with Section 17A of

the Act and the rules and regulations

thereunder because the proposal will

promote the prompt and accurate

clearance and settlement of securities

transactions and will assure the

safeguarding securities and funds which

are in the custody or control of Philadep

or for which it is responsible.

(B) Self-Regulatory Organization’s

Statement on Burden on Competition

Philadep 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 relating to the

proposed rule change have been

solicited or received. Philadep will

notify the Commission of any written

comments received by Philadep.