Federal Register / Vol. 63, No. 91 /Tuesday, May 12, 1998 / Notices 26233

7 17 CFR 200.30–3(a)(12).

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

2See letter from David T. Rusoff, Foley & Lardner,

to Gail A. Marshall, Division of Market Regulation,

Commission, dated February 12, 1998.

3See CHX Manual, Art. XX, Rule 28 regarding

member liability for stopped orders.

4The MAX System provides an automated

delivery and, in certain cases, execution facility for

orders that are eligible for execution under Article

XX, Rule 37(a), and in certain other orders. See

CHX Manual, Art. XX, Rule 37(b).

5For purposes of this filing, a marketable limit

order is a limit order that is marketable when

entered into the MAX System, i.e., the limit price

of the order is at or past (higher for a buy order or

lower for a sell order) the relevant side of the ITS

BBO at the time the order is received in the MAX

System. If the ITS BBO subsequently moves away

from the limit price (i.e., if the limit price is lower

than the ITS best offer for a buy order or higher than

the ITS best bid for a sell order) after receipt of the

order but before execution of the order, the order

will still be considered a marketable limit order for

purposes of pending auto-stop. Conversely, if a

limit order is not marketable when received by the

MAX System, the order will not be considered a

marketable limit order for purposes of pending

auto-stop, even if the ITS BBO subsequently

becomes equal to or past the limit price of the order.

6The term ‘‘agency order’’ means an order for the

account of a customer, but does not include

professional orders as defined in CHX, Art. XXX,

Rule 2, interpretation and policy.04. That Rule

defines a ‘‘professional order’’ as any order for the

account of a broker-dealer, or any account in which

a broker-dealer or an associated person of a brokerdealer has any direct or indirect interest.

7 Dual Trading System Issues are issues that are

traded on the CHX, either through listing on the

CHX or pursuant to unlisted trading privileges, and

are also listed on either the New York Stock

Exchange or American Stock Exchange.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.7

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98–12557 Filed 5–11–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–39956; File No. SR–CHX–

98–01]

Self-Regulatory Organizations; Notice

of Filing of Proposed Rule Change and

Amendment No. 1 by the Chicago

Stock Exchange, Incorporated Relating

to the Stopping of Market and

Marketable Limit Orders

May 5, 1998.

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

Securities Exchange Act of 1934

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

January 16, 1998, the Chicago Stock

Exchange, Incorporated (‘‘CHX’’ or

‘‘Exchange’’) filed with the Securities

and Exchange Commission

(‘‘Commission’’) a proposed rule change

relating to the stopping of market and

marketable limit orders. On February

12, 1998, the Exchange filed amendment

No. 1 with the Commission.2 The

proposed rule change, as amended, is

described in Items I, II, and III below,

which Items have been prepared by the

self-regulatory organization. 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 Exchange proposes to amend

Article XX, Rule 37(b) relating to the

stopping of market orders and

marketable limit orders in the Midwest

Automated Execution System (‘‘MAX

System’’). Below is the next of the

proposed rule change. Proposed new

language is italicized; proposed

deletions are in brackets.

Article XX, Rule 37. Guaranteed

Execution System and Midwest

Automated Execution System (b)

Automated Executions. The Exchange’s

Midwest Automated Execution System

(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 Article XX, Rule 37(a)

(‘‘BEST Rule’’) and certain other orders.

In the event that an order that is subject

to the BEST Rule is sent through MAX,

it shall be executed in accordance with

the parameters of the BEST Rule and the

following. In the event that an order that

is not subject to the BEST Rule is sent

through MAX, it shall be executed in

accordance with the parameters of the

following:

(1)–(9) No change in text.

(10) All market orders received

through the MAX System that would

result in an out of range execution shall

be deemed to be received with a request

to STOP. Additionally, specialists may

stop limit orders that are marketable

when entered into the MAX System.

Subject to Interpretations and Policies

.03 under [paragraph (a) under] this

Rule 37, a specialist may execute a

stopped order out of the primary market

range, at no worse than the stopped

price, provided the specialist receives

approval to do so from two floor

officials. All agency and professional

market orders received through the

MAX System that are from 100 shares

up to and including 599 shares (or such

greater amount designated by a

specialist on a stock-by-stock basis) (the

stop volume threshold), that are not

automatically executed pursuant to

subsections (6) and (7) hereof shall be

designated as ‘‘pending auto-stop’’

orders. A pending auto-stop order shall

be automatically stopped thirty seconds

after entry into the MAX System unless

the order has been canceled, executed,

manually stopped, or put on hold

during such thirty second period. The

pending auto-stop feature shall operate

from 8:45 a.m. until 2:57 p.m.

Notwithstanding the foregoing all or

none orders, fill or kill orders,

immediate or cancel orders and orders

that have been stopped under the

Enhanced SuperMAX program are not

eligible to be ‘‘pending auto-stop’’

orders.

(11)–(12) No change in text.

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

self-regulatory organization 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 self-regulatory organization 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.

As described more fully below, the

purpose of the proposed rule change is

to amend CHX rules relating to

‘‘stopped’’ orders 3 in the MAX System 4

(i) to permit specialists to stop a

marketable limit order 5 if the order is

not immediately executed, and (ii) to

automate the stopping of certain market

orders that are not automatically

executed.

Under the Exchange’s BEST Rule,

Exchange specialists are required to

guarantee executions of all agency 6

market and limit orders for Dual

Trading System issues 7 from 100 shares

up to and including 2099 shares.

Subject to the requirements of the short

sale rule, market orders must be

executed at a price equal to or better

than the Intermarket Trading System

(‘‘ITS’’) best bid or offer (‘‘BBO’’), up to

the size associated with the ITS BBO.

Limit orders must be executed at their

limit price or better when: (1) the ITS

BBO 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 trade-through of a CHX limit

order); or (3) the issue is trading at the

limit price on the primary market unless
26234 Federal Register / Vol. 63, No. 91 /Tuesday, May 12, 1998 / Notices

8 It is the responsibility of the specialist to be able

to demonstrate that the order would not have been

executed had it been routed to the other market.

This is often accomplished by sending a ‘‘marker’’

order to the primary market.

9A MAX order that fits under the BEST

parameters must be executed pursuant to BEST

Rules via the MAX System. (See Art. XX, Rule 37(a)

for BEST Rules) While the BEST Rules do not apply

if the order is outside the BEST parameters, MAX

System handling rules are still applicable. (See Art.

XX, Rule 37(b) for MAX System handling rules)

10While the rule currently permits cancellation

within three minutes, the Exchange has proposed

a rule change (CHX–97–32 published in the Federal

Register on February 11, 1998) to reduce the time

to one minute. (See Securities Exchange Act Release

No. 39615 (February 3, 1998), 63 FR 7020 (February

11, 1998).

11 If an oversized market or limit order is received

by the specialist, he will either reject the order

immediately or display it immediately, in

accordance with CHX Article XX, Rule 7 and the

SEC’s recently adopted Order Execution Rules

(Securities Exchange Act Release No. 37619A (Sept.

6, 1996), 61 FR 48290 (Sept. 12, 1996)). If the order

is displayed, the specialist will check with the

order entry broker to determine the validity of the

oversized order. During the one minute period, the

specialist can cancel the order and return it to the

order entry firm, but until it is canceled the

displayed order is eligible for execution.

12 ‘‘Out of range’’ means either higher or lower

than the range in which the security has traded on

the primary market during a particular trading day.

13See CHX Manual, Art. XX, Rule 37(b)(11).

14See CHX Manual, Art. XX, Rule 37(b)(2).

15See CHX Manual, Art, XX, Rule 37(b)(12).

16CHX Manual, Art, XX, Rule 37(b)(10) and (11),

While market orders may also be stopped under the

Exchange’s Enhanced SuperMAX program, these

orders are not subject to this filing.

17While both agency and professional orders will

be eligible to be ‘‘pending auto-stop’’ orders, all or

none orders, odd-lot orders, fill or kill orders,

immediate or cancel orders, orders that re or will

be stopped under the Enhanced SuperMAX

program, and other orders that cannot be entered

into the MAX System (i.e., not held orders, sell

short exempt orders and special settlement orders)

will not be eligible to be ‘‘pending auto stop’’

orders.

18As is the case for all features of the MAX

System, in unusual trading conditions, this feature

of MAX can be de-activated (in its entirety or on

an issue by issue basis) with the approval of two

members of the Exchange’s Committee on Floor

Procedure or a designated member of the Exchange

staff who would have authority to set execution

prices. See CHX Article XX, Rule 37(b)(8).

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 an execution.8

As stated above, the Exchange’s MAX

System provides for the automatic

execution of orders that are eligible for

execution under the Exchange’s BEST

Rule and certain other orders.9

The MAX System has two size

parameters which must be designated

by the specialist on a stock-by-stock

basis. For Dual Trading System issues,

the specialist must set the autoexecution threshold at 1099 shares or

greater and the auto-acceptance

threshold at 2099 shares or greater. In

no event may the auto-acceptance

threshold be less than the autoexecution threshold. If the order-entry

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

one minute of it being entered into the

MAX System.10 If the order is not

canceled by the specialist, the order is

designated as an open order.11 If the

order-entry firm sends an order through

the MAX System 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 the MAX System that is

less than or equal to the auto-execution

threshold, the order is executed

automatically, unless an exception

applies. The MAX Rules currently

provide several exceptions to automatic

execution, even for orders that are less

than or equal to the auto-execution

threshold. First, unless a professional

order is received with a ‘‘Z’’ designator,

it is not automatically executed,

regardless of size. Second, all market

orders for Dual Trading System issues

received through the MAX System that

would result in an out of range 12

execution are deemed to be received

with a request to ‘‘stop.’’ 13 Stopped

orders are not automatically executed in

the usual course (i.e., pursuant to Rule

37(b)(6)). Instead, they are placed in the

open order file.14 The order sending

firm then receives a ‘‘UR Stopped’’

message. The specialist is then required

to include the order in its quote by

bidding (if it is an order to buy) or

offering (if it is an order to sell) the

shares at one minimum variation better

than the current market, in an effort to

obtain price improvement for the order.

Third, the MAX System will not

automatically execute a market order or

marketable limit order if the size

associated with the ITS BBO is less than

the size of the market or marketable

limit order.15

Currently, the MAX System has no

functionality to automatically ‘‘stop’’

marketable limit orders; only market

orders are stopped, and even then, only

if they would result in out of range

executions or the size of the order is

greater than the size associated with ITS

BBO.16 Consequently, if a marketable

limit order is not immediately executed

(e.g., it is out of range, the order is

greater than the size associated with the

ITS BBO, etc.), it is merely added to the

open order book. No message is sent to

the order sending firm until the order is

executed. The same is true for market

orders that are not automatically

stopped and are not automatically

executed.

Because no message is sent to the

order sending firm, the firm is uncertain

as to the current status of its order. As

a result, as stated above, the purpose of

the proposed rule change is (i) to permit

specialists to stop a marketable limit

orders, and (ii) to automate the stopping

of certain market orders. Once stopped,

the order sending firm will then receive

a stopped message, rather than being

unsure as to the current status of the

order, as is currently the case.

Specifically, the CHX is proposing to

amend Article XX, Rule 37(b)(10) to

provide that all MAX market orders that

are from 100 up to and including 599

shares (or such higher amount

determined by a specialist on a stock by

stock basis) that are not automatically

executed in the normal course pursuant

to Rule 37(b)(6) (i.e., because there is

insufficient size associated with the ITS

BBO, because the order would result in

an out of range execution, because the

order is a professional order and the

specialist has not yet decided whether

to accept the order, or because of any

other reason permitted under CHX

rules) will be identified as a ‘‘pending

auto stop’’ order.17

These orders will retain their

‘‘pending auto-stop’’ status for 30

seconds. At the end of this 30 second

period, the MAX System will

automatically stop the order and send a

‘‘UR Stopped’’ message to the order

sending firm, unless, before the end of

the 30 second period, the order is

executed, canceled, manually stopped

by the specialist or ‘‘put on hold.’’ If any

of these events occur, the ‘‘pending

auto-stop’’ status will be removed from

the order and the order will not

automatically be stopped.18 If an order

is ‘‘put on hold,’’ the CHX’s existing

rules for the order will apply. If the

order is stopped, the stop price will be

the ITS BBO at the time the order is

received in the MAX System.

Furthermore, if the order is stopped

after the ‘‘pending auto-stop’’ period,

the entire order will be stopped.

The change to Rule 37(b)(10) to stop

the entire order will result in better

guarantees for the order than are

required by existing CHX Rules. For

example, professional orders are

currently not guaranteed an execution

under the BEST Rule. Under this

change, eligible professional market

orders will now be guaranteed an
Federal Register / Vol. 63, No. 91 /Tuesday, May 12, 1998 / Notices 26235

19 17 CFR 200.30–3(a)(12).

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

execution at the stopped price.

Additionally, pursuant to Article XX,

Rule 28, a stopped order constitutes a

guarantee that the order will be

executed at the stopped price or better.

However, under existing rules, if the

size of the order is greater than the size

of the ITS BBO in existence when the

order is received, there is merely no

automatic execution of the order, the

order does not have to be ‘‘stopped.’’

Moreover, even if the order is ‘‘stopped’’

under Rule 28 only that portion of the

order that is less than or equal to the

size of the ITS BBO is stopped. The

portion of the order that exceeds the ITS

BBO is not stopped. As proposed, the

entire size of the order (up to 599

shares) would be automatically stopped

after the 30 second delay unless an

exception applies.

This better guarantee can be

illustrated by an example. Suppose the

ITS BBO is $20 bid, $201⁄4 offered, 400

shares × 10,000 shares. Suppose further

that a 500 share agency market order to

sell is entered into the MAX System.

Under current CHX rules, the order

would not be automatically executed.

The specialist would be required to

manually execute 400 shares at $20. The

remaining 100 shares would have to be

executed at the next best prevailing

price. If $20 were out of range, there

would also be no automatic execution.

If the customer requested a stop, then a

specialist would stop 400 shares of the

order at $20, i.e., offer 400 shares at

$201⁄16 and guarantee an execution at no

worse than $20. The remaining 100

shares would be guaranteed an

execution (pursuant to the BEST Rule),

but not necessarily an execution at $20.

Under Rule 37(b)(10), as proposed to be

amended, if the specialist did nothing,

after 30 seconds, all 500 shares of the

order would be stopped. Thus, the

customer would be guaranteed an

execution of no worse than $20 for all

500 shares.

The Exchange believes that the 30

second delay between the time the order

is entered and the time that the order is

stopped is appropriate. The 30 seconds

will give the specialist an opportunity to

review the order to determine whether

a stop is appropriate under the

circumstances.

The ‘‘pending auto-stop’’ feature of

the MAX System will operate from 8:45

a.m. until 2:57 p.m. Thus, only orders

entered into the MAX System after 8:45

a.m. but before 2:57 p.m. will be eligible

to be ‘‘pending auto-stop’’ orders.

In addition to adding the new

‘‘pending auto stop’’ order to the MAX

System the CHX is proposing changes to

the MAX System that would permit a

specialist to manually ‘‘stop’’ a

marketable limit order, regardless of

size.

2. Statutory Basis

The proposed rule change is

consistent with Section 6(b)(5) 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.

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

Within 35 days of the date of

publication of this notice in the Federal

Register or within such longer period (i)

as the Commission may designate up to

90 days of such date if it finds such

longer period to be appropriate and

publishes its reasons for so finding or

(ii) as to which the self-regulatory

organization consents, the Commission

will:

A. By order approve the proposed rule

change, or

B. Institute proceedings to determine

whether the proposed rule change

should be disapproved.

IV. Solicitation of Comments

Intersted 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, D.C. 20549. 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 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–98–01 and should be

submitted by June 2, 1998.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.19

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98–12558 Filed 5–11–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–39946; File No. SR–DTC–

98–03]

Self-Regulatory Organizations; The

Depository Trust Company; Notice of

Filing and Immediate Effectiveness of

Proposed Rule Change Relating to

Fees and Charges

May 4, 1998.

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

Securities Exchange Act of 1934

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

February 20, 1998, The Depository Trust

Company (‘‘DTC’’) filed with the

Securities and Exchange Commission

(‘‘Commission’’), as amended on March

6, 1998, the proposed rule change as

described in Items I, II, and III below,

which items have been prepared

primarily by DTC. The Commission is

publishing this notice to solicit

comments form interested persons on

the proposed rule change.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The proposed rule change will adjust

the fees charged by DTC for various

services provided.

II. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

In its filing with the Commission,

DTC 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. DTC has prepared

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